                       T.C. Memo. 1997-67



                     UNITED STATES TAX COURT


              JEWELL E. GRAY, DONOR, DECEASED and
     ESTATE OF JEWELL E. GRAY, DECEASED, JEWELL MAE DETJEN,
        PERSONAL REPRESENTATIVE, ET AL.,1 Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 18526-93, 18537-93,        Filed February 5, 1997.
                 18538-93.



     Daniel C. Johnson and Philip A. Diamond, for petitioner.

     James F. Kearney, for respondent.




     1
      The cases of Jewell E. Gray, Donor, Deceased, and Estate of
Jewell E. Gray, Deceased, Jewell Mae Detjen, Personal
Representative, docket No. 18526-93; Jewell E. Gray Revocable
Trust, Roger Coleman and Jewell Detjen, Co-Trustees, and Estate
of Jewell E. Gray, Deceased, First Union National Bank of
Florida, Personal Representative, docket No. 18537-93; and Estate
of Jewell E. Gray, Deceased, First Union National Bank of
Florida, Personal Representative, docket No. 18538-93, were
consolidated for trial, briefing, and opinion.
                               - 2 -


              MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency in

petitioner's estate tax of $1,179,865.2

     After concessions, we must decide the following issues:

     1.    Whether transfers totaling $1,724,198 from Beth W.

Corp. to or on behalf of decedent are loans.   We hold that the

transfers are not loans and that petitioner may not deduct the

transfers as a claim against the estate.

     2.    whether the value of the stock of Beth W. Corp. should

be discounted because Beth W. Corp. will be liable for tax on a

capital gain when and if it is paid for real property it sold to

trusts established by decedent.   We hold that the value of the

stock should not be discounted.

     3.    whether the appropriate discount for lack of

marketability for the stock of Beth W. Corp. is 40 percent, as

petitioner contends; zero, as respondent contends; or some other

amount.   We apply a 15-percent discount for lack of

marketability.

     Section references are to the Internal Revenue Code as in

effect on the date of death of Jewell E. Gray (decedent).     Rule

references are to the Tax Court Rules of Practice and Procedure.



     2
      Respondent concedes all of the issues in docket Nos. 18526-
93 (gift tax and generation skipping tax) and 18537-93
(generation skipping tax).
                                - 3 -


                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Decedent and Decedent's Estate

     Decedent, a resident of Broward County, Florida, died

testate on August 30, 1989.    In 1986, decedent owned all of the

stock of Beth W. Corp. (described below at par. B-1).       She

established a revocable trust and irrevocable trusts #1, #2, and

#3 (described below at par. C) and transferred some of her stock

to them before she died.    Decedent was the president of Beth W.

Corp. when she died.

     Jewell Pollett (Pollett) is decedent's granddaughter.

Pollett saw decedent about 3 times a week during the 10 years

before decedent died.   Pollett spoke with decedent on the

telephone daily and did personal things for her such as pay some

of her bills.

     The Broward County Probate Court appointed First Union

National Bank of Florida (First Union) to be the personal

representative of decedent's estate on January 5, 1990.       First

Union published a notice of administration to creditors and

interested parties on January 12, 1990.       Beth W. Corp. timely

filed a claim for $1,711,321.72 with the Broward County Probate

Court stating that decedent owed Beth W. Corp. that amount.

First Union did not file an objection to this claim.
                               - 4 -


     The most valuable asset in decedent's gross estate was Beth

W. Corp. stock.   Decedent owned 7,457 of the 9,040 shares through

the revocable living trust when she died.   The other shares were

owned by two of the irrevocable trusts.

B.   Beth W. Corp.'s Transfers to or on Behalf of Decedent

     1.   Beth W. Corp.

     Beth W. Corp. was a personal holding company.    Decedent

owned 82.49 percent of the stock of Beth W. Corp. when she died.

Beth W. Corp. has been a C corporation and used the accrual

method of accounting since its inception.   Decedent, as Beth W.

Corp.'s president, made most of the business decisions on a day-

to-day basis, and dealt with attorneys, bankers, and accountants.

     Pollett was an officer of Beth W. Corp. from 1982 to the

time of trial.

     Beth W. Corp. reported the following on its corporate income

tax return for fiscal year ending July 31, 1989:

          Assets
          Cash & marketable securities               $80,664
          Accounts receivable-trade                        0
          Inventories                                      0
          Other current assets                        56,277
          Total current assets                       136,941

          Loans to shareholders                    1,878,187
          Mortgages & R.E. loans                   2,265,000
          Marketable securities                      645,187
          Buildings & other depreciable assets             0
          Land (55.91 acres)                               0
          Other assets                               119,048
               Total Assets                        5,044,363
                                 - 5 -


          Liabilities
          Notes payable                                   0
          Accounts payable                           10,905
          Accrued expenses & other                        0
          Total current liabilities                  10,905

          Long term debt                                 0
          Deferred gain - sale of 55.91 acres    2,220,144
          Other liabilities - deferred taxes             0
               Total Liabilities                 2,231,049

          Shareholders' Equity
          Common stock                               9,040
          Paid-in or capital surplus                     0
          Treasury stock                                 0
          Retained earnings                      2,804,274
          Total shareholders' equity             2,813,314

               Total Liabilities & Equity        5,044,363

          Common shares outstanding                    9,040
          Book value per common share                    311.21

     When decedent died on August 30, 1989, Beth W. Corp. had

unrealized appreciation in marketable securities of $165,191.

     Beth W. Corp.'s balance sheet showed the same assets and

liabilities when decedent died as it reported on its corporate

income tax return for the year ending July 31, 1989.    The parties

agree that this balance sheet is correct except that they

disagree about whether decedent owed $1,724,198 to Beth W. Corp.

and whether deferred gain on a mortgage note receivable (built-in

capital gain) was a liability.

     2.   Transfers from Beth W. Corp. to Decedent

     Beth W. Corp. paid a substantial amount of money to and on

behalf of decedent.   Beth W. Corp. recorded the transfers to

decedent as loans in its books and records.   Beth W. Corp.'s
                                 - 6 -


books and records showed that decedent owed $1,724,198 to Beth W.

Corp. when she died.

     Beth W. Corp. reported the transfers as loans on its Federal

corporate income tax returns.    Beth W. Corp. paid Federal income

tax on interest on the transfers it received from decedent.

     Florida required corporations to pay intangible property tax

equal to .1 percent of their assets each year on January 1.     Beth

W. Corp. paid Florida about $5,000 per year for intangible

personal property taxes.   Beth W. Corp. reported the loans

receivable (i.e., $1,724,1983 it had transferred to decedent and

which decedent had not repaid) as an asset for purposes of the

Florida intangible personal property tax.   Beth W. Corp. had

$3,320,165 in other assets.

     At quarterly meetings or directors' meetings, Beth W. Corp.

prepared promissory notes which state that decedent owed Beth W.

Corp. the amounts transferred.    Decedent applied her name to the

notes with a stamp instead of signing them because she had palsy,

which made it difficult for her to sign her name.   Notes for

$483,953 (28 percent) of the amount claimed to be loans were not

offered into evidence; signed notes totaling $1,240,245 (72

percent) of the $1,724,198 were admitted into evidence.   Some of

the notes that Beth W. Corp. issued were demand notes and some


     3
      The parties do not explain the difference between the
$1,878,187 of shareholder loans reported in the balance sheet and
the $1,724,198 at issue here.
                                 - 7 -


had fixed repayment dates.4    Beth W. Corp. had made no demand for

payment on the demand notes when decedent died.    There are 14

signed promissory notes in evidence as follows:

                               Interest
         Date        Amount      Rate       Due Date      Paid
     Jun. 1, 1984   $760,000     10.5     May 31, 1989      No*
     Sep. 1, 1984     12,000     12.0     Aug. 31, 1989    Yes
     Oct. 1, 1984     14,000     12.0     Sep. 30, 1989    Yes
     Jan. 1, 1985     21,000     12.0     Dec. 31, 1990    Yes
     May 1, 1985      32,000     12.0     Apr. 30, 1990    Yes
     Jul. 1, 1985     24,000     12.0     Jul. 30, 1990    Yes
     Jul. 5, 1985     77,245     12.0     Jul. 5, 1993      No
     Aug. 1, 1985     26,000     11.0     Jul. 31, 1990     No
     Aug. 1, 1985    218,000     12.0     Jul. 31, 1990     No
     Mar. 1, 1986     12,000      8.5     Mar. 1, 1989      No*
     May 1, 1986      10,000      8.0     May   1, 1989     No*
     Jun. 1, 1986     10,000      8.0     Jun. 1, 1989      No*
     Jul. 1, 1986     10,000      8.5     Jul. 1, 1989      No*
     Aug. 1, 1986     14,000      8.5     Aug. 1, 1989      No*
         Total    $1,240,245

     Six of these notes (marked with "*") totaling $816,000, were

past due when decedent died.    Petitioner had paid only $103,000

of the $1,240,245 of notes in evidence that were due when she

died.    Decedent repaid some principal by forgoing receipt of some

redemptions and dividends owed to her by Beth W. Corp.    Beth W.

Corp.'s books and records showed that had happened.

     Decedent told her granddaughter, Pollett, that she intended

to repay the transfers (which decedent consistently referred to

as loans).    J. Marvin Smith (Smith), the trust administrator for

First Union, executor and fiduciary to decedent's estate,

believed that the transfers were loans to decedent from Beth W.


     4
        Petitioner did not offer any demand notes into evidence.
                                  - 8 -


Corp., which decedent's estate was obligated to repay.      First

Union did not object to paying Beth W. Corp.'s claim against

decedent's estate for the amount of transfers that decedent had

not repaid.

     3.   Interest Paid by Decedent to Beth W. Corp. and
          Dividends and Salary Paid by Beth W. Corp. to Decedent

     The following chart shows the amounts of interest paid by

decedent to Beth W. Corp. and dividends and salary that Beth W.

Corp. paid to decedent:

                       Interest      Dividends          Salary
                       Decedent    Beth W. Corp.     Beth W. Corp.
                       Paid To        Paid To           Paid To
          Year       Beth W. Corp.    Decedent          Decedent

          1985         $148,905           $200,000      $30,000
          1986          165,169            230,000       30,000
          1987          183,786            270,062       40,000
          1988          145,124            165,738       40,000
          1989           78,471            136,090       15,000

     Decedent paid income taxes on the dividends and salary she

received from Beth W. Corp.   Decedent paid some of the interest

and principal to Beth W. Corp. by journal entries.      Decedent used

some of the dividends to pay interest and principal.      Decedent

could have repaid Beth W. Corp. by liquidating Beth W. Corp.'s

assets.

C.   Trusts Created by Decedent

     Decedent created a revocable trust and irrevocable trusts #1

and #2 in December 1986.   She created irrevocable trust #3 on

March 19, 1987.   The trustees were Pollett, Jeffrey H. Beck
                                   - 9 -


(Beck) (an attorney for Beth W. Corp. and decedent), and Irwin A.

Weiser (Weiser).    Decedent transferred Beth W. Corp. stock to the

irrevocable trusts during her life.

     1.     Revocable Trust

     Decedent was the beneficiary of the revocable trust during

her lifetime.    After she died, the beneficiaries of the revocable

trust were her husband, Clifford Gray; her sister, Gladys White;

her nephew, Rex Deason; her granddaughter, Pollett; and three

great-grandchildren.    Decedent transferred 7,991 shares of Beth

W. Corp. stock to the revocable trust in 1987.

     Decedent transferred 534 shares of Beth W. Corp. stock from

the revocable trust to Beth W. Corp. (454 shares on June 30, 1987

and 80 shares on July 31, 1988).      Decedent reported the amount

received in exchange for the June 30, 1987, transfer as a

$270,062 dividend on her 1987 Federal income tax return.      She

reported the amount received in exchange for the July 31, 1988,

transfer as a $45,146 dividend on her 1988 Federal income tax

return.

     2.     Irrevocable Trust #1

     Clifford Gray was the income beneficiary of irrevocable

trust #1.    The trust agreements stated that when he died, the

remainder was to be distributed to irrevocable trust #2.

     Decedent transferred 765 shares of Beth W. Corp. stock to

irrevocable trust #1 on December 23, 1986.      She reported on her
                                - 10 -


1986 gift tax return that the value of the transfer was $456,705.

She claimed a marital deduction of $456,705 for the gift under

section 2523.

     The assets in irrevocable trust #1 were transferred to

irrevocable trust #2 after Clifford Gray died on January 5, 1988.

     3.     Irrevocable Trust #2

     The trust agreements provided that the income and principal

of irrevocable trust #2 was to be accumulated during decedent's

lifetime.    Decedent's granddaughter and great-grandchildren were

the remainder beneficiaries of irrevocable trust #2.

Irrevocable trust #2 transferred 109 shares of Beth W. Corp.

stock to Beth W. Corp. on March 19, 1988, and 75 shares on July

31, 1989.    Irrevocable trust #2 treated those transfers as

redemptions and reported the amounts received in exchange as

dividends on its income tax returns.     The redemptions were

recorded on duly executed stock certificates.

     4.     Irrevocable Trust #3

     Decedent created and transferred 1,004 shares of Beth W.

Corp. stock to irrevocable trust #3 on March 19, 1987.     The trust

agreement for irrevocable trust #3 required the trustees to

distribute all principal and accumulated income to Pollett when

decedent died.    Irrevocable trust #3 did not grant to any

beneficiary a power to demand immediate possession of any part of

the corpus.     Decedent reported on her 1987 gift tax return that
                              - 11 -


the transfer of the 1,004 shares was a taxable gift which had a

total value of $595,090.88.

     Irrevocable trust #3 transferred 134 shares of Beth W. Corp.

stock to Beth W. Corp. on March 19, 1988, and 108 shares on July

31, 1989.   Irrevocable trust #3 treated the transfers as a

redemption and reported the amount received in exchange as

taxable dividends on its income tax returns.

     Petitioner and the trusts recorded the dividends and

redemptions on their books and records.   Petitioner recorded the

redemptions on duly executed stock certificates.   Petitioner

reported the dividends and redemptions on its income tax returns.

D.   Land Sale

     Beth W. Corp. sold 55.91 acres of unimproved, non-income

producing land to irrevocable trusts #2 and #3 on March 19, 1987,

for $2,265,000.   The parties obtained two appraisals before the

sale.   The average value of the two appraisals was $1,882,000.

     The trusts paid for the 55.91 acres with a promissory note

for $2,265,000 secured by the 55.91 acres and a $500,000

mortgage.   The note required the trustees to pay interest at a

rate of 6.15 percent per year.   The principal was due on March

19, 1990.   The mortgage provided that Beth W. Corp. could

foreclose on the trusts in the event of default.

     Beth W. Corp. reported the sale of the 55.91 acres on its

Federal income tax return for its taxable year ending July 31,
                               - 12 -


1987.    Beth W. Corp. realized a taxable capital gain of

$2,220,143, but did not recognize it (built-in capital gain)

because it elected installment sale treatment.5

     The trustees wanted to have the 55.91 acres rezoned so they

could sell it for a profit and repay the promissory note.     They

retained counsel, who arranged to have the zoning of the 55.91

acres changed to commercial.

     The trustees listed the 55.91 acres for sale with a realtor.

Despite the realtor's efforts and a price reduction (of an amount

not specified in the record), the trusts had not sold the 55.91

acres by the time of trial.    Several other comparable

developments already underway in the same area were not doing

well.

     Beck resigned as a trustee early in 1989.    First Union

succeeded Beck as a trustee.    Smith, the trust administrator for

First Union, was responsible for irrevocable trusts #2 and #3.

     The trusts paid the interest that was due on the note in

1988 and 1989, but did not pay the principal when it was due in

March 1990.    Beth W. Corp. paid Federal income tax on the

interest it received on the note.    Beth W. Corp. had not

foreclosed on the mortgage as of the date of trial.

     The fair market value of the 55.91 acres was $2,265,000 when

decedent died.


     5
      The parties stipulated that the real estate transfer was
not a taxable gift or generation skipping transfer.
                                - 13 -


E.   The Certified Public Accountants

         Irwin A. Weiser, a certified public accountant for 38

years, provided accounting services to Beth W. Corp., decedent,

and irrevocable trusts #2 and #3 from about 1964 to 1988.     He was

Beth W. Corp.'s treasurer for about 15 years during that time.

He was familiar with Beth W. Corp.'s practices for keeping

records and paying taxes.

     Albert W. Todd, a C.P.A. for 33 years, provided accounting

services for decedent, Beth W. Corp., and irrevocable trusts #2

and #3 after Weiser left.     He prepared tax returns for Beth W.

Corp., the irrevocable trusts, and decedent's estate.     He wrote

checks, made bank deposits, and prepared the books and records

(including financial statements) for Beth W. Corp.

F.   Decedent's Estate Tax Return

     On decedent's estate tax return, the estate reported a gross

estate of $2,813,175, deductions of $1,772,808, and adjusted

taxable gifts of $595,091.6    The estate did not elect the

alternate valuation date under section 2032.

     The estate reported that the value of decedent's Beth W.

Corp. stock was $2,293,800, or $307.61 per share.     The estate


     6
      The parties have stipulated that the gross estate should be
increased by $3,343 because petitioner inadvertently omitted a
$1,545 bank account from the gross estate and understated the
amount of life insurance paid to decedent's estate by $1,798.
The parties have also stipulated that decedent's estate may
deduct $1,251 less than it claimed, based on a change in the
amount allowed for executor's commissions and administration
expenses.
                                - 14 -


reported that decedent owed $1,724,198 to Beth W. Corp. when she

died.

                                OPINION

A.   Whether the Transfers from Beth W. Corp. to Decedent Are
     Loans or Dividends

        1.   Background and Contentions of the Parties

        Petitioner contends that the transfers from Beth W. Corp. to

or on behalf of decedent are loans which decedent owed to Beth W.

Corp. during her life and which are deductible as a claim against

decedent's estate under section 2053(a).

        A transfer of money is a loan for Federal income tax

purposes if, at the time the funds were transferred, the

transferee unconditionally intended to repay the money, and the

transferor unconditionally intended to secure repayment.       Haag v.

Commissioner, 88 T.C. 604, 616 (1987), affd. without published

opinion 855 F.2d 855 (8th Cir. 1988); see also Haber v.

Commissioner, 52 T.C. 255, 266 (1969), affd. 422 F.2d 198 (5th

Cir. 1970); Saigh v. Commissioner, 36 T.C. 395, 419 (1961).

        Respondent concedes that if we decide that the transfers at

issue are loans, then they are included in the value of the stock

of Beth W. Corp., and petitioner may deduct the amount of the

unpaid transfers as a claim against the estate under section

2053.
                               - 15 -


     2.   Applicable Factors

     The following factors suggest that a transfer to a

shareholder from a corporation is a loan rather than a dividend:

(a) The shareholder does not control the corporation; (b) the

corporation is restricted in the amount of funds it can lend to

the shareholder; (c) the corporation has had substantial earnings

and paid a large amount of dividends; (d) the shareholder is able

to repay the amount transferred; (e) the corporation seeks

repayment; (f) there is an interest-bearing note or other

evidence of indebtedness; (g) there is a fixed repayment

schedule; (h) there is security or collateral; (i) there is a

written loan agreement; (j) the parties treat the transactions as

loans in their records; (k) the borrower has made repayments; and

(l) the borrower intended to repay the amounts transferred.

Busch v. Commissioner, 728 F.2d 945, 948 (7th Cir. 1984), affg.

T.C. Memo. 1983-98; Dolese v. United States, 605 F.2d 1146, 1153

(10th Cir. 1979); Alterman Foods, Inc. v. United States, 505 F.2d

873, 877 n.7 (5th Cir. 1974); Road Materials, Inc. v.

Commissioner, 407 F.2d 1121, 1123-1124 (4th Cir. 1969), affg. in

part and vacating in part T.C. Memo. 1967-187; Zimmerman v.

United States, 318 F.2d 611, 613 (9th Cir. 1963); Clark v.

Commissioner, 18 T.C. 780, 783 (1952), affd. 205 F.2d 353 (2d

Cir. 1953); Frierdich v. Commissioner, T.C. Memo. 1989-393, affd.

925 F.2d 180 (7th Cir. 1991); McLemore v. Commissioner, T.C.

Memo. 1973-59, affd. 494 F.2d 1350 (6th Cir. 1974).   The factors
                               - 16 -


are not exclusive, and no one factor controls.     See John Kelley

Co. v. Commissioner, 326 U.S. 521 (1946); Litton Bus. Sys., Inc.

v. Commissioner, 61 T.C. 367, 376-377 (1973); Roschuni v.

Commissioner, 29 T.C. 1193, 1201-1202 (1958), affd. 271 F.2d 267

(5th Cir. 1959).    We apply these factors next.

            a.   The Shareholder's Degree of Control Over the
                 Corporation

     Decedent owned 82.49 percent of Beth W. Corp.'s stock when

she died.    She was Beth W. Corp.'s president, made the daily

business decisions, and had complete control of Beth W. Corp.

This factor favors respondent.

            b.   The Degree to Which Beth W. Corp. Was Restricted
                 in Transferring Funds to or on Behalf of Decedent

     There is no evidence that Beth W. Corp. was limited in the

amount it could transfer to decedent.    This factor favors

respondent.

            c.   Beth W. Corp.'s Dividends and Earnings History

     Beth W. Corp. paid a substantial amount of dividends to

decedent.    This factor favors petitioner.

            d.   Decedent's Ability To Repay

     Decedent could have repaid the amounts transferred only if

she had liquidated Beth W. Corp.    This factor favors respondent.

            e.   Beth W. Corp.'s Attempts To Enforce Repayment

     Decedent had not paid $1,621,198 of the $1,724,198 that

petitioner claims is a loan when decedent died.    There is no
                                  - 17 -


evidence that Beth W. Corp. tried to collect any of the unpaid

amount.    This factor favors respondent.

            f.      The Existence of Notes or Other Evidence of
                    Indebtedness

     Petitioner contends this factor favors petitioner because

Beth W. Corp. prepared promissory notes for decedent.      We

disagree.

     The parties stipulated to copies of 14 stamped promissory

notes totaling $1,240,245 and one unsigned note in the amount of

$176,423.12.      Most of that amount was past due when decedent

died.     Beth W. Corp.'s books and records show that decedent paid

$103,000 of the amount due when she died by forgoing payments for

redemptions and dividends.      That amount is less than 6 percent of

the amount that petitioner contends decedent owed to Beth W.

Corp.

     The parties to the notes do not appear to have treated the

notes with much substance because they largely ignored their

terms.     This factor favors respondent.

             g.     Fixed Repayment Schedule

     Petitioner contends that there was a fixed schedule to repay

the transfers because the notes had due dates.      We disagree.

Petitioner did not introduce a repayment schedule.      Decedent did

not pay the notes when due.      When decedent died, $816,000 was due

but unpaid.       Some of the notes were payable on demand, but Beth

W. Corp. had not made any demand for payment on those notes.       We
                                  - 18 -


conclude that the parties did not have a fixed repayment

schedule.    This factor favors respondent.

            h.      Security or Collateral

     Petitioner contends that decedent provided collateral to

Beth W. Corp. for the purported loans in the form of a $500,000

mortgage on her home, but introduced no convincing evidence to

establish that this had happened.       Even if true, this does not

establish that decedent gave Beth W. Corp. adequate collateral

for the transfers.       This factor favors respondent.

            i.      Existence of a Written Loan Agreement

     There was no written loan agreement.       This factor favors

respondent.

            j.      Treatment as Loans in Records

     Decedent and Beth W. Corp. recorded and treated the

transfers as loans.       Beth W. Corp. reported interest income and

decedent recognized dividends owing to her that she used to repay

the loans.       Beth W. Corp. reported the transfers as loans

receivable on its Florida intangible property returns.       This

factor favors petitioner.

            k.      Repayments

     Decedent had received but not repaid transfers of $1,724,198

when she died.       Beth W. Corp. deemed $103,000 of the notes

satisfied.       This was apparently done by forgoing payments of

redemptions and dividends by Beth W. Corp.       This factor favors

respondent.
                                 - 19 -


           l.      Intent to Repay

     Petitioner contends that Weiser's and Pollett's testimony

establishes that decedent intended to repay the amounts

transferred.     We disagree.   Weiser testified that decedent did

not tell him that she did not intend to repay the purported

loans.    This does not show that decedent intended to repay the

transfers.      Pollett testified that decedent told her that she

intended to repay the transfers.        However, decedent had repaid

only $103,000 of the amounts transferred when she died, leaving a

claimed balance of $1,724,198.        The testimony that decedent

intended to repay those funds is less persuasive than decedent's

conduct.    This factor favors respondent.

     3.    Conclusion

     Courts carefully scrutinize a taxpayer's claim that

transfers from corporations to their sole stockholders are loans.

Turner v. Commissioner, 812 F.2d 650, 654 (11th Cir. 1987), affg.

T.C. Memo. 1985-159.      Petitioner argues that the notes decedent

gave to Beth W. Corp. and decedent's and Beth W. Corp.'s records

establish that the transfers were loans; however, we give less

weight to written evidence of debt, bookkeeping and financial

reporting, and the labels used by the parties when, as here, the

corporation is closely held.         Fin Hay Realty Co. v. United

States, 398 F.2d 694, 697 (3d Cir. 1968); Calumet Indus., Inc. v.

Commissioner, 95 T.C. 257, 286 (1990); Jos. N. Neel Co. v.

Commissioner, 22 T.C. 1083, 1090 (1954).        We give more weight to
                               - 20 -


the objective evidence present here:    decedent's failure to repay

the transfers and Beth W. Corp.'s lack of effort to collect, even

though most of the notes were past due; the absence of a

repayment schedule, adequate collateral, or a loan agreement; and

the lack of objective evidence that decedent intended to repay

the amounts transferred.   We conclude that the transfers were not

loans.   Petitioner may not deduct the transfers as a claim

against the estate under section 2053(a), and the transferred

amounts are not an asset of Beth W. Corp.

B.   Discount for Tax Liability on Built-In Capital Gain7

     Beth W. Corp. will be liable for income tax on a built-in

capital gain of $2,220,143 if and when the trusts pay the agreed

amount for the 55.91 acres.    Sec. 453(a).   Petitioner contends

that the stock of Beth W. Corp. should be discounted to take into

account this tax liability.8




     7
      The parties agree that the value of Beth W. Corp. stock
before discounts (assuming that the transfers are not loans,
decided above) equals the net market value of its assets. That
amount is $1,254,307.
     8
      Courts have not allowed a discount for built-in capital
gain tax for an asset owned by the corporation if the corporation
was not likely to pay tax on the capital gain. See, e.g., Estate
of Piper v. Commissioner, 72 T.C. 1062, 1087 (1979); Estate of
Huntington v. Commissioner, 36 B.T.A. 698, 706 (1937).
Conversely, courts have allowed a discount for built-in capital
gains if, among other factors, payment of tax on a capital gain
is likely. See, e.g., Clark v. United States, 36 AFTR 2d 75-
6417, at 75-6419, 75-6420, 75-1 USTC par. 13,076 at 87,486,
87,489 (E.D. N.C. 1975); Obermer v. United States, 238 F. Supp.
29, 34, 36 (D. Hawaii 1964).
                                - 21 -


     The fair market value of property on either the date of a

decedent's death or on the alternate valuation date is included

in a decedent's gross estate.    Secs. 2031(a), 2032(a); sec.

20.2031-1(b), Estate Tax Regs.    Petitioner did not elect to value

the estate on the alternate valuation date.     Thus, we must decide

the fair market value of decedent's Beth W. Corp. stock on the

date of death.

     The fair market value of stock, including whether a discount

applies, is a question of fact.    Commissioner v. Scottish Am.

Inv. Co., 323 U.S. 119, 123-125 (1944); Helvering v. National

Grocery Co., 304 U.S. 282, 294 (1938); Estate of Newhouse v.

Commissioner, 94 T.C. 193, 217-218, 245 (1990).

     It is speculative if, when, and for what price the trusts

will sell the 55.91 acres and pay Beth W. Corp.     Payment on the

note was due in 1990 but had not been made as of the time of

trial.   We infer that payment on the note depended on sale of the

55.91 acres by the trusts.   Beth W. Corp. had a right of

foreclosure against the 55.91 acres.     If it exercised that right

it would not pay tax on capital gain for sale of the land unless

it found another buyer.   Sec. 1038.     The trusts had not sold the

land as of the time of trial despite a price reduction.

Petitioner has not shown that it is likely that Beth W. Corp.

will pay tax on the built-in capital gain.9


     9
      See Estate of Robinson v. Commissioner, 69 T.C. 222, 226
                                                   (continued...)
                                - 22 -


        Petitioner contends that repeal of the General Utilities

doctrine10 entitles it to a discount for built-in capital gains.

A corporation could liquidate without paying corporate level tax

on its capital gain under the General Utilities doctrine and

sections 336 and 337 before their repeal by the Tax Reform Act of

1986, Pub. L. 99-514, sec. 631(a), 100 Stat. 2269-2282.    Repeal

of the General Utilities doctrine makes it more difficult to

avoid capital gain tax liability at the corporate level.

However, repeal of the General Utilities doctrine has no bearing

here because a corporation generally recognizes built-in gain if

it distributes an installment obligation without regard to the

General Utils. doctrine.    See sec. 453B(a); Krist v.

Commissioner, 231 F.2d 548, 550 (9th Cir. 1956); Affiliated

Capital Corp. v. Commissioner, 88 T.C. 1157, 1171 (1987).

     We conclude that the value of the stock of Beth W. Corp.

should not be discounted for built-in tax liability on a capital

gain.




     9
      (...continued)
(1977) (decedent owned an installment obligation which we did not
discount for income tax payable on collections of future
installment payments on the note).
     10
       The General Utilities doctrine originated in General
Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935).
                               - 23 -


C.   Discount for Lack of Marketability

     A discount for lack of marketability may apply if there is

no ready market for shares in closely held corporations.       Estate

of Andrews v. Commissioner, 79 T.C. 938, 953 (1982).    Petitioner

must prove that a discount for lack of marketability should apply

and the appropriate amount of the discount.    Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933); Estate of Gilford v.

Commissioner, 88 T.C. 38, 50-51 (1987).

     Respondent contends that the value of decedent's Beth W.

Corp. stock should not be discounted for lack of marketability

because decedent owned a controlling interest in Beth W. Corp.

We disagree.   A controlling interest in a nonpublic corporation

may be unmarketable.    Estate of Andrews v. Commissioner, supra.

Respondent offers no authority that a marketability discount does

not apply when valuing a controlling interest.

     Respondent contends that a discount for lack of

marketability applies only to property valued by using comparable

sales or freely traded value and not by reference to net asset

value.   We disagree.   Marketability discounts may apply to

companies that were valued using the net asset value method.

See, e.g., Ward v. Commissioner, 87 T.C. 78, 109 (1986); Harwood

v. Commissioner, 82 T.C. 239, 268-269 (1984), affd. 786 F.2d 1174
                              - 24 -


(9th Cir. 1986); Estate of Piper v. Commissioner, 72 T.C. 1062,

1084, 1086.11

     Respondent contends that no discount for lack of

marketability applies here because we held in Estate of Cloutier

v. Commissioner, T.C. Memo. 1996-49, that a discount for lack of

marketability applies only to a stock's freely traded value, and

petitioner did not apply it to freely traded value.     We disagree.

Petitioner's expert testified that he used the stock's freely

traded value.   Estate of Cloutier is distinguishable on that

basis.    Respondent did not challenge petitioner's expert's

testimony on this point.

     Beth W. Corp. has no source of income other than dividends,

interest, or sale of its assets.   Petitioner's expert testified

that there is no ready market for the stock of Beth W. Corp.

Respondent provided no evidence to the contrary.

     We conclude that a discount for lack of marketability

applies here.

     Petitioner used a 35-percent discount for marketability on

its estate tax return.   Petitioner's expert used a 40-percent

discount for marketability.   Petitioner contends that we should


     11
      See also Estate of Frank v. Commissioner, T.C. Memo. 1995-
132; Estate of Luton v. Commissioner, T.C. Memo. 1994-539; Estate
of Ford v. Commissioner, T.C. Memo. 1993-580, affd. 53 F.3d 924
(8th Cir. 1995); Estate of Bennett v. Commissioner, T.C. Memo.
1993-34; Estate of Dougherty v. Commissioner, T.C. Memo. 1990-
274; Gallun v. Commissioner, T.C. Memo. 1974-284; Estate of Maxcy
v. Commissioner, T.C. Memo. 1969-158, revd. in part on other
grounds 441 F.2d 192 (5th Cir. 1971).
                               - 25 -


apply a 40-percent discount for lack of marketability.   We

disagree.

     Petitioner's expert relies on our analysis in Mandelbaum v.

Commissioner, T.C. Memo. 1995-255, affd. 91 F.3d 124 (3d Cir.

1996).   In Mandelbaum, we used studies of marketability discounts

for sales of similar interests in similar companies to establish

a benchmark, then compared the facts and circumstances of that

case to the benchmark to conclude that a 30 percent discount for

lack of marketability applied.   The corporation in that case was

very different from Beth W. Corp.   It owned women's apparel

retail stores and had total annual revenue of $124,898,972 in

1985 that grew steadily to $270,903,000 in 1991.   The

shareholders in Mandelbaum had agreements that restricted

transfer of stock.

     Here, petitioner's expert cited a series of studies of

discounts for lack of marketability with various ranges,

averages, and medians.   However, he did not show that the

companies in the studies were similar to Beth W. Corp. from the

standpoint of marketability.   Thus, we do not use those studies

here.

     We conclude that petitioner's expert overstated the amount

of the appropriate discount for lack of marketability.   We

believe the proper amount of the discount for lack of

marketability is 15 percent.
                             - 26 -


     The value of 82.49 percent of Beth W. Corp. stock was

$879,476.12 ($1,254,307 x .85 x .8249) on August 30, 1989.

     To reflect concessions and the foregoing,



                                             Decisions will be

                                   entered under Rule 155.
