                          125 T.C. No. 11



                   UNITED STATES TAX COURT



ESTATE OF DORIS F. KAHN, DECEASED, LASALLE BANK, N.A., TRUSTEE
                  AND EXECUTOR, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket No. 12551-04.                     Filed November 17, 2005.



        The estate filed Form 706, U.S. Estate (and
   Generation-Skipping Transfer) Tax Return (“estate tax
   return”). R issued a notice of deficiency that inter
   alia asserted increases to the gross estate by
   disallowing a reduction in value of P’s individual
   retirement accounts (IRAs) by the expected Federal
   income tax liability resulting from the distribution of
   the IRAs’ assets to the beneficiaries under sec.
   408(d)(1), I.R.C. (income tax liability). This matter
   is before us on P’s motion for partial summary judgment
   under Rule 121(a), contesting R’s disallowance of the
   reduction in the value of the IRAs. R filed a cross-
   motion for summary judgment in response to P’s motion.

        Held: In computing the gross estate value, the
   value of the assets held in the IRAs is not reduced by
   the anticipated income tax liability following the
                               - 2 -

     distribution of the IRAs. A hypothetical sale between
     a willing buyer and a willing seller would not trigger
     the tax liability of distributing the assets in the
     IRAs because the subject matter of a hypothetical sale
     would be the underlying assets of the IRAs (marketable
     securities), not the IRAs themselves. Further, sec.
     691(c), I.R.C., addresses the potential double tax
     issue. Accordingly, the valuation of the IRAs should
     depend on their respective net aggregate asset values.

          Held, further, a discount for lack of
     marketability is not warranted because the assets in
     the IRAs are publicly traded securities. Payment of
     the tax upon the distribution of the assets in the IRA
     is not a prerequisite to making the assets in the IRAs
     marketable. Thus, there is no basis for a discount.



     Jonathan E. Strouse, for petitioner.

     Jason W. Anderson and Laurie A. Nasky, for respondent.

                              OPINION

     GOEKE, Judge:   This matter is before the Court on cross-

motions for summary judgment under Rule 121(a).1

     Respondent issued a notice of deficiency in the Federal

estate tax of the estate of decedent Doris F. Kahn (the estate),

determining, among other adjustments, that the estate had

undervalued two IRAs on the estate’s Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return.   The issue

before us is whether the estate may reduce the value of the two

IRAs included in the gross estate by the anticipated income tax


     1
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect as of the date of the decedent’s death,
unless otherwise indicated.
                                 - 3 -

liability that would be incurred by the designated beneficiary

upon distribution of the IRAs.    We hold that the estate may not

reduce the value of the IRAs.

     The following is a summary of the relevant facts that are

not in dispute.   They are stated solely for purposes of deciding

the pending cross-motions for summary judgment and are not

findings of fact for this case.    See Lakewood Associates v.

Commissioner, T.C. Memo. 1995-552 (citing Fed. R. Civ. P. 52(a)).

                            Background

     Doris F. Kahn (decedent) died testate on February 16, 2000

(the valuation date).   At the time of death, decedent resided in

Glencoe, Illinois.   The trustee and executor of the decedent’s

estate, LaSalle Bank, N.A., had its office in Chicago, Illinois,

at the time the petition was filed.      At the time of her death,

decedent owned two IRAs--a Harris Bank IRA and a Rothschild IRA.

Both IRA trust agreements provide that the interests in the IRAs

themselves are not transferable; however, both IRAs allow the

underlying marketable securities to be sold.2     The Harris IRA

     2
      The Rothschild IRA agreement provides:

          Section 5.7B. Neither the Account Holder nor the
     Trustee shall have the right to amend or terminate this
     Trust in such a manner as would cause or permit all or
     part of the entire interest of the Account Holder to be
     diverted for purposes other than their exclusive
     benefit or that of their Beneficiary. No Account
     Holder shall have the right to sell, assign, discount,
     or pledge as collateral for a loan any asset of this
     trust.
                                                   (continued...)
                              - 4 -

contained marketable securities with a net asset value (NAV) of

$1,401,347, and the Rothschild IRA contained marketable

securities with a NAV of $1,219,063.   On the estate’s original

Form 706, the estate reduced the NAV of the Harris IRA by 21

percent to $1,102,842 to reflect the anticipated income tax

liability from the distribution of its assets to the


     2
      (...continued)

          Section 5.5H. The Brokerage Firm named in the
     Application is designated by the Account Holder with
     authority to provide the Trustee with instructions, via
     confirmations or otherwise, implementing his or her
     directions to the Brokerage Firm to purchase and sell
     securities for his or her account.

Thus, although the account holder cannot personally sell the
securities, he may do so through the brokerage firm and trustee.

     The Harris IRA Agreement provides:

          5.6 Neither the Grantor nor any Beneficiary may
     borrow Trust property from the Trust or pledge it for
     security for a loan. Margin accounts and transactions
     on margins are prohibited for the Trust. No interest
     in the Trust shall be assignable by the voluntary or
     involuntary act of any person or by operation of law or
     be liable in any way for any debts, marital or support
     obligations, judgments or other obligations of any
     person, except as otherwise provided by law. No person
     may engage in any transaction with respect to the Trust
     which is a “prohibited transaction” within the meaning
     of Code Section 4975.

          5.9 * * *the Trustee shall have the following
     powers * * * (d) to purchase, sell assign or exchange
     any Trust property and to grant and exercise options
     with respect to Trust property.

Here, again, although the IRA itself cannot be sold, the trustee
has the power to sell the underlying assets.
                               - 5 -

beneficiaries.   The estate did not report the value of the

Rothschild IRA on the original tax return.   On the amended estate

tax return, the estate reduced the value of the Rothschild IRA by

22.5 percent to $1,000,574 to reflect the income tax liability

upon the distribution of its assets to the beneficiaries.

     Respondent determined in the notice of deficiency an estate

tax of $843,892.3   The estate’s motion for partial summary

judgment was filed on June 30, 2005, and on June 30, 2005,

respondent’s cross-motion for summary judgment was filed seeking

summary adjudication on the following issues:   (1) Whether the

value of each IRA is less than the value of the NAVs, and (2)

whether the estate properly deducted amounts not paid for

estimated Federal income tax liabilities of decedent.   The estate

filed a reply in opposition to respondent’s cross-motion for

summary judgment; however, the estate did not address the second

issue regarding the validity of the estate’s deduction.     We

therefore consider this issue to be conceded by the estate.


     3
      The only portion of the deficiency that is in dispute is
the amount attributable to the valuation of the IRAs. In the
Form 886-A, Explanation of Adjustments, respondent determined
that the value of the Harris IRA should be increased from
$1,086,044 to $1,401,347 “to more accurately reflect the fair
market value of this asset at the date of death under secs. 2031
and 2039 of the Internal Revenue Code.” Further, respondent
determined that the value of the Rothschild IRA should be
reported at $1,219,063. The Rothschild IRA was omitted from the
original Federal estate tax return. The parties have stipulated
the settlement of the remaining issues pertaining to the notice
of deficiency that the estate raised in its petition.
                                - 6 -

Respondent also submitted a reply memorandum in opposition to the

estate’s motion for partial summary judgment.

                             Discussion

       Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Either party may move for

summary judgment upon all or any part of the legal issues in

controversy.    A decision may be rendered by way of summary

judgment if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law.    Rule 121(b); Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);

Naftel v. Commissioner, 85 T.C. 527, 529 (1985).    This case is

ripe for summary judgment because both parties agree on all of

the relevant facts and a decision may be rendered as a matter of

law.

       Section 2001 imposes a Federal tax “on the transfer of the

taxable estate of every decedent who is a citizen or resident of

the United States.”    A deceased taxpayer’s gross estate includes

the fair market value of any interest the decedent held in

property.    See secs. 2031(a), 2033; sec. 20.2031-1(b), Estate Tax
                                 - 7 -

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

Fair market value reflects the price that the property would

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

neither being under any compulsion to buy or to sell and both

having reasonable knowledge of relevant facts.”     United States

v. Cartwright, supra at 551; sec. 20.2031-1(b), Estate Tax Regs.

Fair market value is an objective test that relies on a

hypothetical buyer and seller.    See Estate of Bright v. United

States, 658 F.2d 999, 1005-1006 (5th Cir. 1981); Rothgery v.

United States, 201 Ct. Cl. 183, 475 F.2d 591, 594 (1973); United

States v. Simmons, 346 F.2d 213, 217 (5th Cir. 1965); Estate of

Andrews v. Commissioner, 79 T.C. 938, 956 (1982).    The willing

buyer and the willing seller are hypothetical persons, rather

than specific individuals or entities, and the individual

characteristics of these hypothetical persons are not necessarily

the same as the individual characteristics of the actual seller

or the actual buyer.     Estate of Bright v. United States, supra at

1005-1006; Estate of Davis v. Commissioner, 110 T.C. 530 (1998)

(citing Estate of Curry v. United States, 706 F.2d 1424, 1428,

1431 (7th Cir. 1983)).    The hypothetical willing buyer and

willing seller are presumed to be dedicated to achieving the
                                  - 8 -

maximum economic advantage.      Estate of Curry v. United States,

supra at 1428; Estate of Newhouse v. Commissioner, 94 T.C. 193,

218 (1990).4

I.   Estate Tax Consequences Applicable to IRAs

     An IRA is a trust created for the “exclusive benefit of an

individual or his beneficiaries.”     Sec. 408(a), (h).   An IRA can

hold various types of assets, including stocks, bonds, mutual

funds, and certificates of deposit.       IRA owners may withdraw the

assets in their IRAs; however, there is a 10-percent additional

tax on early withdrawals subject to statutory restrictions.      See

sec. 72(t).

     IRAs are exempt from income taxation as long as they do not

cease to exist as an IRA.   Sec. 408(e)(1).     Distributions from

IRAs are included in the recipient gross income of the

distributee.   Sec. 408(d)(1).    Hence, earnings from assets held

in an IRA are not subject to taxation in the IRA when earned, but

rather, are subject to taxation when distributions are made.

This fact does not change when the IRA is inherited from the

decedent.   See sec. 408(e)(1).    IRA owners can designate

beneficiaries to inherit IRAs in the event that the owner dies

before receiving distributions of the owner’s entire interest in


     4
      The estate makes the argument that “Neither the Code or
Regulations contains the requirement that the buyer and seller be
hypothetical.” However, the weight of authority clearly
contradicts the estate’s assertion.
                                - 9 -

the IRA.    Distributions to beneficiaries of a decedent are

includable in the gross income of the beneficiaries.       Secs.

408(d)(1), 691(a)(1)(B).    The portion of a lump-sum distribution

to a decedent’s beneficiary from an IRA, is, in the beneficiary’s

hands, income in respect of a decedent (IRD) in an amount equal

to the excess of the account balance at the date of death over

any nondeductible contributions by the decedent to the account.

Such amount is included in the beneficiary’s gross income the

year in which it is received.    Sec. 691(a)(1).   The portion of

the lump-sum distribution to the beneficiary in excess of the

entire balance (including unrealized appreciation, accrued income

and nondeductible contributions) in the IRA at the owner's death

is not income in respect of a decedent.    Such amount is taxable

to the beneficiary under sections 408(d) and 72, see Rev. Rul.

92-47, 1992-1 C.B. 198, in the taxable year the distribution is

received.    Section 691(a)(3) provides that the character of the

income in the hands of either the estate or decedent’s

beneficiary is the same as if decedent had such amount.       If an

IRA owner dies before distributions were required to begin, the

owner’s interest in the IRA generally must be distributed to the

beneficiary within 5 years of decedent’s death.     Sec.

401(a)(9)(B)(ii).    If an IRA owner dies after distributions were

required to begin, the IRA assets generally must be distributed
                                - 10 -

to the beneficiary of the IRA at least as rapidly as under the

method of distribution to the owner.     Sec. 401(a)(9)(B)(i).

      An IRA account owned by a decedent at death is considered

part of the decedent's estate for Federal estate tax purposes.

Sec. 2039(a).   As such, the estate must pay an estate tax on the

value of the IRA.    Id.   In addition, an income tax will be

assessed against the beneficiaries of the accounts when the

accounts are distributed.    See secs. 408(d)(1), 691(a)(1)(B).     To

compensate (at least partially) for this potential double

taxation, Congress enacted section 691(c), which grants the

recipient of an item of IRD an income tax deduction equal to the

amount of Federal estate tax attributable to that item of IRD.

Estate of Smith v. United States, 391 F.3d 621, 626 (5th Cir.

2004) (citing sec. 691(c)), affg. 300 F. Supp. 2d 474 (S.D. Tex.

2004).   Therefore, decedent’s beneficiaries will be allowed a

deduction in the amount of Federal estate tax paid on the items

of IRD included in the distributions to them from the IRA.       The

deduction is allowed in the same year the income is

recognized--that is, when the IRA is actually distributed.       See

sec. 691(c)(1)(A).

II.   The Estate’s Arguments That Income Tax Liability Should Be
      Taken Into Account in the Valuation of the IRAs

      The estate contends that the application of the willing

buyer-willing seller test mandates a reduction in the fair market

value of the IRAs to reflect the tax liability associated with
                              - 11 -

their distribution.   The logic of the estate’s argument is that

the IRAs themselves are not transferable and therefore are

unmarketable.   According to the estate, the only way that the

owner of the IRAs could create an asset that a willing seller

could sell and a willing buyer could buy is to distribute the

underlying assets in the IRAs and to pay the income tax liability

resulting from the distribution.   Upon distribution, the

beneficiary must pay income tax.   Therefore, according to the

estate, the income tax liability the beneficiary must pay on

distribution of the assets in the IRAs is a “cost” necessary to

“render the assets marketable” and this cost must be taken into

account in the valuation of the IRAs.

      In support of its argument, the estate cites caselaw from

three different areas of estate valuation that allow a reduction

in value of the assets in an estate for costs necessary to render

an estate’s assets marketable or that have otherwise considered

the tax impact of a disposition of the estate’s assets in other

contexts.   The first line of cases allows consideration of a

future tax detriment or a future tax benefit to the assets in the

estate.   The second line of cases allows a marketability discount

in connection with assets that are either unmarketable or face

significant marketability restrictions.   The third line of cases

allows for a reduction in value to reflect the cost of making an

asset marketable, such as the costs associated with rezoning and
                             - 12 -

decontamination of real property.   The estate contends that each

line of cases is analogous to the estate’s circumstances and

therefore provides authority to resolve the matter in favor of

the estate.

     A.   Cases Allowing Consideration of Future Tax Detriments
          or Benefits

          Built-in Capital Gains Cases

     The estate relies on Estate of Davis v. Commissioner, 110

T.C. 530 (1998), and its progeny5 to support the proposition that

the value of the IRAs should be reduced by the income tax

liability resulting from their distribution.   In Estate of Davis,

the donor held shares of a closely held corporation.   The

corporation held assets which had appreciated and could not

readily be sold without payment of Federal income tax.   The

Internal Revenue Service argued that the gift tax value of the

donor’s interest in the corporation should not be adjusted or

     5
      See, e.g., Estate of Dunn v. Commissioner, 301 F.3d 339
(5th Cir. 2002), revg. T.C. Memo. 2000-12; Estate of Jameson v.
Commissioner, 267 F.3d 366 (5th Cir. 2001), revg. T.C. Memo.
1999-43; Eisenberg v. Commissioner, 155 F.3d 50 (2d Cir. 1998),
revg. T.C. Memo. 1997-483. Prior to 1986, courts generally held
that an estate could not reduce the value of closely held stock
by the capital gains tax potential. The repeal of the General
Utilities doctrine, by the Tax Reform Act of 1986, Pub. L. 99-
514, 100 Stat. 2085, dealing with corporate liquidations,
prompted courts to reconsider the settled law and allow estates
to take capital gains tax attributable to closely held corporate
stock into account. Gen. Utils. & Operating Co. v. Helvering,
296 U.S. 200 (1935); see Dunn v. Commissioner, supra; Estate of
Jameson v. Commissioner, supra; Eisenberg v. Commissioner, supra;
Estate of Davis v. Commissioner, 110 T.C. 530 (1998).
                               - 13 -

discounted for built-in capital gains tax with respect to the

underlying assets.    This Court, however, agreed with the donor’s

estate that the value of the stock must be discounted to allow

for the tax liability that would be paid upon selling the assets

in the corporation.   This Court concluded that “even though no

liquidation of   * * * [the corporation] or sale of its assets was

planned or contemplated on the valuation date, a hypothetical

willing seller and a hypothetical willing buyer would not have

agreed on that date on a price for each of the blocks of stock in

question that took no account of [the corporation’s] built-in

capital gains tax.”    Id. at 550.   Similarly, in Eisenberg v.

Commissioner, 155 F.3d 50 (2d Cir. 1998), revg. T.C. Memo. 1997-

483, the Court of Appeals for the Second Circuit held that the

donor may consider the potential future capital gains tax

liability resulting from corporate liquidation when valuing a

gift of corporate stock.    In applying the willing buyer-willing

seller test, the court reasoned that “‘the potential transaction

is to be analyzed from the viewpoint of a hypothetical buyer

whose only goal is to maximize his advantage.    * * * [C]ourts may

not permit the positing of transactions which are unlikely and

plainly contrary to the economic interest of a hypothetical

buyer.’.”   Id. at 57 (quoting Estate of Curry v. United States,

706 F.2d at 1428-1429).
                               - 14 -

     Here, the estate argues that it has a stronger case than the

taxpayer in Estate of Davis because in that case, unlike this

case, the taxpayer’s asset--the stock--could be marketed without

paying the income tax liability associated with the sale of the

underlying assets.   The estate contends that “it is not merely

likely, it is legally certain, that the IRA could not be sold at

all, nor could the underlying assets be sold by Petitioner except

by distributing the assets and paying the tax on that

distribution.”

     The second portion of this statement is simply not true.

The IRA trust agreements provide that the account holder may not

sell their IRA interest; however, the agreements specifically

provide that the underlying assets in the IRAs may be sold.     See

supra note 2.    Because it is legally certain that the IRAs cannot

be sold, the subject of a hypothetical sale between a willing

seller and a willing buyer would not be the IRAs themselves but

their underlying assets, which are marketable securities.     The

sale of the underlying marketable securities in the IRAs is not

comparable to the sale of closely held stock because in the case

of closely held stock, the capital gains tax potential associated

with the potential liquidation of the corporation survives the

transfer to an unrelated third party.   The survival of the

capital gains tax liability is exactly why a hypothetical buyer

would take it into account.   See Estate of Smith v. United
                               - 15 -

States, 391 F.3d at 628.6   Because the tax burden associated with

distributing the assets in the IRAs will never be transferred to

a hypothetical buyer, we find that the reasoning of Estate of

Davis v. Commissioner, supra, inapplicable to this case.

     B.     Cases Where Future Tax Benefit Taken Into Account

            1.   Estate of Algerine Smith–Value of Section 1341
                 Deduction Taken Into Account in Valuing Claim
                 Against Estate

     In Estate of Algerine Smith v. Commissioner,7 198 F.3d 515

(5th Cir. 1999), revg. 108 T.C. 412 (1997), the Court of Appeals

for the Fifth Circuit addressed whether to consider the impact of

an income tax benefit in valuing a claim against an estate for

the purpose of the estate tax deduction under section 2053.     The

estate owned a royalty interest in Exxon.   The U.S. Government

had obtained a multibillion dollar judgment against Exxon, and

the company asserted that it had the right to recoup some of the

royalty payments it made to the estate and others to pay that

judgment.    Exxon sued the royalty owners, and the District Court

ruled on a motion for summary judgment determining that the

royalty owners were liable to Exxon.    The court then referred the


     6
      Estate of Smith v. United States, 300 F. Supp. 2d 474 (S.D.
Tex. 2004), affd. 391 F.3d 621 (5th Cir. 2004), is discussed at
length infra sec. III.
     7
      For the sake of avoiding confusion, we are providing a
method to differentiate this Estate of Smith from the Estate of
Smith cited in this section and further discussed infra sec. III.
                              - 16 -

calculation of damages to a special master.    Exxon claimed that

it was owed a total of $2.48 million by the estate.    Exxon

settled with the estate 15 months after decedent died for

$681,840.

     The Commissioner determined a deficiency, asserting that the

estate was allowed to deduct only the amount paid in settlement

because Exxon’s claim was pending at the time of decedent’s

death, and therefore the amount of the decedent’s liability on

that claim was then uncertain.   The Tax Court agreed with the

Commissioner’s conclusion.   See Estate of Algerine Smith v.

Commissioner, 108 T.C. 412 (1997).     The Court of Appeals, in

reversing, vacating, and remanding the Tax Court’s original

decision, concluded that the estate was entitled to deduct more

than the settlement amount, but that the estate was not permitted

to deduct the full amount that was being claimed by Exxon at

decedent's death.   Further, the Court of Appeals determined that

the income tax relief afforded by section 1341 upon the payment

of the settlement amount should offset the $2.48 million claim in

calculating the amount of the deduction.    Applying the willing

buyer-willing seller test, the Court of Appeals stated that “We

perceive no reason why this standard [willing buyer-willing

seller test] should presume that the participants in the

hypothetical transaction would not account for the net tax
                               - 17 -

effect--including the * * * [section] 1341 benefit--that would

flow from a judgment against the hypothetical estate.”       Estate of

Algerine Smith v. Commissioner, 198 F.3d at 528.

     The estate’s reliance on this case is misplaced because in

Estate of Algerine Smith the tax benefit from the section 1341

deduction was “inextricably intertwined” with the payment of the

claim against the estate.    Id.   Thus, the willing buyer-willing

seller test would offset the amount of the benefit against the

value of the claim.    However, in this case, there is no

contingent tax liability or tax benefit to take into account when

determining the value a willing buyer would pay for the assets in

the IRAs.    Therefore, this example of accounting for tax

consequences in valuing assets in an estate is distinguishable

from the present valuation issue.    A hypothetical buyer would not

consider the income tax liability of the beneficiary of the IRAs

because it is the beneficiary rather than the buyer who would pay

that tax.    Estate of Smith v. United States, 391 F.3d at 626

(discussed infra).

            2.   Lack of Marketability Discount Cases

                 a.   Closely Held Corporate Stock

     The estate’s attempt to introduce a lack of marketability

discount reveals the most fundamental flaw in its argument.      In

Estate of Davis v. Commissioner, 110 T.C. 530 (1998), the

discount for the capital gains tax liability was part of a
                                - 18 -

general lack of marketability discount.    Shares in a nonpublic

corporation suffer from lack of marketability because of the

absence of a private placement market and the fact that

floatation costs would have to be incurred if the corporation

were to offer its stock publicly.    Estate of Andrews v.

Commissioner, 79 T.C. at 953.    However, there are no such

barriers to the disposition of assets held within the IRAs.     The

assets in the IRAs are traded on established markets and

exchanges, unlike stock in a closely held corporation.      Although

the IRAs themselves are not marketable, the underlying securities

of the IRA are indeed marketable.    Neither the distribution of

the assets in the IRAs nor the payment of the tax upon

distribution is a prerequisite to the marketability of the

assets, as the estate implies.    Therefore, a lack of

marketability discount is not warranted.    If we were to follow

the estate’s line of reasoning, then in any circumstance where a

seller recognizes gain on the disposition of an asset, the fair

market value of an asset would be reduced to reflect taxes

attributable to the gain.   Further, as this Court observed in

Estate of Robinson v. Commissioner, 69 T.C. 222, 225 (1977), a

similar case discussed further infra, the broad ramifications of

such an argument--

     demonstrate its frailty. For instance, under that
     approach, every determination of fair market value for
     estate tax purposes would require consideration of
     possible income tax consequences as well as a myriad of
                                - 19 -

     other factors that are peculiar to the individual
     decedent, his estate, or his beneficiaries.
     Consideration would have to be given in a case such as
     the instant one, for example, as to when the estate is
     likely to distribute the * * * [asset] to the
     beneficiaries, and thereafter, to each beneficiary's
     unused capital loss carryovers, his possible tax
     planning to reduce future taxes on the gain included in
     each installment, his tax bracket both currently and in
     the future, his marital status, and other factors. The
     willing buyer-willing seller test, though it may not be
     perfect, provides a more reasonable standard for
     determining value, and it must be followed. [Fn. ref.
     omitted.]

By following the estate’s line of reasoning, we would have to

consider intricacies in every valuation case that would eliminate

the “hypothetical” element of the willing buyer-willing seller

test.    The decision in Estate of Curry v. United States, 706 F.2d

1424 (7th Cir. 1983), summarizes the consequence if courts and

administrative bodies determining valuation consistently took the

subjective circumstances of the seller into account:     “To hold

otherwise would be to command future * * * [judges] to wade into

the thicket of personal [and] corporate idiosyncrasies and

non-market motives as part of their valuation quest, thus doing

great damage to the uniformity, stability, and predictability of

tax law administration.”     Id. at 1431.   Here, we must decline the

opportunity that the estate has given us to eschew this important

concept underlying the willing buyer-willing seller test.

                  b.   Lottery Cases

        The estate cites several cases in the area of estate asset

valuation that examine the issue of whether unassignable lottery
                                - 20 -

payments remaining in decedent’s estate at death should receive a

marketability discount.    In Shackleford v. United States, 262

F.3d 1028 (9th Cir. 2001), the taxpayer had won a State lottery

and died prior to receiving all the payments.    The taxpayer was

precluded by State law from assigning those payments.      The United

States argued that the annuity rules of section 2039 should

apply, and therefore the stream of payments should be valued

under the tables set forth in section 7520.    The estate argued

that because of the lack of marketability of the payments, a lack

of marketability discount should be allowed.    The Court of

Appeals for the Ninth Circuit upheld the District Court ruling

and explained:    “We have long recognized that restrictions on

alienability reduce value.”     Shackleford v. United States, supra

at 1032 (citing Bayley v. Commissioner, 624 F.2d 884, 885 (9th

Cir. 1980); Trust Servs. of Am., Inc. v. United States, 885 F.2d

561, 569 (9th Cir. 1989)), affg. 69 T.C. 234 (1977).       The Court

of Appeals compared the situation with stock subject to resale

restrictions that prevented it from being sold freely in a public

market.     Shackleford v. United States, supra at 1032.

     The estate also cites a similar lottery case, Estate of

Gribauskas v. Commissioner, 342 F.3d 85 (2d Cir. 2003), revg. 116

T.C. 142 (2001), where this Court held on facts similar to

Shackleford that the taxpayer could not take the marketability

discount.    The Court of Appeals for the Second Circuit reversed
                              - 21 -

the Tax Court and allowed the marketability discount.   In

allowing a marketability discount, the Court of Appeals reasoned

that the “right to transfer is ‘one of the most essential sticks

in the bundle of rights that are commonly characterized as

property,’ and that an asset subject to marketability

restrictions is, as a rule, worth less than an identical item

that is not so burdened.”   Id. at 88 (quoting Shackleford v.

United States, supra at 1032).

     The estate’s analogy fails to recognize a fundamental

difference between the installment payments in a lottery prize

and securities in an IRA.   Lottery payments are classified as

annuities.   Estate of Gribauskas v. Commissioner, 116 T.C. 142

(2001), revd. on other grounds 342 F.3d 85 (2d Cir. 2003).     The

restriction on marketability in both Shackleford and Gribauskas

applied to each constituent payment within the entire prize.

IRAs, however, are trusts composed of marketable assets.     See

sec. 408(a), (h).   As we have already discussed, the underlying

assets of the IRAs are publicly traded securities that have no

such marketability restrictions.   Therefore, Shackleford and

Gribauskas do not support a marketability discount in this case.
                               - 22 -

          3.    Cases That Allow a Reduction in Value To Reflect
                the Cost of Making An Asset More Marketable

     The estate cites two cases addressing the issue of valuing

land that is either subject to unfavorable zoning or

contaminated.    In Estate of Spruill v. Commissioner, 88 T.C. 1197

(1987), this Court allowed valuation methods that required a

reduction in the value of the decedent’s property to reflect

unfavorable zoning associated with the property and the potential

litigation costs associated with obtaining zoning.8    In Estate of

Necastro v. Commissioner, T.C. Memo. 1994-352, this Court held

that contaminated property could be discounted to account for the

cost to clean the property.    The estate characterizes these cases

as instances where “this Court regularly allows discount for

costs necessary to render an estate’s assets marketable.”

     The estate’s characterization of the holdings in these cases

is misplaced.    First, the valuation concerns associated with real

property are markedly different from those associated with

securities.    For tangible property, the fair market value of

property should reflect the highest and best use to which such

property could be put on the date of valuation.    See Symington v.

Commissioner, 87 T.C. 892, 896 (1986).    In the case of real

property, the highest and best use of the land may need to take


     8
      Although agreeing with the premise that these principles
should be taken into account in valuation, this Court ultimately
found that the expert in Estate of Spruill v. Commissioner, 88
T.C. 1197 (1987), failed to consider the reasonable probability
of obtaining zoning at the time of decedent’s death.
                               - 23 -

into account costs associated with zoning or decontamination.

This analysis is inapplicable to marketable securities because

they have no higher or better use.      Therefore, there is no “cost”

associated with making the securities more marketable.

            4.   Summary

       The estate has attempted to convince us that nontransferable

IRAs are similar in nature (1) to unassignable lottery payments,

(2) stock in a closely held corporation, (3) stock that is

subject to resale restrictions, (4) contaminated land, and (5)

land that needs to be rezoned to reflect the highest and best

use.    We have distinguished all of these cases based on the same

common denominator--the fact that the built-in capital gains

liability and/or marketability restriction of the listed assets

will still remain in the hands of a hypothetical buyer, while in

our case, the hypothetical sale of marketable securities will not

transfer any built-in tax liability or marketability restriction

to a willing buyer.

       The main problem with all of the arguments based on the

above-cited cases is that the estate is trying to draw a parallel

where one does not exist by comparing this situation to

situations where a reduction in value is appropriate because a

willing buyer would have to assume whatever burden was associated

with that property--paying taxes, zoning costs, lack of control,

lack of marketability, or resale restrictions.     In this case, a
                              - 24 -

willing buyer would be obtaining the securities free and clear of

any burden.   We have taken note of the fact that the IRAs

themselves are not marketable.    Therefore, in determining their

value under the willing buyer-willing seller test, we must take

into account what would actually be sold--the securities.    In

Davis v. Commissioner, 110 T.C. 530 (1998), and Eisenberg v.

Commissioner, 155 F.3d 50 (2d Cir. 1998), vacating T.C. Memo.

1997-483, the interest in the entity was the subject of the

hypothetical sale.   Therefore, the courts in those cases

rightfully considered the tax liabilities and marketability

restrictions accompanying those interests.   Here, however, we

look through into the underlying assets of the entity because the

assets are what would actually be sold, not the interest in the

IRAs.

     Further, the distribution of the IRAs is not a prerequisite

to selling the securities.   Any tax liability that the

beneficiary would pay upon the distribution of the IRAs would not

be passed onto a willing buyer because the buyer would not

purchase the IRAs as an entity because of their transferability

restrictions.   Rather, a willing buyer would purchase the

constituent assets of the IRAs.   Therefore, unlike all of the

cases the estate cites, the tax liability is no longer a factor.

Further, the lack of marketability is no longer a factor because

a hypothetical sale would not examine what a willing buyer would

pay for the unmarketable interest in the IRAs but instead would
                                  - 25 -

consider what a willing buyer would pay for the underlying

marketable securities.       Therefore, any reduction in value for

built-in tax liability or lack of marketability is unwarranted.

III.       The Estate’s IRAs Should Not Be Entitled to Any Kind of
           Discount

       We find that all of the cases cited by the estate to be

distinguishable from this case, and that the differences in our

case justify a rejection of the estate’s proposed discount of the

IRAs.       Further, we reject the estate’s characterization of the

tax liability that a beneficiary must pay upon distribution of

the IRAs as a “cost” to make the underlying assets marketable.

We agree with the Court of Appeals for the Fifth Circuit’s

reasoning in Estate of Smith v. United States, 391 F.3d 621 (5th

Cir. 2004), which concludes that the application of the willing

buyer-willing seller test does not allow the estate to reduce the

value of its retirement accounts by the income tax liability.

Further, we continue to follow the reasoning in our decision of

Estate of Robinson v. Commissioner, 69 T.C. at 224, which holds

that it is improper for this Court to ameliorate the potential

double taxation that will occur because Congress has already

provided such relief by enacting section 691(c).

       A.      Estate of Smith v. United States9

       We think the better reasoning lies in Estate of Smith v.



       9
      See Estate of Smith v. United States, 300 F. Supp. 2d 474
(S.D. Texas 2004), affd. 391 F.3d 621 (5th Cir. 2004).
                              - 26 -

United States, 391 F.3d 621 (5th Cir. 2004), affg. 300 F. Supp.

2d 474 (S.D. Tex. 2004).   In Estate of Smith, the Court of

Appeals for the Fifth Circuit, affirming the District Court, held

that the proper valuation of certain retirement accounts included

in a decedent’s gross estate reflects the value of the securities

held in decedent’s retirement accounts as determined by reference

to applicable securities rates on the date of decedent’s death

but does not include a discount for the income tax liability to

the beneficiaries.   Id. at 628.   In Estate of Smith, as in this

case, the underlying securities of the retirement accounts were

readily marketable, while the retirement accounts were not

because of   restrictions like those applicable to the IRAs in

this case.   Just as the estate did in this case, the taxpayer in

Estate of Smith supported its argument for the reduction in value

of the retirement accounts by analogy to opinions that allowed

estates possessing closely held corporate stock to reduce the

value by the potential capital gains tax.10   Applying the willing

buyer-willing seller test, the District Court reasoned that while

the retirement accounts may generate a tax liability for the

beneficiaries, a hypothetical willing buyer would not take the

tax liability into consideration when purchasing the underlying

securities but would simply pay the value of the securities as

determined by applicable securities exchange prices.   The


     10
      This line of cases and petitioner’s analysis were
discussed supra sec. II.
                               - 27 -

District Court determined that the cases involving closely held

corporate stock were “inapplicable to the instant dispute” and

that “the specific issue before the Court appears to be one of

first impression”.    Estate of Smith v. United States, 300 F.

Supp. 2d 474, 477 (S.D. Tex. 2004), affd. 391 F.3d 621 (5th Cir.

2004).    The estate argued that the retirement accounts were more

than simply a collection of the assets contained within them and

that due consideration must be paid to the accounts themselves.

The District Court rejected this argument, concluding that “the

accounts are equivalent to the assets contained within them * * *

[and] The potential tax to be incurred by the seller, while

significant to the seller, would not affect that sales price of

the securities and would not factor into negotiations between the

hypothetical buyer and seller.”    Id. at 478 (emphasis added).

The District Court observed that while there is a market for

publicly traded securities such as those contained in the

retirement accounts, there is no market for retirement accounts

themselves.11   Therefore, the court concluded that “it is not



     11
      Although on the trial court level the estate pointed out
the fact that there was no market for the retirement accounts,
the estate did not go as far to argue that a lack of
marketability discount should be applied. On appeal, the estate
argued for the lack of marketability discount but the Court of
Appeals refused to consider the argument because the estate
raised it for the first time on appeal. See Estate of Smith v.
United States, 391 F.3d 621, 625-626 (5th Cir. 2004). We have
set forth our reasons for finding that a lack of marketability
discount is unwarranted in supra sec. II.
                                 - 28 -

reasonable to apply the willing buyer/willing seller test to the

* * * [retirement accounts] in the hands of the decedent as the

Estate suggests.”    Id.   The District Court concluded that a

willing buyer would pay the value of the securities as determined

by applicable securities exchange rates, and a willing seller

would accept the same.

     On appeal, the Court of Appeals for the Fifth Circuit agreed

with the District Court’s reasoning and further opined that

“‘There is no support in the law or regulations for [the

estate's] approach which is designed to arrive at the value of

the transfer as between the individual decedent and his estate or

beneficiaries.’”    Estate of Smith v. United States, 391 F.3d at

627 (quoting Estate of Robinson v. Commissioner, 69 T.C. 222, 225

(1977)).   Further, the Court of Appeals determined that the

estate failed to recognize that “the willing buyer-willing seller

test is an objective one * * *[and] [t]hus, the hypothetical

parties are not the Estate and the beneficiaries of the

Retirement Accounts.”      Id. at 628.    The Court of Appeals again

rejected the estate’s analogy to cases involving closely held

corporate stock.    First, the court observed that those cases were

distinguishable because the type of asset involved was completely

different.   Second, the court made the crucial point that

deflated the taxpayer’s argument:

     while the stock considered in the above cases would
     have built-in capital gains even in the hands of a
     hypothetical buyer, the Retirement Accounts at issue
                              - 29 -

     here would not constitute income in respect of a
     decedent in the hands of a hypothetical buyer. Income
     in respect of a decedent can only be recognized by: (1)
     the estate; (2) the person who acquires the right to
     receive the income by reason of the decedent's death;
     or (3) the person who acquires the right to receive the
     income by bequest, devise, or inheritance. 26 U.S.C. §
     691(a)(1). Thus, a hypothetical buyer could not buy
     income in respect of a decedent, and there would be no
     income tax imposed on a hypothetical buyer upon the
     liquidation of the accounts. * * *

Id. at 629.

     We think that this distinction is the reason that all of

petitioner’s arguments in this case are meritless.    The tax or

marketability burden on the IRAs must be borne by the seller

because the IRAs cannot legally be sold and therefore their

inherent tax liability and marketability restrictions cannot be

passed on to a hypothetical buyer.     Therefore, there is no reason

a hypothetical buyer would seek to adjust the price of the

marketable securities that are ultimately being purchased.       By

the same token, a hypothetical seller would not accept a downward

adjustment in the value of the securities for a tax liability

that does not survive the transfer of ownership of the assets.        A

hypothetical buyer would not purchase the IRAs because they are

not transferable.   The buyer would purchase the IRAs’ marketable

securities and would obtain a tax basis in the assets equal to

the buyer’s cost.   See sec. 1012.   The buyer would only have

taxable gain on the disposition of the marketable securities to

the extent they appreciated in value subsequent to the time of

acquisition.   Therefore, the buyer would be willing to pay the
                              - 30 -

full fair market value for the securities without any discount.

We agree with the Fifth Circuit that “correctly applying the

willing buyer-willing seller test demonstrates that a

hypothetical buyer would not consider the income tax liability to

a beneficiary on the income in respect of a decedent since he is

not the beneficiary and thus would not be paying the income tax.”

Estate of Smith v. United States, 391 F.2d at 628.

     The estate argues that Estate of Smith was decided under a

different theory; i.e., that the case did not consider the

marketability discount argument.   The estate also contends that

the reasoning in Estate of Smith fails to understand the nature

of IRA accounts.   We have already independently considered and

rejected the marketability discount theory.   Further, the

estate’s argument that in general the tax consequences of

distributing the IRAs should be taken into account under the

willing buyer-willing seller test was the exact argument

considered by the court in Estate of Smith.   Finally, the

estate’s assertion that Estate of Smith fails to understand the

nature of IRAs is contradicted by the estate’s misstatements of

the nature of IRAs.

     B.   Section 691(c)

     The Fifth Circuit Court of Appeals, as are we, was convinced

of the relevance of our holding in Estate of Robinson v.

Commissioner, 69 T.C. at 224, in particular the reasoning

utilizing section 691(c).   In Estate of Robinson, this Court
                              - 31 -

examined the issue of whether to discount the value of

installment notes in decedent’s estate for future income taxes

that the beneficiaries of those notes would pay on the income in

respect of a decedent included in future installments.   We

determined that the statutory scheme in section 691 obviated the

need to give the taxpayer any further relief.    Id. at 226.

Section 691(a)(1) provides that “all items of gross income in

respect of a decedent * * *shall be included in the gross income,

for the taxable year when received”.   Section 691(a)(3) provides

that such income in the hands of the person acquiring a right to

it from decedent will be treated in the same manner as it would

have been in the hands of decedent.    We noted that if the statute

stopped here, installment notes transmitted by a decedent at his

death would be included in decedent’s estate at the fair market

value provided under sections 2031 and 2033, and each portion of

the future installment payments which represented taxable gain

would be subject to an income tax in the year of receipt.      Id. at

226.   However, we further observed that section 691(c) grants

some relief from the double taxation by providing that the

recipient of income in respect of a decedent may deduct that

portion of the estate tax levied on decedent’s estate which is

attributable to the inclusion of the right to such income in

decedent's estate.   We concluded therefore in Estate of Robinson

v. Commissioner, supra at 226-227:
                                - 32 -

            Congress has focused on the fact that an
            installment obligation which includes income
            in respect of a decedent is subject to estate
            tax as part of the gross estate. To the extent
            the element of taxable gain included therein
            is also subject to the income tax, Congress
            has chosen to ameliorate the impact of this
            double taxation by allowing an income tax
            deduction for the estate tax attributable to
            the taxable gain. There is no foundation in
            the Code for supplementing this congressional
            income tax relief by the estate tax relief
            which petitioner here seeks.

     We believe this reasoning is applicable to the instant

issue.    Section 691(c) provides some relief to the estate from

the potential double income tax.12    Although the estate argues

that there is no legislative history on point, the legislative

intent is clear from the resulting relief from double income

taxation.    In Estate of Smith v. United States, 391 F.3d 621 (5th

Cir. 2004), the court noted that Congress has not provided

similar relief in cases of closely held corporate stock with

capital gains potential.    In cases involving closely held stock

with built-in capital gains, the capital gains tax potential

survives the transfer of the stock to an unrelated party, and

Congress has not granted any relief from that secondary tax.       Id.

at 629.     Not only does this observation highlight the fundamental



     12
      We note that the sec. 691(c) deduction does not provide
complete relief against the double taxation that is frequently
encountered by income in respect of a decedent. Because this
section provides a deduction rather than a credit, its value is
limited to the highest marginal income tax bracket of the
recipient. However, such discrepancy was a congressional choice
and is not in our discretion to alter.
                                  - 33 -

difference between transferring closely held corporate stock and

stocks in an IRA account that the estate consistently ignores,

but it also provides further confirmation of why we should not

intervene where Congress has already provided the necessary means

to reach a reasonable result.

     The estate argues that it is illogical to value the IRAs as

though they were equivalent to the value of the underlying

assets.     To illustrate this point, the estate compares three

assets with identical underlying assets:       A traditional IRA, a

securities account, and a Roth IRA.        The estate argues that these

three values should not have equal fair market value for Federal

estate tax purposes because valuing these assets at the same

amount would subject them to the same estate tax when the IRA

results in income tax to a beneficiary, and the securities

account and Roth IRA would not subject a decedent’s beneficiary

to tax.13

     We believe that our analysis of the willing buyer-willing

seller test and explanation of the purpose of section 691(c)

diminishes the importance of the difference between the tax

consequences relating to these assets.       Hypothetical buyers and

sellers would agree on the same price for each of these items--

the amount of the account balances.        We have already illustrated

that a hypothetical buyer would not take into account the tax



     13
          See secs. 1014, 408A.
                              - 34 -

consequences of distributing the assets in the IRAs because the

buyer would be purchasing the securities, not the IRAs

themselves.   Unlike the other cases the estate has cited, the tax

liability associated with the distribution of the IRAs would not

be passed on to the buyer.   In addition, section 691(c) provides

relief from the double taxation that would be imposed on the

benficiaries of the IRAs in this case.    In conclusion, the series

of comparisons that the estate has crafted to convince us that it

is entitled to a reduction in the value of its IRAs for the

income tax consequences to the beneficiaries is unconvincing.

The correct result in this case is to value the IRAs based on

their respective account balances on the date of decedent’s

death.

     Consistent with the preceding discussion, we conclude that

petitioner’s motion for partial summary judgment will be denied,

and respondent’s cross-motion for summary judgment will be

granted.

     To reflect the foregoing,



                                      Decision will be entered

                                 under Rule 155.
