                       T.C. Memo. 1998-204



                     UNITED STATES TAX COURT



  JANE CROCKER, F.K.A. JANE C. JACOBS, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 11020-94, 11022-94,            Filed June 8, 1998.
                11985-94, 11986-94.



    Peter S. Buchanan, for petitioner Jane Crocker.

     John Gigounas, Edward B. Simpson, and Todd M. Moreno, for

petitioner Justin M. Jacobs, Jr.

     Elizabeth L. Groenewegen and Bryce A. Kranzthor, for

respondent.




     1
       Cases of the following petitioners were consolidated
herewith for trial and opinion but not for briefing: Jane
Crocker, docket No. 11020-94; Jane Crocker, docket No. 11022-94;
Justin M. Jacobs, Jr., docket No. 11985-94; and Justin M. Jacobs,
Jr., docket No. 11986-94.
                               - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge:   Respondent determined deficiencies in

petitioners' Federal income taxes, an addition to tax, and

penalties as follows:2

Jane Crocker, docket No. 11020-94, and Justin M. Jacobs, Jr.,
docket No. 11985-94:

                               Addition to Tax       Penalty
     Year      Deficiency      Sec. 6653(a)(1)     Sec. 6662(a)
     1988       $152,905            $7,645
     1989        187,343                               $37,469


Jane Crocker, docket No. 11022-94:

                                 Penalty
     Year      Deficiency      Sec. 6662(a)
     1990        $8,621          $1,724
     1991        26,842           5,368



Justin M. Jacobs, Jr., docket No. 11986-94:

                                 Penalty
     Year      Deficiency      Sec. 6662(a)
     1990       $395,134         $79,027




     2
       Respondent issued one notice of deficiency for taxable
years 1988 and 1989 to petitioners, each of whom filed a separate
petition with the Court. Respondent also issued separate notices
of deficiency, one to petitioner Justin M. Jacobs, Jr., for the
year 1990, and the other to petitioner Jane Crocker for the years
1990 and 1991. Each petitioner filed a separate petition with
the Court with respect to these notices.
                                   - 3 -

        After concessions,3 the issues for decision are:   (1) The

fair market value of improved real property and personal property

donated by petitioners to an eligible charitable donee for

purposes of determining the allowable charitable contribution

deductions under section 170 to which petitioners were entitled

for 1986, the year of the gift, and for the years 1988, 1989,

1990, and 1991 by way of carryovers; and (2) whether petitioner

Justin M. Jacobs, Jr. is liable for an addition to tax under

section 6653(a) for 1988 and accuracy-related penalties under

section 6662(a) for 1989 and 1990.

     We find and hold that the value of the improved real

property was $3,100,000, and that the value of the personal

property was $96,000, for a total of $3,196,000 when the gift was

made.       We hold that petitioner Justin M. Jacobs, Jr. is not

liable for the addition to tax and accuracy-related penalties for

the years at issue.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years at issue.        All

Rule references are to the Tax Court Rules of Practice and

Procedure.



        3
       Respondent conceded that petitioner Jane Crocker is not
liable for the addition to tax and penalties for the taxable
years at issue. The parties agree that petitioners are entitled
to an investment interest carryover deduction from taxable year
1987 to taxable year 1988 and subsequent years in the total
amount of $411,539.
                               - 4 -

                         FINDINGS OF FACT

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

The first and second stipulations of facts and the attached

exhibits are incorporated herein by this reference.     Petitioners

resided in Atherton, California, when their petitions were filed.

I.   Background

      Petitioner Justin M. Jacobs, Jr. (Jacobs) is a real estate

developer and licensed attorney.   Since the late 1960's, Jacobs

has primarily worked in the real estate development business,

having stopped the active practice of law in 1970.     Jacobs has

principally built office buildings for the high-tech industry in

the Silicon Valley and San Francisco Bay areas of California.       As

of the date of trial in these cases, Jacobs had constructed

approximately 45 buildings.

      Jacobs has also had an interest in historic buildings.

Consistent with this, he has been involved in the restoration and

subsequent sale of historic properties.     Jacobs has renovated

several houses in California, including a large Victorian-era

house in Atherton, California, and a 33,000-square foot mansion

situated on 6 acres in Hillsborough, California.     He has also

restored an 11th-century chateau located in Loiret, France, and a

five-story townhouse on Sutton Square overlooking the East River

in New York City.

      Jacobs has also been involved in the antiques business.

Sometime prior to May 1981, Jacobs decided to purchase a large
                                - 5 -

building to house his antiques business.   He looked at several

buildings and eventually narrowed his choices to two properties,

the Redwood City Fox Theater Building (the Redwood City Fox or

the property) in Redwood City, California, and the Stanford

Theater in Palo Alto, California.

     In May 1981, Jacobs purchased the Redwood City Fox. He also

purchased personal property associated with the theater.    He

chose the Redwood City Fox over the Stanford Theater because the

Redwood City Fox was in much better condition physically than the

Stanford Theater.    Additionally, the Redwood City Fox building

included commercial space, both retail and office, adjacent to

the theater, which Jacobs wanted to utilize for his antiques

business.    The purchase price for the Redwood City Fox and

associated personal property was $1,000,000,4 allocated $912,556

to the theater and commercial space and $87,444 to the personal

property.5

     4
       Jacobs believed he purchased the Redwood City Fox for a
good price because the prior owners "didn't have the money or the
desire or the knowledge * * * to fix it up, and they just wanted
* * * get rid of it." Jacobs considered the May 1981 sale of the
Redwood City Fox to be a "distress sale".
     5
       There is conflicting evidence in the record concerning the
purchase price of the Redwood City Fox and the associated
personal property. Jacobs testified he paid "somewhere around
$1,080,000." An appraisal of the Redwood City Fox prepared by
David Ingram Jr. and William J. Ewing at Jacob's request and
dated April 1987 indicates that Jacobs paid $1,090,344 to acquire
the property, allocated $399,146 to the land, $610,783 to the
building, and $80,415 to the equipment. The Ingram/Ewing
appraisal report also states that Jacobs was the source of this
                                                   (continued...)
                                 - 6 -

II.   Description of the Redwood City Fox

      The Redwood City Fox is a steel-reinforced concrete building

that was constructed in 1928 and is comprised of a theater with

adjacent commercial space.   The Redwood City Fox is an example of

an American "movie palace"--a distinct phase of theater

architecture which occurred primarily between 1915 and 1945, with

its peak period in the 1920's.    The Redwood City Fox was built to

serve both as a vaudeville house for live entertainment and as a

"fantasy" movie palace.   The inclusion of commercial space within

the larger theater building is indicative of a trend during the

1920's and 1930's to use theaters to create more distinctive

office and retail buildings.

      The facade of the Redwood City Fox building is Gothic

Revival with Art Deco themes, and is representative of the late

1920's.   The theater incorporates many architectural features of

that generation, including an ornate terrazzo sidewalk, a

recessed entrance, an expansive "Grand Lobby", a high level of

interior decoration, a pipe organ and organ lofts, and numerous


      5
      (...continued)
information. The May 1, 1981, Purchase Agreement executed by
Jacobs and the sellers, Redwood Theatre, Ltd., indicates a
purchase price of $1,000,000, with $87,444 of the purchase price
allocated to the personal property and $912,556 allocated to the
real property. Escrow instructions dated May 8, 1981, also
indicate a sales price of $1,000,000, with an additional
$16,675.36 paid by Jacobs for closing costs and prorated property
taxes. Based on the evidence presented, we find that Jacobs paid
$1,000,000 for the Redwood City Fox and associated personal
property, exclusive of closing costs and property taxes.
                               - 7 -

design flourishes.   To accommodate live performances, the stage

house of the theater is equipped with a fly loft, rigging,

dressing rooms, and an orchestra pit.    For films, the theater has

a projection booth and a sound system.

     The Redwood City Fox Theater originally opened as the

Sequoia Theater on January 5, 1929.    In October 1929, the

property was bought by the Fox West Coast Theaters chain.     The

theater operated until June 1950, when a portion of the

auditorium's plaster ceiling collapsed.    The theater was closed

by Fox West Coast Theaters for 3 months while an extensive

renovation was completed.   The renovation involved the

installation of a new ceiling in the auditorium with perimeter

indirect lighting, the installation of new seating, the design

and installation of a new acoustic system, as well as new

restrooms in the main foyer.   The theater's interior, originally

designed as an "atmospheric" Spanish courtyard, was redecorated

in the Fox West Coast Theaters' “Skouras”6 style.   Additionally,

the Sequoia marquee and vertical signs were removed, and a new V-

shaped marquee was installed, bearing the new "Fox" designation.

The newly renamed Redwood City Fox Theater opened in September

1950.

     The Redwood City Fox Theater continued to operate until the

1970's when, due to the decline of the downtown Redwood City

     6
       So named after Charles Skouras, the then-president of Fox
West Coast Theaters.
                               - 8 -

commercial district as well as the advent of large suburban

multiscreen theaters, it lost its audience.   In June 1976, the

Redwood City Planning Department listed the Redwood City Fox as a

key building in the Historic Resources Inventory of Redwood City.

Despite its listing in the Historic Resources Inventory, the

Redwood City Fox stage was rarely used throughout much of the

1970's,7 though the retail/office spaces did have tenants.

     After Jacobs' purchase and subsequent donation of the

property, the City Council of Redwood City designated the Redwood

City Fox an official historic landmark on July 27, 1987.     In

1989, the City Center Action Committee of Redwood City was

formed, which focused on the Redwood City Fox as one element in a

plan for the revitalization of downtown Redwood City.    In 1991,

the City of Redwood City also established the Fox Theater Task

Force (Task Force).   The Task Force was organized to conduct

activities that would benefit Redwood City through the

preservation of the Redwood City Fox.   The potential benefit of

these activities was described in a Task Force Report as "the

preservation of an historic building, assistance in the

revitalization of Downtown [Redwood City] by increasing activity

at the Fox and increasing the availability of cultural activities

in the City."   One of the activities of the Task Force was the

     7
       Jacobs testified that prior to his purchase of the Redwood
City Fox in May 1981, the then-owners of the property were
"making almost no use of the theater" other than to show second-
run and old films.
                               - 9 -

pursuit of national landmark status for the Redwood City Fox.

This goal was achieved when the Redwood City Fox was awarded a

listing in the National Register of Historic Places on May 5,

1994.8

     The Redwood City Fox is located at 2215 Broadway in downtown

Redwood City.   The site area of the property has 100 feet of

frontage along Broadway, and approximately 15 feet of frontage in

the nature of access lanes on each of the other surrounding

streets.   The shape of the site is basically rectangular with the

three, 15-foot wide access lanes extending from the main parcel,

which is located in the center of the block, to the side and rear

streets.   The depth of the lot relative to Broadway is 243 feet.

The 100-foot wide building facade is comprised of a 4-story

building with an added 3-story plaster tower reaching

approximately 63 feet above the street.   The total site area is

approximately 26,583 square feet.

     For purposes of this opinion, the Redwood City Fox will be

analyzed as two separate components:   (1) The theater component,


     8
       A letter from a representative of the National Park
Service to the Mayor of the City of Redwood City described the
Redwood City Fox as follows:

          The 1928 theater building is an excellent local
     example of Late Gothic Revival style design and
     reflects the romantic nature of small-town movie palace
     construction during the golden age of movies. Listing
     in the National Register recognizes the importance of
     the New Sequoia Theater Building to the rich cultural
     history of Redwood City.
                              - 10 -

which includes the lobby and auditorium; and (2) the

retail/office component, which is in turn composed of (a) the

West retail space, which includes the ground floor and mezzanine

level;9 (b) the East retail space, which includes the ground

floor and mezzanine level; (c) the Second floor office space; and

(d) the Third floor office space.10    The square footage of

building areas, both gross and net rentable, is as follows:

                              Gross       Net Rentable
     Area                     Sq. Ft.     Sq. Ft.

     Theater                  24,358      24,358

     East retail:
          Ground floor         2,625       2,611
          Mezzanine            2,625       2,475

     West retail:
          Ground floor         2,625       2,06511
          Mezzanine            2,625       2,174

     Second floor office       6,090       6,090

     Third floor office          876         876



     9
       Logistically, the mezzanine levels can only be leased in
conjunction with their respective first floor retail spaces.
     10
       The appraisers refer to the different areas by a variety
of designations. For clarity, when discussing the experts'
reports, we will refer to the different areas by the designations
we have assigned. We note, however, that our designation of the
East retail and West retail spaces as "retail" spaces in no way
implies that we find these areas to be suitable only for retail
use to the exclusion of office use.
     11
       The West retail space contains an entryway vestibule with
both a staircase and an elevator which services the Second and
Third floor office spaces. The square footage of the entryway
vestibule is not rentable with the West retail space, and is thus
deducted from the gross square footage of the area.
                               - 11 -

     A.   The Theater Component

     The middle 30 feet of the Broadway frontage bears the

theater marquee, which projects over the sidewalk, and the

recessed theater entry.   A bank of 6 decorated wood entry doors

is inset from the sidewalk approximately 29 feet.   The entry area

has a decorative terrazzo floor and tiled walls.

     The entrance of the theater leads to the main lobby, which

has a ceiling height of approximately 30 feet.   Decorative

features include mirrors, aluminum panels, murals, Art Deco

chandeliers resembling plants, and gilt decorative work.   The

risers of a double staircase lead to the second floor mezzanine

lobby along either side of the main lobby.

     At the rear of the main lobby is a concession area which

features an attractive wood bar with a large mirror.   The bar is

an Art Deco piece that was installed by Jacobs in the 1980's.

The main lobby also houses public restrooms and several small

service and storage rooms.

     The seating in the theater auditorium consists of a main

floor, a mezzanine or lower balcony, and an upper balcony.    As

originally designed, the theater contained 1,469 seats.    The 1950

renovation reduced the seating capacity to 1,325 seats to permit

more space between the rows.   As of the date of the donation, the

theater contained a total of 755 seats, 602 of which were located

on the main level and 153 of which were located in the lower

balcony level.   Most of the seats in the center section of the
                               - 12 -

main floor were replaced by Jacobs during his ownership of the

Redwood City Fox.12   The balance of the seats were comprised of

seats and components from the 1950 renovation.   At some point

prior to the gift, Jacobs intended to reinstall 350 seats in the

upper sections of the auditorium, as well as 24 seats behind the

orchestra pit, for a total seating capacity of 1,130 seats.

However, as of the date of trial, the additional seating was not

installed, and there remained 755 seats in the auditorium.13

     The theater auditorium is highly improved in terms of

architectural detailing and artistic design.   The ceiling is

approximately 40 feet high and arched.   The auditorium also

contains an orchestra pit and organ lofts.   The walls on either

side of the theater are improved with spun glass composition

sound insulation panels on which large Art Deco murals are

painted.

     The stage house, with a ceiling height of approximately 60

feet, features a gridiron "fly" system which is suspended

approximately 50 feet above the stage floor and supports a

network of sheaves, cables and counter weights used to raise

scenery, drapes, and curtains from the stage floor into the fly


     12
       Jacobs installed 168 rocker-type theater chairs which he
had purchased from the Orinda Theater.
     13
       As of the date of trial, the 153 seats located in the
mezzanine level had not been used for seating purposes. The
mezzanine level had been used by the charitable donee for the use
and storage of stage lighting equipment.
                                 - 13 -

loft under the gridiron.     The stage house floor is approximately

24 feet deep and 80 feet wide, with a proscenium width of 40

feet.     A small L-shaped basement is located under the stage.    As

of the date of donation, the fly system and stage house were

highly functional and in working condition.

     At the rear of the stage house is a one-story concrete block

annex which houses the dressing rooms and the greenroom.       This

area includes restrooms and a large delivery door for dock-high

loading.

     As of the date of donation, the exterior of the Redwood City

Fox was in good condition.     Over the course of its existence, the

property had survived several earthquakes with no observable

structural weakening.     The interior finishes were also in good

condition and did not require additional restoration.

     B.     Retail/Office Component

             1.   East Retail Space

        The East retail space has 35 feet of frontage on Broadway,

east of the theater entrance.     The space is rectangular, with

8-foot glass windows in the front overlooking Broadway and a

glass and aluminum entry door.        The mezzanine floor, which also

has windows overlooking Broadway, is accessed from the ground

floor by two staircases.     The ceiling height of the mezzanine

floor is 7.3 feet, which is lower than normal.       The space has one

restroom.     At the time of the donation, the East retail space was
                                - 14 -

in very good condition, but needed the installation of heating

elements.

            2.   West Retail Space

     The West retail space has 35 feet of frontage on Broadway,

west of the theater entrance.    The space contains an entryway

vestibule facing Broadway, with an elevator and staircase, which

serves the Second and Third floor office spaces.    The West retail

space, both the ground floor and the mezzanine floor, consists of

two retail suites which form a "U" shape around the entryway

vestibule for the Second and Third floor office spaces. The

ground floor of the West retail space has two entrance doors onto

Broadway, one at each end of the "U".    The mezzanine floor has

windows facing Broadway, as well as a reduced ceiling height of

7.3 feet.    Each retail suite has one restroom.   As of the date of

donation, the West retail space was in very good condition.

            3.   Second Floor Office Space

     The Second floor office is a "U"-shaped space, located

directly above the East and West retail spaces, and excludes the

area used by the vaulted ceiling of the theater lobby, which

reaches to the roof of the building.     The ceiling height is 9.8

feet, with skylights illuminating much of the space.    The space

has several chandeliers, and all outside walls have windows.      The

space contains 31 partitioned offices, separate restrooms for men

and women, one handicapped-equipped restroom, and a storage room.
                                 - 15 -

As of the date of donation, the Second floor office space was in

very good condition.

            4.    Third Floor Office Space

       The Third floor office space has 30 feet of frontage on

Broadway in the center of the parcel.        The area has 9-foot

ceilings.    As of the date of donation, the Third floor office

space was unfinished and accessible only from the roof.

Subsequent to the gift, Jacobs installed a spiral staircase from

the Second floor office space and finished the Third floor area.

Jacobs intended to finish the Third floor office space prior to

his donation of the property.

III.    Location of the Redwood City Fox

       Redwood City, California, was incorporated in 1867 and is

the county seat of San Mateo County.      San Mateo County is one of

the nine counties comprising what is commonly referred to as the

"Bay Area" of San Francisco.      San Mateo County occupies most of

the peninsula south of the city and county of San Francisco.       The

counties of Santa Cruz and Santa Clara are adjacent to the south.

       As of 1985, San Mateo County had a population of

approximately 620,016, and was the 11th largest county in

California.      The median household income in San Mateo County was

$31,806 in 1980, which was the highest in the State of

California.      As of 1986, San Mateo County's economy offered

employment in construction, manufacturing, transportation,

communications, retail and wholesale trades, financial services,
                               - 16 -

and government.    During the relevant period, two of the major

growth areas affecting San Mateo County were high technology and

office-oriented employment.    In the mid-1980's, land values in

the area were escalating rapidly.

     Redwood City is located in the southeasterly portion of San

Mateo County, approximately 25 miles south of San Francisco and

25 miles north of San Jose.    Redwood City is bordered by the San

Francisco Bay to the east, the city of Woodside to the west, the

city of San Carlos to the north, and the cities of Menlo Park and

Atherton to the south.    Its population in 1985 was estimated at

57,300 persons, making it the third largest city in San Mateo

County.   Though primarily residential in nature, commercial and

industrial uses exist, clustered mostly adjacent to Highway 101

in Redwood City's east end and emanating outward from Redwood

City's downtown core.

     The Redwood City Fox is located on Broadway, one of the main

thoroughfares in downtown Redwood City.    The property is situated

on the south side of Broadway, on a block bounded by Hamilton

Street, Middlefield Road, and Winslow Street.    Across Broadway

from the property is the old San Mateo County Courthouse, which

dates from 1908.    As of the date of trial, the Redwood City

Council was in the process of opening the San Mateo County

Historical Museum in the old San Mateo County Courthouse.

     The area surrounding the Redwood City Fox houses both the

City of Redwood City and the County of San Mateo government
                               - 17 -

offices.    The new San Mateo County Courthouse, as well as the

balance of the County of San Mateo and City of Redwood City

government offices, are located within two blocks of the Redwood

City Fox.

     In general, the improvements within the vicinity of the

Redwood City Fox are dominated by older commercial structures

which are small in scale, ranging from two to four stories.      Many

financial institutions and title companies have branches in the

area.    Additionally, the Caltrain commuter railroad station is

within 1 block of the property.

     The Redwood City Fox has two parking spaces on the west side

of the building in one of the access lanes.    There are two

municipally owned public parking lots in the vicinity of the

property, one across Winslow Street, behind the Redwood City Fox,

and the other two blocks to the southeast, by City Hall.    There

is also metered street parking in the area around the property,

which is free on weekday evenings and on weekends.

     The Redwood City Fox is zoned CB, or Central Business.      The

purpose of the Central Business District is "to designate and

promote the orderly development of the downtown business district

as a central shopping facility for the whole city and surrounding

area."    Permitted uses include a variety of commercial and office

uses, including retail, theater, and restaurant commercial uses,

and professional and administrative office uses.    Off-street

parking requirements vary by use.    The subject property is
                                 - 18 -

considered a legal nonconforming use due to the lack of on-site

parking.

     A.    Theater Market

     As of the valuation date, there was a need for a large-

capacity live performance theater in San Mateo County.      The only

other large live performance theater in the area was the San

Mateo Performing Arts Center (SMPAC) at San Mateo High School,

approximately 9 miles northwest of the Redwood City Fox.      The

SMPAC has a seating capacity of 1,605, and is the largest

publicly owned theater facility in San Mateo County.      It was

considered the best large theater in the area for live stage

performances and was tightly scheduled.

     B.    Commercial Market

     Overall, the downtown commercial core of Redwood City has

declined as a community shopping district, but has grown as a

governmental and banking base.      Office rental in downtown Redwood

City is primarily based on a desire to be near the City of

Redwood City and the County of San Mateo government offices.

Similarly, the majority of the commercial users in downtown

Redwood City cater to the City and County employees, the dominant

workforce in the area.      As a result, traffic along Broadway is

diminished during the evenings and on weekends.
                              - 19 -

IV.   Jacobs' Use of the Property

      From 1981 to 1986, Jacobs spent approximately $829,41514 to

restore and improve the Redwood City Fox.   The work performed

included, among other things, an upgrade of the electrical

system, including installation of a Dolby sound system and

replacement of much of the stage lighting; the installation of

stairs in, and the rehabilitation of, the plenum area of the

auditorium; renovation of the restrooms in the public areas of

the auditorium and the retail/office areas; repair of the roof;

installation of new carpet, draperies, tile work, and painting;

restoration of the wood and plaster parts of the theater;

installation of new doors and door frames, including oak doors at

the main theater entrance; installation of new theater seating;

rehabilitation of the ceiling perimeter neon lighting system in

the auditorium; and complete retrofitting of the dressing rooms.

Additionally, the retail/office spaces were completely renovated,

including installation of the mezzanines in both the West and

East retail spaces.   Jacobs oversaw the renovation, putting in

about 2,000 hours of his time, while the workers he hired

performed about 60,000 hours of work.




      14
       While the record is not clear as to the exact amount
Jacobs spent to restore and renovate the Redwood City Fox, we are
satisfied, and respondent agrees, that Jacobs spent at least
$800,000 to restore the property. We find that the most accurate
figure is $829,415 based upon the evidence.
                               - 20 -

     During his ownership of the Redwood City Fox, Jacobs showed

classic films in the theater, as well as some live performances.

He also attempted to operate the Redwood City Fox as a dinner

theater.   To this end, he installed an upscale French

delicatessen in the West retail space, which was operated by his

wife for 2 years.15   He used the East retail space to house his

antiques business and periodically held antique auctions.

Additionally, Jacobs moved his real estate development business

offices from nearby Sunnyvale, California, into offices he had

constructed in the backstage area of the theater.

     Jacobs also leased the Second floor office space to the

County of San Mateo, commencing December 15, 1984.   It was a 3-

year lease, but was terminated on December 14, 1986, prior to the

end of the lease term.   The rent was $7,150 per month, with

Jacobs paying all expenses.    This rent equated to approximately

$.90 to $1.00 per square foot.

     By 1986, Jacobs was convinced that he could not operate the

Redwood City Fox profitably.   Jacobs believed he had the

following alternatives with respect to the property:     Raze the

building and develop the site himself for the construction of an

office building; sell the property to developers; or donate it to

an organization which would preserve the property.   Jacobs wanted



     15
       After he closed the delicatessen, Jacobs renovated the
West retail area and converted it back to commercial use.
                              - 21 -

to preserve the property, as he considered it an historic

treasure.   The Redwood City Fox had been placed on the Historic

Resources Inventory of Redwood City in 1976, and, while not

legally protected, he believed there would be a public outcry if

he demolished the building.

     Jacobs decided to donate the Redwood City Fox to an

organization that would use the theater as a community resource

and preserve it from demolition.   After investigation, Jacobs

selected the Palo Alto Players, Inc. (the Players), a California

nonprofit corporation, to receive the Redwood City Fox as a gift.

The Players is a community-based dramatic arts organization that

qualified at all times relevant to these cases as a section

501(c)(3) exempt organization.   The Players is based in Palo

Alto, a community 10 miles to the south of Redwood City.    At the

time of the gift, Jacobs communicated his intention to place the

Redwood City Fox on the local, State, and National Register of

Historic Places.

     The donation of the Redwood City Fox and associated personal

property to the Players was accepted by the Players' Board of

Directors on December 22, 1986, by corporate resolution.    The

gift was accomplished by an agreement (Agreement) executed by
                              - 22 -

Jacobs and the Players on December 29, 1986.16   The property

donated by Jacobs to the Players consisted of the following:

     Parcel of real property situated in the City of Redwood
     City, County of San Mateo, State of California, located
     at 2215 Broadway consisting of approximately 26,500
     square feet of land; together with all improvements,
     and furniture, fixtures and equipment constructed
     thereon or affixed thereto which are owned by Jacobs,
     including (without limitation) the Fox Theater
     consisting of approximately 24,000 square feet, and
     related office, retail and storage space consisting of
     an additional 13,000 square feet and all easements and
     other rights appurtenant thereto.

     The Agreement contained the following use restrictions,

termed "covenants running with the land":

                            Article 2
                          Restrictions

          2.1 Designation Of The Theater As An Historical
     Landmark. Jacobs intends to cause the Theater to be
     designated as an historical site by the appropriate
     authorities of the State of California and the United
     States Government, and to be registered on the State of


     16
       Jacobs and the Players also executed an "Assignment and
Assumption of Existing Leases" on Dec. 29, 1986, whereby Jacobs
assigned to the Players the following three leases recited in the
assignment:

          (1) A lease entered into on September 24, 1985,
     between * * * [Jacobs] and Big Brothers/Big Sisters of
     the Peninsula, Inc. granting non-exclusive rights to
     use a portion of the Building for semi-weekly bingo
     games, which lease has no definite term;
          (2) An oral lease entered into as of April 1,
     1984, between * * * [Jacobs] and Bayshore Auction
     granting non-exclusive rights to use a portion of the
     Building for periodic auctions, with a percentage of
     revenue derived therefrom paid as rent, which lease has
     no definite term; and
          (3) A lease between * * * [Jacobs] and Sonitrol
     of a portion of the Building dated March 1, 1979.
                             - 23 -

     California Registry of Historical Sites and/or the
     National Registry of Historical Sites of the United
     States. Players shall fully cooperate with Jacobs in
     such efforts, shall execute and deliver any documents
     reasonably requested by Jacobs in furtherence [sic] of
     the above, and shall use its good faith best efforts to
     cause such designation to occur.

          2.2 Maintenance Of The Theater. Players shall
     maintain the facade of the Theater in good condition
     and repair, and shall not take or allow any action
     which would compromise the architectural integrity of
     the art deco facade.

          2.3 Use Of Premises. Players shall use the
     Theater as the "Peninsula Center for the Performing
     Arts". Players shall use the Theater only as a
     performance auditorium and shall not use the theater
     for sporting events or any use other than as an
     auditorium for the performing arts, or as provided in
     section 2.4 herein.

          2.4 Availability Of The Theater For Other Civic
     Uses. Players shall allow and shall have the right to
     allow other performing arts organizations, civic and
     community organizations, the City of Redwood City, and
     the County of San Mateo to use the Theater on a
     financial basis which is affordable to all parties
     involved, during times which do not unreasonably
     conflict with Players' use. The Theater shall be made
     available to such other parties to the greatest extent
     possible which does not interfere with Players' use,
     but in no event less than ten percent (10%) of the
     hours that similar performance auditoriums are usually
     and customarily used.

          2.5 Memorial Plaque. Jacobs is donating the
     Theater to Players in the name and memory of his late
     father, Justin Manning Jacobs, Sr., and Jacobs will
     affix an appropriate bronze memorial plaque to the
     Theater at his sole cost. Players shall maintain the
     plaque in good condition and repair in the location at
     which it was originally installed by Jacobs.

     The gift deed transferring the property to the Players was

recorded on December 31, 1986.
                             - 24 -

     As part of the donation to the Players, Jacobs gifted items

of personal property, described in the bill of sale executed on

December 29, 1986, between Jacobs and the Players.   The items

donated were in good condition and all were functional.   The fair

market value of the personal property on the date of donation was

$96,000.17

     Contemporaneous with the gift of the property to the Players

and pursuant to the December 29, 1986, Agreement, Jacobs leased

from the Players approximately 12,268 square feet of the Redwood


     17
       Jacobs estimated the fair market value of the personal
property donated to the Players to be between $90,000 and
$100,000. Peter Morrison of Adamson Associates, Inc., a
professional cost estimating firm retained by petitioners in
1986, listed the following items of personal property donated and
their estimated values:

     Bingo equipment               $ 4,000
     Fox film library               25,000
     Fireplace                      15,000
     Baldwin theater organ           5,000
     Kitchen and deli equipment     17,000
     Stacking chairs                 3,000
     Double-decker London bus       21,000
     Safe                            1,000
     Piano                           1,000
     Total                         $92,000

In their appraisal report, Ingram/Ewing stated that the correct
figure for the safe was $5,000, rather than the $1,000 listed in
the Adamson report. In light of the $87,444 allocated to the
personal property when Jacobs purchased the property in May 1981
and the fact that he subsequently purchased additional items
which he donated to the Players, we are satisfied that the
$96,000 figure is accurate. Respondent makes no argument against
this figure. Accordingly, we find that, on the valuation date,
the fair market value of the personal property donated by
petitioners to the Players was $96,000.
                                - 25 -

City Fox's commercial space (the Jacobs lease).    The Jacobs lease

included the West retail space (ground floor and mezzanine),

Second floor office space, and unfinished Third floor office

space.18   The lease was for an initial term of 5 years at a rate

of $3,000 per month.   The terms of the lease provided that Jacobs

was obligated to pay all expenses associated with the leased

portion of the premises, including all janitorial services,

utilities, real property taxes allocable to leased portion of the

premises, and comprehensive general liability insurance.    Jacobs

was also required to make all major repairs.

     The Jacobs lease granted Jacobs ten separate options to

extend the lease term for a period of 5 years for each option.

Additionally, the lease granted Jacobs an option to repurchase

the commercial portion of the property for $10,000 if the

commercial portion of the property could be subdivided legally

into condominiums.

     Shortly after the gift to the Players, Jacobs determined

that subdivision of the commercial portion of the property would

not be commercially feasible.    Consequently, Jacobs and the

Players amended the lease on June 26, 1987.    The amended lease

rescinded Jacobs' right to subdivide the commercial space and his

option to purchase after such subdivision.    The amended lease


     18
       As mentioned, Jacobs installed a staircase and finished
the Third floor office space subsequent to his gift of the
property.
                               - 26 -

provided it became effective as of December 29, 1986.      Jacobs

executed a quitclaim deed on September 29, 1987, disclaiming the

rights under the original lease.

      After the donation of the Redwood City Fox, Jacobs

negotiated, on behalf of the Players, a short-term lease between

the Players and the County of San Mateo for the East retail space

(including mezzanine), for the period of March 2, 1987, to

December 1, 1987.19   Rent was $4,720 per month, with the County

of San Mateo paying utility expenses, including gas, electrical,

and janitorial services.   The Players were responsible for paying

all real property taxes, structural repairs, and fire insurance.

      By agreement dated December 23, 1992, Jacobs and the Players

terminated the Jacobs lease.   At that time, Jacobs assigned two

existing subleases he had negotiated to the Players.

V.   Players' Use of the Redwood City Fox

      The Players have offered live theater productions at the

Redwood City Fox from 1987 until the present.      Currently, the

Players, operating as the "Peninsula Center Stage", mount 3

productions a year at the Redwood City Fox.      Each production runs

for approximately 13 performances.      The Players use the West

retail space as the box office for the Peninsula Center Stage.

When not used by the Players, the theater is available for use by


      19
       The lease agreement between the Players and the County of
San Mateo states the leased premises consists of "approximately
4,000 square feet".
                                 - 27 -

community organizations.      The Players operate the Peninsula

Center Stage with financial support from the City of Redwood

City.      The Players receive approximately $30,000 per year from

the City of Redwood City.

      In 1990 and 1991, the Players received from the City of

Redwood City a grant to upgrade the water delivery system for the

sprinkler system located over the stage area of the theater.

Since 1986, the Players have spent less than $100,000 in repairs

and renovations on the Redwood City Fox, primarily for the

sprinkler system upgrade and the addition of new roofing over the

theater.

      Despite the lack of on-site parking, there was "ample"

parking around the property, and parking for events at the

Redwood City Fox has not been considered a problem.

VI.   Petitioners' Valuation and Charitable Contribution
      Deductions

      A.     Ingram/Ewing Appraisal

      In order to ascertain the amount of their charitable

contribution deduction for their donation of the Redwood City Fox

in taxable year 1986, petitioners retained David Ingram, Inc., a

real estate appraisal firm located in Foster City, California, to

prepare an appraisal of the Redwood City Fox.      The appraisal of

the property was performed by David Ingram, Jr. (Ingram)20 and


      20
           David Ingram, Jr. died in November 1993.   Consequently,
                                                        (continued...)
                              - 28 -

William J. Ewing (Ewing).   Ingram and Ewing prepared their report

in early 1987 and delivered it to Jacobs in April 1987.   At the

time they prepared their report, Ingram had been active in the

field of real estate appraisal since 1946, and was a member of

the American Society of Real Estate Counselors, the American

Institute of Real Estate Appraisers, member and past-president of

the Menlo Park-Atherton Board of Realtors, and member and past-

director of the California Real Estate Association.   Ewing had

worked as an independent appraiser since 1970 and was a candidate

for membership with the American Institute of Real Estate

Appraisers.   Ewing testified at trial regarding the Ingram/Ewing

appraisal report.

     Ingram/Ewing commenced their appraisal by breaking down the

Redwood City Fox into four “appraisal units”, which they valued

separately.   The theater space was designated Unit A.   The East

retail space, including the first floor and mezzanine, was

designated Unit B.   The West retail space, including the first

floor and mezzanine, was designated Unit C.   The Second and Third

floor office spaces, including space from the West retail area

for the elevator, staircase, and entryway vestibule, were

designated Unit D.




     20
      (...continued)
William J. Ewing testified regarding the April 1987 appraisal of
the Redwood City Fox.
                              - 29 -

     Ingram/Ewing concluded that the highest and best use of the

Redwood City Fox was its continued use as a performing arts

center and as retail/office space.     In addition to its historical

significance, Ingram/Ewing based their highest and best use

conclusion on the apparent market demand in the surrounding

community and region for a performing arts center with a large

seating capacity, such as the Redwood City Fox.    Ingram/Ewing

estimated 1,130 seats to be the appropriate seating capacity of

the Redwood City Fox, and used this number of seats in their

valuation analysis.

     Ingram/Ewing determined that the highest and best use of the

commercial space would be for use as office space.    Should the

East and West retail spaces be leased for retail use,

Ingram/Ewing determined that the spaces would return one-half to

two-thirds of the rent that would be probable with office use.

     In appraising the value of the Redwood City Fox as of

December 31, 1986, Ingram/Ewing concluded that because the

theater portion of the Redwood City Fox was special use property,

the replacement cost method should be relied upon to estimate

value.   However, because of the recent sale of the San Jose Fox

Theater (San Jose Fox), another Fox movie palace located near the

Redwood City Fox and sold close in time to the valuation date,
                                - 30 -

Ingram/Ewing also employed the comparable sales21 method to value

the theater portion of the Redwood City Fox.   Recognizing that

the theater would be run by a non-profit group and that there

were no income comparison data available, Ingram/Ewing did not

employ the income capitalization approach to value the theater

portion of the Redwood City Fox.

     With respect to valuing the commercial portion of the

Redwood City Fox, Ingram/Ewing employed the replacement cost

approach and the market approach.    Ingram/Ewing did not utilize

the income capitalization method for the retail/office component,

and they did not provide any reason for not employing this

method.   Ingram/Ewing also did not consider the impact of the

Jacobs lease on the value of the retail/office portion of the

property.



            1.   Adamson Cost Estimate

     To perform their appraisal, Ingram/Ewing required Jacobs to

retain a professional cost estimator to do a cost analysis of the

property.    In December 1986, Adamson Associates, a construction

cost planning and management firm located in San Francisco,

California, prepared a detailed report for petitioners estimating

the probable cost to construct a new building matching, in plan


     21
       In their appraisal report, Ingram/Ewing refer to the
comparable sales method as the market data method. For clarity,
we shall refer to this method as the comparable sales method.
                              - 31 -

and construction style, the Redwood City Fox.   The materials and

construction methods would match the existing materials and

methods, except where new materials could mimic the existing

materials at a lower cost.   Historical features were replaced

with new equivalents, not replicated.   The artwork (mainly

painted murals) was not replaced.   No allowance was made in the

Adamson report for the historical value of any item in the

Redwood City Fox, nor was allowance made for depreciation of the

property.   In summary, the replacement building estimated in the

Adamson report would be completely new, with finishes and

fixtures of similar style and character to the existing property,

would be functionally identical to the existing Redwood City Fox,

but would have no historical value.

     The Adamson estimate was based on the total direct

construction costs of 16 components: (1) Foundations; (2)

vertical structural members; (3) floors and roofs; (4) exterior

cladding; (5) roofing and waterproofing; (6) interior partitions;

(7) floor, wall and ceiling finishes; (8) building

function/specialties and equipment;22 (9) vertical

transportation; (10) plumbing; (11) heating, ventilating, and air

conditioning; (12) electrical; (13) fire protection; (14) site

preparation; (15) site development; and (16) utilities.   Added to


     22
       Under the component “8. Specialties and Equipment” for
the theater, a quantity of 760 seats at a cost of $350.00 per
seat was used to calculate the cost of seating.
                                     - 32 -

these total direct construction costs were 7 percent for “General

Conditions” and 5 percent for “Overhead and Profit”.             The Adamson

report estimated the probable replacement cost of the Redwood

City Fox to be $7,016,000, broken down as follows:

                                           Price per
                       Square Feet        Square Foot        Total Cost
Theater                  24,430             $222.06          $5,425,000
Second Level Office       6,892              132.33             912,000
East Retail               5,550               61.62             342,000
West Retail               4,940               68.22             337,000
   Total                                                     $7,016,000

       The Adamson estimate did not include the cost of demolishing

the existing structure, nor did it include the cost of any

improvements to the building, such as increasing seismic

performance or improving accessibility.          Also excluded from the

Adamson cost estimate were legal and financing costs, fire and

all risk insurance costs, building permits, utility connections

and fees, and fees for professional design, testing, inspection,

and management.

            2.   Replacement Cost Approach

       Under the replacement cost approach, Ingram/Ewing first

valued the land utilizing comparable sales.             Ingram/Ewing viewed

6 sales of commercially zoned vacant land in Redwood City as

comparables.     Ingram/Ewing made adjustments to the sale prices

for factors such as location, size, time of sale, and potential

use.    Ingram/Ewing valued the land, as if vacant, at $27.00 per

square foot, or $720,000 rounded (26,583 square feet x $27.00 per

square foot = $717,741).      Ingram/Ewing assigned 20,089 square
                              - 33 -

feet to the theater, for a land value estimate of $542,403, and

they assigned 6,493 square feet to the retail space, for a land

value estimate of $175,311.

     Ingram/Ewing then utilized the cost estimate in the Adamson

report to value the improvements.   For the theater portion, Unit

A, Ingram/Ewing made the following adjustments to the $5,425,000

figure estimated in the Adamson report.   First, Ingram/Ewing

determined that optimum seating for the theater would be 1,130

seats.   Consequently, they recommended the addition of 370 seats

to the 760 seats used in the Adamson report.   At a cost of $350

per seat, Ingram/Ewing made an upward adjustment of $129,500 (370

seats x $350/seat = $129,500) for additional seating.

     Next, under component number 8, “Specialities and

Equipment”, the Adamson report had listed the cost of items that

Ingram/Ewing considered to be “personal goods” which should not

be part of the real estate appraisal.   They thus deducted the

cost of these items and made a downward adjustment of $69,000.

Ingram/Ewing next made an upward adjustment of $4,000, to reflect

the $5,000 cost of a floor safe, rather than the incorrect cost

of $1,000 used in the Adamson estimate.

     In conclusion, with respect to the replacement cost of

$5,425,000 estimated in the Adamson report for the theater,

Ingram/Ewing added $129,500 and $4,000 for a total of $133,500,
                              - 34 -

from which they deducted $69,000, for a net addition of $64,500.

To this figure, they added 7 percent for General Conditions and

5 percent for Profit, for a total upward adjustment of $72,240 to

the $5,425,000 estimate in the Adamson report, for a total

replacement cost estimate of $5,497,240 for theater portion, Unit

A, of the Redwood City Fox.

     Ingram/Ewing next estimated the “Projected Restoration and

Deferred Maintenance Cost” of repairing/restoring the Redwood

City Fox to a condition they term “Market Condition”.

Ingram/Ewing explained their methodology as follows:

     Appraisal of this property employs the Cost Approach
     which is calculated by estimating the replacement cost
     less depreciation, added to the estimated land value.
     Since this property is in the process of being
     restored, it is appropriate to project the costs of
     restoration or rehabilitation to bring it to the
     condition that it may be offered at market rent or
     market sale for it[s] highest-and-best use, which we
     will call “Market Condition”. These projected costs
     are then deducted as capital expenses from the
     estimated market value of the property as if the
     property was completely rehabilitated and ready for
     market. The projected costs are estimated separately
     for each of the four unit spaces * * * .

Ingram/Ewing estimated the cost of “restoration and maintenance”

for the theater portion to be $1,222,045.   They estimated the

cost of “restoration and maintenance” for the retail/office

portions, Units B, C, and D, to be $55,295.

     Ingram/Ewing next estimated accrued depreciation, both

physical deterioration and functional obsolescence, for the

Redwood City Fox.   On the valuation date of December 31, 1986,
                             - 35 -

the Redwood City Fox was 58 years old.    However, rather than

estimating accrued depreciation for the Redwood City Fox as it

existed on December 31, 1986, Ingram/Ewing estimated depreciation

for the Redwood City Fox as if the projected maintenance and

restoration work discussed above had already been completed.

They thus concluded that both the theater and the retail/office

components of the property had an “effective age” which was less

than the Redwood City Fox’s actual age.    To explain their reason

for estimating depreciation in this manner, with respect to the

theater portion, Ingram/Ewing listed 4 theaters that ranged in

age from 79 to 131 years old, and explained:

     These theaters are from 79 to 131 years old and still
     remain in good to excellent condition and are in
     current use, a characteristic that is specific to
     performing arts theaters. For this reason it is
     difficult to predict depreciation or remaining life.
     This RCFox Theatre is in good condition and with the
     projected restoration is expected to be brought to
     “market condition” as previously discussed which is
     projected to be excellent condition. Therefore, in
     considering these facts and relying on Marshall
     Valuation Service, together with appraisal experience,
     it is concluded that based on 45 years life expectancy,
     the subject theater has an effective age of 18 years
     and based on the Marshall Depreciation Table for
     Commercial Properties, is 19 percent depreciated. This
     amounts to $1,044,475 depreciation leaving Net
     Depreciated Value of Improvements of $4,995,168.

     Utilizing the same methodology with respect to the retail/

office space, Ingram/Ewing estimated depreciation as follows:

     Marshall Valuation Service has a guideline of typical
     building lives of 50 years for class C average offices.
     Therefore, we must consider that this office space is
     an integral part of the theatre space in coexisting for
                                   - 36 -

     the life of the property. The office space has already
     been restored, except for the Fourth Floor where tenant
     finish is needed, some minor deferred maintenance yet
     to complete. This office space is in very good to
     excellent condition having been renovated to the extent
     of refinishing most surfaces and installing new
     restrooms. In consideration of these facts and
     experience in appraising commercial properties it is
     concluded that the effective age is 18 years, resulting
     in a depreciation estimate of 15 percent. * * *

Ingram/Ewing estimated depreciation for the retail/office space

to be $238,650.

     Ingram/Ewing estimated a value of $3,773,123 under the

replacement cost approach for the theater space, computed as

follows:23

                Cost Approach Analysis for Theater Use Space

Estimated Replacement Cost,                   $5,497,240
  As completed with 1,130 seats,
  for 24,358 square feet at
  $226 per square foot

Less Provision for Depreciation at 19%1        1,044,475
  (Utilizing Marshall Valuation Service and
   computed after restoration)

Net Depreciated Value of Improvements          4,452,765

Add Land Value Estimate                          542,403

Total Estimated Value by the Cost Approach     4,995,168
  After Provision for Depreciation
  As Completed with Planned Restoration

Less Estimated Cost of Restoration and         1,222,045
  Maintenance


     23
       In the various tables produced by the experts and
reproduced in our opinion, several of the experts' dollar totals
do not appear to be correct. However, the dollar figures
appearing in the experts' tables and reproduced in our opinion
were rounded by the experts to what they considered the nearest
dollar amount. We note that the dollar totals presented are in
fact correct when the unrounded figures are considered.
                                    - 37 -
Estimated Value by the Cost Approach           $3,773,1232
  After Deduction for Cost of Restoration
     1
        Ingram/Ewing considered the theater space to be in "good condition",
and that, after the planned restoration, it would be in "excellent condition".
Thus, relying on the condition of other operating historic theaters, the
Marshall Valuation Service, and their own judgement, Ingram/Ewing concluded
that the theater has an effective age of 18 years, which results in 19-percent
depreciation.
     2
        In their appraisal report in a table titled “Summary of Values”,
Ingram/Ewing state that the value estimate under the replacement cost approach
for the theater is $3,776,390. No explanation is given to account for the
difference between this figure and the $3,773,123 figure calculated above.
Consequently, we use the $3,773,123 figure.

     Under the replacement cost approach, Ingram/Ewing valued

the retail/office space at $1,472,366, computed as follows:
                    Cost Approach for Retail/Office Space

Estimated Actual Gross Floor Area              17,518 square feet

Estimated Replacement Cost                     $1,591,000

Less Provision for Depreciation at 15%1           238,650
  (Utilizing Marshall Valuation Service and
   computed after restoration)

Net Depreciated Value of Improvements           1,352,350

Add Estimated Land Value at                       175,311
  $27 per square foot

Total Estimated Value by Cost Approach          1,527,661
  After Provision for Depreciation as
  Completed with Planned Restoration

Less Estimated Restoration and                     55,295
  Maintenance Cost

Estimated Value by Cost Approach After         $1,472,366
  Deduction for Cost of Restoration
     1
       Ingram/Ewing considered the retail/office space to be in "very good to
excellent condition" and thus concluded that the effective age of the
retail/office improvements on the valuation date was 18 years, which resulted
in a depreciation estimate of 15 percent based on the Marshall Valuation
Service.

     Thus, under the replacement cost method, Ingram/Ewing valued

the Redwood City Fox at $5,245,489.
                               - 38 -

          3.    Comparable Sales Approach--Theater Component

     Ingram/Ewing based their comparable sales approach on the

sale of the San Jose Fox Theater (San Jose Fox), which occurred

in September 1985.    The San Jose Fox is located at 345 South

First Street in downtown San Jose, California, a city located

approximately 25 miles south of Redwood City in Silicon Valley.

The population of San Jose was in excess of 700,000 people in

1985.

     The San Jose Fox opened in April 1927.    It is also a movie

palace, providing both live performance and motion picture

capabilities, and was the first Fox movie palace in Northern

California.    The theater has an art deco facade and Spanish

Baroque architecture, and is similar to the Redwood City Fox

theater in configuration, as well as in both grandeur and

historical appeal.    The site area of the San Jose Fox is

approximately 20,200 square feet, and the building area of the

theater totals about 24,363 square feet.    It was originally

designed to have a seating capacity of 2,000 seats.    Similar to

the Redwood City Fox, the San Jose Fox was listed on the Historic

Resources Inventories of both the City of San Jose and the County

of Santa Clara, and was eligible for listing with the National

Register of Historic Places.

     The San Jose Fox operated continuously from 1927 to 1955,

and operated intermittently until 1974, at which time it was
                               - 39 -

finally closed.    In 1975, the San Jose Fox was purchased by Dr.

Jose Borges for $300,000.    Dr. Borges wished to preserve the

historic splendor of the theater and to reopen it for use as a

movie theater.    Consistent with this, Dr. Borges spent

approximately $700,000 for artistic restoration of the ceiling

and walls of the auditorium.    The seating and all carpeting were

removed.    However, Dr. Borges never reopened the San Jose Fox for

business.

     In September 1985, the Redevelopment Agency of the City of

San Jose (Redevelopment Agency) purchased the San Jose Fox from

Dr. Borges for $2,010,000 in cash.      The Redevelopment Agency

planned to revitalize downtown San Jose which, at that time, was

rather seedy.    At the time of its purchase by the Redevelopment

Agency, the San Jose Fox had been dark since 1974 and was not in

operating condition.    There were neither seats nor carpeting in

the theater, and the entire theater needed cleaning, refinishing,

and restoration.    Additionally, the San Jose Fox was without a

ticket sales office, concession or food service areas, and public

restrooms to serve the ground floor seating area.      The balcony

restrooms needed expansion, and there was no handicapped access.

The theater required, among other things, upgraded plumbing,

electrical (including lighting) and HVAC systems, a new audio

system, and seismic reinforcement.
                              - 40 -

     In 1985, the Redevelopment Agency commissioned Design

Professionals, Inc. (Design Professionals), an architectural

firm, to develop cost estimates for renovation of the San Jose

Fox to bring it to an operating level of quality.    In their

report, entitled “Preliminary Analysis for Renovation of the Fox

Theater for the City of San Jose, August 1, 1985", Design

Professionals presented three alternative schemes of development

based on variations in the level of projected use for the San

Jose Fox.   Each of the 3 schemes was analyzed in terms of

architectural, structural, mechanical, electrical, lighting,

theater systems, acoustical, and audiovisual requirements,

including cost estimates for implementation.   Design

Professionals relied on cost estimates provided by several

consultants with the requisite expertise.

     Scheme 1 consisted of cost estimates to renovate the San

Jose Fox for use as an assembly hall in conjunction with the new

convention center being built across the street from the theater.

A new 2-story lobby with a pedestrian bridge to connect the San

Jose Fox to the convention center was recommended.    Scheme 2

consisted of the improvements recommended in Scheme 1, as well as

developing the theater for use as a symphony hall.    Scheme 3

proposed to transform the San Jose Fox into a multifunctional

facility with capabilities for opera, ballet, and other types of

live performances.   Scheme 3 required the construction of added
                              - 41 -

floor space for a loading area, offices, new dressing rooms,

stage storage, and a truck dock.

     In their appraisal report, Ingram/Ewing used the costs

estimates provided by Design Professionals for each of the

proposed improvement schemes for what they termed a “market

comparison” of the Redwood City Fox to the San Jose Fox.    First,

Ingram/Ewing concluded that the Scheme 2 level of use of the San

Jose Fox was very similar to the existing level of use of the

Redwood City Fox if the proposed lobby/pedestrian walkway

addition to the San Jose Fox were ignored.   The Scheme 2 cost to

bring the San Jose Fox to operating condition, minus $952,000 for

the cost of the lobby addition, was $4,762,500.   With 1,538

planned seats, the Scheme 2 estimated construction cost of

rehabilitation for the San Jose Fox was $3,097 per seat.

Ingram/Ewing then adjusted the Scheme 2 cost estimate by adding

$162,000 for the cost of restrooms and $60,000 for the cost of

stage lighting, and deducting $350,000 (one-half the amount spent

by Dr. Borges) for what Ingram/Ewing considered the superior

artistic decoration of the San Jose Fox.   To this total was added

the original $2,010,000 purchase price of the San Jose Fox.

Ingram/Ewing next deducted the $1,222,045 they estimated to be

the restoration cost of the Redwood City Fox.   They then added a

time adjustment of 4 percent per annum for the 1.3 years between

the sales dates.   Ingram/Ewing thus concluded that the “Market
                                    - 42 -

Approach Value Estimate” for the Redwood City Fox, as of December

31, 1986, was $3,850,115, computed as follows:

Purchase Price of SJFox                          $2,010,000
  Purchase Price per seat for 1,538 seats            $1,307

Estimated Restoration and
  Rehabilitation Cost for Scheme
  2 without Mkt. St. Lobby          $4,762,500
  Cost per seat for 1,538 seats         $3,097

Adjustments for Comparison:
  Add stage lighting                    60,000
  Add restrooms                        162,000
  Deduct Architectural Decorat.       -350,000
  Total Net Adjustment                -128,000

 Estimated Cost Less Adjustment      4,634,500
 Value per seat for 1,538 seats          3,013
 Add purchase price per seat             1,307
 Total Est. Cost per seat SJFox          4,320

Estimated Value by Comparison for
  RC Fox Theatre Use Space
  for 1,130 seats at $4,320 each                 4,881,850

Less Estimated Cost to Restore                   1,222,045
Estimated Net Value Before Restoration           3,659,805

Time Adjustment from September 12, 1985
  to December 30, 1986 at Annual    4.00%
  474 days/365 days = 1.30 years    1.30         $3,850,115

           4.   Comparable Sales Approach--Retail/Office Component

     Under the comparable sales approach for the retail/office

space, Ingram/Ewing chose sales of 5 improved properties, all

office buildings.     The unit of comparison was the price paid per

square foot of gross functional building area, including land.

Ingram/Ewing made adjustments for such factors as location, age

and condition of improvements, size, and date of sale.        Under the

comparable sales approach, and after subtracting the estimated

cost of restoring the retail/office space, Ingram/Ewing estimated
                                     - 43 -

the value of the retail/office spaces to be $1,448,419, broken

down as follows:

                               Price Per       Total
                               Square Foot     Square Feet          Total

East Side Retail/Office        $103.00          2,625           $   270,375
  Space (without mezzanine)

West Side Retail/Office         103.00          2,105               216,815
  Space (without mezzanine)

East Side Mezzanine              65.92          2,625               173,040

West Side Mezzanine              65.92          2,226               146,738

Office Space (without           103.00          6,090               627,270
  Fourth Floor)

Fourth Floor                     79.31            876               69,476
                                               16,547           $1,503,713

Less Estimated Cost of Restoration                                  (55,295)

Total Market Value Estimate                                     $1,448,419

           5.    Ingram/Ewing--Value Reconciliation

     In summary, Ingram/Ewing estimated the following values for

the Redwood City Fox under their application of the replacement

cost approach and the comparable sales approach:

                    Cost         Market        Final Estimate
 Theater          $3,776,390   $3,850,115       $3,850,000
 Retail/Office     1,472,366    1,448,419        1,448,000

 Total                                         $5,299,000

Ingram/Ewing rounded this figure to arrive at $5,300,000 as their

estimate of the fair market value of the Redwood City Fox as of

December 31, 1986.

     B.   Petitioners’ Charitable Contribution Deduction

     Petitioners used the services of an accountant to prepare

their 1986 Federal income tax return.         Based on the Ingram/Ewing
                              - 44 -

appraisal, petitioners claimed a charitable contribution

deduction for the donation of the Redwood City Fox on their 1986

Federal income tax return in the amount of $5,300,000.

Petitioners attached the Ingram/Ewing appraisal and a completed

Form 8283 to their 1986 return.   Petitioners claimed carryover

deductions of the remaining amount on petitioners' joint returns

for 1988 and 1989, Jacob's return for 1990, and Crocker's returns

for 1990 and 1991.

     In the notices of deficiency, respondent determined that the

fair market value of the Redwood City Fox on the date of the

transfer to the Players was $1,290,000, rather than $5,300,000 as

reported by petitioners on their 1986 Federal income tax return.

Respondent's valuation was based on an appraisal performed by

Mansbach Associates, Inc., for respondent in 1994.   Respondent

also determined that Crocker was liable for an addition to tax

under section 6653(a) for taxable year 1988 and accuracy-related

penalties under section 6662(a) for taxable years 1989, 1990, and

1991, and that Jacobs was liable for an addition to tax under

section 6653(a) for taxable year 1988 and accuracy-related

penalties under section 6662(a) for taxable years 1989 and 1990.

     Respondent concedes that Crocker is not liable for the

addition to tax under section 6653(a) for taxable year 1988 and

the accuracy-related penalties under section 6662(a) for taxable

years 1989, 1990, and 1991.
                                - 45 -

VII.   The Expert Reports

       To establish the fair market value of the Redwood City Fox

and associated personal property, each party offered the report

and testimony of an expert witness:      William J. Ewing and Anthony

Reynolds for Jacobs, Christopher Carneghi for Crocker, and

Lawrence Mansbach for respondent.     The parties and their experts

rely extensively on the Ingram/Ewing appraisal for facts about

the Redwood City Fox, including its history, physical dimensions,

and use and condition in 1986, as well as for facts about movie

palaces in general and other theaters in the area.     Much of the

comparable sales data presented in the Ingram/Ewing appraisal is

used by the parties’ experts in their estimates of fair market

value.

       A.   Jacobs' Expert

       Because of Ingram’s death in 1993, Jacobs engaged the firm

of Mitten & Reynolds, Inc., a real estate appraisal firm located

in Washington, D.C., to prepare an appraisal of the Redwood City

Fox.    The Mitten/Reynolds report was prepared by Anthony Reynolds

(Reynolds) and Carol Mitten (Mitten) in February and March 1996

and delivered to Jacobs in April 1996.     Both Reynolds and Mitten

are members of the Appraisal Institute, and both have

considerable experience in valuing historic properties such as

the Redwood City Fox.     Reynolds testified at trial as Jacobs’

expert.     Reynolds had not appraised any properties in California

prior to his appraisal of the Redwood City Fox.
                                - 46 -

     Mitten/Reynolds determined that preservation was the highest

and best use of the Redwood City Fox.     They based this

determination on the property’s character and its use as an

operating theater and related commercial space, which they found

to be consistent with its zoning and location on Broadway.       They

also acknowledged the quality of the Redwood City Fox as an

example of an early movie palace and as an example of Gothic

Revival architecture.24

     Mitten/Reynolds valued the theater component of the Redwood

City Fox separately from the retail/office component.       For the

theater, Mitten/Reynolds relied upon the replacement cost and the

comparable sales approaches.     Because they concluded that the

highest and best use of the Redwood City Fox was preservation,

Mitten/Reynolds found that the value of the theater was not

determined by its income potential and that consequently the

income capitalization method was inappropriate for the theater.

          For the retail/office space, Mitten/Reynolds relied upon

the replacement cost approach, the comparable sales approach, and

the income capitalization approach.      Mitten/Reynolds considered

the impact of the Jacobs’ lease on the property’s value in their

report.



     24
       Highest and best use considerations for historic
properties, according to Mitten/Reynolds, include “the degree of
historical significance, the physical integrity of the structure,
the level of deterioration and obsolescence, and the physical and
economic environment in which the property is located.”
                                   - 47 -

            1.   Replacement Cost Approach--Theater

      Under the replacement cost method, Mitten/Reynolds estimated

the value of the underlying land to be $770,000 (rounded), using

seven sales of commercially zoned vacant25 land as comparables

($29.00 per square foot times 26,583 square feet).

Mitten/Reynolds made adjustments to the sales prices for

financing, date of sale, location, block orientation,

configuration, size, existing improvements, and buyer motivation.

Mitten/Reynolds allocated 15,929 square feet of land area to the

theater, for a land value of $461,000, and 10,654 square feet of

land area to the retail/office component, for a land value of

$309,000.

      For the replacement cost of the theater, Mitten/Reynolds

used the cost estimate in the Adamson report, which they adjusted

by:   (1) Subtracting $92,000 for the personal property donated to

the Players; (2) adding the costs of nonconstruction items

(design costs, permits and fees, financing cost, etc.); and (3)

adding an entrepreneurial fee of 10 percent.          Mitten/Reynolds

estimated the total replacement cost of the theater, excluding

the land, to be $7,000,862, computed as follows:

      Total Direct Construction Cost           $4,829,000
      Deduction for Non-Operating Personalty       92,000
      Adjusted Direct Construction Cost         4,737,000
      General Conditions (7%)                     331,590


      25
       Mitten/Reynolds’ Comparable #4 was sold with an existing
improvement, which was subsequently demolished by the purchaser.
Consequently, Mitten/Reynolds made an upward adjustment of the
sales price.
                                    - 48 -
     Contractor’s Overhead and Profit (5%)       236,850

     Adjusted Total Construction Cost          5,305,440

     Non-Construction Items
       Design                                    530,000
       Permits, Fees, Taxes, Insurance, Etc.     200,000
       Occupancy                                       0
       Financing                                 328,980

     Out-of-Pocket Replacement Cost            6,364,420

     Entrepreneurial Incentive (10%)             636,442

     Total Replacement Cost (Excluding Land)   $7,000,862

     Mitten/Reynolds then estimated total depreciation, both

physical and functional,26 to be 55 percent of the $7,000,862

replacement cost, or $3,850,474.        Mitten/Reynolds estimated the

value of the theater component under the replacement cost method

as follows:

     Total Replacement Cost              $7,000,862
     Depreciation (55%)                   3,850,474
     Depreciated Replacement Cost        $3,150,388
     Land Value Allocation                  461,000

     Value Indication                    $3,611,388

Mitten/Reynolds concluded that the value of the theater component

of the Redwood City Fox, indicated by the replacement cost

approach, was $3,600,000 (rounded), for a value of $147.80 per

square foot ($3,600,000 divided by 24,358 square feet of building

area).




     26
       Mitten/Reynolds cited issues relating to seating, toilet
facilities, air-conditioning, the age of the structure, and its
systems and surfaces as elements of depreciation that affected
their appraisal of the property.
                               - 49 -

           2.   Comparable Sales--Theater

     Under the comparable sales approach, Mitten/Reynolds chose

the sale of the San Jose Fox and the sale of the Stanford Theater

(the Stanford) in Palo Alto, California, as comparables.     As

mentioned, the San Jose Fox is another historic movie palace that

was purchased by the City of San Jose in September 1985.

     The Stanford was sold to the nonprofit David and Lucille

Packard Foundation (Packard Foundation) in December 1987 for

$1,600,000 in an all cash transaction.      The Stanford is located

on University Avenue near the campus of Stanford University in

Palo Alto, an affluent community approximately 30 miles south of

Redwood City.

     The Stanford was built in 1925 and is similar in size and

attractiveness to both the Redwood City Fox and the San Jose Fox,

although less ornate than the Fox theaters.     Unlike the Redwood

City Fox and the San Jose Fox, the Stanford was designed for

movie projection only; there are no stage facilities to

accommodate live performances.   The Stanford has 22,313 square

feet of building space with a post-renovation seating capacity of

1,175.   The precise seating capacity prior to its sale is

unknown, but, due to different seating standards, was probably

greater.

     At the time of its purchase, the Stanford was in extremely

poor condition and void of any decorative work.     Due to its

physical condition, the Packard Foundation undertook a complete
                              - 50 -

rehabilitation of the Stanford.   The rehabilitation included

seismic reinforcement, all new plumbing, and mechanical and

electrical improvements, as well as historically accurate

restoration of all areas of the building, including the facade,

restrooms, auditorium, balconies, floor coverings, concession

stand, and ticket booth.   The building was gutted, a new roof was

constructed, and the foundation was reinforced.    The renovation

cost $6,000,000, and took 18 months to complete.   The renovated

Stanford reopened in December 1989 and is operated by the Packard

Foundation for the exhibition of classic films.

     Mitten/Reynolds also mentioned the sale of the Redwood City

Fox to Jacobs in May 1981.   However, Mitten/Reynolds concluded

that due to the lapse of time between the acquisition date and

the appraisal date, as well as the refurbishment performed by

Jacobs, the sale of the Redwood City Fox in May 1981 neither

supported nor refuted their appraisal opinion.

     The unit of comparison employed by Mitten/Reynolds was the

price paid per square foot of gross building area, including

land.   Mitten/Reynolds did not believe that the price paid per

seat was a proper unit of comparison because the number of seats

in a theater is not fixed.

     Mitten/Reynolds compared the theater sales on the basis of

seller financing, date of sale, size, physical condition,

physical/historical quality, and location.   After adjustment,

Mitten/Reynolds concluded that the value of the theater portion
                                  - 51 -

of the Redwood City Fox indicated by the comparable sales

approach was $135.00 per gross square foot, for a total of

$3,288,330, which they rounded to $3,300,000 (24,358 square feet

times $135.00 per square foot).

          3.   Replacement Cost Approach--Retail/Office

     Under the replacement cost approach for the retail/office

space, Mitten/Reynolds started with the cost estimate contained

in the Adamson report, which they adjusted by adding non-

construction costs and an entrepreneurial incentive.    Based on

their determination that the physical condition of the

retail/office space was “very good”, Mitten and Reynold estimated

all forms of depreciation to amount to 25 percent of the total

replacement cost.    Under the replacement cost approach,

Mitten/Reynolds valued the retail/office space at $1,800,000

(rounded), computed as follows:

     Total Construction Cost           $1,587,040
     Non-Construction Items
       Design                                111,093
       Permits, etc.                          50,000
       Occupancy                              40,000
       Financing                             106,199
     Out of Pocket Replacement Cost        1,894,332

     Entrepreneurial Incentive (5%)        94,717
     Total Replacement Cost             1,989,049
     Depreciation (25%)                   497,262
     Depreciated Replacement Cost       1,491,787
     Land Value Allocation                309,000
     Value                             $1,800,787

          4.   Comparable Sales--Retail/Office

     Under the comparable sales approach, Mitten/Reynolds chose

the sales of 6 small commercial properties located in the
                              - 52 -

vicinity of the Redwood City Fox.   All the sales, except for one,

occurred prior to the valuation date of December 31, 1986.    The

selected unit of comparison was price paid per square foot of

gross building area.   The elements of comparison included seller

financing, date of sale, building size, physical condition,

parking, and location.   After adjustment, Mitten/Reynolds

concluded that the value for the retail/office component of the

Redwood City Fox was $110.00 per gross square foot, for an

indicated value under the comparable sales approach of

$2,000,000, rounded (18,489 square feet times $110.00 per square

foot).

     In summary, under the comparable sales approach,

Mitten/Reynolds concluded that the value of the Redwood City Fox

was $3,300,000 for the theater, $2,000,000, for the

retail/office, for a total of $5,300,000.

          5.   Income Capitalization--Retail/Office

     Mitten/Reynolds concluded that the income capitalization

method was not appropriate for the theater.

     With respect to the retail/office space, Mitten/Reynolds

examined the lease rates for 8 properties (lease comparables).

Seven of the lease comparables were rented on a fully serviced27

basis, while only one was on an unserviced basis.     Consequently,

Mitten/Reynolds estimated the market rent of the Redwood City Fox


     27
       “Fully serviced”, in the context of commercial leases, is
one in which the landlord pays all operating expenses.
                                          - 53 -

on a fully serviced basis.               Full service operating expenses were

estimated at a rate of $.30 per square foot per month.                 Due to

its lower ceiling height and because it would have to be rented

in conjunction with the ground floor retail space,

Mitten/Reynolds concluded that the mezzanine space would command

less rent.      Mitten/Reynolds estimated the market rental rates for

the different areas of the retail/office portion of the property

as follows:

     3rd Floor              $1.35
     2nd Floor              $1.35
     Mezzanine              $1.00
     1st Floor              $1.35

Mitten/Reynolds did not consider the lease of the property in

1984 by the County of San Mateo in their analysis.                 Though not

entirely clear from the record, it does not appear that

Mitten/Reynolds considered the lease of the property by the

County of San Mateo in 1987 either.

     Mitten/Reynolds estimated the net operating income for the

retail/office space28 as follows:

     Income per Month
       3rd Floor:   876     sq.ft.   x   $1.35       $  1,183
       2nd Floor: 6,090     sq.ft.   x   $1.35          8,221
       Mezzanine: 4,649     sq.ft.   x   $1.00          4,649
       1st Floor: 4,676     sq.ft.   x   $1.35          6,313
       Total     16,291     sq.ft.                   $ 20,366
                                                     x 12 months
          Total per annum                            $244,392

     Vacancy/Collection Loss (10%)                     24,439
     Total Collections                               $219,953
     Expenses


     28
       Mitten/Reynolds used the rentable square footage
determined by Ingram/Ewing in their report.
                                   - 54 -
       16,291 sq.ft. x $.30 x 12                58,648
     Net Operating Income                     $161,305

     Mitten/Reynolds then used the capitalization rate

information for the lease comparables to estimate a

capitalization rate of 8.5 percent for the property.

Mitten/Reynolds arrived at a value of $1,900,000 (rounded) under

the income capitalization approach for the retail/office

component of the Redwood City Fox.

     Mitten/Reynolds next adjusted this figure for the impact of

the Jacobs lease.    Jacobs leased the Second floor office, the

Third floor office, and the West retail space, including the

mezzanine, at a rate of $3,000 per month, completely net.

Referring to the Jacobs lease as the “Master Lease”,

Mitten/Reynolds modified thus modified their net operating income

estimate as follows:

     Income
       Master Lease: 11,205 sq.ft. x $0.27 net     $ 3,000
       Mezzanine:     2,475 sq.ft. x $1.00 gross     2,475
       1st Floor:     2,611 sq.ft. x $1.35 gross     3,525
       Total per month                             $ 9,000
                                                   x 12 months
      Total per Annum                              $108,000

     Vacancy/Collection Loss (10%)
       (Applied to non-Master only)                   7,200
     Annual Collections                            $100,800
     Expenses (non-Master only)
       5,086 sq.ft. x $.30 x 12                      18,310
     Modified Net Operating Income                 $ 82,490

     Mitten/Reynolds then determined that because 69 percent of

the commercial space was rented under a long-term below-market

lease and that the risk of not receiving that net income was

slight, a lower capitalization rate was warranted to reflect the
                                     - 55 -

lower level of risk.      Consequently, Mitten/Reynolds applied a

capitalization rate of 7.5 percent to the modified net operating

income for a value, reflecting the lease, of $1,100,000

(rounded).    According to Mitten/Reynolds, the $800,000 reduction

in value reflected the extent to which the Jacobs lease was below

market, as well as the 55-year potential duration of the lease.

           6.   Mitten/Reynolds--Value Reconciliation

     Mitten/Reynolds determined the following values for both

components of the Redwood City Fox under the respective

approaches:

Method                  Theater           Retail/Office   Total (incl. Land)
Replacement Cost        $3,600,000        $1,800,000      $5,400,000
Comparable sales        $3,300,000        $2,000,000      $5,300,000
Income Capitalization      n/a            $1,900,000         n/a

After correlating all the values, Mitten/Reynolds estimated the

market value of the theater to be $3,500,000, and the market

value of the retail/office component to be $1,900,000, for a

total of $5,400,000.      After reduction for the impact of the

Jacobs lease, which reduced the value of the retail/office

component to $1,100,000, Mitten/Reynolds arrived at a fair market

value of $4,600,000 for the Redwood City Fox as of December 31,

1986.

     B.   Crocker's Expert

     Crocker engaged the firm of Carneghi-Bautovich & Partners,

Inc. (Carneghi-Bautovich), a real estate appraisal firm with

offices in San Francisco and San Jose, to appraise the Redwood
                               - 56 -

City Fox.   The Carneghi-Bautovich report was prepared by

Christopher Carneghi (Carneghi) and Ronald Blum (Blum), and

delivered to Crocker in September 1994.    Carneghi and Blum are

both certified general real estate appraisers in California and

members of the American Institute of Real Estate Appraisers.

Carneghi, who is the president of Carneghi-Bautovich, testified

at trial regarding his report.

     Carneghi determined that the highest and best use of the

Redwood City Fox, as improved on the valuation date, was to

retain the property as a theater and market it to a nonprofit

public or private group capable of generating funds in the future

to renovate the building.    Carneghi concluded that the property

was in good physical condition and was suited for its current use

as a performing arts theater and retail/office space.    Carneghi

also noted that “public outcry” would have made demolition of the

property “very difficult”.

     Carneghi valued the theater component separately from the

retail/office component of the property.    Carneghi utilized the

replacement cost approach and the comparable sales approach for

valuing the theater.   Due to its lack of income potential,

Carneghi did not consider the income approach an appropriate

methodology for valuing the theater.    With respect to valuing the

retail/office space, Carneghi utilized the replacement cost,

comparable sales, and income capitalization approaches.
                                 - 57 -

             1.   Replacement Cost Approach--Theater

     Under the replacement cost approach, Carneghi estimated the

value of the underlying land to be $660,000 (rounded), using 5

sales of commercially-zoned vacant land located in Redwood City

as comparables ($25.00 per square foot of land area times

26,52829 square feet).     Carneghi adjusted the sales prices on the

basis of location, size, site configuration, financing, and date

of sale.     Carneghi determined the gross building area of the

theater component to be 24,358 square feet, which he found was

58.16 percent of the total gross building area of 41,876 square

feet.     Carneghi thus allocated a land value of $383,902 (58.16

percent of the $660,000 land value) to the theater.

     Carneghi next estimated the total direct and indirect

construction costs of the theater to be $4,829,000, based on the

Adamson estimate.     Carneghi did not subtract the cost of the

personal property from the Adamson estimate.     Carneghi next added

7 percent for “General Conditions”, 5 percent for “Contractor’s

Overhead and Profit”, and 12.5 percent for “Developer’s Profit”,

for a total replacement cost new of $6,103,554.



     29
       Carneghi's estimate uses 24,528 square feet of land area.
Ingram/Ewing and Mitten/Reynolds use 26,583 as the number of
square feet of land area. Mansbach, respondent’s expert, uses
the figure 26,584 as the square feet of land area. Carneghi did
not explain this discrepancy in his square footage of land area.
At $25.00 per square foot, using what we find to be the correct
total square footage of the property, 26,583, Carneghi’s land
value estimate should be $664,575. However, when rounded to
$660,000, we find the error in Carneghi’s square footage of land
area to have no effect on his estimate.
                                  - 58 -

     To estimate depreciation, Carneghi determined that, due to

the several renovations, the effective age of the theater was

less than its chronological age of 57 years.          Carneghi thus

estimated the effective age of the theater to be 30 years.30

Based upon the Marshall Valuation Cost Estimation Manual, which

estimates the economic life of a good quality, Class C (concrete

construction) motion picture or performing arts theater to be 45

years, Carneghi determined that the remaining economic life of

the theater was 15 years.      Based on the effective age and

remaining economic life of the theater, and after consulting the

Marshall Valuation Manual depreciation tables, Carneghi estimated

the amount of depreciation due to incurable physical

deterioration for the theater to be 45 percent, or $2,746,599.

Carneghi did not find that deductions for functional obsolescence

or external obsolescence were warranted.

     Under the replacement cost method, Carneghi valued the

theater at $3,740,000 (rounded), computed as follows:

     Total Replacement Cost New                $6,103,554
     Less: Depreciation                        (2,746,599)
     Total Depreciated Value of Improvements    3,356,955
     Add: Land Value                              383,902
     Indicated Market Value by Cost Approach   $3,740,857



     30
       At one point in his report, Carneghi states that the
effective age of both the theater and the retail/office component
is “35 years”. However, in his table entitled “Cost Analysis”
and in his calculations, Carneghi uses the 30 year figure as the
effective age of the property. Consequently, we find the 35 year
figure to be a typographical error.
                                  - 59 -

          2.   Replacement Cost Approach--Retail/Office

     Under the replacement cost method for the retail/office

component of the property, Carneghi estimated the value of the

underlying land to be $276,098 (41.83 percent of the $660,000

total land value).    He then estimated the replacement cost new of

the retail/office component to be $1,790,999.          Again, Carneghi

relied on the Adamson cost estimate, to which he added 7 percent

for “General Conditions”, 5 percent for “Contractor’s Overhead

and Profit”, and 12.5 percent for “Developer’s Profit”.          Accrued

depreciation for physical deterioration was estimated to be 34

percent or $608,940, based on an economic life of 50 years (per

the Marshall Valuation Cost Estimation Manual), an effective age

of 30 years, and the resulting remaining economic life of 20

years.   Carneghi estimated the total value for the retail/office

portion of the property under the replacement cost approach to be

$1,460,000 (rounded), computed as follows:

     Total Replacement Cost New                $1,790,999
     Less: Depreciation                          (608,940)
     Total Depreciated Value of Improvements    1,182,060
     Add: Land Value                              276,098
     Indicated Market Value by Cost Approach   $1,458,158

          3.   Comparable Sales Approach--Theater

     For the comparable sales approach, Carneghi analyzed the

sales of the San Jose Fox and the Stanford.         Carneghi also looked

at the sale of the Circle Star Theater (Circle Star), a live

performance theater located in the City of San Carlos, near the
                                - 60 -

Redwood City border.   The Circle Star is a 72,192-square foot

“theater in the round” which was built in 1965.    The Circle Star

lacks the ornate architectural quality of the Redwood City Fox,

as well as the other comparables.    The site area of the Circle

Star is 8.44 net acres and has onsite parking.    The Circle Star

has 3,713 seats, 5 cocktail bars, 2 snack bars, a ticket sales

and lobby area, and an adjacent 300-seat restaurant with a full

kitchen.

     The Circle Star was purchased in April 1987 from First

Federal Savings Bank of California for $6,450,000, plus a

broker’s commission paid by the buyers of $96,750, for a total

purchase price of $6,546,750.    The purchase price did not include

furniture, fixtures, and equipment, which were valued at

$750,000.   The buyer renovated the Circle Star at a cost of

approximately $2,000,000, and subsequently operated it as a

performing arts theater.   In January 1994, a sealed bid auction

was held for the sale of the Circle Star, with an asking price of

$14,725,000.   As of September 1994, the date of Carneghi’s

appraisal report, the Circle Star remained for sale.

     Carneghi also considered the purchase of the Redwood City

Fox by Jacobs in 1981.   Due to Jacobs’ renovation of the Redwood

City Fox, as well as what Carneghi termed “booming” real estate

prices in California between 1981 and 1986, Carneghi gave the

1981 sale secondary consideration “because significant
                              - 61 -

appreciation occurred between the date of this sale and the

appraisal date.”

     Using both price per seat and price per square foot as units

of measurement, Carneghi found that the comparable sales

indicated a range of unit values between $1,307 and $1,737 per

seat, and $71.71 and $88.36 per square foot.   Carneghi adjusted

the sales prices on the basis of physical condition, date of

sale, location, size, seating capacity, and other physical

characteristics.

     On a per seat basis, Carneghi estimated a value of $1,600

per seat.   Carneghi determined the appropriate number of seats

for the Redwood City Fox, based on modern standards (including

seat width and handicapped seating and accessibility), to be

1,130 seats.   Thus, with 1,130 seats at $1,600 per seat, the

indicated value was $1,810,000 (rounded).

     On a per square foot basis, Carneghi concluded that a value

of $85.00 per square foot was indicated.    With 24,358 square feet

of gross building area, Carneghi estimated the value of the

theater to be $2,070,000 (rounded).

     After considering the two values, Carneghi concluded that

the value on a per square foot basis was slightly less subjective

than on a per seat basis.   Carneghi thus concluded the indicated

value for the theater component under the comparable sales method

was $2,000,000.
                               - 62 -

          4.    Comparable Sales Approach--Retail/Office

     Under the comparable sales method for the retail/office

space, Carneghi looked at 5 sales of small office and commercial

buildings, 4 of which were located in Redwood City and 1 of which

was located in nearby Menlo Park.   Using the net area square

footage as the unit of measurement, Carneghi found that the

comparables indicate a range of sales prices between $73.17 and

$144.55 per square foot.   Carneghi adjusted the comparable sales

prices on the basis of date of sale, building age, size (both lot

and gross building area), quality, location, parking, conditions

of sale, and economic factors.   Carneghi concluded that a unit

value of $90.00 per square foot was indicated for the

retail/office space of the Redwood City Fox.   With 16,291 square

feet at $90.00 a square foot, Carneghi valued the retail/office

space under the comparable sales method at $1,470,000.     This

value did not take into account the Jacobs lease.

          5.    Income Capitalization Method--Retail/Office Space

     To calculate annual gross potential income under the income

capitalization approach, Carneghi used the income generated by

Jacobs’ lease (what he termed “contract income”) of the West

retail space (both ground floor and mezzanine) and the Second and

Third floor office spaces, to which he added his estimate of

market rent for the East retail space (both ground floor and

mezzanine).    Carneghi did not use in his calculations the income
                              - 63 -

generated by the 1984 lease or the 1987 lease of portions of the

property by the County of San Mateo.

     Carneghi determined that the rental rate of the Jacobs lease

was $.27 per square foot, net of expenses.   Carneghi determined

that this rental rate was below market.

     To estimate market rent (and to make his determination that

the rental rate in the Jacobs lease was below market), Carneghi

used 8 lease comparables, 5 for ground level spaces and 3 for

upper level spaces.   Carneghi determined that the range of rents

for the upper floor office spaces was $1.07 to $1.30 per square

foot on a full service basis,31 and that the range for the ground

floor commercial spaces was $1.03 to $1.30 per square foot on a

triple net basis after adjustment for expenses.   He further

determined that a survey of the relevant area indicated that the

lowest rent for office space in Redwood City on the valuation

date was $1.15 per square foot, fully serviced.

     After considering the location, quality, age, and lack of

parking at the Redwood City Fox, Carneghi estimated market rent

of $1.10 per square foot, full service, for the Second floor



     31
       According to Carneghi, office leases are typically on a
“gross” basis, whereby operating expenses are borne by the
tenant. Office leases can also be on a “full service” basis,
whereby operating expenses are borne by the landlord. With
respect to retail space, in a “triple net” lease, operating
expenses are borne by the tenant, and in a "gross" lease,
operating expenses are borne by the landlord.
                                - 64 -

office space.   Because it was unfinished at the time, Carneghi

estimated a lower market rent of $.80 per square foot for the

Third floor office space.   After subtracting operating expenses,

which he estimated at $.35 per square foot, Carneghi determined

the triple net equivalent rent of $.75 per square foot for the

Second floor office space, and triple net equivalent rent of $.45

per square foot for the Third floor office space.

     For the ground floor of the East retail space, Carneghi

estimated a triple net rental rate of $1.20 per square foot.    For

the mezzanine floor, he estimated a lower rental rate, triple

net, of $.60 per square foot.

     Using the net rentable square footage determined by

Ingram/Ewing for the different areas, Carneghi estimated the

monthly gross potential income for the property.    From this

figure, he subtracted a “vacancy and credit loss” for both the

space covered under the Jacobs lease and the eastern retail

space.   Carneghi stated that a vacancy and credit loss estimate

“is often utilized in the market to account for eventual vacancy

and credit loss over an investment period.”   For the space

covered under the Jacobs lease, Carneghi estimated that a zero

vacancy deduction was appropriate, and that for the East retail

space, a “standard” vacancy and credit loss allowance of 5

percent was appropriate.
                              - 65 -

     Carneghi next subtracted landlord expenses from the annual

gross potential income.   Because the market rents were estimated

on a triple net basis (whereby the tenant is responsible for all

expenses including taxes, insurance, maintenance, utilities, and

janitorial), the only expenses Carneghi determined to be incurred

by the landlord were management and structural reserves.    He

projected these expenses at 3 percent and 1 percent of effective

gross income, respectively.

     After subtracting the estimated expenses, Carneghi arrived

at an estimate of net operating income for the property.    To this

figure he applied a capitalization rate of 7.5 percent.    Carneghi

chose this capitalization rate based on his comparable office

building sales, which encompassed a range of capitalization rates

of 6.5 percent to 10.5 percent.   Carneghi concluded that, after

consideration of the quality of the property, its lack of

parking, the fact that the retail/office space is small and is

part of a larger building, a capitalization rate of 8.0 percent

was appropriate.   However, in light of the below-market Jacobs

lease, which created a low-risk situation for the building owner,

a lower capitalization rate of 7.5 percent was warranted.

     Carneghi arrived at a value of $1,130,000 (rounded) for the

retail/office space under the income capitalization approach,

calculated as follows:
                                   - 66 -
Income - All triple net

Contract income-Western space + Office   11,205 sq.ft. at $0.27   $3,000
Market rent-Eastern space-Ground floor    2,611 sq.ft. at $1.20    3,133
Market rent-Eastern space-Mezzanine       2,475 sq.ft. at $0.60    1,485
Monthly Gross Potential Income           16,291           $0.468 $ 7,618
                                                           X 12 X     12

Annual Gross Potential Income                              $5.61   $91,418
Less: Vacancy and credit loss at
      Leased space      0.0%                                       $     0
      Eastern space     5.0%                                         2,771
Effective Gross Income                                             $88,647

Less: Landlord expenses
      Reserves          1.0% of effective gross income      $0.05 $   886
      Management        3.0% of effective gross income       0.16   2,659
      Total expenses                                        $0.22 $ 3,546

Stabilized Net Operating Income                             $5.22 $85,102

Overall Capitalization Rate                                        0.0750

Indicated Stabilized Value                                    $1,134,688

Rounded                                                       $1,130,000

           6.   Carneghi--Value Reconciliation

                 a.   Theater Value Conclusion

     Under the replacement cost approach, Carneghi estimated a

value of $3,740,000 for the theater.         Under the comparable sales

approach, he estimated a value of $2,000,000.            With respect to

the replacement cost approach, Carneghi stated:

          The Cost Approach is considered a poor indicator
     of value in this case. No deduction was made in the
     Cost Approach for functional obsolescence. However,
     the theater was designed for film exhibition and
     therefore has some disutility for performance use.
     Renovations and upgrading will be required as discussed
     in this report, and the Cost Approach does not fully
     account for this. Also, for older special purpose
     buildings, estimating physical obsolescence is
     subjective. This approach is considered highly
     unreliable for older special purpose buildings like the
     subject.
                               - 67 -

Carneghi considered the comparable sales approach, which was

based on contemporaneous sales of “similar old theater buildings”

like the Redwood City Fox, to be more reliable.    Consequently,

Carneghi accorded the value indicated by the comparable sales

approach all the weight and accorded no weight to the value

indicated by the replacement cost approach.    Carneghi thus valued

the theater portion of the Redwood City Fox at $2,000,000.

                b.   Retail/Office

     For the retail/office component of the Redwood City Fox,

Carneghi arrived at the following values under the following

appraisal methods:

     Replacement Cost Approach                 $1,460,000
     Comparable Sales Approach                 $1,470,000
     Income Approach-Direct Capitalization     $1,130,000

With respect to the replacement cost approach, Carneghi again

stated that valuation under this method “is not considered a good

indicator in valuation of a renovated older building with

specialized improvements.”    Carneghi found that valuation under

the comparable sales approach was a “good indicator” of value,

but that the approach did not “consider” the below-market Jacobs

lease.   With respect to the income capitalization approach, which

utilized both the market rent estimate and the rent generated by

the Jacobs lease, Carneghi found that the approach

     is considered a good   indicator for the subject property
     which is impacted by   a below market lease. However,
     this approach may be   unduly impacted by the below
     market rent although   the upside income potential was
     accounted for in the   selection of the capitalization
     rate.
                                 - 68 -

For these reasons, Carneghi gave more weight to the income

capitalization approach, and less weight to the comparable sales

and replacement cost approaches.     Carneghi’s final estimate of

the value of the retail/office portion of the Redwood City Fox

was $1,150,000.

                  c.   Final Value Conclusion

     Carneghi valued the theater component of the Redwood City

Fox at $2,000,000, and valued the retail/office component at

$1,150,000, for a final value estimate for the Redwood City Fox

of $3,150,000 as of December 31, 1986.

     C.   Respondent's Expert

     Respondent determined in the notice of deficiency that the

value of the Redwood City Fox at the time of the gift was

$1,290,000.   This valuation figure was based upon an appraisal

report prepared by Lawrence Mansbach (Mansbach).32    Mansbach is a

member of the Appraisal Institute and a certified General Real

Estate Appraiser in California.     Mansbach is a principal in the

San Francisco-based firm of Mansbach Associates, Inc., and, in

the 1980's, worked for Carneghi, petitioner Crocker’s expert, as

a principal in Carneghi’s firm.     Mansbach testified at trial as

respondent's expert.




     32
       Mansbach's associate, Jean Rote, assisted Mansbach with
the preparation of his appraisal report. The record does not
contain additional information regarding Ms. Rote's professional
qualifications.
                               - 69 -

     Mansbach initially prepared his appraisal report in early

1994 and submitted it to respondent on March 16, 1994.   In early

1996, Mansbach revised his appraisal report, performing what he

termed “editorial type * * * modifications” at respondent’s

request.   Mansbach's revised appraisal report was submitted to

respondent on April 4, 1996.   Mansbach testified that there were

no changes in the revised report with respect to his reasoning or

his conclusions as to the value of the Redwood City Fox.

     For valuing the Redwood City Fox, Mansbach found that the

replacement cost method was (1) inappropriate because it would

not be "economically feasible to replace the existing structures

in today's market", and (2) unreliable due to the subjective

nature of estimating accrued depreciation on a 65-year old

building with significant functional, exterior, and physical

deterioration.   Additionally, with respect to the theater

component of the property, Mansbach found that the income

capitalization approach was inappropriate because "the purchaser

of the theater is likely to be a non-profit entity which places

little emphasis on its income producing capabilities."

Consequently, Mansbach utilized the comparable sales approach for

the theater component of the property.   For the retail/office

component, which Mansbach valued separately from the theater,

Mansbach utilized both the sales comparison and income

capitalization approaches.   Mansbach also included a valuation of

the underlying land, as if vacant.
                                    - 70 -

     Mansbach determined the following area measurements for the

Redwood City Fox:33

                                         Gross     Rentable   Mezzanine
     Area                                Sq.Ft.    Sq.Ft.     Storage

     Theater                             24,358    24,358
     East side retail/office              2,625     2,611
     East Mezzanine                       2,625               2,475
     Ground floor west retail/office      2,625    2,105
     West Mezzanine                       2,677               2,226
     Second floor office space            6,090    6,090
     Third floor space                      876      876

     Total                               41,876    36,040     4,701


Mansbach cites the Ingram/Ewing appraisal as the source of these

area measurements.      Mansbach also cites the Ingram/Ewing

appraisal as the source of information regarding "the extent of

renovation [of the Redwood City Fox] in 1950 and in the 1980s."

             1.   Highest and Best Use

                   a.   As Vacant

     Mansbach first determined the highest and best use of the

property as vacant.      Considering the location and size of the

Redwood City Fox, its zoning, neighborhood characteristics, and

market influences, Mansbach found that the highest and best use

of the property as vacant was for "office development with ground

floor retail or business/service use."        However, Mansbach

recognized that analyzing the property as vacant was essentially

"an academic exercise" because:


     33
       Mansbach cites the Ingram/Ewing appraisal as the source
of his building area square footage. We note, however, that
Mansbach's gross and rental square footage measurements for the
West retail space, both ground floor and mezzanine, differ from
those found in the Ingram/Ewing appraisal.
                                 - 71 -

     The deed restrictions effectively prohibit demolition
     of the building. Furthermore, without even such
     restrictions, any attempt to demolish the building
     would likely encounter vocal public opposition and a
     complicated process to obtain a demolition permit.

                  b.   As Improved

     With respect to the highest and best use of the property as

improved, Mansbach gave consideration to the Redwood City Fox's

"poor operating history", "average" physical condition, and its

"poor suburban location".     Mansbach also considered the Redwood

City Fox's "limited purchase market appeal":

          Overall, it is concluded that there is a very
     narrow purchase market for the subject theater. The
     primary purchaser of the historic movie palaces
     nationwide is a public or non-profit entity. However,
     this purchase segment typically involves redevelopment
     agencies within cities, and/or historic foundations.
     Even public entity purchases of historic theaters over
     the past decade have generally been limited to urban
     locations and involved only a few transactions. As
     such, due to the lack of activity within this purchase
     market, there is scant evidence to support a highest
     and best use conclusion for the subject improvements to
     renovate it to a modern stage facility.

Despite these considerations, Mansbach found that the integrated

retail/office portions of the property would have "stronger

demand", and that the "value of the subject as currently improved

exceeds the value on the land only basis."    Mansbach also noted

that the Redwood City Fox was "architecturally significant", and

that it had some "intrinsic value regardless of its

profitability."    Mansbach thus concluded that overall,

preservation of the existing improvements on the subject site
                                 - 72 -

represented the highest and best use of the property, as

improved, on the valuation date.

           2.   Land Valuation

     Mansbach chose 5 sales of commercially zoned vacant land as

comparables to value the underlying land.34       After adjustments

for factors such as size, location, date of sale, and buyer

motivation, Mansbach determined a land value for the site, as if

vacant, of $25.00 per square foot.        Assigning 26,584 square feet

to the property, Mansbach estimated the value of the underlying

land to be $665,000 (rounded).

          3.    Comparable Sales Approach--Theater

     For the comparable sales approach, Mansbach viewed as

comparables the sales of the San Jose Fox, the Circle Star

Theater, and the Laurel Theater.     Mansbach also considered

Jacobs' May 1981 purchase of the Redwood City Fox.

     The Laurel Theater was located in the downtown district of

San Carlos, California.    The property consisted of a 17,500-

square foot building on a 27,759-square foot site, which included

a 10,259-square foot parking lot.     The improvements were built in

1949, and consisted of the Laurel Theater and three retail

stores.   The improvements were not architecturally significant.

The property was purchased in March 1984 for $775,000, and again



     34
       Mansbach's comparable land sales include 2 sales of the
same property, which occurred 12 months apart. At the time of
the initial sale, the site was improved with a vacant bakery
building.
                              - 73 -

in December 1989 for $1,200,000.   The improvements were

demolished thereafter.

     Mansbach determined that the 1984 purchase price of the

Laurel Theater equated to $44.29 per square foot of building area

and $27.92 per square foot of site area.   He further determined

that the 1989 purchase price of the Laurel Theater equated to

$68.57 per square foot of building area and $43.23 per square

foot of site area.   Mansbach did not provide per seat prices for

the two sales of the Laurel Theater.

     Mansbach determined that the $2,010,000 purchase price of

the San Jose Fox in 1985 equated to $1,300 (rounded) per seat,

based on 1,538 "planned" seats, and $82.50 per square foot of

building area.   Because the San Jose Fox did not have any seats

installed when it was sold, Mansbach estimated it would cost

between $600,000 to $700,000 to install seats and carpeting in

the San Jose Fox.

     For the Circle Star Theater, Mansbach determined the 1987

purchase price equated to $1,743 per seat based on the 3,700

seats in the theater, $88.36 per square foot of building area,

and $17.08 per square foot of site area.

     With respect to Jacobs' purchase of the Redwood City Fox in

May 1981, Mansbach determined that the purchase price equated to

$1,336 per seat based on 756 seats, $24.85 per square foot of

rentable building area, and $37.99 per square foot of site area.

Mansbach next added the $829,415 expended by Jacobs for
                               - 74 -

renovation of the property to the original purchase, which

resulted in a per seat price of $2,433, a per square foot of

building area price of $69.19, and a per square foot of site area

price of $45.25.   Mansbach noted that the purchase price paid by

Jacobs included the entire building, while he was only valuing

the theater component.

     Mansbach considered the appropriate unit of comparison among

his comparable sales to be the price paid per seat.   For the

Redwood City Fox, Mansbach determined that the "appropriate seat

count to apply in the valuation" was 602.   Mansbach acknowledged

that the seating capacity of the Redwood City Fox at one time

exceeded 1,300, and further acknowledged that 756 seats were

installed in the auditorium on the valuation date (602 on the

floor and 154 in the balcony).   However, due to a "lack of

documented demand for the mezzanine seats", Mansbach concluded

that a buyer "would not allocate value to these seats in making

its price decisions."    Mansbach explained his choice of 602 seats

as follows:

     The appraiser was not provided information on the total
     potential capacity of the theater given modern
     requirements for seat and aisle width, as well as
     handicapped seating. Nevertheless, the valuation of
     the subject property based on the theoretical maximum
     seating would require a deduction from value to account
     for the cost of installing such seats. More
     importantly, with inadequate demand, the market would
     not place a value on the subject property based on the
     theoretical maximum seating. Rather, with demand for
     only 602 seats at best, there would be no economic
     reason to spend such money for additional seats, as
     well as bear the added costs for maintenance,
     management and potentially insurance.
                             - 75 -

     Among his comparables, Mansbach considered the San Jose Fox

to be the most comparable to the Redwood City Fox.    Mansbach

adjusted the $1,300 per planned seat purchase price of the San

Jose Fox downward on the basis of its purchase by a public entity

and its urban San Jose location.   Mansbach then considered this

downward adjustment to be largely offset by the San Jose Fox's

lack of seating and carpeting at the time of purchase.    Overall,

Mansbach found that the purchase of the San Jose Fox supported an

estimated value of the Redwood City Fox of $1,300 per seat.

     With respect to the Circle Star Theater and the Laurel

Theater, Mansbach determined that the purchase prices equated to

land value only, with little allocation to the improvements.

Mansbach concluded that these sales supported a value for the

Redwood City Fox equivalent to land value.   Allocating 20,089

square feet to a footprint of the theater site and a land value

of $25.00 per square foot, Mansbach determined a land value of

$502,225 for the theater component of the property.    Mansbach

found that this $502,225 value allocation equated to $835 per

seat for the 602 seats in the theater.

     After considering the $1,300 per seat value supported by the

purchase of the San Jose Fox and the $835 per seat value,

assuming a land only value allocation, Mansbach concluded that a

"mid-range average per seat value" of $1,100 was appropriate.

With 602 seats, Mansbach valued the theater portion of the
                                - 76 -

Redwood City Fox under the comparable sales method at $660,000

(rounded).

            4.   Comparable Sales Approach--Retail/Office

     Under the comparable sales approach for the retail/office

portion of the Redwood City Fox, Mansbach utilized 5 sales of

commercial property in Redwood City.      Two of Mansbach's sales

involve the same property.    All the sales were for fully occupied

free standing buildings located within a 1-mile radius of the

Redwood City Fox.

     Mansbach's unit of comparison was price per square foot of

building area.    The comparable sales ranged in price from

approximately $77.00 to $142.00 per square foot.      Mansbach

adjusted the sales for factors such as date of sale, condition,

location, physical characteristics, and income characteristics.

Mansbach determined that the sales supported a value for the

retail/office component of the Redwood City Fox of $87.50 per

square foot of "true rentable area".      Mansbach determined the

"true rentable area" of the property to be 11,682 square feet,

consisting of the following:

                                 Rentable
     Area                        Sq.Ft.

     East Retail                 2,611
     West Retail                 2,105
     Second Floor Office         6,090
     Third Floor Office            876

     Total                       11,682
                              - 77 -

Mansbach did not include the mezzanine floors as rentable space

because

     [g]iven the storage use and low income potential
     associated with the mezzanine space due to its low
     ceiling heights, it is anticipated that a potential
     buyer would not allocate value to this space in making
     its price decision.

Mansbach also allocated 50 percent of the $87.50 determined value

to the 876 square feet available in the Third Floor office space

due to its "shell condition" and use as storage space at the time

of donation.

     Under the comparable sales method, Mansbach estimated the

value of the retail/office component of the property to be

$983,850, computed as follows:

          10,806 square feet x $87.50 = $945,525
             876 square feet x $43.75 =   38,325

          Total indicated value          $983,850


          5.   Income Capitalization Approach--Retail/Office

     With respect to the income capitalization approach, Mansbach

determined a value for the retail/office component, both with and

without the Jacobs lease.   Mansbach did not consider either the

1984 lease or the 1987 lease by the County of San Mateo in his

income capitalization calculations.

     To determine economic rent for the property, Mansbach looked

at average income and expense information for suburban office and

retail buildings in the San Francisco Bay Area in 1987 compiled
                                   - 78 -

by the Building Owners & Management Association (BOMA).35        The

BOMA information reported median income of $1.26 per square foot

for office space and $1.40 per square foot of retail space, both

on a full service expense structure.

     In addition to the BOMA information, Mansbach utilized 4

full service leases of commercial property, which he viewed as

comparables.        One of the properties used by Mansbach as a lease

comparable was located in Belmont, a city neighboring Redwood

City.        The other three were located in Redwood City.   However,

Mansbach did not provide an address for one of the properties

located in Redwood City, nor did he provide an address for the

property located in Belmont.36       Mansbach stated that the lease

information was provided by Cornish & Carey, a local commercial

real estate firm.       In addition to providing the lease

information, brokers from Cornish & Carey told Mansbach that

rents within the mid-San Mateo County area for office space, as

well as commercial space within the immediate subject market

area, averaged at $1.00 per square foot per month on a full

service expense structure.

     After consideration of the lease comparables and the other

information, Mansbach concluded that an average market rent, with


        35
       According to Mansbach, BOMA is an organization which has
"established industry standards in terms of building area
measurements, income and expenses, on a nationwide basis."
        36
       Mansbach listed "NA" as the location for these properties
in his comparable office leases table. We assume "NA" to mean
"not applicable".
                               - 79 -

a full service expense structure, would be $1.00 per square foot

per month for the retail/office portion of the Redwood City Fox.

Mansbach assigned 50 percent of this value, or $.50, to the 876

square feet of the Third Floor office space.    For the 4,701

square feet of mezzanine space, Mansbach assigned a "storage

rent" of $.25 per square foot per month.

     Mansbach estimated total potential gross income from the

property as of the valuation date, based on the above market

rents, to be $149,031.    From this figure, Mansbach deducted a

vacancy and collection loss of 5 percent to arrive at effective

gross income of $141,579.

     Mansbach's market rent estimates were stated on a full

service basis, whereby the landlord is responsible for all

associated expenses.   Based on the actual expenses incurred by

Jacobs' lease of the property from 1987 through 1992, as well as

average reported expenses from the BOMA survey, Mansbach

estimated expenses for the retail/office component at $4.95 per

square foot, per month.   Included in his estimated expenses were

a "management and administration" expense of 3 percent of

effective gross income, and a "reserves" expense of 2 percent of

effective gross income.

     Mansbach chose a capitalization rate of 9 percent.    In

estimating this rate, Mansbach analyzed a survey reported in the

January 1987 issue of the Appraisal Journal which identified

institutional investors' criteria for investment, as of the
                                     - 80 -

summer of 1986.        This survey indicated a range of rates from 8 to

11 percent.       Mansbach also considered the capitalization rates

based on his comparable sales, all of which were fully occupied

by tenants when sold.        His comparables indicated a range of

capitalization rates from 8.25 to 11.48 percent.               Mansbach

concluded that the 9-percent rate was appropriate based on the

Redwood City Fox's lack of onsite parking and lack of investment

appeal, due to the fact that the retail/office space was not a

free standing building.

     Mansbach estimated the value of the retail/office component

of the Redwood City Fox under the income capitalization method,

without considering the impact of the Jacobs lease, to be

$930,000 (rounded), computed as follows:

REVENUE
Market Rent:              10,806 sq.ft. @ $12.00 =        $129,672
                             876 sq.ft. @   6.00 =           5,256
                           4,701 sq.ft. @   3.00 =          14,103
Total Potential
Gross Income              16,383 sq.ft. @    9.10 Avg.               $149,031

Less Vacancy & Collection Loss         @     5.00%                    (7,452)

Effective Gross Income                                               $141,579

EXPENSES
Taxes                                                     $9,303
Utilities                 $1.50 per sq.ft.                17,523
Maintenance & Repairs      1.75 per sq.ft.                20,444
Insurance                  0.30 per sq.ft.                 3,505
Management                 3.00% effective gross income    4,247
Reserves                   2.00% effective gross income    2,832

Total Expenses            $4.95 per sq.ft.                $57,853    (57,853)

Net Operating Income                                                 $83,726

Capitalized @ 9.00%                                                  $930,294
Rounded to                                                           $930,000
                              - 81 -

     Without considering the Jacobs lease, Mansbach estimated the

following values for the retail/office component of the Redwood

City Fox:

     Comparable Sales Approach:          $983,850
     Income Capitalization Approach:     $930,000

Mansbach considered the comparable sales approach to be "weakened

by the lack of directly comparable properties, as none of the

properties had both commercial and office income potential, nor a

location within the immediate neighborhood."   Consequently,

placing more emphasis on the income capitalization approach,

Mansbach estimated the value of the retail/office component of

the Redwood City Fox, as of December 31, 1986, and without

consideration of the Jacobs lease, to be $950,000.

     Mansbach also determined a value for the retail/office

component of the Redwood City Fox under the income capitalization

approach incorporating the provisions of the Jacobs lease.

Mansbach found that the rentable area leased by Jacobs was 9,071

square feet.   Mansbach excluded the 2,226 square feet of space on

the mezzanine floor from his calculations.   Utilizing both his

estimated market rent and the contract rent paid by Jacobs,

Mansbach estimated potential gross income to be $71,019.    From

this figure he again deducted 5 percent for a vacancy and

collection loss.

     With respect to expenses, Mansbach noted that the Jacobs

lease was triple net, whereby Jacobs was responsible for his pro

rata share of expenses.   Mansbach determined that the Jacobs
                                    - 82 -

lease covered all but 22 percent of the rentable area.

Consequently, Mansbach reduced effective gross income by only 22

percent of the expenses he had previously estimated.               With

respect to the capitalization rate, Mansbach did not change it

from the 9 percent he previously estimated without consideration

of the Jacobs lease.

     Incorporating the provisions of the Jacobs lease, Mansbach

estimated the value of the retail/office component of the Redwood

City Fox under the income capitalization method to be $631,000

(rounded), computed as follows:

REVENUE
Contract Rent:           9,071 sq.ft. @ $ 3.97 =         $36,000
Market Rent:             2,611 sq.ft. @ 12.00 =           31,332
                         2,475 sq.ft. @   3.00 =           7,425
Total Potential
Gross Income             14,157 sq.ft. @    5.28 Avg.               $74,757

Less Vacancy & Collection Loss        @     5.00%                    (3,738)

Effective Gross Income                                               71,019

EXPENSES
Taxes                                                    $1,389
Utilities                $1.50 per sq.ft.                 3,917
Maintenance & Repairs     1.75 per sq.ft.                 4,569
Insurance                 0.30 per sq.ft.                   783
Management                3.00% effective gross income    2,131
Reserves                  2.00% effective gross income    1,420

Total Expenses           $1.22 per sq.ft.                $14,209    (14,209)

Net Operating Income                                                $56,810

Capitalized @ 9.00%                                                 $631,227
Rounded to                                                          $631,000

           6.     Mansbach--Value Reconciliation

     Mansbach estimated the value of the Redwood City Fox, as of

December 31, 1986, and considering the Jacobs lease, to be

$1,290,000 (rounded), computed as follows:
                               - 83 -

      Theater Value Estimate                $660,000
      Retail/Office Value Estimate           631,000
      Total Value Estimate                $1,291,000

                              OPINION

I.   Introduction

      There is no dispute that petitioners' gift of the Redwood

City Fox and associated personal property to the Players is a

charitable contribution deductible under section 170(a)(1).   We

find and hold that the fair market value of the personal property

on the date of donation was $96,000.    Consequently, we need only

decide the fair market value of the Redwood City Fox as of

December 31, 1986, for purposes of determining the proper amount

of petitioners' charitable contribution deduction and carryover

deductions.37   We must also decide whether Jacobs is liable for

an addition to tax and penalties for the years at issue.

     The fair market value of donated property is the price at

which the property would change hands between a willing buyer and


      37
       Petitioners initially argued that respondent was
precluded from redetermining the value of petitioners' 1986
charitable donation because the period of limitations under sec.
6501 had expired for taxable year 1986 at the time respondent
issued the notices of deficiency. Petitioners make no argument
regarding the statute of limitations in their briefs and appear
to have conceded this point. We note, however, that petitioners
executed extensions pursuant to sec. 6501(c)(4), and the notices
of deficiency were timely issued for each taxable year within the
period as set forth in sec. 6501(a). Although the charitable
contribution from which the carryovers arose was outside of these
periods, sec. 6501 does not foreclose this Court from looking to
a closed year to redetermine petitioners' tax liability for the
years at issue. See Barenholtz v. United States, 784 F.2d 375,
380-381 (Fed. Cir. 1986); see also Angell v. Commissioner, T.C.
Memo. 1986-528, affd. without published opinion 861 F.2d 723 (7th
Cir. 1988).
                               - 84 -

a willing seller, neither being under any compulsion to buy or

sell and both having reasonable knowledge of relevant facts.

Sec. 1.170A-1(c)(2), Income Tax Regs.   The standard is objective,

using a purely hypothetical willing buyer and seller.     Propstra

v. United States, 680 F.2d 1248, 1251-1252 (9th Cir. 1982);

Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990).     The

fair market value of property as of any given date is an issue of

fact to be resolved by considering and weighing all the relevant

evidence in the record.   Symington v. Commissioner, 87 T.C. 892,

896 (1986); Skripak v. Commissioner, 84 T.C. 285, 320 (1985);

Zmuda v. Commissioner, 79 T.C. 714, 726 (1982), affd. 731 F.2d

1417 (9th Cir. 1984).   While we must consider the entire record,

we have broad discretion to decide what facts are most important

in reaching our conclusion because "finding market value is,

after all, something for judgment, experience, and reason."

Colonial Fabrics, Inc. v. Commissioner, 202 F.2d 105, 107 (2d

Cir. 1953), affg. a Memorandum Opinion of this Court.

Petitioners have the burden of proving that the fair market value

of the donated property exceeds the value determined by

respondent in the notices of deficiency.   Rule 142(a); Welch v.

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

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

44 T.C. 801, 806-807 (1965).

II.   Fair Market Value of the Redwood City Fox

      The experts' conclusions regarding the fair market value of

the Redwood City Fox as of December 31, 1986, are as follows:
                                  - 85 -

                      Theater          Retail/Office   Total Value

Ingram/Ewing          $3,850,000       $1,448,000      $5,300,000

Mitten/Reynolds        3,500,000           1,100,000    4,600,000

Carneghi               2,000,000           1,150,000    3,150,000

Mansbach                 660,000             631,000    1,290,000

     Based upon their respective expert's report and testimony,

the parties take the following positions regarding the fair

market value of the Redwood City Fox:38

                      Theater          Retail/Office   Total Value

Jacobs:               $3,850,000 to    $1,150,000 to   $5,000,000 to
                       3,500,000        1,100,000       4,600,000

Crocker:               2,000,000           1,000,000    3,000,000

Respondent:             660,000             631,000     1,290,000

     In arriving at their estimated fair market values, the

experts in these cases relied upon one or more of the three

commonly recognized methods of valuing real property and other

assets:    (1) The replacement cost approach;39 (2) the comparable

sales approach;40 and (3) the income capitalization approach.41


     38
       Respondent requests that we sustain the value determined
by Mansbach and find that the fair market value of the Redwood
City Fox was no greater than $1,290,000. Thus, while respondent
does not request separate findings of fact with respect to the
theater and retail/office components of the property, we assume
the values for the separate components estimated by Mansbach to
be reflective of respondent's position.
     39
       See Marine v. Commissioner, 92 T.C. 958, 983 (1989),
affd. without published opinion 921 F.2d 280 (9th Cir. 1991).
For purposes of this opinion, the terms "replacement" and
"reproduction", when used to describe cost, are synonymous.
     40
          See Estate of Spruill v. Commissioner, 88 T.C. 1197, 1229
                                                      (continued...)
                               - 86 -

The significant divergence in the above estimates and the

parties' positions can be attributed mainly to their disagreement

as to validity of the replacement cost method for judging the

fair market value of the Redwood City Fox on the date it was

transferred to the Players.   Before addressing the parties'

contentions regarding the most appropriate valuation methodology,

we note several points on which the parties agree.

     First, the experts agreed that the highest and best use of

the Redwood City Fox, as improved on the date of the gift, was

its preservation and continued use as theater and retail/office

space.    We agree that the evidence supports preservation of the

property as its highest and best use, and we so find.42

Accordingly, our decision with respect to the fair market value

of the property shall reflect its preservation and continued use

as a theater and retail/office space.    See Frazee v.

Commissioner, 98 T.C. 554, 563 (1992); Stanley Works & Subs. v.

Commissioner, 87 T.C. 389, 400 (1986).

     Second, the parties agree, and we find that, because the

theater will not be operated for the production of income, the

income capitalization approach is not appropriate to value the


     40
      (...continued)
n.24 (1987); Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C.
1, 19 (1979).
     41
       See Narver v. Commissioner, 75 T.C. 53, 90 n.17, affd.
per curiam 670 F.2d 855 (9th Cir. 1982).
     42
       We agree with Reynolds, Jacobs' expert, that the Redwood
City Fox is a property "for which the profit is cultural rather
than monetary."
                             - 87 -

theater component of the Redwood City Fox.   Conversely, the

parties agree, and we find, that the income capitalization

approach is an appropriate method to value the retail/office

component of the property.

     Finally, consistent with our findings regarding the highest

and best use of the property and the nonincome producing nature

of the theater, we agree with the appraisers that the willing

purchaser for the Redwood City Fox would be a public or private

nonprofit entity that intends to use the property as it was on

the date of donation.

     We now turn to the parties' dispute regarding the validity

of the replacement cost approach with respect to valuing the

Redwood City Fox.

     Jacobs contends that the property should be valued primarily

by use of the replacement cost method, with secondary

consideration given to the comparable sales approach.   He submits

that the comparable sales approach to fair market value alone is

not reliable where "there is a limited market and limited

comparable sales, where there is special purpose property and

where preservation is the highest and best use."   Because the

Redwood City Fox is "unique and of a significant historical

importance to the Redwood City community" and because "there are

only two possible comparables, i.e., the Stanford Theatre and the

San Jose Fox", Jacobs argues that the replacement cost approach,

supported by the comparable sales approach, is the proper method

of valuation.
                              - 88 -

     Crocker contends that the best method to value both the

theater component and the retail/office component of the property

is the replacement cost method because there are no true

comparable sales:

     There are no comparable sales of a historic movie
     palace such as the Fox Theater with its appendage, the
     Retail/Office Space. There are comparable sales of the
     parts, but not the whole, and in our case, for
     appraisal value purposes, the whole is bigger than the
     sum of its parts.

Because each appraiser determined that the property should be

preserved, and "the whole is inseparable", Crocker argues the

property must be valued by use of the replacement cost method.

     Respondent's position is that comparable properties--the San

Jose Fox and the Stanford Theater--were sold during the relevant

time period, and, therefore, these transactions should be given

primary emphasis in the determination of fair market value.

Respondent disputes the reliability of the replacement cost

method in this instance for a number reasons, and further argues

that the comparable sales transactions demonstrate that the fair

market value of the Redwood City Fox is "not equal to * * * [its]

replacement cost, but rather, it is far less."

     This Court has held that replacement cost may be considered

in valuing property.   Cupler v. Commissioner, 64 T.C. 946, 955

(1975).   However, replacement cost is an appropriate measure of

value only where the taxpayer establishes a probative correlation

between such cost and the fair market value of the property.
                                   - 89 -

Estate of Palmer v. Commissioner, 839 F.2d 420, 424 (8th Cir.

1988), revg. and remanding 86 T.C. 66 (1986).43

        Generally, a correlation between replacement cost and fair

market value has been proved where the property is unusual in

nature and other methods of valuation, such as comparable sales

or income capitalization, are not applicable because of the

property's uniqueness and nonincome-producing nature.        See, e.g.,

Estate of Palmer v. Commissioner, 839 F.2d at 424.        While we have

found that the income capitalization method is not appropriate to

value the theater portion of the Redwood City Fox, the comparable

sales method is appropriate because two properties which we find

to be substantially similar to the Redwood City Fox were sold

close in time to the valuation date of December 31, 1986.

     The San Jose Fox is a 24,363-square foot "movie palace" that

opened in 1927.        The Redevelopment Agency of the City of San Jose

purchased the San Jose Fox in September 1985 with the intent to

renovate the theater and revitalize the downtown area of San

Jose.        Similarly, the Stanford Theater is a 22,313-square foot

movie theater that was built in 1925, and, while not a live

performance theater, is similar in size and attractiveness to

both the San Jose Fox and the Redwood City Fox.        It was purchased



        43
       In published guidelines, respondent has taken a similar
approach to the use of reproduction cost in valuing property for
purposes of the sec. 170 deduction. Such guidelines direct that
"fair market value depends upon value in the market and not on
intrinsic worth", and that reproduction cost is to be considered,
but only to the extent it is probative of value. Rev. Proc. 66-
49, secs. 2.04, 2.07, 1966-2 C.B. 1257, 1257-1258.
                               - 90 -

in December 1987 by the Packard Foundation, which then completely

renovated the theater and reopened it for the exhibition of

classic films.

       We think the sale of the San Jose Fox and the sale of the

Stanford establish a benchmark by which to value the Redwood City

Fox.    It is true that these properties did not have adjacent

commercial space.    However, the value of the Redwood City Fox

would be no less than the value of its theater component.    And we

find that the theater component can be reliably valued by looking

to the sales of the San Jose Fox and the Stanford.    The fact that

the theater component could not be purchased separately from the

retail/office component and vice versa, is, in our view, an

important element deserving of consideration in the process of

determining the fair market value of the Redwood City Fox.

However, we think that the adjacent commercial space does not

preclude valuation on the basis of the sales of comparable

properties.    All of the experts considered these transactions to

represent comparable sales.    Additionally, all of the experts

presented evidence of sales of retail and office property which

they considered comparable to the retail/office component of the

Redwood City Fox.    And finally, all the experts arrived at a fair

market value for the Redwood City Fox by valuing the theater

component separately from the retail/office component, and then

adding the resulting values together.    We see no need to deviate

from the approach adopted by the experts in order to reach our

ultimate determination of fair market value.
                                - 91 -

     We agree with petitioners that the Redwood City Fox was

possessed of much architectural significance and was a unique

property.   However, we do not agree that the presence of both

theater space and commercial space mandates reliance on the

replacement cost method to value the property.

     When dealing with an older, historic structure such as the

Redwood City Fox, it is questionable whether the replacement cost

method can be used to provide a true indication of the fair

market value of the property.    Crocker's expert, Carneghi,

recognized in his appraisal report that the replacement cost

approach is considered "highly unreliable for older special

purposes buildings" like the Redwood City Fox.44   This

unreliability is demonstrated by the variation in the amount of

accrued depreciation utilized by the experts.45    A further

problem recognized with the use of the replacement cost method is

the assumption that one would actually reproduce the improvements

involved.   United States v. Toronto, Hamilton & Buffalo

Navigation Co., 338 U.S. 396, 403 (1949).    It is questionable

whether a willing buyer, such as a public entity or philanthropic



     44
       Jacobs' expert, Reynolds, also stated in his appraisal
report that the replacement cost method is commonly used to value
proposed or new buildings.
     45
       Ingram/Ewing used 19 percent for the theater and 15
percent for the retail/office component. Reynolds used 55
percent for theater, and 25 percent for the retail/office
component. Carneghi used 45 percent depreciation for the
theater, and 34 percent for the retail/office component.
Carneghi subsequently testified that the replacement cost method
was inappropriate under the circumstances.
                             - 92 -

organization, would pay to reproduce the Redwood City Fox, which

derives a great deal of its appeal from the fact that it was

built in 1928 and reflects the architectural charm of that era.

Consistent with this, Jacobs' expert, Reynolds, testified that

"one wouldn't replicate this theater, because it wouldn't be

historic if it were replicated."   Moreover, in light of the many

historically distinctive features, it is doubtful that a building

such as the Redwood City Fox could be constructed today.    Indeed,

Jacobs testified that he would not replicate the property:

     The Fox Theater, to me, if I had to -- and I've built
     forty-five concrete buildings before in my time. If I
     had to take the contract to replicate the Fox Theater
     from scratch, I wouldn't take it for $10 million. I
     think it would be a very difficult thing to build,
     rebuild for that price.

     After considering the evidence presented and the arguments

of the parties, we find that petitioners have not proven the

requisite probative correlation between the reproduction cost of

the Redwood City Fox and its fair market value.46   Accordingly,

we confine ourselves to an examination of the expert valuations

utilizing the comparable sales method, as well as the income

capitalization method for the retail/office component.

     While we do not consider the replacement cost of the Redwood

City Fox to be indicative of its fair market value, after

comparing the substance and reasoning of each appraisal report,


     46
       Both petitioners recognize that the replacement cost
approach to valuation is not favored. On brief, Jacobs stated
that "[t]here is no question that there exists a preference for
the market data approach." Crocker also stated on brief that the
"comparable sales method is the preferred method."
                              - 93 -

as well as the testimony presented at trial, we conclude that

petitioners have successfully established that respondent's

determination with respect to the fair market value of the

Redwood City Fox is deserving of adjustment.

     We again note that valuation is not a precise science, and

determining the fair market value of donated property on a given

date is a question of fact to be resolved on the basis of the

entire record.   See McShain v. Commissioner, 71 T.C. 998, 1004

(1979); Kaplan v. Commissioner, 43 T.C. 663, 665 (1965).     Expert

opinion evidence is obviously admissible and relevant on the

question of value and is intended to help the Court understand

areas requiring specialized training, knowledge, or judgment.

However, expert opinion sometimes aids the Court in determining

valuation; other times it does not.    See Laureys v. Commissioner,

92 T.C. 101, 129 (1989).   We evaluate expert opinions in light of

the demonstrated qualifications of the expert and all other

evidence of value in the record.   Estate of Christ v.

Commissioner, 480 F.2d 171, 174 (9th Cir. 1973), affg. 54 T.C.

493 (1970); Estate of Newhouse v. Commissioner, 94 T.C. 193, 217

(1990); Parker v. Commissioner, 86 T.C. 547, 561 (1986).     As the

trier of fact, we are not bound by the opinion proffered by any

expert witness when that opinion contravenes our judgment.

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

Estate of Newhouse v. Commissioner, supra at 217; Parker v.

Commissioner, supra at 561.   While we may accept the opinion of

an expert in its entirety, Buffalo Tool & Die Mfg. Co. v.
                              - 94 -

Commissioner, 74 T.C. 441, 452 (1980), we may also be selective

in the use of any portion of such an opinion, Parker v.

Commissioner, supra at 562.   Consequently, we consider expert

opinion testimony only to the extent that it aids us in arriving

at the fair market value of the property.    Moreover, because

valuation is necessarily an approximation, it is not required

that the value we determine be one as to which there is specific

testimony, provided that it is within the range of figures that

properly may be deduced from the evidence.      Silverman v.

Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo.

1974-285; Anderson v. Commissioner, 250 F.2d 242, 249 (5th Cir.

1957), affg. in part and remanding in part T.C. Memo. 1956-178.

     With these principles in mind, we turn to valuation of the

Redwood City Fox.   We discuss the theater component of the

property separately from the retail/office component.

     A.   Valuation of Theater Component

     Utilizing the comparable sales approach, the experts

estimated the following values for the theater component of the

Redwood City Fox:

                               Value Estimate

     Ingram/Ewing              $3,850,115

     Mitten/Reynolds            3,300,000

     Carneghi                   2,000,000

     Mansbach                     660,000

     As the above figures indicate, respondent's expert,

Mansbach, valued the theater component much lower than the other
                              - 95 -

experts.   In considering Mansbach's opinion with respect to the

theater component of the Redwood City Fox, we find several

problems that seem to account for much of the difference between

Mansbach's value conclusions and the value conclusions of

petitioners' experts.

     First, Mansbach considered the appropriate unit of

comparison among his comparable sales to be the price paid per

seat.   For the Redwood City Fox, he determined that the

"appropriate seat count to apply in the valuation" was 602.

Mansbach acknowledged that the seating capacity of the Redwood

City Fox at one time exceeded 1,300, and further acknowledged

that 756 seats were installed in the auditorium on the valuation

date.   However, due to a "lack of documented demand for the

mezzanine seats", Mansbach concluded that a buyer "would not

allocate value to these seats in making its price decisions."

Thus, he concluded that "the market would not place a value on

the subject property based on the theoretical maximum seating."

     We disagree with this conclusion.   Jacobs' experts,

Mitten/Reynolds, found that price paid per seat was not an

appropriate unit of comparison because the number of seats in a

theater is not fixed.   Crocker's expert, Carneghi, felt that a

purchaser would consider the maximum seating capacity a theater

has to offer in making his or her decision.   Carneghi determined

that the appropriate number of seats for the Redwood City Fox,

based on modern standards, was 1,130 seats.   However, Carneghi

concluded that the value indicated on a per square foot of
                              - 96 -

building area basis was less subjective than the value indicated

on a per seat basis.

     Mansbach's conclusion regarding the appropriate seat count

for the Redwood City Fox is further called into question by his

analysis of his comparable sales.   He was unable to provide the

seating capacity for one of his comparable sales, the Laurel

Theater.   Additionally, the San Jose Fox, which Mansbach

considered the most comparable to the Redwood City Fox, had no

seats when it was sold.   Mansbach thus evaluated the sale of the

San Jose Fox on the basis of 1,538 "planned" seats.

     We find, for comparison purposes, the appropriate seat count

for the Redwood City Fox to be 1,130.   We do not agree with

Mitten/Reynolds that number of seats is not a proper unit of

comparison.   With respect to how the number of seats affects

value, Crocker's expert, Carneghi, stated:

     I'm not relating the seats based on their income
     potential. I'm relating the seats based on their
     audience potential. So in the market comparison, the
     prospective buyer of the subject or any of my
     comparables, I believe would logically say, as San Jose
     did, "I know the theater's not going to make a profit;
     we all know cultural facilities don't make profits.
     But what I -- what I want to know is, how much of my
     population, how much of my market can this theater
     accommodate -- i.e., how many people can I seat in this
     theater?" That has to be an influence on value.

We agree with Carneghi's analysis on this issue.   While we

realize that a purchaser would not be interested in the number of

seats as a measure for the potential income stream the theater

could generate, we think a purchaser would assign value to the

theater based on the number of patrons the theater could
                               - 97 -

accommodate.   We also agree with Carneghi's conclusion that the

square footage of building area is a less subjective measure than

price paid per seat.

     Another problem we find with Mansbach's appraisal is his

omission of the December 1987 sale of the Stanford Theater as a

comparable sale.    Mansbach admitted that his omission of the

Stanford Theater was a mistake, and we agree that it was.

Mansbach further testified that inclusion of the Stanford Theater

as a comparable sale would not have changed his value conclusion.

Despite this testimony, we have difficulty relying on his

opinion, arrived at without considering one of the two comparable

properties available.

     We also find error in Mansbach's adjustments to the sales

price of the San Jose Fox.    Mansbach found that the condition of

the San Jose Fox was "inferior" on its sale date to the condition

of the Redwood City Fox.    Despite the San Jose Fox's inferior

condition, Mansbach considered any upward adjustment for

condition to be offset by downward adjustments on the basis of

the San Jose Fox's superior location and its purchase by a

nonprofit entity.    While we agree that a downward adjustment for

location is appropriate, we do not agree that a downward

adjustment is warranted on the basis of the San Jose Fox's

purchase by a government entity.    There is no evidence in the

record to suggest that this sale was anything but adversarial,

legitimate, and at arm's length.    Consequently, we do not see how
                               - 98 -

the identity of the purchaser would support a downward adjustment

to the sales price of the San Jose Fox.

     On brief, respondent argues that the sales prices of the San

Jose Fox and the Stanford Theater "should be adjusted downward to

account for the thin market participant potential in Redwood

City."    While we realize that lack of a market is a factor to

consider in evaluating the fair market value of property, we do

not think it is an appropriate adjustment here.    Respondent

admits that the sale of the San Jose Fox, as well as the sale of

the Stanford Theater, represent comparable sales.    The fact that

there are comparable sales belies respondent's argument in this

regard.   Additionally, as mentioned, there is no evidence in the

record to suggest that these properties were acquired by the

respective purchasers for anything less than fair market value.

     Furthermore, we are troubled by the fact that the value

conclusions proffered by Mansbach, respondent's expert, appear to

focus on the views of the buyer, to the exclusion of the seller.

See Mandelbaum v. Commissioner, T.C. Memo. 1995-255 (expert's

disregard for views of a willing seller may be fatal to the

expert's opinion), affd. without published opinion 91 F.3d 124

(3d Cir. 1996); see also Estate of Cloutier v. Commissioner, T.C.

Memo. 1996-49.    Although a buyer would most likely want to

purchase the Redwood City Fox at Mansbach's ascertained value,

the test of fair market value rests on the concept of a

hypothetical willing buyer and a hypothetical willing seller.

Ignoring the views of the willing seller is contrary to this
                              - 99 -

well-established test, and, as mentioned above, may be fatal.    In

this regard, our reading of Mansbach's appraisal report does not

persuade us that he ever considered whether a hypothetical

willing seller would sell the Redwood City Fox for the value he

determined.   In light of the prices the sellers of the San Jose

Fox and the Stanford received, as well as the income producing

potential of the retail/office component of the property, we

think it is doubtful that a hypothetical seller of the Redwood

City Fox would be willing to sell the property for $1,290,000, if

he or she were not under a compulsion to sell.

     Based on the above errors, we are not convinced that

Mansbach's appraisal is a reliable reflection of the fair market

value of the theater component of the property.   We are also not

convinced that the Ingram/Ewing and Mitten/Reynolds appraisals

are reflective of the fair market value.

     Ingram/Ewing performed what they termed a "market approach

value estimate" by adding the projected renovation costs of the

San Jose Fox to its $1,307 per seat purchase price.   This

resulted in an upward adjustment of $3,013, for a total of $4,320

per seat.   They then estimated the value of the Redwood City Fox,

by comparison to the San Jose Fox, to be $4,881,850 (1,130 seats

at $4,320 per seat).   From this figure, Ingram/Ewing then

deducted what they estimated to be the restoration cost of the

Redwood City Fox.   After an adjustment for inflation,

Ingram/Ewing estimated a value of $3,850,115 for the theater

component of the Redwood City Fox.
                              - 100 -

     We believe their adjustment for physical condition was too

high in view of the location of the San Jose Fox.   Similarly,

Mitten/Reynolds concluded that the sales of the San Jose Fox and

the Stanford, whose purchase prices equated to $82.50 per square

foot and $71.71 per square foot, respectively, indicated a fair

market value for the Redwood City Fox of $135 per square foot.

As with Ingram/Ewing, we are not persuaded that such large upward

adjustments to the purchase prices of the San Jose Fox and the

Stanford are warranted.   We think the location of the Redwood

City Fox was inferior to the locations of the comparable

properties.   Consequently, we find that Ingram/Ewing and

Mitten/Reynolds approaches resulted in an inflated fair market

value.

     After examination of the record, we find Crocker's expert,

Carneghi, to be more persuasive than the other experts.     As

mentioned above, where we find the evidence of valuation by one

of the parties sufficiently more convincing than that of the

other party, we may accept the opinion of the expert in its

entirety.   Buffalo Tool & Die Mfg. Co. v. Commissioner, 74 T.C.

at 452.   In these cases, with respect to the theater component of

the property, we accept Carneghi's opinion in its entirety.

     Carneghi considered the sales of the San Jose Fox, the

Stanford, and the Circle Star to be comparable to the Redwood

City Fox.   Carneghi also considered the purchase of the Redwood

City Fox by Jacobs in May 1981.   Due to Jacobs’ renovation of the

Redwood City Fox, as well as what Carneghi termed “booming” real
                              - 101 -

estate prices in California between 1981 and 1986, Carneghi gave

the May 1981 sale of the Redwood City Fox to Jacobs secondary

consideration “because significant appreciation occurred between

the date of this sale and the appraisal date.”

     Using both price per seat and price per square foot as units

of measurement, Carneghi found that the comparable sales

indicated a range of unit values of between $1,307 and $1,737 per

seat, and $71.71 and $88.36 per square foot.   Carneghi determined

that the Circle Star sold basically for land value, and

consequently he did not further consider its sale in his

analysis.   Carneghi adjusted the sales prices of the San Jose Fox

and the Stanford on the basis of physical condition, date of

sale, location, size, seating capacity, and other physical

characteristics.

     On a per seat basis, Carneghi estimated a value of $1,600

per seat.   Carneghi determined the appropriate number of seats

for the Redwood City Fox, based on modern standards (including

seat width and handicapped seating and accessibility), to be

1,130 seats.   Thus, with 1,130 seats at $1,600 per seat, the

indicated value was $1,810,000 (rounded).

     On a per square foot basis, Carneghi concluded that a value

of $85.00 per square foot was indicated.    With 24,358 square feet

of gross building area, Carneghi estimated the value of the

theater to be $2,070,000.

     As mentioned above, Carneghi concluded that the value on a

per square foot basis was slightly less subjective than on a per
                               - 102 -

seat basis.   Carneghi thus concluded that the indicated value for

the theater component under the comparable sales method was

$2,000,000.

     We are convinced that Carneghi's appraisal is the best

reflection of the fair market value of the theater component of

the Redwood City Fox.    Consequently, we find that the fair market

value of the theater component of the Redwood City Fox as of

December 31, 1986, was $2,000,000.

     B.   Valuation of Retail/Office Component

     With respect to the retail/office component of the Redwood

City Fox, we agree with petitioners that none of the office

buildings considered by the experts were truly comparable.

Unlike the Redwood City Fox, all were free standing structures

with onsite parking.    None were constructed in the 1920's, and

none possessed any historical significance.    Moreover, an

investor would be free to purchase the properties without the

additional purchase of a theater also.    While it is our view that

these differences do not mandate use of the replacement cost

method to value the property, we find that they preclude the use

of the comparable sales approach as a reliable indicator of fair

market value.   Furthermore, we think that a willing buyer, such

as a nonprofit entity, would accord value to the retail/office

component of the property on the basis of its income producing

potential.    Consequently, and in light of the Jacobs lease, which

all the experts found to be below market, we conclude that the
                              - 103 -

income capitalization approach is the most appropriate method for

valuing the retail/office component of the Redwood City Fox.

     Under the income capitalization approach, with consideration

given to the impact of the Jacobs lease, the experts47 estimated

the following fair market values for the retail/office component

of the Redwood City Fox:

                               Value Estimate

     Mitten/Reynolds           $1,100,000

     Carneghi                   1,130,000

     Mansbach                     631,000

     As was the case with the theater component, Mansbach's

estimated value is significantly lower than the other experts'

estimates.   As was also the case with the theater component, in

evaluating Mansbach's opinion, we find several errors48 that seem


     47
       Ingram/Ewing did not estimate a value for the
retail/office component of the property under the income
capitalization method.
     48
       The first problem is the amount of market rent Mansbach
estimated the property would command. Mansbach cites the BOMA
survey, which indicated median market rent on a full service
basis of $1.26 per square foot per month for office space and
$1.40 per square foot per month for retail space in the Bay Area
in 1987. However, Mansbach estimates the market rent for the
property, both the ground floor and the upper floors, to be $1.00
per square foot per month on a full service basis. Mansbach
bases his estimate on "[d]iscussions with several brokers * * *
[which] revealed that average market rents in the Redwood City
area in 1986 were typically lower than as reported in the BOMA
survey." These brokers told Mansbach that rents for both retail
space and office space, including ground floor commercial space,
in the immediate subject area "generally averaged at $1.00 per
square foot on a full service expense structure." These same
brokers provided Mansbach with four leases that Mansbach
considered comparable to the Redwood City Fox. All the
                                                   (continued...)
                             - 104 -

to account for much of the difference between Mansbach's value

conclusions and the value conclusions of petitioners' experts.

However, one overriding problem we have with all the appraisers'

reports is their failure to consider the County of San Mateo's

lease of the East retail space, both the ground floor and

mezzanine, in their income capitalization analysis.



     48
      (...continued)
comparable leases were for office space; none were for retail
space. Additionally, comparable lease number 1, the "Jeanne
Bishop" and comparable lease number 4, "Intermodel Delivery
Service" have no address identified. Mansbach finds the
comparable leases indicate a range of $1.00 to $1.30 per square
foot per month. Mansbach states that the Second floor office
space has "an attractive appearance which retains many of the
historic and architectural details of the original structure."
In spite of these facts, Mansbach still estimates a market rent
at the lower end of the indicated range. For the mezzanines, to
reflect their lower ceiling heights and his determination that
they must be rented in conjunction with the ground floor retail
areas, Mansbach estimates a "storage rent" of $.25 per month.
     Based on our review of the lease comparables provided by the
experts, and in light of the rent provided for in the County of
San Mateo lease, we believe that the market rent estimated by
Mansbach is too low.
     Our second problem with Mansbach's estimate is his
capitalization rate. Without consideration of the Jacobs lease,
Mansbach estimated a 9-percent capitalization rate. The
comparables presented by the experts indicate capitalization
rates ranging from a low of 6.5 percent to a high of 10.5
percent. Based on the comparables, we find Mansbach's 9-percent
capitalization rate too conservative under the circumstances.
     Still another problem we have with Mansbach's estimate is,
when considering the impact of the Jacobs lease under the income
capitalization method, Mansbach still utilizes a capitalization
rate of 9 percent. We believe this was an error. Although
basically related to the rate of interest, the capitalization
rate also includes risk and liquidity factors. See Narver v.
Commissioner, 75 T.C. 53, 90 n.17 (1980), affd. 670 F.2d 855 (9th
Cir. 1982). Because 69 percent of the retail/office component
was subject to a long-term lease, albeit below market, the risk
of receiving that portion of income is slight. Consequently, we
believe the capitalization rate should be reduced to reflect the
lower of level risk.
                              - 105 -

     The County of San Mateo leased the East retail space for the

period of March 2, 1987, to December 1, 1987.   Rent was $4,720

per month, with the County of San Mateo paying utility expenses,

including gas, electrical, and janitorial services.   However, the

Players were responsible for paying all real property taxes.

Based on our finding of 5,086 rentable square feet, the rental

rate paid by the County of San Mateo equates to $.93 (rounded)

per square foot per month.

     We believe it is appropriate to estimate the value of the

retail/office component of the Redwood City Fox by incorporating

the actual income from the below-market Jacobs lease and from the

County of San Mateo lease to calculate the total gross income of

the property.   We find that a vacancy and collection loss of 5

percent is appropriate under the circumstances to arrive at

effective gross income.   However, we agree with Carneghi that the

vacancy and collection loss should not be deducted from the space

subject to the Jacobs lease, because of the nature of the lease.

     From effective gross income, we agree with Mansbach that

deductions for management expenses of 3 percent of effective

gross income and for reserves of 2 percent of effective gross

income are appropriate.   We also find that a deduction for the

real estate taxes the landlord must pay under the County of San

Mateo lease to be appropriate.49   Finally, with respect to the


     49
       Based on information provided by Mansbach in his
appraisal report, we estimate the deduction for the real estate
taxes to be $4,067. We note that no deduction for real estate
                                                   (continued...)
                                     - 106 -

proper capitalization rate, our review of the record persuades us

that Carneghi's capitalization rate of 7.5 percent50 is the most

appropriate under the circumstances.

     In accord with these findings, under the income

capitalization approach, we arrive at a fair market value of

$1,100,000 (rounded) for the retail/office component of the

Redwood City Fox, calculated as follows:

Contract income-Jacobs lease               11,205 sq.ft. at $0.27   $3,000
Contract income-Cty. of San Mateo lease     5,086 sq.ft. at $0.93    4,720
Monthly Gross Potential Income             16,291                    7,720
                                                                    X   12

Annual Gross Income                                                 92,640
Less: Vacancy and credit loss at
      Jacobs space            0.0%                                       0
      Cty. of San Mateo space 5.0%                                   2,832
Effective Gross Income                                              89,808

Less: Landlord expenses
      Reserves          2.0% of effective gross income   1,796
      Management        3.0% of effective gross income   2,694
      Property taxes                                     4,050
      Total expenses                                     8,540      8,540

Net Operating Income                                                81,268

Capitalization Rate                                                 0.0750




     49
       (...continued)
taxes with respect to the space subject to the Jacobs lease is
warranted, as Jacob was responsible for paying the real estate
taxes.
     50
          Carneghi found that

            Considering the quality of the subject * * *
            [Redwood City Fox], its lack of parking, the
            fact that the subject space is part of a
            larger building, and the small size, a rate
            of 8.0 percent is concluded. However, the
            below market lease for a majority of the
            space creates a low risk situation for the
            building owner which argues for a lower rate.
            Therefore an 7.5 percent rate is used for
            capitalization purposes.
                                 - 107 -
Indicated Value                                         $1,083,568

Rounded                                                 $1,100,000

       C.    Value Conclusion

       Based upon an analysis of all the valuation evidence

introduced through both testimony and documentation, and giving

due consideration to the credibility of the witnesses at trial,

we hold that the fair market value of the Redwood City Fox as of

December 31, 1986, the date of its donation to the Players, was

$3,100,000.51

III.      Addition to Tax and Penalties

       The final issue is whether Jacobs is liable for an addition

to tax for negligence or disregard of rules or regulations under

section 6653(a)(1) for taxable year 1988; and whether Jacobs is

liable for accuracy-related penalties under section 6662 for

negligence or disregard of rules or regulations, any substantial

understatement of income tax, and/or any substantial valuation

overstatement for taxable years 1989 and 1990.

       A.    Addition to Tax for Negligence

       For 1988, section 6653(a)(1) imposes an addition to tax

equal to 5 percent of the underpayment if any part of the

underpayment is attributable to negligence or disregard of rules

or regulations.      "Negligence" means any failure to make a

reasonable attempt to comply with the Internal Revenue Code, and

       51
       Respondent introduced evidence of the Redwood City Fox's
assessed value for purposes of California real property taxes.
We considered the property's 1986 assessed value for real estate
tax purposes, but we find that value not to represent the Redwood
City Fox's fair market value.
                                 - 108 -

"disregard" includes any careless, reckless, or intentional

disregard.    Sec. 6653(a)(3).

     Negligence is defined as a lack of due care or the failure

to do what a reasonable and ordinarily prudent person would do

under the circumstances.    Zmuda v. Commissioner, 731 F.2d 1417,

1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982); Neely v.

Commissioner, 85 T.C. 934, 947 (1985).     However, reasonable

reliance upon expert opinion, asserted in good faith, can shield

a taxpayer from section 6653(a) additions to tax.     United States

v. Boyle, 469 U.S. 241, 250 (1985); Collins v. Commissioner, 857

F.2d 1383, 1386 (9th Cir. 1988), affg. T.C. Memo. 1987-217.

     We find that Jacobs reasonably relied upon the expert

opinions of Ingram and Ewing, as well as those contained in the

Adamson report, when he claimed the charitable deduction at

issue.    Both Ingram and Ewing were licensed real estate

appraisers in California.    Their valuation report is detailed and

complete, and was attached to Jacobs' Federal income tax return

for taxable year 1986.    While Jacobs has considerable knowledge

regarding real estate development, we think the evidence of his

knowledge falls short of requiring him to second-guess licensed

appraisers.    Hence, under these circumstances, we do not find

Jacobs negligent.    Accordingly, we hold that he is not liable for

the section 6653(a) addition to tax for negligence for 1988.

     B.    Accuracy-Related Penalties

     For 1989 and 1990, section 6662(a) imposes an accuracy-

related penalty of an amount equal to 20 percent of the portion
                               - 109 -

of the underpayment attributable to negligence or disregard of

rules or regulations, any substantial understatement of income

tax, or any substantial valuation overstatement.    See sec.

6662(b)(1)-(3).    The section 6662 accuracy-related penalty does

not apply with respect to any portion of an underpayment if

reasonable cause exists for the underpayment and the taxpayer

acted in good faith with respect to such portion.    Sec.

6664(c)(1).    The determination of whether the taxpayer acted with

reasonable cause and in good faith depends upon the pertinent

facts and circumstances.    Sec. 1.6664-4(b), Income Tax Regs.    The

most important factor in determining reasonable cause is the

extent of the taxpayer's effort to assess the proper tax

liability.    Sec. 1.6664-4(b), Income Tax Regs.

     In our judgment, Jacobs acted with reasonable cause and in

good faith when he claimed the charitable contribution deduction

for his donation of the Redwood City Fox.    Accordingly, we hold

that he is not liable for the section 6662 accuracy-related

penalties for 1989 and 1990.

     To reflect the foregoing,



                                      Decisions will be entered

                                 under Rule 155.
