                          T.C. Memo. 1998-365



                      UNITED STATES TAX COURT



     ESTATE OF ANN H. BROOKSHIRE, DECEASED, HARVEY B. KING,
               INDEPENDENT EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9804-96.                  Filed October 8, 1998.



     William R. Cousins III, Robert Don Collier, and Robert M.

Bolton, for petitioner.

     Donna Mayfield Palmer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined a deficiency of

$3,509,857 in the Federal estate tax of the Estate of decedent

Ann H. Brookshire.
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     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect as of November 20, 1993, the

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

Court Rules of Practice and Procedure.

     After settlement, the issue remaining for decision is the

value, as of the date of decedent's death, of 106,826 shares of

common stock of a closely held family corporation.


                         FINDINGS OF FACT

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

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

Texas, and at the time the petition was filed, the executor,

Harvey B. King, resided in Tyler, Texas.

     Upon her death, decedent owned directly 60,743 shares or

2.71 percent, and indirectly through a family trust 158,967

shares or 7.08 percent, of the common stock of Brookshire Grocery

Co. (Brookshire).   Decedent’s stock interest in Brookshire

represented a total of 219,710 shares or 9.79 percent of the

total 2,243,727 shares outstanding.

     Brookshire was founded by Wood T. Brookshire in the 1920's

and was incorporated in Texas in 1953.   Brookshire owned and

operated a chain of 96 retail grocery stores located primarily in

rural communities in Texas, Louisiana, and Arkansas.

     Brookshire common stock is closely held by relatives of Wood

T. Brookshire, by current and former employees of Brookshire and
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their relatives, and by an employee profit-sharing plan.   The

stock is not listed on any stock exchange and is not traded over

the counter.

     More specifically with regard to the ownership of Brookshire

common stock, on the date of decedent’s death, Brookshire common

stock was owned by two groups of shareholders:   66 percent was

owned by relatives of Wood T. Brookshire; and 34 percent was

owned by 200 current and former employees of Brookshire and their

relatives and by an employee profit-sharing plan.

     Under longstanding buy-sell agreements to which all

shareholders in Brookshire were subject, Brookshire had a right

of first refusal or a right to purchase any Brookshire common

stock that any shareholder proposed to sell or transfer.   The

price at which Brookshire could purchase shares of Brookshire

common stock under the buy-sell agreements (hereinafter referred

to as the formula price) was set at the lesser of book value or

the proposed per-share purchase price reflected by the proposed

sale or transfer.

     However, on October 4, 1988, decedent and Brookshire entered

into a stock-purchase agreement under which it was provided that,

after decedent's death and at the option of decedent's estate,

Brookshire was obligated to purchase from decedent's estate the

Brookshire common stock owned by the estate.   As indicated,

Brookshire's obligation under the stock-purchase agreement to
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purchase decedent’s common stock in Brookshire was triggered only

if decedent’s estate exercised the option to sell the stock, and

Brookshire’s purchase obligation was limited to the number of

shares that (under the same book-value-based formula as set forth

in the buy-sell agreements) would reflect a total purchase price

of no more than $7,844,233.   This amount corresponded with the

total amount of life insurance that Brookshire carried on the

life of decedent.

     The purpose of the stock-purchase agreement was to ensure

that decedent’s estate would have funds available to pay Federal

estate and State inheritance taxes relating to the Brookshire

common stock owned by decedent’s estate.

     Under similar stock-purchase agreements entered into with a

number of other members of the Brookshire family, Brookshire also

was obligated, upon their death, to purchase from their estates

the number of shares of Brookshire common stock that corresponded

to the amount of life insurance Brookshire carried on their

respective lives.

     On the date of decedent’s death, in addition to a chain of

grocery stores, Brookshire owned the following:   (1) Two food and

merchandise distribution centers that supplied approximately 80

percent of the products sold in Brookshire stores; (2) two bakery

plants; (3) a milk processing plant; and (4) a photo processing

center.
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     By the fall of 1993, Brookshire stores were experiencing

increased competition from Wal-Mart SuperCenters that were being

opened within the same geographic markets in which Brookshire

stores were located.    In 1992, a Wal-Mart SuperCenter opened in

Mount Pleasant, Texas, in direct competition with two Brookshire

stores, apparently the cause in a drop of current sales of those

two Brookshire stores by 20 to 30 percent.

     In 1993, prior to decedent’s death, four additional Wal-Mart

SuperCenters opened in direct competition with Brookshire stores,

apparently the cause in a drop of current sales of those

Brookshire stores by 20 to 40 percent.

     In early fall of 1993, Wal-Mart announced the opening in

1994 of four or five additional SuperCenters, and Wal-Mart had

plans to open approximately 15 additional Wal-Mart SuperCenters

in the near future in the same markets as those in which

Brookshire stores were located.

     To be competitive with the Wal-Mart SuperCenters that were

being opened in its markets, Brookshire would be required to make

large capital expenditures to refurbish old grocery stores and to

construct new stores.

     For its fiscal year ending September 28, 1993, Brookshire's

net sales from its grocery stores and other business activities

was approximately $1.12 billion.
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     For at least each of the 10 years prior to decedent’s death,

Brookshire paid cash dividends to its shareholders.

     On November 20, 1993, the date of decedent’s death -- based

on an approximate total book value for Brookshire of $164,764,000

-- the per-share formula price under the buy-sell and stock-

purchase agreements for the shares of Brookshire common stock

owned by decedent’s estate was $73.43 per share.

     Prior to decedent's death, no blocks of Brookshire common

stock anywhere near as large as decedent's block of 219,710

shares had been sold.   In fact, in the 3 years prior to

decedent’s death, the largest block of Brookshire common stock

that had been sold consisted of 6,111 shares.   Prior to

decedent’s date of death, it appears that each sale of Brookshire

stock constituted a non-arm’s-length sale.

     On August 22, 1994, decedent’s estate sold 29,410 shares of

Brookshire common stock back to Brookshire for $79.50 per share

in order to provide cash to the estate for payment of decedent’s

reported estate tax liability.

     On August 23, 1994, petitioner timely filed decedent's

Federal estate tax return.   Based on an appraisal, the total

value of the 219,710 shares of Brookshire common stock owned

directly and indirectly by decedent’s estate was reported on the

estate tax return at $12,907,962 or $58.75 per share.
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     On audit, based solely on the book-value-based formula set

forth in the stock-purchase agreement, respondent determined

that, on the date of decedent’s death, the total value of 106,826

shares of Brookshire common stock (consisting of the 60,743

shares owned directly by decedent’s estate and 46,083 of the

158,967 shares owned indirectly by decedent’s estate) was

$7,844,233 or $73.43 per share.   Respondent accepted the $58.75

per-share value of the remaining 112,884 shares of Brookshire

common stock owned indirectly by decedent’s estate as reported on

decedent’s Federal estate tax return (for a value of $6,631,935).

Respondent determined the total value of all of the shares of

Brookshire common stock owned by decedent’s estate to be

$14,476,168.

     In a report exchanged a few weeks before the trial herein,

respondent's expert opined that the value of the shares of

Brookshire common stock owned by decedent’s estate was $89.14 per

share or a total value for all shares of $19,584,950,

representing an increase of $5,108,782 over the value determined

by respondent in the notice of deficiency.

     At the conclusion of the trial and based on the increase to

$89.14 per share that was reflected in respondent’s expert’s

report, respondent orally moved to amend the answer herein to

increase the deficiency in an unspecified amount reflecting the

total revised value of the Brookshire common stock owned by
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decedent's estate on the date of death, or alternatively, just

the revised value of 106,826 shares of Brookshire common stock

subject to the stock-purchase agreement.

     On the grounds of timeliness and prejudice, petitioner

objects to any increase in respondent’s proposed deficiency.   We

regard as patently prejudicial respondent’s attempt, at trial, to

increase the value of the Brookshire common stock owned by

decedent's estate by $5,108,782 or by $1,678,237, and we shall

deny respondent’s motion.


                                OPINION

     For Federal estate tax purposes, property is generally

included in a decedent’s gross estate at its fair market value on

the date of decedent's death.    Sec. 2031(a); sec. 20.2031-1(b),

Estate Tax Regs.   Fair market value is defined generally 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 to sell and both having reasonable knowledge of relevant

facts.   United States v. Cartwright, 411 U.S. 546, 551 (1973);

Rushton v. Commissioner, 498 F.2d 88, 89-90 (5th Cir. 1974),

affg. 60 T.C. 272 (1973); Estate of Gilford v. Commissioner, 88

T.C. 38, 48 (1987); sec. 20.2031-1(b), Estate Tax Regs.

     Fair market value involves a question of fact.    Estate of

Newhouse v. Commissioner, 94 T.C. 193, 217 (1990); Estate of

Andrews v. Commissioner, 79 T.C. 938, 940 (1982).
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     Arm's-length sales of stock in the normal course of business

within a reasonable time before or after the relevant valuation

date represent the best criteria of fair market value.      Estate of

Andrews v. Commissioner, supra at 940.    In the absence, however,

of arm's-length sales, the value of unlisted and closely held

stock often is based on the value of listed stock of corporations

engaged in similar lines of business.    Sec. 2031(b); Estate of

Hall v. Commissioner, 92 T.C. 312, 336 (1989).

     Additional factors that are relevant in valuing shares of

stock in closely held corporations are the following:


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

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

     (3)   The earning and dividend-paying capacity of the
           corporation;

     (4)   Whether or not the corporation has goodwill or
           other intangible value;

     (5)   The corporation’s net worth; and

     (6)   Non-arm’s-length sales of the stock and the size
           of the block of stock to be valued.


See Estate of Newhouse v. Commissioner, supra at 217-218; sec.

20.2031-2(f)(2), Estate Tax Regs.; Rev. Rul. 59-60, 1959-1 C.B.

237, 238-239.
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     Generally, only facts reasonably known on the valuation date

provide a basis for the valuation.       Estate of Newhouse v.

Commissioner, supra at 218.

     In valuing closely held stock, discounts are often warranted

to reflect the stock's lack of marketability and limitations on

transferability.     Estate of Newhouse v. Commissioner, supra at

249; Estate of Andrews v. Commissioner, supra at 953.

     The fair market value of closely held stock may be

controlled for estate tax purposes by an enforceable agreement

that fixes the price at which the stock can be sold during a

taxpayer's lifetime and upon the decedent's death.       Estate of

Bischoff v. Commissioner, 69 T.C. 32, 39 (1977); Estate of

Reynolds v. Commissioner, 55 T.C. 172, 188-189 (1970); Estate of

Obering v. Commissioner, T.C. Memo. 1984-407; sec. 20.2031-2(h),

Estate Tax Regs.

     Under the buy-sell and stock-purchase agreements involved in

this case, if Brookshire failed to exercise its rights under the

buy-sell agreements, neither decedent nor her estate was

prohibited from selling the stock at a price lower or higher than

the formula price.    We conclude, and the parties do not dispute,

that for Federal estate valuation purposes, the formula price set

forth in the buy-sell and stock-purchase agreements does not

control the value of the stock.
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     In determining the fair market value of decedent’s 219,710

shares of Brookshire common stock (representing 9.79 percent of

all outstanding shares of Brookshire common stock), petitioner's

two experts and respondent's expert agree that a discount is

appropriate to reflect the lack of marketability of the stock.

They disagree, however, as to the amount thereof.

     Because petitioner and respondent’s notice of deficiency

utilize the same $58.75 per-share value for the 112,884 shares of

Brookshire common stock that are not subject to the stock-

purchase agreement, we need only address the valuation of the

106,826 shares of Brookshire common stock that are subject to the

stock-purchase agreement.

     Petitioner's first expert values the 106,826 shares of

Brookshire common stock subject to the stock-purchase agreement

at $6,302,734 or $59.00 per share.     Petitioner's first expert

utilized:   (1) The guideline company method, comparing

Brookshire's revenue, net income, earnings, cash-flow, and book

value with those of similarly sized, publicly traded corporations

operating grocery stores; (2) the discounted cash-flow method,

calculating the net present value and future earnings of

Brookshire and the return on investment using a 9-percent rate of

return; and (3) the capitalization of dividends method, using a

2-percent yield rate.   Petitioner’s first expert also applied a
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discount of 45 percent to reflect the lack of marketability of

the stock.

     Petitioner's second expert values the 106,826 shares of

Brookshire common stock subject to the stock-purchase agreement

at $5,237,679 or $49.03 per share.      Petitioner's second expert

utilized:    (1) The guideline company method, comparing

Brookshire's net income, earnings, and cash-flow with those of

similarly sized, publicly traded corporations operating grocery

stores; (2) the discounted cash-flow method, calculating the net

present value and future earnings of Brookshire and the return on

investment using an 11-percent rate of return; and (3) the

transaction method, comparing actual sales of stock within a

reasonable time before or after the valuation date and applying a

20-percent blockage discount because there were no other blocks

of stock similar in size to decedent's block of stock sold within

several years of the valuation date.      Petitioner’s second expert

also applied a discount of 40 percent to reflect the lack of

marketability of the stock.

     Respondent's expert values the 106,826 shares of Brookshire

common stock subject to the stock-purchase agreement at

$9,522,470 or $89.14 per share.    Respondent's expert utilized:

(1) The guideline company method, comparing Brookshire's revenue,

earnings, cash-flow, and book value with those of similarly

sized, publicly traded corporations operating grocery stores; (2)
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the discounted cash-flow method, calculating the net present

value and future earnings of Brookshire and the return on

investment using a 9-percent rate of return; (3) the

capitalization of dividends method, using a 1.8-percent yield

rate; and (4) the capitalization of earnings method, using a 7-

percent current-year capitalization rate.   Respondent’s expert

also applied a discount of 34 percent to reflect the lack of

marketability of the stock.

     Respondent's expert overstates the value of the Brookshire

common stock because of his use of three companies as comparable

companies that have significant sales in markets other than

retail grocery and that are not comparable to Brookshire.     The

use of these companies distorts each of the valuation methods

used by respondent's expert.

     Respondent's expert also overstates the value of Brookshire

common stock because he does not take into account Brookshire's

loss of profits apparently caused by increased competition from

Wal-Mart SuperCenters.

     Petitioner's second expert relies on the sale of small

blocks of Brookshire common stock that occurred in years prior to

decedent’s date of death and that constituted non-arm’s-length

sales.

     In analyzing the economic outlook as of the date of

decedent’s death, petitioner's experts properly considered not
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only the national economy, but also the specific economies of the

geographic region in which Brookshire operated its stores.

     In selecting earnings multiples, petitioner's first expert

properly considered the increased competition from Wal-Mart and

the decrease in Brookshire’s net income for Brookshire’s fiscal

year ending September 28, 1993.

     For the reasons stated, we agree with petitioner's first

expert witness that, before applying any discount, the date-of-

death value of decedent's 106,826 shares of Brookshire stock

equals $11,493,409 or $107.59 per share.

     With regard to the discount for lack of marketability, the

parties' three expert witnesses rely on various market studies

which indicate that discounts for lack of marketability often

fall in a range of 23 to 45 percent with an average of

approximately 35 percent for the restricted stock of a publicly

traded company.

     It is clear that decedent's block of 106,826 shares was not

readily marketable and that any hypothetical purchaser would

demand a significant discount to account for that fact.

     Certainly, the consistent history of Brookshire's strong

current financial position and liquidity as well as the quality

management would make Brookshire an attractive investment.   There

still existed, however, no public market in which to sell the
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stock, and transfer of the stock would be subject to the

restrictive buy-sell and stock-purchase agreements.

     We conclude that the appropriate discount to use to reflect

the lack of marketability of decedent's 106,826 shares of

Brookshire common stock equals 40 percent.    This discount is

supported by the lack of a ready market on which to sell the

stock, the restrictive buy-sell agreements, the lack of

transactions involving large blocks of stock similar in size to

decedent's shares of Brookshire stock, and the fact that

decedent's stock reflects a minority interest.

     Applying the 40-percent discount to the $11,493,409 pre-

discounted value of the stock, we conclude that the value of

decedent's 106,826 shares of Brookshire common stock on

November 20, 1993, is $64.55 per share or a total fair market

value of $6,895,618.

     To reflect the foregoing,


                                      An appropriate order will be

                                 issued, and decision will be

                                 entered under Rule 155.
