                         T.C. Memo. 1997-484



                       UNITED STATES TAX COURT



ESTATE OF THOMAS A. FLEMING, DECEASED, CATHY J. HIRT, INDEPENDENT
                SUCCESSOR EXECUTRIX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22462-95.                  Filed October 27, 1997.



     William R. Cousins III, James R. Dobbs, Jr., Robert D.

Collier, and Robert M. Bolton, for petitioner.

     John R. Hunter, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     CHIECHI, Judge:    Respondent determined a deficiency of

$512,881 in petitioner's Federal estate tax.     The sole issue

remaining for decision is the fair market value of the stock

interest in a closely held corporation that was owned by Thomas
                               - 2 -


A. Fleming (decedent) at the date of his death.

                         FINDINGS OF FACT

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

      Decedent died testate on November 22, 1991 (the valuation

date).   Cathy J. Hirt (Ms. Hirt), the independent successor

executrix of decedent's estate (the estate), resided in Tyler,

Texas, at the time the petition was filed.

      At the time of his death, decedent owned, inter alia, a 50-

percent community property interest (decedent's 50-percent stock

interest) in the 100,000 shares of the common stock of B&W

Financial Corporation of Longview, Inc. (B&W Longview), that were

outstanding at that time, and his spouse, Jeanette T. Fleming,

owned the remaining 50-percent community property interest in

that stock.   Decedent's spouse died in December 1992.

      On the valuation date, B&W Longview, which had three offices

in Tyler, Longview, and San Antonio, Texas, was engaged, inter

alia, in the business of making small loans that were regulated

by the Office of Consumer Credit in Texas.   (The parties refer to

those loans as trade notes receivable, and we shall do the same.)

Pursuant to Texas law and/or regulations, on the valuation date,

the amount of a loan reflected by a trade note receivable could

not exceed $380.1   Although B&W Longview's trade notes receivable

did not bear interest, under Texas law and/or regulations, B&W

1
    All dollar amounts are rounded.
                               - 3 -


Longview was permitted to charge for each such note a $10 acqui-

sition fee (acquisition fee) and a handling charge (handling

charge), the amount of which varied according to the amount and

duration of the trade note receivable.   If a debtor of B&W

Longview prepaid that debtor's trade note receivable, B&W

Longview was required under Texas law and/or regulations to

refund a portion of the acquisition fee and/or the handling

charge.   The amount of any such refund, which was regulated by

the Office of Consumer Credit in Texas, depended upon the amount

and duration of the trade note receivable.

     In addition to the trade notes receivable, on the valuation

date, B&W Longview had in its portfolio of loans 11 demand loans

(demand loans), each of which bore monthly interest of one

percent of the unpaid balance of the loan.   Five of those loans

were in amounts exceeding $100,000, one loan to decedent was in

the amount of $6,200, and one loan was for less than $1,000.    As

of the date of the trial of this case, two of the demand loans

remained outstanding.

     On the valuation date, the assets of B&W Longview consisted

of cash totaling $760,953, the gross amount of the trade notes

receivable totaling $1,012,177,2 nondepreciable assets totaling

$75,323, the demand loans totaling $652,139, and other assets

2
   B&W Longview showed on its balance sheet as of the valuation
date a "Discount for Bad Debts" of $101,217 with respect to the
gross amount of trade notes receivable.
                                - 4 -


totaling $22,630.    On that date, B&W Longview had total liabili-

ties of $253,166 and equity of $2,168,839 consisting of $100,000

of capital stock, $9,412 of paid-in capital, and $2,059,427 of

retained earnings.   The book value of B&W Longview on the valua-

tion date was $2,168,839.

     Prior to the valuation date, decedent participated in the

following transactions involving corporations in which he had an

interest and which had portfolios of business loans that were

similar to B&W Longview's trade notes receivable:3   (1) The

purchase during 1987 (Young transaction) by decedent from Tommy

Young (Mr. Young) of Mr. Young's 50-percent stock interest in

TA&T Finance Corporation (TA&T Finance); (2) the purchase during

1989 (B&W El Paso transaction) by an unidentified individual from

decedent of decedent's 100-percent stock interest in B&W El Paso

(B&W El Paso); and (3) the purchases during 1991 (FNFS transac-

tion) by FNFS, Inc. (FNFS), from decedent of decedent's respec-

tive 100-percent stock interests in five corporations.   (We shall

sometimes refer collectively to the foregoing transactions as the

precedent transactions.)

     In the Young transaction, decedent, who owned 50 percent of

the stock of TA&T Finance, purchased during 1987 Mr. Young's 50-

percent stock interest in that corporation, thereby resulting in

3
   Hereinafter, we shall also refer to the respective portfolios
of loans held by the corporations involved in the transactions in
question as trade notes receivable.
                               - 5 -


decedent's owning 100 percent of the stock of TA&T Finance.4

Although Mr. Young and decedent were not related, Mr. Young had

previously worked for decedent.   In calculating the price for Mr.

Young's 50-percent stock interest in TA&T Finance, the parties to

the Young transaction added to the book value of that company a

premium of 23 percent of the trade notes receivable that were

held by TA&T Finance at the time of that transaction.

     In the B&W El Paso transaction, an unidentified individual

who was not related to decedent purchased during 1989 decedent's

100-percent stock interest in B&W El Paso.   In calculating the

price for decedent's 100-percent stock interest in B&W El Paso,

the parties to the B&W El Paso transaction added to the book

value of that company a premium of 15 percent of the trade notes

receivable that were held by B&W El Paso at the time of that

transaction.

     In the FNFS transaction, FNFS purchased during 1991 dece-

dent's respective 100-percent stock interests in B&W Brownsville,

B&W Harlingen, B&W Mission, B&W Austin, and B&W Finance.   At the

time of that transaction, FNFS was a holding company owned

equally by David Harwood (Mr. Harwood) and Wayne McKinney, who

were not related.   Mr. Harwood, who was not related to decedent,

negotiated on behalf of FNFS in the FNFS transaction.   In calcu-

4
   Sometime after decedent's death, B&W Longview merged into TA&T
Finance, and, around May 1992, Ms. Hirt became president of that
corporation.
                                 - 6 -


lating the price for each of decedent's respective stock inter-

ests in B&W Brownsville, B&W Harlingen, B&W Mission, B&W Austin,

and B&W Finance, the parties to the FNFS transaction added to the

book value of each of those companies a premium of 23 percent of

the trade notes receivable that were held by each such company at

the time of that transaction.

      On or about August 7, 1992, the estate filed Form 706,

United States Estate (and Generation-Skipping Transfer) Tax

Return (estate tax return).   In that return, the estate listed

the value of 100 percent of the stock of B&W Longview as $2

million and claimed a value of $1 million for decedent's 50-

percent stock interest in that corporation.

      On or about November 17, 1993, the estate filed an amended

estate tax return (amended estate tax return) in which the estate

listed the value of 100 percent of the stock of B&W Longview as

$1,452,000 and claimed a value of $726,000 for decedent's 50-

percent stock interest in that corporation.   Respondent treated

the amended estate tax return as a claim for refund and denied

it.

                                OPINION

      Respondent determined in the notice of deficiency, inter

alia, that on the valuation date the fair market value of dece-

dent's 50-percent stock interest in B&W Longview was $1,251,460.

Respondent modified that determination and claims on brief that
                               - 7 -


the value of that stock interest was $1,110,000.    The estate also

modified on brief its prior positions as to the value on the

valuation date of the stock interest in question.   The estate now

claims that that value was $604,777.

     As is customary in valuation cases, the parties rely exten-

sively on the opinions of their respective experts to support

their differing views about the fair market value on the valua-

tion date of decedent's 50-percent stock interest in B&W

Longview.   The estate relies on Richard P. Bernstein (Mr.

Bernstein), a member of the American Society of Appraisers, who

is the founder and president of the business valuation firm of

Bernstein, Phalon & Conklin.   Respondent relies on Monty L.

Harrell (Mr. Harrell), who is employed by the Internal Revenue

Service as an economist.   Although Mr. Harrell is not a member of

the American Society of Appraisers, he has taken business valua-

tion courses offered by that organization.

     We evaluate the opinions of experts in light of the demon-

strated qualifications of each expert and all other evidence in

the record.   Anderson v. Commissioner, 250 F.2d 242, 249 (5th

Cir. 1957), affg. in part and remanding in part T.C. Memo. 1956-

178; Parker v. Commissioner, 86 T.C. 547, 561 (1986).    We have

broad discretion to evaluate "'the overall cogency of each

expert's analysis.'"   Sammons v. Commissioner, 838 F.2d 330, 334

(9th Cir. 1988) (quoting Ebben v. Commissioner, 783 F.2d 906, 909
                                 - 8 -


(9th Cir. 1986), affg. in part and reversing in part T.C. Memo.

1983-200).   We are not bound by the formulae and opinions prof-

fered by expert witnesses, especially when they are contrary to

our judgment.   Silverman v. Commissioner, 538 F.2d 927, 933 (2d

Cir. 1976), affg. T.C. Memo. 1974-285; IT&S of Iowa, Inc. v.

Commissioner, 97 T.C. 496, 508 (1991).     Instead, we may reach a

determination of value based on our own examination of the

evidence in the record.     Lukens v. Commissioner, 945 F.2d 92, 96

(5th Cir. 1991), affg. Ames v. Commissioner, T.C. Memo. 1990-87

(citing Silverman v. Commissioner, supra).     The persuasiveness of

an expert's opinion depends largely upon the disclosed facts on

which it is based.   See Tripp v. Commissioner, 337 F.2d 432, 434

(7th Cir. 1964), affg. T.C. Memo. 1963-244.    Where experts offer

divergent estimates of fair market value, we shall decide what

weight to give those estimates by examining the factors used by

those experts to arrive at their conclusions.     Casey v. Commis-

sioner, 38 T.C. 357, 381 (1962).    While we may accept the opinion

of an expert in its entirety, Buffalo Tool & Die Manufacturing

Co. v. Commissioner, 74 T.C. 441, 452 (1980), we may be selective

in the use of any part of such an opinion, Parker v. Commis-

sioner, supra at 562.     We also may reject the opinion of an

expert witness in its entirety.     Palmer v. Commissioner, 523 F.2d

1308, 1310 (8th Cir. 1975), affg. 62 T.C. 684 (1974); Parker v.

Commissioner, supra at 562-565.
                               - 9 -


     In their respective original reports (expert reports), both

experts relied on the market approach in determining the fair

market value on the valuation date of decedent's 50-percent stock

interest in B&W Longview.   In applying that approach, each of

those experts used a combination of the transaction method and

the market multiple or guideline company method (market multiple

method) in order to arrive at his opinion of that value.   At

trial, Mr. Bernstein and Mr. Harrell modified and/or abandoned

portions of their respective expert reports, as follows:   In

applying the market approach to valuing the stock interest in

question, petitioner's expert modified his application of the

market multiple method (modified market multiple method), and

respondent's expert modified his application of the transaction

method (modified transaction method) and abandoned his determina-

tion of value under the market multiple method.   Consequently,

both experts modified their respective opinions of the fair

market value on the valuation date of decedent's 50-percent stock

interest in B&W Longview.   We have problems with the opinions of

both experts.

     Mr. Bernstein relied on the market approach and applied an

equally weighted combination of the transaction method and his

modified market multiple method under that approach because he

did not believe that either method alone produced what he consid-

ered to be an accurate estimate of the fair market value on the
                              - 10 -


valuation date of the stock interest in question.

     In applying the transaction method, Mr. Bernstein examined

the precedent transactions that occurred in 1987, 1989, and 1991,

respectively.   He concluded that under that method the value of

decedent's 50-percent stock interest in B&W Longview should be

derived by (1) adding to the book value of B&W Longview on the

valuation date a premium equal to 23 percent of the gross amount

of the trade notes receivable held by that corporation on that

date and (2) multiplying the resulting sum by 50 percent to

reflect the fact that decedent owned only a 50-percent stock

interest in B&W Longview.   Mr. Bernstein determined that, under

the transaction method and before considering any discounts that

he believed are warranted because of the lack of control and the

lack of marketability inherent in that stock interest on the

valuation date, its value was $1,200,801.

     In applying his modified market multiple method, Mr.

Bernstein selected three publicly traded companies (guideline

companies) engaged to varying degrees in consumer lending that he

determined were comparable or similar to B&W Longview.   Mr.

Bernstein did not explain in his report or adequately explain at

trial why the three guideline companies that he chose were

comparable to B&W Longview on the valuation date and why he

selected only three publicly traded companies as guideline

companies.   For these reasons, we are not persuaded that the
                              - 11 -


results that Mr. Bernstein reached under his modified market

multiple method are reliable, and we shall not give any weight to

those results in determining the fair market value on the valua-

tion date of the stock interest in question.5   Consequently, we

shall ignore Mr. Bernstein's opinion that, under his modified

market multiple method and before considering any discounts that

he believed are warranted because of the lack of control and the

lack of marketability inherent in decedent's 50-percent stock

interest in B&W Longview on the valuation date, its value was

$660,050.

     Although we shall not rely on Mr. Bernstein's modified

market multiple method, for the sake of completeness we shall

describe what Mr. Bernstein did with the results that he derived

under that method.   After having arrived at the respective values

of the stock interest in question under his modified market

multiple approach and the transaction method and after having

determined that each such value should be accorded equal weight

in ascertaining the fair market value of that interest, Mr.

Bernstein calculated the mean of those two values to be $930,425

(mean value).   He applied a 35-percent combined minority and


5
   There are additional reasons why we are not convinced that the
results under Mr. Bernstein's modified market multiple method are
reliable. For example, Mr. Bernstein did not adequately explain,
and has not convinced us, that his determinations of the market
multiples for the guideline companies that he selected are
proper.
                              - 12 -


lack-of-marketability discount6 (35-percent combined discount) to

that mean value and arrived at an amount, viz., $604,777, that he

determined was the fair market value on the valuation date of

decedent's 50-percent stock interest in B&W Longview.   We are not

persuaded on the record presented to us that the 35-percent

combined discount which Mr. Bernstein applied is appropriate.

     When he prepared his expert report, Mr. Harrell, like Mr.

Bernstein, believed that applying a weighted combination of the

market multiple method and the transaction method generally would

produce an accurate estimate under the market approach of the

fair market value on the valuation date of the stock interest in

question.7   However, after he prepared his report and before

trial, Mr. Harrell discovered deficiencies in the data which were

provided to him and on which he relied in applying the market

multiple method.   Those deficiencies caused Mr. Harrell to

conclude that the results that he reached under that method are

not reliable.   We agree, and we shall not give any weight to

6
   Mr. Bernstein described the 35-percent discount that he ap-
plied as a lack-of-marketability discount. However, his explana-
tion in his expert report of what that discount was intended to
cover makes it clear, and petitioner agrees on brief, that that
discount was applied by Mr. Bernstein not only because he be-
lieved that there was a lack of marketability inherent in the
stock interest in question, but also because he concluded that
that stock interest was a noncontrolling interest.
7
   Unlike Mr. Bernstein who gave equal weight to those two meth-
ods, Mr. Harrell believed when he prepared his expert report that
one-third weight should be given to the market multiple method
and two-thirds weight should be given to the transaction method.
                              - 13 -


those results in determining the fair market value of the stock

interest in question.

     In applying his modified transaction method, Mr. Harrell,

like Mr. Bernstein, examined the precedent transactions that

occurred in 1987, 1989, and 1991, respectively.   Mr. Harrell

testified that under that method the value of that interest was

between approximately $1,110,000 and approximately $1,124,000,

derived as follows:   Mr. Harrell, like Mr. Bernstein, added to

the book value of B&W Longview on the valuation date a premium

equal to 23 percent of the gross amount of the trade notes

receivable held by that corporation on that date.   Mr. Harrell,

unlike Mr. Bernstein, also added to that book value a premium on

the demand loans that Mr. Harrell believed should be between 10

percent and 15 percent of those loans.   Mr. Harrell reduced the

resulting sum by 50 percent to reflect the fact that decedent

held only a 50-percent stock interest in B&W Longview on the

valuation date.   Finally, Mr. Harrell applied a 10-percent

minority discount, but, unlike Mr. Bernstein, he applied no

discount for lack of marketability.

     On the record before us, we are not persuaded that Mr.

Harrell should have added any premium to the demand loans in

determining the fair market value of the stock interest in

question.   We found Mr. Harrell's testimony about the propriety

of such a premium to be tentative and unconvincing.   Accordingly,
                              - 14 -


we shall not accept Mr. Harrell's opinion that a premium should

be applied to the demand loans.

     We also are not convinced on the present record that Mr.

Harrell was correct in not applying any lack-of-marketability

discount in valuing the stock interest in question.

     Despite the deficiencies that we found in the respective

expert reports and opinions of the parties' experts, we agree

with both experts that, under the market approach to determining

the fair market value on the valuation date of decedent's 50-

percent stock interest in B&W Longview, the combined use of the

market multiple method and the transaction method would produce a

better indication of that value than the use of only the transac-

tion method.   However, as discussed above, we are not persuaded

that the respective results of Mr. Bernstein's modified market

multiple method and Mr. Harrell's market multiple method are

reliable.   Consequently, we are left with a deficient record from

which to determine the effect of the proper application of the

market multiple method on the determination of the value of the

stock interest in question.   Nonetheless, we shall determine the

fair market value on the valuation date of decedent's 50-percent

stock interest in B&W Longview by applying our best judgment to a

record that we find to be inadequate in that and other respects8

8
   We take this opportunity, as we did before and after the trial
of this case, to remind the parties that questions of fair market
                                                   (continued...)
                               - 15 -


and bearing in mind that the valuation of that stock interest is

a question of fact, Estate of Bonner v. United States, 84 F.3d

196, 197 (5th Cir. 1996); Estate of Andrews v. Commissioner, 79

T.C. 938, 940 (1982), on which petitioner has the burden of

proof, Rule 142(a).9

       The determination of the value of closely held stock is a

matter of judgment, rather than of mathematics.    Hamm v. Commis-

sioner, 325 F.2d 934, 940 (8th Cir. 1963), affg. T.C. Memo. 1961-

347.    Moreover, since valuation is necessarily an approximation,

it is not required that the value that 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 at 933; Anderson v. Commis-

sioner, 250 F.2d at 249.

       The regulations define fair market value for purposes of the

Federal estate tax as "the price at which the property would

change hands between a willing buyer and a willing seller,

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


8
 (...continued)
value, like the one that is presented here, are generally more
properly resolved through the give and take of settlement negoti-
ations by the parties, rather than adjudication by the Court.
Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74 T.C.
441, 451 (1980).
9
   All Rule references are to the Tax Court Rules of Practice and
Procedure. All section references are to the Internal Revenue
Code in effect at the date of decedent's death.
                              - 16 -


having reasonable knowledge of relevant facts."   Sec. 20.2031-

1(b), Estate Tax Regs.   In the case of unlisted stock, the price

at which sales of stock are made in arm's-length transactions in

an open market is the best evidence of its value.   Champion v.

Commissioner, 303 F.2d 887, 893 (5th Cir. 1962), revg. T.C. Memo.

1960-51; Estate of Andrews v. Commissioner, supra at 940.     In the

instant case, the record does not disclose any such sales of the

stock interest in question.   The record does disclose, however,

information with respect to the precedent transactions that

involved corporations in which decedent had an interest and

which, like B&W Longview, had portfolios of trade notes receiv-

able.

     Where the value of unlisted stock cannot be determined from

actual sale prices, section 2031(b) provides that value is to be

determined by taking into consideration the value of stock of

corporations listed on an exchange that are engaged in the same

or similar business, as well as all other factors bearing on

value.   The factors we must consider are those that an informed

buyer and seller would take into account.   Hamm v. Commissioner,

supra at 938.   Section 20.2031-2(f), Estate Tax Regs., lists some

of those factors, including the company's net worth, prospective

earning power, dividend-earning capacity, goodwill, the economic

outlook for its industry, its position in the industry, its

management, the degree of control represented by the block of
                                - 17 -


stock to be valued, and nonoperating assets to the extent not

otherwise considered.    Section 5 of Rev. Rul. 59-60, 1959-1 C.B.

237, 238-242, sets forth criteria that are virtually identical to

those listed in section 20.2031-2(f), Estate Tax Regs., and "has

been widely accepted as setting forth the appropriate criteria to

consider in determining fair market value".    Estate of Newhouse

v. Commissioner, 94 T.C. 193, 217 (1990).

     There is no fixed formula for applying the foregoing fac-

tors.   See Estate of Goodall v. Commissioner, 391 F.2d 775, 786

(8th Cir. 1968), vacating T.C. Memo. 1965-154.    We have held, and

the regulations provide, that the weight to be given to the

various factors in arriving at fair market value depends upon the

facts of each case.     Estate of Andrews v. Commissioner, supra at

940-941; sec. 20.2031-2(f), Estate Tax Regs.    As the trier of

fact, we have broad discretion in assigning the weight to accord

to the various factors and in selecting the method of valuation.

Estate of O'Connell v. Commissioner, 640 F.2d 249, 251 (9th Cir.

1981), affg. on this issue T.C. Memo. 1978-191.

     Each of the parties' experts agree that, under the transac-

tion method that each applied under the market approach to

valuation, the starting point for determining the fair market

value of the stock interest in question should be the book value

of B&W Longview on the valuation date plus a 23-percent premium

on the gross amount of the trade notes receivable that that
                               - 18 -


corporation held on that date.    We accept that starting point

under the transaction method as reasonable.    According to the

expert reports, market conditions on the valuation date, like

market conditions in 1991 at the time of the FNFS transaction in

which a 23-percent premium was applied to the trade notes receiv-

able there involved, were more favorable than they were in 1989

at the time the B&W El Paso transaction occurred in which a 15-

percent premium was applied to the trade notes receivable in-

volved in that transaction.

     A major difference between the parties' experts in valuing

the stock interest in question relates to the discounts that each

applied.    Respondent's expert applied only a 10-percent minority

discount, and petitioner's expert applied a 35-percent combined

minority and lack-of-marketability discount.    Discounts for a

minority interest and for lack of marketability are conceptually

distinct.    Estate of Newhouse v. Commissioner, supra at 249.     A

minority discount reflects the minority shareholder's inability

to compel liquidation and thereby realize a pro rata share of the

corporation's net asset value.    A discount for lack of market-

ability reflects the fact that there is no ready market for the

stock of a closely held corporation.    Id.   The appropriate amount

of a minority discount and/or a lack-of-marketability discount is

a question of fact.    Id.

     We agree with both parties' experts that a minority discount
                              - 19 -


should be applied in valuing decedent's 50-percent stock interest

in B&W Longview.   Although Mr. Harrell specified that he would

apply a 10-percent discount, Mr. Bernstein did not specify how

much of the 35-percent combined discount that he applied was

attributable to the fact that decedent did not own a controlling

stock interest in B&W Longview on the valuation date.   On brief,

petitioner, who has the burden of proof, does not insist that a

minority discount in excess of 10 percent be applied in this

case.

     Respondent contends, and petitioner disputes, that, because

the precedent transactions on which both experts, inter alia,

relied involved stock for which there was no ready market, the

respective prices paid for the stock sold in those transactions

reflected some lack-of-marketability discount.   While we gener-

ally agree with respondent, it is significant that the stock

interests acquired in the precedent transactions were different

from decedent's 50-percent stock interest in B&W Longview in that

(1) the respective purchasers in the transactions involving

(a) B&W El Paso and (b) B&W Brownsville, B&W Harlingen, B&W

Mission, B&W Austin, and B&W Finance acquired 100 percent of the

stock of each of those corporations; and (2) although decedent

purchased only 50 percent of the stock of TA&T Finance in the

Young transaction, after that purchase, decedent owned 100

percent of the stock of that corporation.   On the record before
                             - 20 -


us, we find that there was even less of a ready market for

decedent's 50-percent stock interest in B&W Longview than there

was for the stock interests sold in the precedent transactions.

Consequently, we conclude that, in addition to a minority dis-

count, some amount of lack-of-marketability discount should be

applied in determining the fair market value on the valuation

date of decedent's 50-percent stock interest in B&W Longview.

     Based on our consideration of the entire record before us,

and using our best judgment, we find that the fair market value

on the valuation date of decedent's 50-percent stock interest in

B&W Longview was $875,000.

     To reflect the foregoing,



                                        Decision will be entered

                                   under Rule 155.
