                        T.C. Memo. 1997-53



                      UNITED STATES TAX COURT



              ESTATE OF W. CLYDE WRIGHT, DECEASED,
            BRIAN R. WRIGHT, EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2554-94.                     Filed January 29, 1997.



     Philip J. Kramer, for petitioner.

     Raymond M. Boulanger, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined a deficiency of

$2,275,040 in the Federal estate tax of the Estate of W. Clyde

Wright (decedent).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect on April 20, 1990, the date
                                 - 2 -

of decedent's death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     After settlement, the sole issue for decision is the value,

as of October 20, 1990 (the alternate valuation date), of 201,408

shares of common stock of the Wilber Corp. (Wilber Corp).


                         FINDINGS OF FACT

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

     At the time of decedent's death, decedent resided in Otsego

County, New York.   At the time the petition was filed, the

executor resided in Vestal, New York.    Petitioner opted to use

the alternate valuation date of October 20, 1990, for purposes of

valuing decedent's stock in Wilber Corp.

     At the time of his death, decedent owned 201,408 shares or

23.8 percent of the total 847,524 shares of common stock of

Wilber Corp.   Wilber Corp holds 100 percent of the common stock

of Wilber National Bank (Wilber Bank or the bank).   Wilber Bank

is a federally chartered bank.    Wilber Corp’s stock is not listed

on any stock exchange but is traded infrequently on the over-the-

counter market.

     The following schedule identifies, as of October 20, 1990,

the 10 largest shareholders of Wilber Corp, and for each

shareholder the number and percentage of shares owned:
                                - 3 -

     10 Largest Shareholders             Number of     Percentage of
         of Wilber Corp                 Shares Owned   Total Shares

     Estate of W.C. Wright                 201,408        23.8
     David Wilber                           80,000         9.4
     Farone Foundation Trust                78,000         9.2
     Magdeline Farone Trust                 36,764         4.3
     Anna Farone Trust                      36,764         4.3
     Jesuits of Holy Cross                  31,412         3.7
     Sterling Harrington                    30,872         3.6
     Shearson Lehman Hutton                 16,624         2.0
     Ruth Fox Trust                         12,804         1.5
     Brian R. Wright                        12,592         1.5

              Total                                        63.3


     As of October 20, 1990, all of the above shareholders had

held their shares of stock in Wilber Corp for many years.         The

shareholders in Wilber Corp not identified in the above schedule

were apparently employees who, over the years, were given a few

shares of stock or local investors and charitable trusts that,

over the years, had obtained a few shares of stock.

     Wilber Bank was formed in the 1870's as a community bank in

Oneonta, New York.    Wilber Bank has had a strong performance

record, relying mainly on the local, rural economy for its

business.   Wilber Bank's business consists primarily in making

agricultural, consumer, and real estate loans, and in providing

typical banking services to small businesses and individuals.

     During the 1970's, in an unsuccessful attempt to acquire

control of Wilber Bank, the Bank of New York made a tender offer

for all of the shares of stock of Wilber Bank well above book
                                - 4 -

value of the shares and above the over-the-counter price of the

shares.

     During the 1980's, Wilber Bank developed a strong loan

portfolio.   From the mid-1980's through September of 1990, Wilber

Bank's total assets steadily increased, and, overall,

profitability remained constant.

     In February of 1990, the shares of stock in Wilber Corp were

split 4-to-1 and increased dividends were declared on the shares.

Also in 1990, while much of the Nation's banking industry was

experiencing an economic downturn due to the savings and loan

crisis, Wilber Bank expanded its activity in the Oneonta region

by acquiring two branches of another local bank.

     As of September 30, 1990, Wilber Bank held assets totaling

$284,590,000.

     Approximately 10,000 shares of common stock of Wilber Corp

were traded each year on the over-the-counter market.   Generally,

no blocks of Wilber Corp stock larger than 500 shares were ever

traded, and the small number of shares of stock in Wilber Corp

that traded in the month of October of 1990 traded at an average

sales price of $50 per share.   On or about October 20, 1990,

there existed a waiting list of perhaps 50 investors who were

interested in acquiring shares of stock in Wilber Corp.

     Wilber Corp's articles of incorporation state that no

merger, consolidation, dissolution, or sale of all or of
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substantially all of the assets of the corporation may occur

without approval of at least 66 2/3 percent of the shareholders.

     On January 20, 1991, petitioner timely filed decedent’s

Federal estate tax return, and, for purposes of valuing the

201,408 shares of stock in Wilber Corp that decedent owned as of

the date of his death, petitioner elected to use on the estate

tax return the alternate valuation date of October 20, 1990.

Petitioner attached to the Federal estate tax return a letter

prepared by Alex Sheshunoff & Co., Inc. (petitioner’s first

expert), a national investment banking firm that maintains a

division specializing in the appraisal of banks and bank stock,

in which this expert valued decedent’s 201,408 shares of stock in

Wilber Corp, after discounting for various factors, at

$7,653,504, or $38 per share.

     On audit, respondent obtained an appraisal of decedent's

201,408 shares of stock in Wilber Corp from Business Valuation

Services, Inc. (BVS).   Respondent's expert considered the same

basic factors used by petitioner's expert but applied a control

premium, valuing decedent's 201,408 shares of stock in Wilber

Corp at $13,562,815, or $67.34 per share.


                                OPINION

     Fair market value is defined as the price at which property

would change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or sell and both having
                                 - 6 -

reasonable knowledge of relevant facts.    United States v.

Cartwright, 411 U.S. 546, 551 (1973); Collins v. Commissioner,

3 F.3d 625, 633 (2d Cir. 1993), affg. T.C. Memo. 1992-478; Estate

of Hall v. Commissioner, 92 T.C. 312, 335 (1989); sec.

20.2031-1(b), Estate Tax Regs.    The question of fair market value

involves a question of fact, and the trier of fact must weigh all

relevant evidence and draw appropriate inferences.    Commissioner

v. Scottish Am. Inv. Co., 323 U.S. 119, 123-125 (1944); Hamm v.

Commissioner, 325 F.2d 934, 938 (8th Cir. 1963), affg. T.C. Memo.

1961-347; Estate of Newhouse v. Commissioner, 94 T.C. 193, 217

(1990); Estate of Andrews v. Commissioner, 79 T.C. 938, 940

(1982).

      In valuing shares of stock, the price at which shares are

sold, on a stock exchange, in an over-the-counter market, or

otherwise, is often the best evidence of the value.    Dellacroce

v. Commissioner, 83 T.C. 269, 288 (1984); Estate of Damon v.

Commissioner, 49 T.C. 108, 115 (1967); sec. 20.2031-2(b)(1),

Estate Tax Regs.

     In addition to the selling price of shares of stock, other

factors and elements of value are often considered, particularly

where stock of a nonpublicly traded company is being valued.

Estate of Gilford v. Commissioner, 88 T.C. 38, 49 (1987); sec.

20.2031-2(e), Estate Tax Regs.    Additional factors that are

relevant in valuing shares of stock include the following:
                               - 7 -

     (1)   The economic outlook in general and the condition
           and outlook of the specific industry;

     (2)   The book value of the stock and financial
           condition of the company;

     (3)   The earning capacity of the company;

     (4)   The dividend-paying capacity;

     (5)   Whether or not the enterprise has goodwill or
           other intangible value;

     (6)   The market price of shares of stock of companies
           engaged in the same or similar line of
           business;

     (7)   The company's net worth.

     (8)   The size of the block of stock to be valued.


See sec. 20.2031-2(f)(2), Estate Tax Regs.; Rev. Rul. 59-60,

1959-1 C.B. 237.

     Petitioner’s first expert rated Wilber Bank, in comparison

to other U.S. banks with similar total assets, with respect to

return on assets, return on equity, asset quality (specifically

nonperforming loans), and liquidity, as indicated in the

following schedule:


                               Rating of Wilber Bank Among U.S.
  Factors of Comparison        Banks With Similar Total Assets

  Return on Assets                     Top          4%
  Return on Equity                     Top         21%
  Nonperforming Loans                  Bottom      41%
  Liquidity                            Bottom      31%


     In October of 1990, an independent report published by First

Albany Corp. (First Albany report), a regional investment banking
                               - 8 -

company, rated Wilber Bank as having the highest estimated 1990

earnings per share and the second highest estimated 1990 dividend

payment per share of any upstate New York commercial bank.     Out

of the upstate New York commercial banks, the First Albany report

recommended that investors purchase shares of stock in four banks

or bank holding companies, one of which was Wilber Corp.

     In the instant case, shares of stock in Wilber Corp were

traded in small quantities in the over-the-counter market on and

around the valuation date, at a price of approximately $50 per

share.   Both parties' experts appear to have used this figure as

a starting point in valuing decedent's 201,408 shares of stock in

Wilber Corp.

     Petitioner's first expert valued the shares of stock in

Wilber Corp at $7,653,504, or $38 per share.   Petitioner’s expert

utilized:   (1) The comparable market approach to valuation,

comparing Wilber Corp's book value, earnings per share, price-to-

book-value ratio, adjusted book value, and adjusted earnings with

those of similarly sized, publicly traded banks and bank holding

companies, and (2) the income or investment value approach to

valuation, calculating the net present value and future earnings

of Wilber Corp and the return on investment using a 12-percent

rate of return.   Also, although the size of the block of stock

was considered and taken into account in arriving at a value of

$38 per share, petitioner's first expert testified that he did

not factor in a specific and separate discount or premium
                              - 9 -

percentage to reflect the size of the block of stock to be

valued.

     For the 10 years subsequent to the valuation date,

petitioner's first expert projected for Wilber Corp a low

dividend yield, low asset growth, low net income growth, low

return on average assets, and low return on average equity.

     At trial, petitioner's second expert focused on the

significant size of the block of stock to be valued, the limited

type and number of investors that would be capable of purchasing

the large block of stock (namely, banks and other financial

institutions), and the regulatory restrictions that he believed

would discourage such investors from purchasing the block of

stock.

     Petitioner's second expert opined that the October sales

price of approximately $50 per share on the over-the-counter

market did not accurately indicate the price that investors would

pay for the shares of decedent's stock if all 201,408 shares

became available at the same time.    Petitioner's second expert

concluded that the market could only absorb a sale of 15,000 to

20,000 shares of stock in Wilber Corp at the October sales price

of approximately $50 per share, and that, within a reasonable

period of time, the increased supply of shares would flood the

market and cause the market price of the shares to decrease to

perhaps as low as $34 per share.
                              - 10 -

     Both of petitioner's experts opined that a control premium

should not be applied to decedent's block of 201,408 shares

because they believed that the shares (representing 23.8 percent

of the stock in Wilber Corp) did not constitute a controlling

interest.   Based on their valuations and on their analyses with

respect to the number of shares to be valued, petitioner's

experts concluded that, as of October 20, 1990, the value of the

201,408 shares of Wilber Corp's stock that were owned by decedent

at the time of his death was $7,653,504, or $38 per share.

     Respondent's expert relied primarily on a market transaction

approach to valuation in concluding that, as of October 20, 1990,

the value of decedent's shares of stock in Wilber Corp was

$13,562,815, or $67.34 per share.   Respondent's expert

acknowledged that, in October of 1990, the economy was in a

recession and that in the Northeast region the economy was

experiencing a particular downturn due to financial difficulties

of its two primary industries, defense and finance.

     With respect, however, specifically to the Oneonta, New York

region, respondent's expert concluded that the region (because it

was more rural and less tied to the defense and finance

industries) was less likely to be affected by general economic

difficulties of the Nation and of the Northeast region.

     Respondent's expert concluded that petitioner's experts'

valuations of the shares of stock in Wilber Corp were
                             - 11 -

unreasonably low and inconsistent with Wilber Corp's historically

strong financial position.

     Respondent's expert then relied heavily on a hypothetical

scenario in which a single investor or group of investors

(purchasers) might purchase decedent's entire block of stock

(representing a 23.8-percent interest in Wilber Corp) and use

this block of stock to force the Farone family trusts, the

Jesuits of Holy Cross, other charitable trusts, and other current

holders of shares of stock in Wilber Corp to sell their shares to

the purchasers, enabling the purchasers to acquire at least 51

percent or effective control of Wilber Corp.   Because of

respondent’s expert’s opinion that his hypothetical scenario had

a realistic possibility of becoming a reality, respondent's

expert opined that a conservative control premium of

approximately 35 percent should be applied to the average over-

the-counter sales price of $50 per share.   Finally, respondent's

expert concluded that because the market for shares of stock in

Wilber Corp was thin, not for lack of buyers, but for lack of

willing sellers, the size of the block of stock should not be

considered significant and no blockage discount should apply.

     Although we conclude that petitioner's experts made

unreasonably low projections regarding the future financial

condition, profitability, and overall performance of Wilber Bank,

we find petitioner's experts generally more credible and their
                               - 12 -

valuation methods and opinions more correct than those of

respondent's expert.

     Based simply on comparable market data used by each of the

experts and in the First Albany report, the average market price

of shares of stock in regional banks similar to Wilber Bank was

approximately $22 per share.

     With respect to respondent's expert's valuation, we find his

comparable market analysis contradictory and the explanation

thereof somewhat cursory.   We do, however, agree with

respondent's expert's opinion regarding his more positive picture

of Wilber Bank's financial position.    Although Wilber Bank did

experience an increase in the amount of nonperforming loans in

1990, we are not convinced that such loans reflected for Wilber

Bank a permanent downturn in profitability.    In general, the

shares of stock in Wilber Corp were in demand and the regional

investment community regarded Wilber Corp to be in excellent

condition.

     In view, however, of the loyalties of the shareholders of

Wilber Corp, we find respondent's scenario, in which hypothetical

investors would purchase decedent’s entire block of 201,408

shares of stock as well as an additional 27.2 percent of the

shares and thereby gain a 51-percent controlling interest in

Wilber Corp, an unlikely scenario unsupported by the facts.

     In this case, there is no credible evidence that decedent's

block of 201,408 shares of stock in Wilber Corp should be
                               - 13 -

considered part of a control group.     Also, respondent's expert,

in concluding that decedent's 23.8-percent interest should

somehow be treated as part of a hypothetical 51-percent

controlling interest, effectively ignores the requirement present

in Wilber Corp's articles of incorporation of a 66 2/3-percent

super majority for decisions regarding the merger, consolidation,

dissolution, or sale of all or substantially all of the assets of

the bank.

     Respondent argues that a control premium is justified,

because decedent's block of stock arguably could control one

member of the Board of Directors and thereby "substantially

influence" corporate action and cause the sale of the bank.

Before a control premium may be applied, however, something more

than "substantial influence" is required.    See Estate of Newhouse

v. Commissioner, 94 T.C. 193, 251-252 (1990).

     Based on our analysis of petitioner's experts’ opinions

(implicitly reflecting a blockage discount), we use as our

starting point the $38 per-share value calculated by petitioner's

experts.    Adjusting upward this figure based on the excellent

financial condition of Wilber Bank, and taking into account the

$50 per-share average sales price of Wilber Corp stock in the

thinly traded over-the-counter market, we conclude that on

October 20, 1990, the value of the 201,408 shares of stock in

Wilber Corp was $9,063,360, or $45 per share.

     To reflect the foregoing,
- 14 -


         Decision will be entered

under Rule 155.
