                           T.C. Memo. 2002-152



                       UNITED STATES TAX COURT



 ESTATE OF LEWIS A. BAILEY, DECEASED, FRANCES JEANETTE FOSTER,
                    EXECUTRIX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 15005-99.               Filed June 17, 2002.


       James Allen Brown, for petitioner.

       William F. Castor, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION


       THORNTON, Judge:    Respondent determined a $119,731 Federal

estate tax deficiency with respect to the estate of Lewis A.

Bailey (the estate).      After concessions, the issues for decision

are:    (1) The date-of-death value of decedent’s 25-percent

interest in C&L Bailey, Inc. (C&L Bailey); (2) the date-of-death

value of a 25-percent interest in C&L Bailey that was held in a
                              - 2 -

qualified terminable interest property (QTIP) trust established

by decedent’s predeceased first wife and that is includable in

decedent’s gross estate pursuant to section 2044; (3) the amount,

if any, of net taxable gifts arising with respect to the 1995

assignment to decedent’s children of a promissory note; (4) the

amount, if any, of decedent’s unreported taxable gifts in 1993

and 1989; and (5) the amount deductible under section 2053(a)(2)

as administration expenses of the estate.1

                        FINDINGS OF FACT

     The parties have stipulated some facts, which we

incorporate, along with the associated exhibits, into our

findings.

Decedent

     Lewis A. Bailey (decedent) died on December 18, 1995.   His

domicile at death was in Garland County, Arkansas.   When the

petition was filed, the executrix resided in Hot Springs,

Arkansas.

C&L Bailey

     In 1985, decedent and his wife, Ethel C. Bailey (Ethel),

incorporated C&L Bailey, an Arkansas nonpublicly traded




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the date of decedent’s
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                 - 3 -

corporation.   Initially, they each owned one half of the 300

outstanding shares of C&L Bailey stock.

     In 1989, Ethel died.    Her 150 shares of C&L Bailey stock

passed to the Ethel C. Bailey Trust (the trust).    Pursuant to

section 2056(b)(7), her estate elected to treat 50 of these

shares as QTIP property, giving decedent the right for life to

all income from the 50 shares.    Under the trust, each of

decedent’s and Ethel’s six children received a one-sixth residual

interest in the 50 shares of QTIP election property and also in

the other 100 shares of C&L Bailey stock held in the trust.

     Between 1985 and 1993, decedent gave some of his C&L Bailey

stock to relatives.   The gifts included two shares each to his

son Roger Bailey (Roger), his daughter Frances Jeanette Foster

(Frances), and his daughter-in-law Lillian Bailey (Lillian).

Between 1989 and 1993, C&L Bailey redeemed 100 shares of its

stock at $5,000 per share.    These redemptions included all the

stock that decedent had given to relatives and all but 50 of

decedent’s shares of C&L Bailey stock.    Consequently, at

decedent’s death, there were outstanding 200 shares of C&L Bailey

stock, 50 shares (25 percent) of which decedent owned outright

and 150 shares (75 percent) of which were held in the trust.

     At decedent’s death, C&L Bailey’s principal assets were two

motels that it owned and operated (the motels):    (1) An Econo

Lodge Motel in Hot Springs, Arkansas (the Arkansas motel); and
                                - 4 -

(2) a Quality Inn in Ridgecrest, California (the California

motel).   Decedent’s grown children managed the motels.

     The California motel was located on two parcels of land.

One of these parcels (parcel 1) was owned by C&L Bailey.    The

other parcel (parcel 2) was titled to decedent and Ethel jointly

as to an undivided one-half interest and to C&L Bailey as to the

remainder.   After Ethel’s death, decedent owned an undivided one-

half interest in parcel 2.

     After providing for certain specific bequests that are not

relevant here, decedent’s will directed that the residue of his

estate, including all real and personal property, would go in

equal shares to three of his and Ethel’s six children; namely,

Frances, Roger, and Harold Lewis Bailey (Harold).

Assignment of Promissory Note

     On February 19, 1993, decedent created the Lewis A. Bailey

Family Trust, a revocable grantor trust (the grantor trust).

Decedent was the trustee.    The corpus of the grantor trust was

composed of certain of decedent’s separate property, including

real property located at Lake Catherine, Route 6, Box 870, Hot

Springs, Arkansas (the Lake Catherine property).    Pursuant to the

terms of the grantor trust agreement, the grantor trust was to

terminate upon decedent’s death, with all the trust assets to be

distributed equally to decedent’s six children.
                               - 5 -

      Attached to and made part of the grantor trust agreement

was an antenuptial agreement that decedent and his second wife-

to-be, Melba J. Bushnell (Melba), had executed in 1991 (the

antenuptial agreement).   The antenuptial agreement stated that

decedent and Melba would each retain separate control of property

they had acquired before their marriage, “the same as if the

marriage relationship did not exist”.   The antenuptial agreement

identified as decedent’s separate property virtually the same

property (including the Lake Catherine property) that later

became the corpus of the grantor trust.   In the antenuptial

agreement, decedent and Melba agreed:

     should either party desire to * * * sell, or otherwise
     convey * * * his or her separate property now owned and
     acquired before the marriage of the parties, * * * the
     other hereby covenants to join in any conveyance or
     other instrument as may be necessary to make the
     transfer * * * effectual and satisfactory to any third
     party; provided, however, that by joining in such
     conveyance * * *, the party so joining pursuant to this
     Agreement does not acquire any interest in the profits
     or other benefits from the transaction * * *.

     On December 14, 1994, decedent executed a revocation of the

grantor trust; on February 1, 1995, the revocation was filed.

     Prior to the revocation of the trust, on January 31, 1994,

Neil and Allison Maness (the Manesses) executed a $148,700

promissory note (the promissory note) in favor of the grantor

trust.   Exactly a year later, on January 31, 1995, decedent and

Melba executed a warranty deed conveying the Lake Catherine

property to the Manesses.   The warranty deed recited that this
                               - 6 -

real property was previously held in the grantor trust, “which

Trust was revoked by Grantor before this conveyance.”     Also on

January 31, 1995, decedent and Melba executed an assignment of

the promissory note to three of decedent’s children (Harold,

Roger, and Frances).

Decedent’s Estate Tax Return

     C&L Bailey Stock

     On Form 706, United States Estate (and Generation-Skipping

Transfer) Tax Return, Schedule B--Stocks and Bonds, the value of

decedent’s 50 shares of C&L Bailey stock was reported as

$370,708.   Similarly, on Schedule F–-Other Miscellaneous Property

Not Reportable Under Any Other Schedule, the value of the 50

shares included in decedent’s gross estate as QTIP property was

reported as $370,708.   Supporting schedules attached to the Form

706 indicate that $370,708 represents 25 percent of an indicated

$2,965,662 total “liquidation value” of the two motels, after

applying a 50-percent discount, described on the schedules as a

“Key Man, Minority Ownership, Lack of Market Discount”.

     The $2,965,662 total “liquidation value” of the two motels

(as indicated on the schedules to decedent’s Form 706)

represented the estimated value of C&L Bailey’s assets (primarily

the California motel and the Arkansas motel) net of corporate

liabilities.   For this purpose, the estimated value of the motels

was based on two appraisal reports:    (1) A May 1996 report (the
                              - 7 -

original Biles report), prepared by Ralph W. Biles, an Arkansas

State certified general appraiser, appraising the fair market

value of the Arkansas motel to be $2,380,000; and (2) a March

1996 report (the Ohrmund report), prepared by Ronald D. Ohrmund,

a California certified general appraiser, appraising the fair

market value of the California motel to be $1,388,000.

     When the estate tax return was filed, the executor of

decedent’s estate was unaware of decedent’s individual one-half

ownership interest in parcel 2.   Consequently, this asset was not

separately reported on the estate tax return.    Similarly,

decedent’s one-half ownership interest in parcel 2 was not taken

into consideration in the Ohrmund report’s valuation of the

California motel or otherwise reflected in the valuation of

decedent’s C&L Bailey shares as reported on Form 706.

     The Promissory Note

     On decedent’s estate tax return, the $148,700 promissory

note was listed on Schedule E–-Jointly Owned Property, as

decedent’s and Melba’s joint property; consequently, a one-half

interest in the promissory note ($74,350) was reported as being

included in decedent’s gross estate.

Notice of Deficiency

     On or about June 13, 1997, respondent commenced the

examination of decedent’s estate tax return.    On July 2, 1999,

respondent issued the notice of deficiency.
                               - 8 -

     C&L Bailey Stock

     In the notice of deficiency, respondent determined that the

date-of-death value of decedent’s 50 shares of C&L Bailey stock

was $451,263, rather than $370,708, as shown on decedent’s estate

tax return.   Similarly, respondent determined that the date-of-

death value of the 50 shares of C&L Bailey stock includable in

decedent’s estate as QTIP property under section 2044 was

$451,263.

     In determining these values, respondent relied upon an

October 1996 valuation report (the original Smith report) that

had been prepared for the trust by Dennis C. Smith (Smith), a

certified public accountant and certified valuation analyst in

Hot Springs, Arkansas.   The original Smith report concluded that

the total, undiscounted fair market value of C&L Bailey as of the

date of decedent’s death was $3,610,200, or $18,051 per share.

Applying a 25-percent marketability discount to this indicated

value, the original Smith report concluded that the date-of-death

value of decedent’s 50 shares of C&L Bailey stock was $13,358 per

share.

     In the notice of deficiency, respondent adopted Smith’s

conclusions, but increased Smith’s 25-percent discount rate by an

additional 25 percent, to match the 50-percent combined discount

reflected on the estate tax return.    Applying this 50-percent

discount to the values indicated by the original Smith report,
                               - 9 -

respondent determined that the value of decedent’s 50 shares of

C&L Bailey stock was $9,025 per share, yielding the $451,263

total value determined in the notice of deficiency.   Respondent

used the identical approach in valuing at $451,263 the 50 shares

of C&L Bailey stock includable in the gross estate under section

2044.

     The Promissory Note

     In the notice of deficiency, respondent determined that

decedent’s estate tax return improperly treated the promissory

note as decedent’s and Melba’s jointly owned property and

improperly reported a half interest in the note as includable in

the gross estate; accordingly, respondent reduced the gross

estate by $74,350.   Respondent further determined that upon

assignment of the promissory note to three of his children in

1995, decedent had made three taxable gifts totaling $118,700

(after allowance for three $10,000 annual exclusions).

     Other Taxable Gifts

     In the notice of deficiency, respondent also determined that

decedent had made unreported taxable gifts of $20,000 and $10,000

in 1989 and 1993, respectively.   The notice of deficiency

contains no other explanation of this determination or

description of the alleged unreported gifts or of the alleged

donees.
                               - 10 -

Sale of the California Motel

     After decedent’s death, an attempt was made to sell the

California motel.    In 1999, a buyer was found for the property.

Before the sale could be consummated, a preliminary report from

the title company disclosed decedent’s one-half interest in

parcel 2.    A California probate proceeding was instituted.   In a

January 21, 2000, order determining succession to real property,

the Superior Court of Kern County, California, found and ordered

that Frances, Roger, and Harold each had a one-third interest in

what had been decedent’s one-half interest in parcel 2.

     To clear up the title and facilitate sale of the California

motel, Frances executed a grant deed, conveying her interest in

parcel 2 to C&L Bailey.    Similarly, Roger and Harold each

executed quitclaim deeds, conveying their interests in parcel 2

to C&L Bailey.    The grant deed and quitclaim deeds each stated

identically that the “Documentary transfer tax is $ NONE-TO CLEAR

UP TITLE”.

     On March 15, 2000, the grant deed and two quitclaim deeds

were filed in Kern County, California.    On the same date, there

was filed in Kern County, California, a corporation grant deed,

executed February 11, 2000, whereby C&L Bailey conveyed parcel 2

to the purchaser of the California motel, Grewal Hotels, Inc.
                              - 11 -

                              OPINION

A.   Valuation of Decedent’s 50 Shares of C&L Bailey Stock

      The value of a decedent’s gross estate includes “the value

at the time of his death of all property, real or personal”.

Sec. 2031(a).   The relevant value is “the price at which the

property would change hands between a willing buyer and a willing

seller, neither being under any compulsion to buy or to sell and

both having reasonable knowledge of relevant facts.”    Sec.

20.2031-1(b), Estate Tax Regs; see United States v. Cartwright,

411 U.S. 546, 551 (1973).   See generally Rev. Rul. 59-60, 1959-1

C.B. 237.   The fair market value of property reflects its highest

and best use on the valuation date.     Mitchell v. United States,

267 U.S. 341, 344-345 (1925); Frazee v. Commissioner, 98 T.C.

554, 563 (1992); Symington v. Commissioner, 87 T.C. 892, 896

(1986).

      The parties disagree about the date-of-death value of

decedent’s 50 shares of C&L Bailey stock.    They also disagree

about the value of the 50 shares of QTIP property includable in

decedent’s gross estate under section 2044.    It is undisputed

that the 50-share blocks are valued independently of each other

rather than aggregated.   See Estate of Mellinger v. Commissioner,

112 T.C. 26 (1999).   The parties have, as a threshold matter,

focused on the value of the 50 shares that decedent owned

outright, agreeing that the value of this 50-share block will
                              - 12 -

govern the value of the other 50-share block.   We proceed

likewise in our analysis.

     Valuation of stock for tax purposes is a matter of “pure

fact” and one to be decided by considering all circumstances

connected with the corporation; there is no one universally

applicable formula.   Hamm v. Commissioner, 325 F.2d 934, 938 (8th

Cir. 1963), affg. T.C. Memo. 1961-347; see Estate of Goodall v.

Commissioner, 391 F.2d 775, 786 (8th Cir. 1968), affg. in part

and revg. in part T.C. Memo. 1965-154.

     Respondent, who determined in the notice of deficiency that

the value of decedent’s 50 shares of C&L Bailey stock was

$451,263, now contends that the value is $415,319.    Petitioner,

who originally reported the value of the 50 shares as $370,708,

contends on brief that the value is only $194,565.

     In support of their positions, each party relies on expert

testimony.   We evaluate expert opinions in light of all the

evidence in the record and may accept or reject expert testimony,

in whole or in part, according to our own judgment.   See

Helvering v. Natl. Grocery Co., 304 U.S. 282, 295 (1938); Estate

of Ford v. Commissioner, 53 F.3d 924, 927 (8th Cir. 1995), affg.

T.C. Memo. 1993-580; Palmer v. Commissioner, 523 F.2d 1308, 1310

(8th Cir. 1975), affg. 62 T.C. 684 (1974); Shepherd v.

Commissioner, 115 T.C. 376 (2000), affd. 283 F.3d 1258 (11th Cir.

2002).
                                 - 13 -

      Respondent’s Expert

      Respondent’s expert, Smith, valued decedent’s C&L Bailey

stock on the basis of the adjusted book value of the

corporation’s net assets.2     In doing so, he adopted without

change the appraised values of the California motel and the

Arkansas motel as reflected in the Ohrmund report and the

original Biles report, respectively.      Like the Ohrmund report,

Smith’s report makes no adjustment in the California motel value

for decedent’s individual one-half ownership interest in parcel

2.   In determining a $415,319 value for decedent’s 50 shares of

C&L Bailey stock, Smith allowed a 20-percent minority-interest

discount and a 27.44-percent discount for lack of marketability.

     Petitioner’s Experts

          Petitioner offered two expert witnesses:   (1) Richard L.

Schwartz (Schwartz), who is a certified public accountant and

certified business appraiser; and (2) Biles, who, as previously

discussed, is the Arkansas appraiser who prepared the original

Biles report valuing the Arkansas motel.

      Like Smith, Schwartz valued decedent’s C&L Bailey stock by

reference to the adjusted book value of the corporation’s net

assets.      Like Smith, Schwartz adopted the appraised value of the



      2
       As previously discussed, Dennis C. Smith (Smith) also
prepared the October 1996 valuation report from which respondent
derived the C&L Bailey stock values reflected in the notice of
deficiency.
                               - 14 -

Arkansas motel as reflected in the original Biles report.    Like

Smith, in valuing the California motel, Schwartz used the Ohrmund

report’s appraised value as a starting point; unlike Smith,

Schwartz adjusted this value downward by $193,000 to reflect

decedent’s individual ownership interest in parcel 2.    Schwartz

concluded that the value of decedent’s 50 shares of C&L Bailey

stock was $307,100.    Like Smith, Schwartz allowed a 20-percent

minority-interest discount.    Unlike Smith, Schwartz allowed a 40-

percent (instead of a 27.44-percent) marketability discount.

     Petitioner’s other expert, Biles, did not undertake to value

decedent’s 50 shares of C&L Bailey stock but instead performed a

“desk review” of the Ohrmund report’s appraisal of the California

motel.   In his report (the Biles report), Biles concluded that

the value of decedent’s individual ownership interest in parcel 2

was $64,100.    Biles also concluded that the value of the

California motel was only $819,180.

     On brief, to derive the $194,565 asserted value for

decedent’s 50 shares of C&L Bailey stock, petitioner generally

follows Schwartz’s valuation methodology and conclusions but

substitutes Biles’ valuation of the California motel into

Schwartz’s analysis.

     As reflected in the preceding discussion, Smith and Schwartz

agree about a number of fundamental issues in valuing the C&L

Bailey stock.    They agree that decedent’s 50 shares of C&L Bailey
                                - 15 -

stock should be valued on the basis of the adjusted book value of

the corporation’s net assets.    In determining the adjusted value

of the motels (which make up almost all the assets of C&L

Bailey), they have both used, as a starting point, the Ohrmund

appraisal report’s valuation of the California motel and have

both adopted the original Biles report’s appraisal value of the

Arkansas motel.   They agree that a 20-percent minority interest

discount is appropriate and that some additional marketability

discount is appropriate.

     After concessions by respondent,3 the parties and their

experts disagree primarily about these three issues:   (1) The

value of the California motel at decedent’s death, and in

particular, the effect of decedent’s individual one-half

ownership interest in parcel 2 on the value of his 50 shares of

C&L Bailey stock; (2) whether a $145,000 shareholder liability

reflected on C&L Bailey’s yearend 1995 corporate books

represented a valid debt that should be included as a negative

item in determining C&L Bailey’s net assets; and (3) the total

discount that should be allowed in valuing decedent’s 50 shares

of C&L Bailey stock.   We address each of these issues in turn.




     3
       Respondent concedes that C&L Bailey’s assets should
exclude certain assets reported on the corporation’s yearend 1995
balance sheets; namely, a $16,316 corporate loan to stockholders
and a $19,000 franchise fee asset.
                                - 16 -

     Valuation of The California Motel

          The Ohrmund Report

     In valuing the California motel, all the experts start with

the Ohrmund report.   Accordingly, we start there too.   The

Ohrmund report concluded that the December 18, 1995, value of the

California motel was $1,388,000.    The Ohrmund report states that

the appraisal of the property “has been made with the

understanding that the present ownership of the subject property

includes all rights that may be lawfully owned, and therefore,

title in ‘fee simple’.”   Consequently, in valuing the California

motel, the Ohrmund report did not consider any effect of

decedent’s one-half ownership interest in parcel 2.

     The Ohrmund report employed three methods of estimating the

market value of the California motel:    the cost approach, the

sales comparison approach, and the income approach, which yielded

value indications of $1,100,000, $1,374,000, and $1,400,000,

respectively.4   The Ohrmund report correlated these three values

to reach its final estimate of $1,388,000.

          Respondent’s Expert

     Smith adopted the Ohrmund report’s $1,388,000 value for the

California motel.




     4
       To reach the $1,374,000 value indicated by the income
approach, the Ohrmund report applied a capitalization rate of
13.5 percent to estimated annual net income of $192,536.
                               - 17 -

          Petitioner’s Experts

     Schwartz also utilized the Ohrmund report’s $1,388,000

valuation of the California motel; in a footnote, however,

Schwartz indicated, without elaboration, that he had adjusted the

value of C&L Bailey’s assets downward by $193,000 to reflect “the

land originally owned by C&L Bailey, Inc., but discovered to be

owned by” decedent.

     In his “desk review” of the Ohrmund report, Biles accepted

the Ohrmund report’s conclusion that the combined value of

parcels 1 and 2 was $250,000 and sought to allocate this value

between the two parcels.    Using the commercial land sales

comparables contained in the Ohrmund report, Biles concluded that

the value of parcel 1, as a stand-alone asset, was $185,895.

Biles then concluded that the $64,105 “residual value”

represented the value of parcel 2, which he concluded should be

treated as decedent’s separate property.

     In his “desk review”, Biles faulted the Ohrmund report for

failing to give appropriate weight to a number of economic

factors cited therein, including a downturn in the Ridgecrest,

California, motel market.    The Biles report also faulted the

Ohrmund report for failing to consider a “‘QUICK SALE VALUE’

which, based on the review appraiser’s [i.e., Biles’] knowledge

of the NEED TO SETTLE THE ESTATE, should have been a MAJOR FACTOR

in the FINAL ESTIMATED VALUE”.    (Idiosyncratic typography in
                              - 18 -

original.)   The Biles report noted that the California motel

could have been classified as a property with a “discrepancy” in

the title.   The Biles report concluded that if all these factors

were properly considered, the California motel should be valued

based on “‘Rates and Terms’ of A ‘DISTRESS SALE’, with added

consideration being given to the ‘clouded title’ of the land”.

(Idiosyncratic typography in original.)    The Biles report stated,

with little elaboration, that on the basis of all this

information and discussions with lenders in the local market, the

proper capitalization rate to use in applying the income

valuation method was 15.5474 percent, rather than the 9.846

percent indicated by the Ohrmund report.   Biles also concluded

that the Ohrmund report had overstated net income from the

California motel by underestimating the ratio of expenses to

gross income as 60 percent; with little elaboration, Biles

concluded that a 75-percent expense ratio was more appropriate.

After making this adjustment, Biles concluded that the annual net

income from the California motel was only $127,361, rather than

the $192,536 indicated by the Ohrmund report.   Factoring in his

upwardly adjusted capitalization rate and his downwardly adjusted

net income figure, Biles concluded that the “discounted value” of

the California motel was only $819,200, rather than $1,388,000,

as indicated by the Ohrmund report.
                               - 19 -

            Our Valuation of the California Motel

     At his death, decedent owned both a one-half undivided

interest in parcel 2 and 50 shares of C&L Bailey stock.    C&L

Bailey, in turn, owned the other half of parcel 2, as well as the

motel that sat upon it.    The estate, being initially unaware of

decedent’s individual ownership interest in parcel 2,

inadvertently omitted this asset from decedent’s gross estate on

the estate tax return.    Petitioner now contends that this

inadvertent omission should be cured by increasing decedent’s

gross estate by $64,100, on the basis of Biles’ determination of

the date-of-death value of decedent’s ownership interest in

parcel 2.    At the same time, petitioner contends, the value of

the 50 shares of C&L Bailey stock included in decedent’s gross

estate should be reduced from $370,708 (as reported on the estate

tax return) to $194,565, to reflect the “title problem” that

petitioner contends reduced the value of the California motel

from $1,388,000 (as indicated by the Ohrmund report, on which the

relevant values reported on the estate tax return were

predicated) to $819,000 (as determined by Biles).

     We are unpersuaded by petitioner’s contentions.    In the

first instance, Biles’ conclusion that decedent’s ownership

interest in parcel 2 should be valued at $64,100 appears based on

an erroneous assumption that decedent owned all of parcel 2.     In

fact, decedent owned only a one-half undivided interest in parcel
                              - 20 -

2–-an ownership interest that cannot reliably be assumed to have

a value equal to one-half the value of the whole.

     More fundamentally, we are unpersuaded by Biles’ conclusion

that the California motel should be valued at $819,000.5   As

previously discussed, the primary focus of Biles’ “desk review”

was the Ohrmund report’s application of the income method and, in

particular, its indicated capitalization rate and net income

figures.   The reasons Biles gives in support of his adjustments

to the Ohrmund report are highly conclusory and lacking in

analytical support.   For instance, Biles’ downward adjustment of

the California motel’s value on account of the alleged need of

decedent’s estate to make a “distress sale” to settle the estate

(an otherwise unsubstantiated factual premise) is inconsistent

with the concept of fair market value as determined by reference

to a hypothetical willing buyer and willing seller.   “The fair

market value is the price at which the property would change

hands between a willing buyer and a willing seller, neither being

under any compulsion to buy or to sell * * *.   The fair market

value * * * is not to be determined by a forced sale price.”

Sec. 20.2031-1(b), Estate Tax Regs.


     5
       Although petitioner seems to suggest that Biles’ downward
adjustment of the $1,388,000 Ohrmund report valuation resulted
from Biles’ consideration of decedent’s individual ownership
interest in parcel 2, Biles’ report clearly indicates that this
was just one of several factors that entered into his analysis.
Although Biles mentions the parcel 2 title problem, he does not
separately identify its effects upon his final conclusions.
                             - 21 -

     We are unconvinced that Biles, an Arkansas appraiser who

performed only a “desk review” of the Ohrmund report and who

testified that he had never even spoken with Ohrmund about it,

was in a better position that Ohrmund, a California appraiser, to

make the key economic assumptions required for applying the

income approach in valuing the California motel.    Indeed, leaving

aside faulty assumptions regarding the ownership of parcel 2 (a

matter in which the Ohrmund report and the Biles report are both

guilty, though differently), we generally found the Ohrmund

report to be better explained, better supported, and more

convincing than Biles’ “desk review” of it.   Both petitioner’s

other expert, Schwartz, and respondent’s expert, Smith, utilized

Ohrmund’s report without expressing any reservations as to its

methodology.

     In sum, we are unpersuaded by Biles’ conclusion that the

value of the California motel was only $819,000.6   Although it

may be true, as petitioner contends, that the divided ownership

of parcel 2 impaired the value of the California motel to some

degree, Biles’ report–-which does not purport to separately

identify the effects of the “clouded title” on the California


     6
       Even if we were to assume, for sake of argument, that the
Biles report appropriately adjusted the Ohrmund report’s
application of the income method of valuation, the Biles report
nevertheless fails to address the two other valuation methods
(the sales comparison method and cost method) that the Ohrmund
report also applied and correlated in reaching its final
valuation estimate.
                                - 22 -

motel valuation--provides no meaningful assistance in measuring

any such impairment of value.    Nor does the record otherwise

provide a reliable basis for estimating any such impairment of

value.7

     Moreover, if we were to assume, for sake of argument, that

the gross estate, as determined by respondent (and as reported on

decedent’s estate tax return), should be adjusted downward to

reflect some impairment to the value of decedent’s C&L Bailey

stock resulting from the divided ownership of parcel 2, it would

follow (as petitioner concedes) that decedent’s gross estate

should be correspondingly increased to reflect decedent’s

inadvertently omitted individual ownership interest in parcel 2.

Petitioner has not shown that the net result of these correlative

adjustments would be to the estate’s advantage.    To state the

problem more precisely, petitioner has not shown that ignoring

any such title-related impairment to the value of the California

motel resulted in an overstatement of decedent’s gross estate

greater than the understatement of the gross estate that resulted

from the omission of decedent’s individual ownership interest in



     7
       As previously discussed, Schwartz deviated from the
Ohrmund report in making a $193,000 downward adjustment to
reflect the divided ownership of parcel 2. Schwartz, however,
offered no explanation or support for this downward adjustment.
Consequently, his report is of little assistance in measuring the
effect of the “clouded title” of parcel 2 on the value of the
California motel. Petitioner has not argued that we should rely
on Schwartz’s conclusion in this regard.
                              - 23 -

parcel 2.8   In these unusual circumstances, where decedent

himself was the only potential adverse claimant with respect to

the parcel 2 title defect that petitioner contends decreased the

value of decedent’s 50 shares of C&L Bailey stock, and on this

record, we have no reasonable basis for estimating the amount of

any resulting net decrease in the value of decedent’s gross

estate.9


     8
       Because decedent’s gross estate included only a total 50-
percent interest in C&L Bailey (the sum of the 25-percent
interest that decedent owned outright and the 25-percent interest
includable under sec. 2044 as QTIP property), his estate would
realize only a proportional benefit from any decrease in the
value of the California motel, further limited by any applicable
valuation discount utilized in determining the value of his C&L
Bailey shares. On the other hand, the gross estate should
reflect the full value of decedent’s individual ownership
interest in parcel 2. For example, assuming that a 50-percent
combined valuation discount is applicable (to foreshadow our
eventual holding in this regard), a hypothetical $100,000 title-
related decrease in the value of the California motel would
result in only a $25,000 decrease (($100,000 x (1-.5)) x .5) in
the gross estate. If the value of decedent’s ownership interest
in parcel 2 were determined to be at least $25,000 and included
in decedent’s gross estate, the estate would realize no net
benefit from these adjustments. Stated another way, any title-
related impairment to the California motel value would have to
exceed the value of decedent’s individual ownership interest in
parcel 2 by at least a factor of 4 before disregarding these
unequal and opposite valuation effects (as in respondent’s
determination) would result in any net detriment to the estate.
The record contains no basis for reliably quantifying such
asymmetrical valuation effects.
     9
       In reaching this result, it is unnecessary for us to
consider, and we do not attempt to resolve, conceptual issues as
to whether decedent’s potentially self-opposing interests in
parcel 2 (as the individual owner of a one-half interest therein,
on the one hand, and as a 25-percent stockholder of C&L Bailey,
on the other hand) should be considered separately so as to
                                                   (continued...)
                             - 24 -

     Accordingly, we hold that for purposes of valuing decedent’s

50 shares of C&L Bailey stock, the value of the California motel

is appropriately estimated at $1,388,000.   Taking into

consideration that respondent has not determined that the estate

erred by excluding decedent’s one-half ownership interest in

parcel 2 from the gross estate as reported on the estate tax

return, and seeking to avoid possible double counting, we hold

further that decedent’s gross estate includes no separate value

attributable to decedent’s individual ownership interest in

parcel 2.

     The $145,000 Shareholder Liability

     C&L Bailey’s December 31, 1995, balance sheet reported a

$145,000 liability for “Loans from shareholders”.   In determining

     9
      (...continued)
reduce the value of his total assets or should be viewed in the
aggregate to reflect the economic reality that decedent would be
unlikely to act adversely to his own economic interests. In this
latter regard, however, we observe that a hypothetical seller in
decedent’s shoes, rather than sell the 50 shares of C&L Bailey
stock at a bargain-basement price on account of the divided
ownership of parcel 2, might reasonably be expected to relinquish
the individual ownership interest in parcel 2 to clear the title
and thereby preserve the stock’s value. The evidence strongly
suggests that this is precisely what decedent’s heirs did:
shortly after the title defect was discovered in the course of
C&L Bailey’s attempted sale of the California motel to a third
party, Frances, Roger, and Harold each deeded over to C&L Bailey,
apparently without consideration, their one-third interests in
decedent’s one-half interest in parcel 2. Although we do not
predicate our holding on these postdeath events, we believe they
are usefully considered for the limited purpose of illuminating
expectations that a hypothetical willing buyer and seller might
reasonably have entertained as of the date of decedent’s death.
See Estate of Gilford v. Commissioner, 88 T.C. 38, 52-53 (1987);
Estate of Jephson v. Commissioner, 81 T.C. 999, 1002 (1983).
                               - 25 -

C&L Bailey’s net assets for purposes of appraising the value of

decedent’s C&L Bailey stock, Smith reclassified this $145,000

liability item as paid-in capital (thereby increasing C&L

Bailey’s indicated net assets).    Respondent’s determination

reflects this adjustment.    Petitioner contends it is erroneous.

     The only evidence that petitioner points to as

substantiating the alleged $145,000 liability is an entry on

decedent’s Schedule C-–Mortgages, Notes, and Cash, of Form 706,

for “NOTE RECEIVABLE - C&L BAILEY, INC.”, in the amount of

$140,000.     Petitioner alleges that $140,000 was the balance of

the liability as of December 31, 1995.    On brief petitioner

states:   “If the loan is not a valid obligation as argued by Mr.

Smith, then it would be proper to adjust the Gross Estate as

shown of [sic] Form 706 * * * to remove this asset[.]    Removal

from the gross estate would provide a greater benefit to the

Petitioner but it would not be correct.”

     Because the record does not reliably substantiate the

alleged $145,000 liability, we sustain respondent’s determination

that it should be excluded from the calculation of C&L Bailey’s

net assets.   We also conclude that the $140,000 note receivable

from C&L Bailey should be excluded from decedent’s gross estate.

As petitioner observes, the net result is to petitioner’s

advantage.
                               - 26 -

     Valuation Discount

     As reported on the estate tax return, the value of

decedent’s 50 shares of C&L Bailey stock reflected a total 50-

percent discount.   In the notice of deficiency, respondent

applied the same 50-percent total discount in valuing the stock.

In this proceeding, however, the parties’ seeming harmony on this

score has modulated to a discord of contending experts.   Although

the parties and their experts agree that a 20-percent minority

discount is appropriate and that some additional marketability

discount is appropriate, they disagree about the amount of the

marketability discount.   Petitioner contends it should be 40

percent (thus suggesting a combined valuation discount of 52

percent, after taking into account the agreed 20-percent minority

discount).10   Respondent, on the other hand, contends that the

marketability discount should be only 27.44 percent (thus

suggesting a combined valuation discount of 41.95 percent).




     10
       On brief, without explanation or discussion, petitioner
treats the agreed-upon 20-percent minority discount and the
asserted 40-percent marketability discount as being additive,
resulting in a claimed combined discount of 60 percent (20
percent + 40 percent), rather than multiplicative, which would
result in a combined discount of 52 percent (20 percent +
(40 x (1-.20) percent). Although the result reached herein does
not depend upon the distinction, we note that as a general
proposition the application of a minority discount and discount
for marketability is multiplicative rather than additive. See
Trugman, Understanding Business Valuation: A Practical Guide to
Valuing Small to Medium-Sized Businesses 286 (1998).
                              - 27 -

     Petitioner’s Expert

     Petitioner’s expert, Schwartz, based his recommended 40-

percent marketability discount on various studies of restricted

stocks and on various studies analyzing “the relationship between

the prices of companies whose shares were initially offered to

the public (IPO) and the prices at which their shares traded

privately within a short period immediately preceding the public

offering.”   Schwartz concluded that these various studies

indicated a “reasonable range” for a marketability discount

between 35 and 50 percent.   In valuing the C&L Bailey stock,

Schwartz selected a marketability discount of 40 percent as being

somewhat below the midpoint of this indicated range.

     The restricted stock studies that Schwartz relied upon

analyzed stocks that had a holding period of 2 years or less.

The record contains no evidence, however, to support an

assumption that an investor in C&L Bailey would likely have such

a short-term investment horizon.   To the contrary, the evidence

in the record strongly suggests that since the inception of C&L

Bailey, there has been no trading of its shares, suggesting that

the hypothetical willing buyer who is representative of

prospective investors in C&L Bailey might well have a longer

investment horizon than the investors of the restricted stocks

analyzed in the studies.   Moreover, the restricted stock studies

that Schwartz relies upon analyzed, at least in part, the
                                 - 28 -

restricted stock of publicly traded corporations.11    C&L Bailey

is not a publicly traded corporation.     Consequently, we are

unpersuaded that Schwartz appropriately relied on these

restricted stock studies in deriving his recommended 40-percent

marketability discount.   See Furman v. Commissioner, T.C. Memo.

1998-157; Mandelbaum v. Commissioner, T.C. Memo. 1995-255, affd.

91 F.3d 124 (3d Cir. 1996).

           Respondent’s Expert

     Smith’s recommended 27.44-percent marketability discount

represents the sum of his recommended 21.44-percent discount for

the tax on built-in gains of C&L Bailey’s assets and a 6-percent

discount for “stock sale costs”.

     To derive his recommended discount for tax on built-in

gains, Smith assumed that the value of C&L Bailey’s assets would

be $4,160,177, after an assumed 5-year holding period, during

which he assumed the assets would grow at an annual rate of 2

percent.   He assumed selling expenses of 7 percent and estimated

that at the end of the assumed 5-year holding period the tax

basis of the assets would be $1,721,279, yielding an estimated

gain of $2,147,686, to which he applied an assumed combined

Federal and State tax rate of 39.06 percent, to yield an

estimated tax on potential gain of $838,886.     Smith concluded

     11
       Ironically, petitioner criticizes the report of
respondent’s expert, Smith, for inappropriately relying on
studies of publicly traded companies in arriving at his
recommended 20-percent minority discount.
                              - 29 -

that this estimated potential gain had a present value of

$613,552, after applying an assumed 8-percent discount rate.

Comparing this estimated present value of tax with C&L Bailey’s

adjusted net asset value as of the date of decedent’s death,

Smith concluded that the appropriate rate of discount for tax on

built-in gains was 21.44 percent.

     Smith offered no explanation or support for any of the many

assumptions that he utilized in the just-described analysis.    Nor

did he offer any explanation or support for his conclusion that

the discount related to stock sale costs should be 6 percent.    An

expert report that is based on estimates and assumptions not

supported by independent evidence or verification is of little

probative value or assistance to the Court.   See Rose v.

Commissioner, 88 T.C. 386, 418 (1987), affd. 868 F.2d 851 (6th

Cir. 1989); Parker v. Commissioner, 86 T.C. 547, 561 (1986); see

also Klapmeier v. Telecheck Intl., Inc., 482 F.2d 247, 252 (8th

Cir. 1973).   “The persuasiveness of an expert’s opinion depends

largely upon the disclosed facts on which it is based.”     Estate

of Davis v. Commissioner, 110 T.C. 530, 538 (1998).

Consequently, we find Smith’s report unpersuasive in its

determination of appropriate discounts for tax on built-in gains

or stock sale costs.   We deem respondent to have conceded,

however, that a combined discount of at least 27.44-percent is

appropriate with regard to these factors.
                               - 30 -

     In his report, Smith also identified a number of other

factors (apart from tax on built-in gains and stock sale costs)

that he says are normally considered in calculating a

marketability discount.   For various reasons, however, he

assigned no weight to any of these other factors.    For instance,

he assigned no weight to management continuity, because he

believed that C&L Bailey was merely a “holding company”.     For a

contrary viewpoint, we need look no further than Smith’s own

report.    In the section of his report captioned “Company

Background”, Smith stated that C&L Bailey was founded for “the

primary purpose of owning and operating motel properties” and

that decedent’s grown children managed the motels.    Similarly, in

the “Financial Analysis” section of his report, Smith stated that

C&L Bailey “owns and operates two motels”.    From his report, we

infer that Smith believes that management continuity would

support an additional amount of marketability discount if C&L

Bailey were considered to be an operating company.    As just

noted, Smith’s own report (although internally inconsistent in

this regard), as well as the evidence in the record, fairly

supports a conclusion that C&L Bailey was in fact an operating

company.   Hence, Smith’s own report supports a conclusion that

his recommended marketability discount is understated insofar as

it disregards continuity of management.
                              - 31 -

     Accordingly, we believe that, after taking into account the

parties’ agreed-upon 20-percent minority discount and

respondent’s deemed concessions as to discounts for tax on built-

in gains and stock costs, the appropriate combined valuation

discount lies somewhere between the 52-percent combined discount

suggested by Schwartz’s recommendations and the 41.95-percent

combined discount recommended by Smith.   We conclude and hold

that the appropriate combined valuation discount rate is 50

percent.   In doing so, we give due regard to the fact that this

is the same combined discount rate reflected on decedent’s estate

tax return, cf. Estate of Hall v. Commissioner, 92 T.C. 312, 337-

338 (1989) (stock values reported on an estate tax return were an

“admission” that could not be overcome “without cogent proof that

the reported values were erroneous”), and to the fact that

respondent, in his notice of deficiency, accepted this 50-percent

combined discount rate and has not shown that a lower discount

rate is appropriate, cf. Rule 142(a) (burden of proof is upon

respondent as to any new matter pleaded in the answer).

     In sum, we conclude and hold that the value of C&L Bailey’s

adjusted net assets at decedent’s death was $2,861,903 (the

calculations are detailed in Appendix A).   Employing the adjusted

net asset valuation method that the parties agree is appropriate

in this case, and applying a 50-percent combined valuation

discount, we conclude and hold that the date-of-death value of
                                - 32 -

decedent’s 50 shares of C&L Bailey stock was $357,738 (see

Appendix B).

B.   Valuation of QTIP Property

      As previously discussed, the parties agree that the value of

the 50 shares of C&L Bailey stock includable in decedent’s gross

estate pursuant to section 2044 and the value of the 50 shares of

C&L Bailey stock that decedent owned outright are identical.

Consequently, we hold that the 50 shares of C&L Bailey stock

includable in decedent’s gross estate pursuant to section 2044

have a value of $357,738.

C.   Unreported Taxable Gifts

      The Promissory Note

      In 1993, decedent transferred certain of his separate

property, including the Lake Catherine property, into the grantor

trust.   On January 31, 1994, the Manesses executed a $148,700

promissory note in favor of the grantor trust.     A year later, on

January 31, 1995, after decedent had revoked the grantor trust,

decedent and Melba executed a warranty deed conveying the Lake

Catherine property to the Manesses.      On the same date, decedent

and Melba executed an assignment of the promissory note to three

of decedent’s children.

      Respondent contends that the assignment of the promissory

note gave rise in 1995 to taxable gifts from decedent to three of

his children in the full amount of the promissory note (less
                              - 33 -

$30,000, reflecting three $10,000 annual exclusions).    Petitioner

argues that the promissory note was decedent’s and Melba’s joint

property and appears to contend that the assignment should be

regarded as gifts from decedent and Melba equally.

     Respondent asserts that the promissory note was

consideration to the grantor trust for its sale of the Lake

Catherine property to the Manesses.    Petitioner counters that

respondent’s assertion is bald speculation.    Petitioner, however,

has offered no other explanation for the promissory note’s being

made payable to the grantor trust.12   We believe that the

evidence in the record fairly supports an inference that the

promissory note was in fact consideration for the Lake Catherine

property, which had been decedent’s separate property before he

placed it in the grantor trust.   Consequently, pursuant to the

antenuptial agreement, Melba would have had no interest in either

the Lake Catherine property or the promissory note, either before

or after decedent’s revocation of the grantor trust.

Accordingly, we conclude, as respondent has determined, that in

assigning the promissory note to three of his children, decedent

made three unreported taxable gifts totaling the face amount of


     12
       On brief, petitioner makes various arguments predicated
on a supposition that the promissory note was made payable to
decedent and Melba jointly. Petitioner has offered neither the
promissory note nor any other evidence in support of this
supposition. The only evidence on this score is found in the
assignment of the promissory note, which decedent and Melba
executed on Jan. 31, 1995, and which states that the promissory
note was “in favor of Lewis A. Bailey Family Trust”.
                              - 34 -

the promissory note less $30,000 (to reflect three annual

exclusions).13

     Petitioner suggests vaguely that Melba might have acquired

an interest in the promissory note, presumably after decedent’s

revocation of the grantor trust (since the grantor trust

contained no provision whereby Melba might acquire any interest

in any trust property) but before the assignment of the note to

decedent’s three children.   There is no evidence in the record,

however, to support this suggestion, which is undermined by the

contemporariness of the transfers of the note out of the grantor

trust and to decedent’s three children, and by the antenuptial

agreement between decedent and Melba, which states decedent’s

desire that his children should receive his separate property

“unaffected by the marriage of the parties hereto”.

     Petitioner also suggests that Melba’s joining in on the

execution of the warranty deed conveying the Lake Catherine

property to the Manesses and on the assignment of the note to

three of decedent’s children shows that she had an interest in

the Lake Catherine property and the promissory note.   We are

unpersuaded by petitioner’s argument.   We believe it more likely

that, pursuant to the terms of the antenuptial agreement, Melba

signed these legal documents as a mere formality, without thereby




     13
       Petitioner does not contend that the conditions of the
gift-splitting provisions of sec. 2513 have been met here.
                               - 35 -

acquiring any interest in either the Lake Catherine property or

the promissory note.

     Accordingly, we sustain respondent’s determination on this

issue.

     Other Taxable Gifts

     In the notice of deficiency, respondent determined, without

explanation, that decedent made unreported taxable gifts of

$20,000 and $10,000 in 1989 and 1993, respectively.   On brief,

respondent contends, with only slightly more specificity, that

this determination is predicated on certain of decedent’s gifts

of C&L Bailey stock to Roger, Frances, and Lillian.

     Petitioner concedes that decedent made gifts of C&L Bailey

stock to Roger, Frances, and Lillian but contends they each

received no more than two shares of C&L Bailey stock in any given

year.    The parties have stipulated that from 1989 through 1993,

C&L Bailey redeemed 100 of its shares for $5,000 per share.

Therefore, petitioner concludes, each share of stock that

decedent gave away had a value of $5,000, so that his total

annual gift to each donee was $10,000-–an amount equal to the

annual exclusion.    Thus, petitioner concludes, decedent’s gifts

of C&L Bailey stock properly were not reported as taxable gifts.

     Although petitioner’s assumption of a $5,000 value for the

stock shares in question seems questionable, respondent does not
                               - 36 -

appear to dispute it.14   Respondent disputes petitioner’s

premise, however, as to the number of C&L Bailey shares decedent

gave to his relatives.    Respondent argues essentially that

because decedent’s stock holdings in C&L Bailey decreased from

150 shares to 50 shares between 1985 and 1993, he must have made

gifts of two shares per year to at least five of his descendants

for each of these 9 years.15   Leaving aside respondent’s

unsatisfactory math, which leaves 10 shares of stock unaccounted

for, and leaving aside the fact that respondent’s argument bears

no discernible relationship to his determination in the notice of

deficiency, we note that even these many alleged two-shares-at-a-

time gifts of stock shares over 9 years would result in no


     14
       To the contrary, in his opening brief, respondent appears
to embrace the assumed $5,000-per-share value. Respondent first
refers to the parties’ stipulations that decedent gave Roger,
Lillian, and Frances two shares each of C&L Bailey stock, and
that C&L Bailey redeemed these shares at $5,000 per share. On
the basis of these stipulations, respondent then asserts–-
mistakenly–-that petitioner has conceded the $30,000 increase in
taxable gifts as determined in the notice of deficiency. From
this mistaken assertion, we infer that respondent reckons the
$30,000 adjustment in the notice of deficiency as based on
decedent’s gifts of six shares of stock at a value of $5,000
each.
     15
       Viewed charitably, there is some tension between
respondent’s argument and the following stipulation of the
parties:

     3. Between the inception of C & L Bailey, Inc. and
     1993, the Decedent gave certain shares of C & L Bailey,
     Inc. stock to his descendants, including gifts of two
     shares of C & L Bailey, Inc. stock to his son, Roger
     Bailey, two shares of C & L Bailey, Inc. stock to his
     daughter-in-law, Lillian Bailey, and two shares of C &
     L Bailey, Inc. stock to his daughter, Jeanette Foster.
                               - 37 -

taxable gifts if we accept the $5,000 per-share value that

respondent does not appear to dispute.    Moreover, we are

unimpressed with respondent’s suggestion that the decrease in

decedent’s stockholdings can be explained only by supposing that

decedent gave the shares away.     In light of the previously noted

stipulation that C&L Bailey redeemed 100 shares of its stock from

1985 to 1993, it seems more plausible that C&L Bailey simply

redeemed some of decedent’s shares.

      After due consideration of the limited evidence in the

record, and bearing heavily against respondent, who has failed to

show any meaningful basis for his determination in the notice of

deficiency, we conclude and hold that respondent erred in

determining that decedent had unreported taxable gifts of C&L

Bailey stock in 1989 and 1993.16

D.   Administrative Expenses

      Petitioner claims $47,522 of administrative expenses that

were not claimed on the estate tax return.    Respondent has

conceded all these claimed administrative expenses except for



      16
       At trial, petitioner sought to raise new issues as to
whether decedent’s 1993 gift tax return erroneously reported a
$28,147 taxable gift to Frances Jeanette Foster and as to whether
decedent’s 1989 gift tax return overstated amounts of gifts to
Roger and Lillian Bailey. We decline to consider these
intrinsically factual issues raised for the first time at trial,
since they were not properly pleaded and resulted in surprise and
prejudice to respondent. See Estate of Mandels v. Commissioner,
64 T.C. 61, 73 (1975); see also Rules 34(b)(4), 41(b). In any
event, the evidence in the record does not credibly establish
petitioner’s entitlement to the relief sought.
                               - 38 -

$10,500 of claimed expenses, consisting of:   (1) $7,500 fees for

legal services of Dan McCraw, a Hot Springs, Arkansas, attorney,

and (2) $3,000 fees for legal services of George Plastiras, a

Little Rock, Arkansas, attorney.17   On the basis of all the

evidence, we conclude that petitioner has adequately established

that these disputed amounts were necessarily or reasonably

incurred in the administration of the estate.   Accordingly, we

hold that the claimed $47,522 of postreturn administrative

expenses is deductible from the value of the gross estate

pursuant to section 2053(a).

     To reflect the foregoing and the parties’ concessions,


                                          Decision will be

                                     entered under Rule 155.




     17
       Included in the $47,522 of postreturn administrative
expenses that petitioner has claimed is $4,899.19 of fees paid to
Joy Gibson (Gibson), a California attorney who handled the
California probate of decedent’s one-half ownership interest in
parcel 2. Respondent concedes that “the expense of bringing the
probate case to clear up title” should be deductible from the
gross estate. Respondent does not dispute that the fees paid to
Gibson were reasonably incurred for this purpose, but contends,
without explanation, that the deductible amount is only
$4,846.49. The parties have stipulated that the estate paid
Gibson $4,899.19. We deem respondent to have conceded that
$4,899.19 is deductible from the gross estate.
                                          - 39 -


                                        APPENDIX A

                          Net Asset Value of C&L Bailey

                                Estate Tax
                                  Return      Petitioner   Respondent      Holding

Assets
                            1
Arkansas Motel               $2,400,730       $2,380,000   $2,380,000     $2,380,000
California Motel              1,388,000          819,000    1,388,000      1,388,000
                                                  2           3
Other assets                    430,198             -–          202,252      202,252
  Total assets               $4,218,928       $3,199,000   $3,970,252     $3,970,252


Liabilities
                                    4
Loans from stockholders           -–             145,000         --            --
                                    4
Other liabilities                 -–           1,108,349    1,108,349      1,108,349
  Total liabilities         $1,253,266        $1,253,349   $1,108,349     $1,108,349

Net assets                  $2,965,662        $1,945,651   $2,861,903     $2,861,903

     1
       The estate tax return includes a $20,730 addition to the value of the
Arkansas motel described only as “Godbehere Appraisal.” The record is
silent as to what this amount represents. Neither party has included such
a separate amount in their calculations, and we ignore it in our holding.
     2
       On brief, petitioner omits from her net asset value calculations all
assets other than the motels. Because petitioner has not otherwise
disputed the existence or amounts of other assets as reported on the estate
tax return, we assume that the omission was inadvertent and deem petitioner
to have conceded the values of other assets in the lesser amounts
determined by respondent.
     3
       Respondent’s $202,252 of other assets consists of $104,816 cash,
$29,697 accounts receivable, $42,574 mortgage and real estate loans, and
$25,165 other current assets. All these amounts are as reflected on C&L
Bailey’s Dec. 31, 1995, balance sheet. Respondent has excluded $19,000
franchise fees deposits and $16,316 loans to stockholders as shown on the
corporate balance sheets.
     4
      The estate tax return provides no detail as to the types of
liabilities included in the net asset value calculation.
                                     - 40 -


                                   APPENDIX B

          Calculation of Value of Decedent’s 50 Shares C&L Bailey Stock

                                Estate Tax
                                  Return   Petitioner      Respondent     Holding

Value of C&L Bailey’s           $2,965,662    $1,945,651   $2,861,903   $2,861,903
  adjusted net assets
25% ownership percentage          $741,416      $486,413     $715,476    $715,476
Combined valuation discount
                                                     1
  rate (percent)                        50            60       41.952          50
Amount of discount                $370,708      $291,848     $300,157    $357,738
Discounted value of 50 shares     $370,708      $194,565     $415,319    $357,738
     1
       As indicated in note 10 of the opinion, on brief petitioner erroneously
treats the 40-percent claimed minority discount and 20-percent agreed-upon
minority discount as being additive rather than multiplicative.
