                        T.C. Memo. 1996-156




                      UNITED STATES TAX COURT


      ESTATE OF RUTH J. CASEY, DECEASED, FIRST INTERSTATE
      BANK OF NEVADA, SPECIAL ADMINISTRATOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19512-94.             Filed March 27, 1996.



     Casey W. Vlautin, for petitioner.

     Paul L. Dixon, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent determined a $716,355 deficiency

in petitioner’s Federal estate tax.   The parties have agreed to

the fair market value of certain property included in the estate

before the application of any discount, but they disagree about

the amount of any such discount.
                                 - 2 -

                         FINDINGS OF FACT1

     Ruth J. Casey, decedent, was domiciled in California at the

time of her death, May 2, 1990.    Decedent was employed as a nurse

by George Whittell (Whittell).    Whittell died in 1969 leaving,

among other things, a residence, along with the 50 acres of land

on which it was situated (Residence), in trust for his wife for

her life and then to decedent for her life, with a remainder to

various charities.   Whittell funded a trust (Maintenance Trust)

with $1 million to maintain Residence.    Whittell also created a

trust for the support of decedent during her life (Support

Trust).

     Whittell’s wife died in 1979, and decedent occupied

Residence from that time forward.    By the mid-1980's, Maintenance

Trust was approaching depletion and contained less than $150,000,

an amount which was anticipated to be insufficient to maintain

Residence for decedent’s remaining life expectancy.    The

Residence was appraised at market values of $3,740,000 and

$5,400,000 during 1985 and 1986, respectively.    A disagreement

concerning the maintenance of Residence arose between decedent

and the charitable remaindermen.    The remaindermen asserted that

it was decedent’s obligation to maintain Residence and pay the

taxes in the event the Maintenance Trust was insufficient.

Decedent asserted that, if the Maintenance Trust was

     1
       The parties’ stipulation of facts and exhibits is
incorporated by this reference.
                                 - 3 -

insufficient, she would seek partition of her interest from that

of the charitable remaindermen.

     The dispute was settled during August 1987, and the parties

agreed to the following:   (1) The Support Trust would be

terminated with its assets divided, 55 percent for decedent and

45 percent for the charitable remaindermen, and (2) the assets

remaining in the Maintenance Trust (including Residence, its

furnishings, and cash) would be distributed to a liquidating

trust (Liquidating Trust).   The Liquidating Trust was chosen in

order to provide centralized management and to assist in

representing the multiplicity of interests in selling the

property.   The Liquidating Trust was to terminate by

approximately August 1990.   The Liquidating Trust continued

beyond its prescribed termination date due to controversy over

the trustee’s fees.   Decedent had a 50-percent interest in the

Liquidating Trust, and seven charitable organizations had varying

percentage shares in the remaining 50 percent.

     The Liquidating Trust instrument provided that, except for

transfers by will or by the laws of intestate succession, no

trust beneficiary could assign or transfer an interest to any

party other than to another beneficiary.   The express purposes of

the Liquidating Trust were to:

     hold the property * * * [Residence and related assets
     from the Maintenance Trust], to liquidate the Property
     in an efficient manner, to manage and maintain the
     Property in an efficient manner during the process of
                               - 4 -

     liquidation, and to effect eventual distribution of the
     proceeds of the Property to the beneficiaries * * *.

     During 1989, the Liquidating Trust instrument was amended to

permit decedent to transfer her interest to her living trust for

estate planning purposes, and, in all other respects, the

restrictions on alienation of an interest in the Liquidating

Trust remained in force.   The Liquidating Trust instrument could

be amended only by the consent of at least 71 percent of the

beneficiaries.   The trustee of the Liquidating Trust had the

power to sell Residence without the consent of the beneficiaries,

and, accordingly, decedent’s living trust had no direct control

over the terms or conditions of the sale.

     After Residence was placed in the Liquidating Trust, the

trustee began receiving offers which, during 1988, ranged from

$4,500,000 to $9,600,000, with the majority of them placing near

$7 million.   The offers were generally contingent on soil and

geologic testing and, in some cases, approval to subdivide.     The

trustee, after deciding that the offers received up to that point

were unacceptable, began looking for a wealthy purchaser in order

to exploit Residence’s unique character and to maximize its

selling price.   To avoid possible contingencies, the trustee, at

the expense of the Liquidating Trust, caused soil and earthquake

tests to be conducted during 1988 and 1989.   An auction of the

Liquidating Trust personalty, which attracted 2,500 people, was

conducted during September 1989.   Gross proceeds of the auction
                               - 5 -

were about $800,000, which resulted in a $100,000 cash

distribution to decedent’s living trust during December 1989.

     All testing of the realty had been completed during the

spring of 1990; thereafter, the trustee set a $24 million asking

price for Residence.   Decedent, throughout the entire time and

until the date of her death on May 2, 1990, resided in Residence.

The trustee received a $17,500,000 cash offer on June 8, 1990,

from a former Apple Computer executive, which was accepted on

June 11, 1990.   The sale closed on June 29, 1990.   Decedent’s

living trust received a $6,300,000 distribution during August

1990.

     After the real estate closing, a dispute arose over the fee

of the trustee of the Liquidating Trust.   During September 1991,

decedent’s living trust received a $1,500,000 distribution from

the Liquidating Trust.   After the settlement of the litigation

concerning the trustee’s fee, an additional $190,000 was received

by decedent’s living trust.   The parties agree that the

Liquidating Trust’s net value (without any discount) at the time

of decedent’s death was $16,779,630.

     The original estate tax return, filed August 2, 1991,

reported a $6,948,806 value for decedent’s interest in the

Liquidating Trust (including a 15-percent discount).    Following

respondent’s issuance of the notice of deficiency, petitioner

filed a refund claim using a 25-percent discount for

marketability.   Petitioner, at trial and on brief, seeks a 50-
                                - 6 -

percent discount, and respondent, on brief, seeks a 9.5-percent

discount.

                               OPINION

     This case presents the recurrent issue of estate tax asset

valuation.   The parties have agreed to the undiscounted value of

the asset at the time of decedent’s death.   The unresolved

controversy concerns the percentage discount that should be

applied.    Petitioner argues that this case involves a fractional

interest to which control and marketability discounts should be

applied.    Conversely, respondent argues that, in a case where the

property is being liquidated, no control or marketability

discount should be applied.   Respondent, however, would adjust

the agreed value for the time value of money or the time it takes

to liquidate the property.    Converting the parties’ arguments to

numerical equivalents, petitioner and respondent would apply

discounts of 50 percent and 9.5 percent, respectively.

     Property is generally included in the gross estate at its

fair market value on the date of a decedent's death.   Sec.

2031(a);2 sec. 20.2031-1(b), Estate Tax Regs.   Fair market value

is defined as "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

     2
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect on the date of decedent’s death.
Rule references are to this Court’s Rules of Practice and
Procedure.
                                - 7 -

knowledge of relevant facts."    United States v. Cartwright, 411

U.S. 546, 551 (1973); Estate of Hall v. Commissioner, 92 T.C.

312, 335 (1989); Estate of Heckscher v. Commissioner, 63 T.C.

485, 490 (1975); sec. 20.2031-1(b), Estate Tax Regs.   All

relevant facts and elements of value as of the applicable

valuation date shall be considered in every case.    Commissioner

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

v. Commissioner, 84 T.C. 285, 320 (1985); sec. 20.2031-1(b),

Estate Tax Regs.

     Valuation is an inexact process, Buffalo Tool & Die

Manufacturing Co. v. Commissioner, 74 T.C. 441, 452 (1980), and

we may accept or reject in full or in part experts’ opinions

proffered by the parties.   Helvering v.   National Grocery Co.,

304 U.S. 282, 294-295 (1938); Seagate Tech., Inc., & Consol.

Subs. v. Commissioner, 102 T.C. 149, 186 (1994).    Petitioner

bears the burden of proving that respondent’s determination is in

error.   Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933);

Estate of Gilford v. Commissioner, 88 T.C. 38, 51 (1987).

     Petitioner’s expert compares the Liquidating Trust to

situations where partners or shareholders have a fractional

interest in an entity which, in turn, holds real estate.     He then

postulates that the value of the fractional interest is derived

from the value of the underlying assets and/or potential

earnings.   Finally, he explains that “Less-than-controlling

equity interests in real property * * * may not be worth a pro
                                - 8 -

rata portion of a 100 percent (controlling) interest in the

underlying net asset value.”    Petitioner’s expert further

explained that discounts are used to reflect a lack of control

and/or marketability.    A lack of control is the inability to

change corporate or business attributes (dividends, capital,

etc.).   A lack of marketability is a reduced liquidity because of

no ready market for part of a closely held entity.    The expert

then concluded that decedent’s interest in the property, because

it was held in the Liquidating Trust, had the same attributes as

an interest in a corporation or partnership and should be subject

to the same discounts.    Following that conclusion and valuing the

Liquidating Trust interest as though it were a commercial or

investment activity, petitioner’s expert reached a 30-percent

discount for lack of control and a 30-percent discount for lack

of marketability.   After considering the sequential effect of the

two discounts at about 51 percent, petitioner’s expert opined

that 50 percent was the appropriate combined discount for the

lack of marketability and control.

     Respondent’s expert considered language contained in the

Liquidating Trust that limited its purpose to the efficient

liquidation of the trust property and the general prohibition

from engaging in a trade or business.    Although respondent’s

expert generally agreed with petitioner’s expert’s methodology,

respondent’s expert deemed petitioner’s approach irrelevant,

because the purpose of the trust was to liquidate assets and it
                               - 9 -

was not a “going concern”.   Instead, respondent’s expert opined

that a willing buyer would be concerned with the question of

liquidity because of the time required to liquidate Residence.

Accordingly, respondent’s expert concluded that the agreed fair

market value should simply be adjusted or discounted for the time

value of money (i.e., the delay in realizing the liquidation

value of the assets).

     Respondent’s expert used the May 1990 short-term Treasury

rate of 7.8 percent and added a 2.2-percent premium to account

for the lapse of time, arriving at a 10-percent discount rate.

Respondent’s expert noted that the long-term home mortgage rate

was a comparable 10.3 percent during the same time period.    Based

on comparable properties, respondent’s expert calculated a 12.4-

month mean and 10-month median of time on the market.   Using this

information, respondent’s expert arrived at a range of 9.5 to 11

percent for the discount and a value range of $7,355,141 to

$7,478,238.

     Petitioner, citing Propstra v. United States, 680 F.2d 1248

(9th Cir. 1982), argues that a control discount applies because

the liquidating trust is no different from a business entity

holding property, and because decedent lacked control over the

property because she owned less than a majority interest.

Respondent agrees that the discount principles of Propstra v.

United States, supra, would apply in a case where the property in

question was used in a business.   Respondent also agrees that
                                - 10 -

decedent did not have control over the asset.   However,

respondent emphasizes that the property was in a liquidating

trust and not held for investment or as an operating asset in a

business setting, and, accordingly, the typical reasons for

applying a control discount do not exist in this case.

Respondent also emphasizes that the trust document prohibited any

business operation and its sole purpose was to liquidate the

trust assets.   See Estate of McMullen v. Commissioner, T.C. Memo.

1988-500.

     Petitioner relies heavily on Propstra v. United States,

supra, in which a husband and wife owned several parcels of

realty as community property.    In that case the Government argued

that the taxpayer was required to show that the deceased spouse’s

community property interest would likely be sold apart from the

other undivided interest.   The Court of Appeals for the Ninth

Circuit held that “unity of ownership” principles did not apply

to property valuations for estate tax purposes.    Propstra v.

United States, supra at 1251.

     Respondent argues that this case is factually outside the

Court of Appeals’ holding in Propstra because decedent had given

her interest and all other beneficiaries had given theirs to the

liquidating trustee for the express purpose of selling the

property.   We agree.   The beneficiaries, by relinquishing their

interests in the property and giving the trustee control and

authority to sell, including the authority to decide the selling
                              - 11 -

price, transformed their undivided interests into a “unity of

ownership” in the trustee.   That is not to say that a discount

should not be applied for some other reason, but it does preclude

a control discount.

     The Liquidating Trust was not a business entity, and it

should not be treated as a going concern.     The stated purpose of

the trust was to liquidate or sell the realty so that a willing

buyer would not be concerned about control, income, organization

of the enterprise, etc.   Instead, the buyer would be purchasing

the right to receive liquidation proceeds upon the property’s

sale.3

     As a practical matter, the beneficiaries, by collectively

releasing their individual interests to the trustee, have

obviated most of the traditional concerns underlying the

application of a control discount.     A potential buyer of a

partial interest would look to the underlying value of the assets

being liquidated.   Accordingly, we hold that no control discount

should be applied to this situation.

     The marketability discount relates to the question of

liquidity.   Petitioner and respondent have addressed the

liquidity question in different ways.     Petitioner, following the

same approach as used for the control-discount question, treats

     3
       The parties did not argue that there was any limitation on
the sale or transfer of liquidation proceeds. The parties agreed
that an interest in the Liquidating Trust could be transferred
with approval of at least 71 percent of the beneficiaries.
                               - 12 -

the trust as a business entity and uses real estate business

examples (ostensibly comparable entities) to arrive at a 30-

percent discount.   Respondent, on the other hand, depicts the

question of liquidity as a time value of money concept, rather

than a marketability discount issue.    Using time-value concepts,

respondent arrives at a 9.5-percent discount to account for the

delay in realization of the liquidated value.

     We do not find it necessary to resolve the debate about

which labels should be used.     We simply hold that a willing buyer

would expect a discount for delay in the realization of the

liquidated value.   In that regard, petitioner’s approach to

discounting is, in part, due to the fact that decedent had a

fractional interest.   As explained above, because all of the

fractional-interest holders gave up their right to control the

liquidation of the property, the resulting effect is to enable

the trustee to liquidate without conditions or hindrances from

beneficial interest holders.     Those circumstances would have the

effect of reducing any marketability discount.    Considering both

approaches, we find that the agreed value of decedent’s interest

in the trust should be reduced by 15 percent to arrive at the

fair market value for purposes of determining decedent’s gross

estate and petitioner’s estate tax liability.

     To reflect the foregoing,

                                      Decision will be entered under

                                 Rule 155.
