                          T.C. Memo. 1999-424



                        UNITED STATES TAX COURT



     ESTATE OF EILEEN K. BROCATO, DECEASED, NINA CIMARELLI
         AND LEON SCHILLER, CO-EXECUTORS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18887-97.                  Filed December 29, 1999.



     Keith Schiller, for petitioners.

     Kevin G. Croke, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:     Respondent determined a deficiency of

$1,373,797 in the Federal estate tax of the Estate of Eileen K.

Brocato (petitioner).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and
                                - 2 -

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After a concession by respondent,1 the issue for our

decision is whether respondent is equitably estopped from

assessing additional estate tax.    If we find that respondent is

not estopped, we must decide the proper amount of blockage and

fractional interest discounts to be applied to petitioner’s nine

real properties.

                          FINDINGS OF FACT

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.

     Eileen K. Brocato (decedent) died on April 12, 1993.    At the

time of her death, decedent resided in San Anselmo, California.

     On June 30, 1994, coexecutors Nina Cimarelli and Leon

Schiller filed an estate tax return (the return) on behalf of

petitioner.    At the time the petition was filed, the coexecutors

resided in San Francisco, California.

Family Background

     Decedent was predeceased by her husband, John Brocato (Mr.

Brocato).    Under the terms of Mr. Brocato’s will, his estate

passed into a testamentary trust for the benefit of decedent



     1
        Respondent concedes that the value of the property
located at 40 Legend Road, San Anselmo, California, was $231,625,
as reported on decedent’s estate tax return.
                               - 3 -

until her death.   Upon decedent’s death, the remainder of Mr.

Brocato’s estate was distributed predominantly to his sisters,

Nina Cimarelli and Anne Ghiselli.

     Decedent’s estate passed under the Eileen K. Brocato Living

Trust (decedent’s trust).   Under the terms of decedent’s trust,

decedent’s grandchildren and the children of Nina Cimarelli and

Anne Ghiselli received outright monetary gifts.   The remainder of

decedent’s trust was distributed as follows: One-third in trust

for the benefit of Anne Ghiselli, one-third in trust for the

benefit of decedent’s son Thomas Brocato, one-sixth in trust for

the benefit of Nina Cimarelli, and one-sixth in trust for the

benefit of Alfred Cimarelli, Nina’s husband.

Decedent’s Interest in Real Properties

     At the time of decedent’s death, decedent’s trust included

the following nine real properties (collectively, the Brocato

properties):

     (1)   25 Cervantes Boulevard, an 18-unit apartment
           building (25 Cervantes)

     (2)   3637 Fillmore Street, an 18-unit apartment
           building (3637 Fillmore)

     (3)   2395 Francisco Street, an 18-unit apartment
           building (2395 Francisco)

     (4)   15 and 27 Alhambra Street, a 12-unit apartment
           building (15 Alhambra)

     (5)   2360-2370 Chestnut Street, a 42-unit apartment
           building (2360 Chestnut)
                                - 4 -

     (6)    2000 Beach Street, an 18-unit apartment building
            (2000 Beach)

     (7)    101 Capra Way, a 15-unit apartment building,
            wherein decedent owned a 50-percent interest
            (101 Capra)

     (8)    3737 Fillmore Street, a 15-unit apartment
            building, wherein decedent owned a 50-percent
            interest (3737 Fillmore)

     (9)    1359-61 Bay Street, a duplex house, wherein
            decedent owned a 50-percent interest (1359 Bay)

All of the above properties are located in the Marina District of

San Francisco, California.    The Marina District is one of several

desirable districts in which to reside in San Francisco.      The 101

Capra, 3737 Fillmore, and 1359 Bay properties (collectively, the

fractional interest properties) were held by decedent and Mr.

Brocato as tenants in common during their lives, each owning a

50-percent interest.

     The parties agree that the values of decedent’s interests in

the nine properties before applying discounts are as follows:

     (1)   25 Cervantes                      $1,640,000
     (2)   3637 Fillmore                      1,293,000
     (3)   2395 Francisco                     1,058,000
     (4)   15 Alhambra                          914,000
     (5)   2360 Chestnut                      2,875,000
     (6)   2000 Beach                         1,173,000
     (7)   101 Capra                            619,000
     (8)   3737 Fillmore                        593,000
     (9)   1359 Bay                             267,000
           Total                             10,432,000

The Closing Letter

     On the return filed June 30, 1994, petitioner reported the

value of the Brocato properties based on an appraisal report by
                               - 5 -

David P. Rhoades & Associates, Inc. (Rhoades report).    In the

spring of 1995, Marc Samuelson (Mr. Samuelson), an estate tax

attorney for the Internal Revenue Service (IRS), began an audit

of the return.

     On June 26, 1995, an IRS engineer issued a review report

concluding that the values before discounts determined in the

Rhoades report were acceptable, but the amounts of the discounts

claimed were unacceptable.   Mr. Samuelson made a settlement

proposal to petitioner, but petitioner rejected it.   On October

10, 1995, Mr. Samuelson told petitioner’s counsel that respondent

would not be relying on the IRS engineer’s report and respondent

would be hiring an appraiser to value the properties.    He

informed petitioner’s counsel that this process would take at

least 3 months, and he would contact counsel when the expert was

hired.

     On November 14, 1995, petitioner filed a supplemental estate

tax return (the supplemental return) with respondent’s Ogden

Service Center claiming an interest deduction.   On December 14,

1995, the Ogden Service Center erroneously issued petitioner a

closing letter in response to the supplemental return.    The

closing letter provided:
                              - 6 -

     This is not a formal closing agreement under Section
     7121 * * *. However, we will not reopen this return
     unless: (1) There is evidence of fraud, malfeasance,
     collusion or misrepresentation of a material fact; (2)
     a substantial error, based upon an established service
     position, existing at the time of the prior closing; or
     (3) other circumstances exist which indicate that a
     failure to reopen would result in a serious
     administrative omission.

     A clerk at the Ogden Service Center issued the closing

letter without referring to the transcript of petitioner’s

account which would have revealed that an examination was in

progress and a closing letter should not be issued.

     On May 20, 1996, petitioner sold 2360 Chestnut.    Neither

petitioner nor its counsel contacted Mr. Samuelson or any other

IRS employee to seek an explanation of the closing letter before

selling 2360 Chestnut.

     Unaware of the erroneous closing letter, on June 24, 1996,

Mr. Samuelson sent petitioner’s counsel a letter informing him

that the IRS was still in the process of hiring an appraiser.

On July 2, 1996, petitioner’s counsel responded and stated that

the continuing audit was contrary to the closing letter.    On

August 19, 1996, the IRS notified petitioner of its intent to

reopen the examination of decedent’s estate tax return on the

grounds that a serious administrative omission had occurred which

“would result in criticism, undesirable precedent, or

inconsistent treatment.”
                                 - 7 -

                                OPINION

I.   Estoppel

      We must first decide whether respondent is equitably

estopped from determining additional estate taxes against

petitioner.     The U.S. Supreme Court has stated that the

Government may not be estopped on the same grounds as a private

person.   See OPM v. Richmond, 496 U.S. 414, 419 (1990); Heckler

v. Community Health Servs., 467 U.S. 51, 60 (1984).      It is well

established that the estoppel doctrine should be applied against

the Commissioner with the utmost caution and restraint.      See

Boulez v. Commissioner, 76 T.C. 209, 214-215 (1981), affd. 810

F.2d 209 (D.C. Cir. 1987); Estate of Emerson v. Commissioner, 67

T.C. 612, 617 (1977).

      The traditional elements of estoppel include:

      (1) Conduct constituting a [mis]representation of
      material fact; (2) actual or imputed knowledge of such
      fact by the representor; (3) ignorance of the fact by
      the representee; (4) actual or imputed expectation by
      the representor that the representee will act in
      reliance upon the representation; (5) actual reliance
      thereon; and (6) detriment on the part of the
      representee. * * * [Graff v. Commissioner, 74 T.C. 743,
      761 (1980).]

See Norfolk S. Corp. v. Commissioner, 104 T.C. 13, 60 (1995);

Hudock v. Commissioner, 65 T.C. 351, 363 (1975).      The U.S. Court

of Appeals for the Ninth Circuit, to which the present case is

appealable, requires two additional elements in order to estop

the Government:     (1) Affirmative misconduct going beyond mere
                                - 8 -

negligence by the Government, and (2) the Government’s wrongful

act causes a serious injustice and the public’s interest does not

suffer undue damage by imposition of estoppel.   See Watkins v.

United States Army, 875 F.2d 699, 707 (9th Cir. 1989).

     Affirmative misconduct requires an affirmative

misrepresentation or affirmative concealment of a material fact

by the Government.    See United States v. Ruby Co, 588 F.2d 697,

703-704 (9th Cir. 1978).   Affirmative misconduct must be more

than negligence, but it does not require that the Government

intends to mislead.   See United States v. Hatcher, 922 F.2d 1402,

1410 (9th Cir. 1991); S&M Inv. Co. v. Tahoe Regl. Planning

Agency, 911 F.2d 324 (9th Cir. 1990); Watkins v. United States

Army, supra; Morgan v. Heckler, 779 F.2d 544 (9th Cir. 1985);

Jablon v. United States, 657 F.2d 1064, 1067 n.5 (9th Cir. 1981).

     Petitioner argues that respondent should be estopped from

assessing additional estate taxes on two grounds:   (1)

Respondent’s closing letter constituted affirmative misconduct on

which petitioner relied to its detriment; and (2) respondent

failed to follow the procedures for reopening a case outlined in

the Internal Revenue Manual (the Manual) and closing letter.

     There is no doubt that the Ogden Service Center’s closing

letter was erroneous.   It, however, appears from the sparse

record on this point that the error occurred because an Ogden

Service Center employee neglected to check the estate’s
                                - 9 -

transcript which indicated an examination was underway before

issuing the closing letter.    Respondent never affirmatively

concealed the mistake.    Once the mistake was discovered,

respondent immediately notified petitioner that the audit was

still underway.   Petitioner has failed to demonstrate how this

isolated and careless act amounts to affirmative misconduct going

beyond mere negligence.

     As for petitioner’s second argument, we do not believe that

respondent violated the Manual procedures or the closing letter’s

description of the circumstances for reopening petitioners’ case.

Under section 4023.2(1) of the Manual, there are three criteria

for reopening an audit.   The third criterion is that an audit may

be reopened where “other circumstances exist which indicate

failure to reopen would be a serious administrative omission.”        1

Audit, Internal Revenue Manual (CCH), sec. 4023.2(1) at 7063-4.

Under section 4023.5 of the Manual, a “serious administrative

omission” is defined as a closed case where failure to reopen the

case could “result in serious criticism of the Service’s

administration of the tax laws”.    1 Audit, Internal Revenue

Manual (CCH), sec. 4023.5 at 7065.      The closing letter stated:

“we will not reopen this return unless * * * other circumstances

exist which indicate that a failure to reopen would result in a

serious administrative omission.”       The reopening letter stated

that the audit was being reopened because a “serious
                               - 10 -

administrative omission” had occurred and failure to reopen the

case “would result in criticism, undesirable precedent, or

inconsistent treatment.”

     Failure to reopen the audit, herein, would mean that a

potential $1,373,797 of estate tax could go uncollected.    The

loss of such revenue could result in criticism of the IRS’

administration of the tax laws and inconsistent treatment among

taxpayers.   We believe that respondent complied with the Manual’s

procedures and the closing letter’s description of circumstances

for reopening an audit.    Further, this Court has stated numerous

times that procedural rules of this sort are “merely directory,

not mandatory, ‘and compliance with them is not essential to the

validity of a notice of deficiency.’”    Collins v. Commissioner,

61 T.C. 693, 701 (1974)(quoting Luhring v. Glotzbach, 304 F.2d

560, 563 (4th Cir. 1962)).

     We are also not convinced that the traditional elements of

equitable estoppel are satisfied.   We doubt whether petitioner’s

reliance on the closing letter was reasonable.    On October 10,

1995, Mr. Samuelson notified petitioner’s counsel that the IRS

intended to hire an appraiser to value the properties which would

take at least 3 months, and Mr. Samuelson would contact

petitioners’ counsel when the expert was hired.    On December 14,

1995, the Ogden Service Center issued the closing letter.

Neither petitioner’s counsel nor a representative of petitioner
                              - 11 -

contacted Mr. Samuelson to discuss the issuance of the closing

letter and the inconsistencies between its issuance and the

conversation between petitioner’s counsel and Mr. Samuelson just

2 months earlier.   We believe that a reasonable and prudent

person would have inquired about these inconsistencies.

     Additionally, we are skeptical as to petitioner’s claim of

detriment in this case.   Petitioner claims that it wanted to know

the precise amount of estate tax owed before formulating its plan

to dispose of the Brocato properties and it relied on the closing

letter in determining that amount.     If petitioner had not

received the closing letter, petitioner contends that it would

have exercised its section 6166 election and would have waited to

sell 2360 Chestnut after the property appreciated.2

     It is not disputed that petitioner had a valid section 6166

election and could have deferred payment of its estate tax.     We,

however, question whether petitioner would have actually

exercised its section 6166 election.     Petitioner paid its estate

tax liability on May 22, 1996, approximately 3 years before it

was required to pay under section 6166.     It is speculative

whether petitioner would have continued to take advantage of the



     2
        Petitioner later argues that it is entitled to use the
concurrent sales method in determining the appropriate blockage
discount because it would be too risky to hold the Brocato
properties over a reasonable time period to dispose of them.
This argument suggests that petitioner desired to sell each
property as quickly as possible including 2360 Chestnut.
                              - 12 -

section 6166 election had it been told of the increased estate

tax liability.

      Petitioner also claims that the Chestnut property

appreciated in value after its premature sale, and petitioner

would have been able to sell it for a higher sum but for the

issuance of the closing letter.   Again, this involves conjecture.

Petitioner has failed to demonstrate that it suffered a detriment

as a result of its reliance on the closing letter.

      We conclude that respondent is not equitably estopped from

assessing additional estate taxes.

II.   Discounts

      We must now decide the proper amounts of blockage and

fractional interest discounts to apply to the Brocato properties.

      On the return, petitioner applied a 20-percent blockage

discount to the Brocato properties and applied an additional 20-

percent fractional interest discount to the fractional interest

properties.   These discounts were based on the Rhoades report.

On brief, petitioner continues to claim a 20-percent fractional

interest discount on the fractional interest properties but

concedes it is entitled only to a 12.5-percent blockage discount

on eight properties (excluding 101 Capra).

      In the notice of deficiency, respondent allowed a blockage

discount of $116,627 (approximately 1.92 percent) on seven of the

nine Brocato properties and a fractional interest discount on the
                                - 13 -

fractional interest properties based on partition costs.

     For Federal estate tax purposes, property is generally

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

at his death.     See sec. 2031(a); sec. 20.2031-1(b), Estate Tax

Regs.     Fair market value is defined as the price at which

property would change hands between a willing buyer and a willing

seller, neither being under any compulsion to buy or sell and

both having reasonable knowledge of relevant facts.      See United

States v. Cartwright, 411 U.S. 546, 551 (1973); sec. 20.2031-

1(b), Estate Tax Regs.

        A determination of the fair market value of a group of items

includes a consideration of how many of the items would be

available for sale at any one time and the length of time

necessary to liquidate the entire inventory.      See Calder v.

Commissioner, 85 T.C. 713, 722-723 (1985); Rimmer v.

Commissioner, T.C. Memo. 1995-215.       Where the addition of a group

of similar items into the market within a short period of time

depresses the price of the items, a blockage discount is

appropriate.

        When dealing with fractional interests in real property,

courts have held that the sum of all fractional interests can be

less than the whole and have used fractional interest discounts

to value undivided interests.     See Harwood v. Commissioner, 82

T.C. 239, 267-268 (1984), affd. without published opinion 786
                              - 14 -

F.2d 1174 (9th Cir. 1986); Estate of Williams v. Commissioner,

T.C. Memo. 1998-59; Mooneyham v. Commissioner, T.C. Memo. 1991-

178; Estate of Sels v. Commissioner, T.C. Memo. 1986-501.

Fractional interest discounts may be necessary to compensate a

willing buyer for the lack of control, lack of marketability,

illiquidity, and potential partitioning expenses associated with

such interests.   See Estate of Pillsbury v. Commissioner, T.C.

Memo. 1992-425.

     Petitioner primarily relies on an appraisal report prepared

by Paul E. Talmage (Mr. Talmage) to establish the appropriate

blockage and fractional interest discounts.   Respondent relies on

an appraisal report prepared by Karen Simons (Ms. Simons).

     We have wide discretion in accepting expert testimony.    See

Helvering v. National Grocery Co., 304 U.S. 282, 294-295 (1938).

We examine the expert’s qualifications and compare his or her

testimony with all other credible evidence in the record.     We may

accept or reject an expert’s opinion in toto, or we may pick and

choose the portions of the opinion that we wish to adopt.     See

id.; Seagate Tech., Inc., & Consol. Subs. v. Commissioner, 102

T.C. 149, 186 (1994); Estate of Newhouse v. Commissioner, 94 T.C.

193, 218 (1990); Parker v. Commissioner, 86 T.C. 547, 562 (1986).

     Mr. Talmage was recognized by the Court as an expert in real

estate appraisal, including blockage and fractional interest

discounts.   He is a member of the Appraisal Institute and has
                                  - 15 -

been an appraiser since 1971.      The majority of his assignments

(80 percent) are in the San Francisco Bay area.

     Ms. Simons was also recognized by the Court as an expert in

real estate appraisal.      She is a member of the Appraisal

Institute and has been appraising since 1975.      She, however, has

limited experience with blockage and fractional interest

discounts.

     After a careful review of the entire record, we believe Mr.

Talmage’s report best represents the fair market value of

decedent’s interest in the Brocato properties; however, we do not

agree entirely with his results.

     A.   Blockage Discount

             1.    Mr. Talmage’s Report

     In determining the appropriate blockage discount, Mr.

Talmage assumed the Brocato properties would be placed on the

market contemporaneously or over a reasonably short period and

sold within the normal marketing period.      Mr. Talmage determined

that the normal marketing period for buildings with five or more

units in northern San Francisco during 1993 was 6 months.      He

also found that all of the Brocato properties except 1359 Bay

(the duplex) would compete with each other if listed

contemporaneously, thus requiring a blockage discount for eight

properties.       Mr. Talmage determined that a 12.5-percent blockage

discount was appropriate based on various factors, particularly a
                                - 16 -

comparison of the number of properties listed in the Marina

District/northern San Francisco area during 1992 and 1993 and the

number of Brocato properties.    Mr. Talmage gathered these market

statistics from the multiple listing service (MLS) and Comps Inc.

(Comps).   Mr. Talmage’s report also refers to the San Francisco

economy, investor pessimism, earthquake concerns, size of the

Brocato properties, and potential pool of investors in

determining an appropriate blockage discount.

           2.   Ms. Simons’ Report

     Ms. Simons’ report determines a blockage discount of

$116,627 (approximately 1.92 percent).    Ms. Simons assumed a sale

of all properties within a certain time period and used a

discounted cash-flow analysis to determine her blockage discount

(blockage discount model).   She chose a discount rate of 12.5

percent.

     Ms. Simons determined that the normal marketing period was 4

months and the Brocato properties could reasonably be sold two at

a time.    Thus, in total, Ms. Simons concluded that it would take

16 months to market successfully the Brocato properties.

     Ms. Simons also found that only seven of the Brocato

properties would compete in the same market; therefore, she

applied the blockage discount only to these seven properties

(excluding 1359 Bay and 2360 Chestnut).
                                - 17 -

     When performing the present value calculations, Ms. Simons

assumed two properties were marketed and sold every 4 months.

Ms. Simons used an average sales price for each of the properties

and discounted this price back to the date of decedent’s death

based on the time required to sell the properties.      Because the

first two properties were assumed to sell within a normal

marketing period of 4 months, Ms. Simons did not discount these

prices back to present value.

          3.   Appropriate Blockage Discount

     The parties disagree as to the appropriate method for

determining a blockage discount.    Although we do not find

anything inherently wrong in Ms. Simons’ approach, we believe

that Mr. Talmage’s approach is the better determiner of the

appropriate blockage discount to apply in the present case.      Cf.

Estate of Auker v. Commissioner, T.C. Memo. 1998-185 (wherein we

adopted an approach similar to Ms. Simons’ approach).      Mr.

Talmage’s report is well reasoned and based on reliable

statistical data.

     We find that 6 months was a reasonable marketing period for

properties in the Marina District.       Not only do the MLS and Comps

data support such a finding, but we believe that Ms. Simons’

report also does.   Ms. Simons’ report concludes that it would

take 3 to 4 months to list and either sell or escrow a property.

Mr. Talmage’s marketing period begins with the listing and ends
                              - 18 -

with the closing of the escrow.   We believe that Mr. Talmage’s

marketing period better represents the actual time required to

close and collect the sales proceeds of a property.

     We agree with Mr. Talmage’s use of MLS and Comps data in

determining the number of available apartment buildings in the

Marina District and greater northern San Francisco area during

the year at issue.   The MLS figures showed that in 1992 and 1993

there was an average of 29 listings per year in northern San

Francisco (includes the Marina District).   Taking into account a

6-month normal marketing period, there were approximately 14 to

15 properties listed in northern San Francisco at any given time

during 1992 and 1993.   The Comps data showed that there were only

18 listings in the Marina District during 1993.   Again,

accounting for a 6-month normal marketing period, only nine

properties were listed in the Marina District in 1993 at any

given time.   Mr. Talmage concludes from these statistics that the

addition of 8 new properties from the Brocato estate on the

market in 1993 would have increased the market by at least 30

percent (4 new properties/14 properties in northern San Francisco

market) and could have increased the market by 44 percent (4 new

properties/9 properties in the Marina District market).

     We, however, disagree with Mr. Talmage’s conclusions with

regard to how many of the Brocato properties would compete with

each other and deserve a blockage discount.   Mr. Talmage and Ms.
                                - 19 -

Simons agree that 1359 Bay, the duplex, would not compete with

the other Brocato properties.    Ms. Simons also believes that 2360

Chestnut, the 42-unit building, would not compete with the other

Brocato properties.    We agree with Ms. Simons.   Based on its size

and value, we believe 2360 Chestnut would appeal to a different

pool of potential buyers.    The other Brocato properties would

most likely be purchased by “Mom and Pop” buyers.3    Most likely,

these buyers would not have the resources to finance such a large

purchase as 2360 Chestnut, nor would they be interested in

running such a large apartment complex.    We agree with respondent

that only seven of the Brocato properties–-25 Cervantes, 3637

Fillmore, 2395 Francisco, 15 Alhambra, 2000 Beach, 101 Capra, and

3737 Fillmore–-would compete with each other and are entitled to

a blockage discount.

     Based on the number of properties in the same market in

1993, the San Francisco economy at that time, and the limited

pool of investors, we believe that the introduction of seven new

properties, 3.5 properties each 6 months, warrants an 11-percent

blockage discount.




     3
        “Mom and Pop” buyers are described by both experts as
individuals purchasing a rental property with the intention of
living on the premises and managing the property.
                                 - 20 -

     B.   Fractional Interest Discount

             1.   Mr. Talmage’s Report

     Mr. Talmage applied a 20-percent fractional interest

discount to the fractional interest properties.4    Mr. Talmage

examined eight comparable sales of fractional interests and the

fractional interest discounts applied in each sale.    In three of

the comparable sales (comparables 2, 4, 6), no fractional

interest discount was applied because the buyer was acquiring a

controlling interest with the purchase of the fractional

interest.5    Comparables 1, 5, 7, and 8 consisted of fractional

interests ranging from approximately 1 to 20 percent with

discounts ranging from 6 to 50 percent.    Mr. Talmage adjusted

comparables 1, 5, and 8 downward and comparable 7 upward to

arrive at a 20-percent fractional interest discount.    In making



     4
        Mr. Talmage alternatively suggested that a 25-percent
fractional interest discount would be appropriate due to
potential conflicts among the beneficiaries of decedent’s trust
which might burden the income-producing capabilities of the
properties. The only potential conflict shown by the record was
Thomas Brocato’s (son of decedent) contemplation of forcing the
sale of the fractional interest properties. Because we
determined the fractional interest discount based on a
hypothetical sale of the decedent’s interest, Thomas Brocato’s
threat of a forced sale has no impact on the fractional interest
discount. We find no additional discount is warranted based on
potential family conflicts.
     5
        Comparable 3 also yielded no fractional interest
discount; however, the buyer in that comparable was not acquiring
control of the property. Mr. Talmage accounts for the lack of a
discount by pointing to an accommodating seller and exceptional
circumstances surrounding the sale.
                               - 21 -

these adjustments, Mr. Talmage examined the size of the

comparable interests, lack of a market for the interests, special

circumstances surrounding their sale, and whether there was a

forced sale.

           2.   Ms. Simons’ Report

     Ms. Simons based her fractional interest discount on the

costs to partition the properties.      Ms. Simons recognized that

there are three methods to partition property in California:        (1)

Physical division; (2) sale of property and division of proceeds;

and (3) partition by appraisal.      See Cal. Civ. Proc. Code secs.

873.210, 873.510, 873.910 (West 1980).      Ms. Simons determined

1359 Bay could be physically divided in 6 months at a cost of

$20,000.   Ms. Simons determined the fair market value of the

interest, deducted the partition costs, and accounted for the

delay associated with the physical division of the property using

a discounted cash-flow analysis assuming a 6.5-percent discount

rate.

     Ms. Simons determined 101 Capra and 3737 Fillmore would

require a partition sale and division of the proceeds.      Ms.

Simons determined that the partition sales would be relatively

simple, cost $20,000 each, and would take approximately 6 months

to complete.    Ms. Simons assumed these properties would be listed

in the ninth month and sold in the twelfth month under her

blockage discount model and applied the blockage discount model
                                - 22 -

discount rate of 12.5 percent to the partition proceeds less the

partition costs of these properties.6

          3.   Conclusion

     The parties’ arguments center upon the correct method for

determining a fractional interest discount.    Courts have often

looked at costs to partition in determining an appropriate

fractional interest discount.    Courts, however, consider other

factors, such as the historical difficulty in selling these

interests and lack of control.    See Estate of Pillsbury v.

Commissioner, T.C. Memo. 1992-425.

     Given the limited scope of Ms. Simons’ analysis, we find Mr.

Talmage’s report to be more persuasive in determining the

fractional interest discount.    We conclude that a 20-percent

fractional interest discount is appropriate.

     To the extent not herein discussed, we have considered the

parties’ other arguments and found them to be meritless.

To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155.




     6
        It is unclear why Ms. Simons chose to use the 12.5-
percent discount rate utilized in her blockage discount model as
opposed to the 6.5-percent discount rate used for 101 Capra.
