                        T.C. Memo. 1998-157



                      UNITED STATES TAX COURT



    MAUDE G. FURMAN, DONOR, DECEASED, AND ESTATE OF MAUDE G.
          FURMAN, DECEASED, ROBERT G. FURMAN, EXECUTOR,
   Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

         ROYAL G. FURMAN, DONOR, DECEASED, AND ESTATE OF
      ROYAL G. FURMAN, DECEASED, ROBERT G. FURMAN, EXECUTOR
   Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 11568-96, 11569-96.          Filed April 30, 1998.



     Stanley W. Rosenkranz and James R. Freeman, for petitioners.

     James F. Kearney, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   Respondent determined deficiencies in

petitioners' Federal gift taxes and Federal estate tax and

additions to tax as follows:
                                  - 2 -

                     Estate of Maude G. Furman

                                               Additions to Tax
                     Deficiency           Sec. 6651(a)   Sec. 6653(a)

     Gift tax--       $75,460               $18,865         $3,773
       1981

     Estate Tax       115,649                  --              --

                     Estate of Royal G. Furman

                                               Additions to Tax
                     Deficiency           Sec. 6651(a)   Sec. 6653(a)

     Gift tax--       $75,460               $18,865         $3,773
       1981

     After concessions regarding the estate tax deficiency, the

issues for decision are:

     1.   Whether for purposes of computing the taxable gifts of

Royal G. Furman (Royal) and the taxable gifts and taxable estate

of Maude G. Furman (Maude), the fair market value of 24 shares of

Furman's, Inc. (FIC) common stock exchanged by each of Royal and

Maude in 1981 for preferred stock of FIC was $300,000 ($12,500

per share) as petitioners contend, $540,540 ($22,522 per share)

as respondent contends, or some other amount.         We hold that the

fair market value was $424,552 ($17,690 per share).

     2.   Whether for purposes of computing Maude's taxable

estate, the fair market value of six shares of FIC common stock

that she transferred to Robert G. Furman (Robert) in 1980 was

$62,016 ($10,336 per share), as petitioners contend, $147,600

($24,600 per share), as respondent contends, or some other

amount.   We hold that the fair market value was $82,859 ($13,810

per share).
                                 - 3 -

       3.   Whether Royal and Maude had reasonable cause for

failing to file gift tax returns for the period ending

September 30, 1981, and whether their failures to pay gift taxes

for that period were due to negligence or intentional disregard

of rules and regulations.    We hold that Royal and Maude had

reasonable cause for failing to file gift tax returns and were

not negligent in failing to pay gift taxes.

                          FINDINGS OF FACT

       Some of the facts have been stipulated and are incorporated

herein by this reference.    Unless otherwise noted, all section

references are to the Internal Revenue Code in effect for the

years at issue, and all Rule references are to the Tax Court

Rules of Practice & Procedure.    All amounts have been rounded to

the nearest dollar.

A.     Decedents

       Royal died testate on June 29, 1990.   His wife Maude died

testate on June 12, 1992 (collectively decedents).     Royal and

Maude were residents of Florida at the times of their deaths.

Robert, the personal representative of decedents' estates,

resided in Florida at the time of filing the petitions.1

Decedents weresurvived by five children, including Robert, their

son.

       1
       Under Florida law, the terms "executor" and "personal
representative" are synonymous. Fla. Stat. Ann. sec. 731.201(25)
(West 1995) defines "personal representative" as a court-
appointed fiduciary who administers a decedent's estate. For
purposes of the Florida Probate Code, the definition supersedes
"executor" and other synonymous terms. Id.
                                - 4 -

B.   Furman's, Inc.

     FIC is a Florida corporation that was organized in 1959.

The principal place of business of FIC is Florida.   Throughout

its existence FIC has been a C corporation, and the stock of FIC

has never been publicly traded.   FIC was founded by Maude, Royal,

and Robert for the purpose of acquiring and operating a Burger

King2 restaurant franchise after Royal had retired from a 35-year

career as a mail carrier.   Until the founding of FIC, Maude,

Royal, and Robert resided in Chicago, Illinois.

     From its organization in 1959 until February 1980, FIC was

capitalized with 100 shares of no-par common stock issued and

outstanding, held as follows:

                  Maude      30 shares

                  Royal      30 shares

                  Robert     40 shares

Although Royal and Maude had five children, Robert is their only

child who has ever had a common stock ownership interest in FIC

or been active in its management.

     Burger King Corp. (BKC), a Florida corporation headquartered

in Miami, Florida, is the franchisor of the second largest

restaurant chain in the world, after McDonald's.   Since 1967, BKC

has been a wholly owned subsidiary of Pillsbury, Inc.   Pillsbury

was acquired by Grand Metropolitan PLC in 1989.


     2
       Burger King Corp. is the exclusive licensee of the Burger
King® registered trademark used in this opinion.
                               - 5 -

     FIC, since its formation, has been engaged solely in the

business of owning and operating franchised Burger King

restaurants.   At the date of trial, FIC operated 27 Burger King

restaurants, primarily in Manatee, Sarasota, Charlotte, and Lee

Counties, on the west coast of Florida.

     FIC entered the fast-food business in May 1959 by opening

Burger King Store No. 12 (Store No. 12) in North Miami Beach,

Florida, one of the original restaurants in the Burger King

chain.   Royal and Maude relocated to Florida to operate the new

restaurant, while Robert had intended to stay in Chicago, where

he was employed as a special agent for an insurance company.

     Just 2 weeks after the opening of Store No. 12, Robert

received a call from James McLamore, one of the cofounders of

BKC, informing him that Royal had been hospitalized.   Robert

traveled to Florida and immediately went to work in Store No. 12.

After Royal's recuperation, Robert decided to stay in Florida and

help manage FIC.   Robert has remained in the fast-food business

ever since.

     In 1961, FIC purchased a 20-percent interest at a cost of

$15,000 in three corporations that were opening Burger King

restaurants in the greater Chicago area (the Chicago Operation).

In 1962, at the request of Mr. McLamore, Robert moved back to

Chicago to participate in the management and operation of the

Chicago Operation of which he ultimately became executive vice

president and a member of the board of directors.   Robert's
                               - 6 -

management duties in the Chicago Operation included the approval

of new restaurant locations, supervising the construction of new

restaurants, and the hiring and training of their employees.    As

of November 1969, the Chicago Operation directly operated 37

Burger King restaurants and was subfranchisor of 29 other

Chicago-area Burger King restaurants.

     In 1970, after a corporate reorganization of the Chicago

Operation, FIC sold its interest in the Chicago Operation to

Self-Service Restaurants (Self-Service), a publicly traded Burger

King franchisee.   In exchange for all of FIC's shares in the

Chicago Operation, FIC received shares of Self-Service common

stock that FIC later sold for approximately $222,000, as well as

Self-Service's promissory note in the principal amount of

$868,500.   Following the sale, Robert was employed by Self-

Service to assist during the period of transition to Self-Service

management.

     In 1971, Robert terminated his employment with Self-Service.

Robert remained in Chicago, where he managed five Burger King

restaurants that he owned directly, and participated in the

management of six Burger King restaurants in Milwaukee,

Wisconsin, in whose corporate franchisee he had acquired a 27-

percent stock interest.

     In 1973, FIC purchased an existing Burger King restaurant in

Fort Myers, Florida.   Thereafter, in 1976, after Robert returned

to Florida, FIC acquired three existing Burger King restaurants,
                               - 7 -

in Sarasota, Bradenton, and Port Charlotte on the west coast of

Florida (the 1976 Purchase), with an exclusive territorial

agreement (the Territorial Agreement).   The purchase price for

the 1976 Purchase was $500,000, payable $300,000 in cash and

$200,000 over 5 years.   FIC allocated $200,000 of the $500,000

purchase price to the Territorial Agreement.

     The Territorial Agreement granted FIC, for a period of 5

years, an exclusive territorial right to build, own, and operate

Burger King restaurants in Manatee, Sarasota, and Charlotte

Counties in Florida (the Exclusive Territories) and a right of

first refusal to build, own, and operate Burger King restaurants

in Lee County, Florida (collectively, the Protected Territories).

The Territorial Agreement also provided that if FIC had six

Burger King restaurants open and in operation on or before

August 26, 1981, it would be entitled to a right of first refusal

on all Burger King restaurants to be subsequently franchised in

the Exclusive Territories through August 1986.

     After his return to Florida, Robert moved to Sarasota,

Florida, and worked full time for FIC selecting and developing

real estate sites, securing financing, and supervising the

construction of new restaurants, while continuing to supervise

the operations of existing FIC-owned restaurants.

     As of February 2, 1980, FIC had seven Burger King

restaurants in operation in the Exclusive Territories.   As of

August 24, 1981, FIC had a total of nine Burger King restaurants.
                                  - 8 -

Inasmuch as FIC had more than six Burger King restaurants in

operation before August 26, 1981, FIC became entitled to the

right of first refusal in the Exclusive Territories through

August 1986.

C.   FIC's Advisers

     1.     Hugh B. Shillington

     After opening Store No. 12 in 1959, FIC retained Hugh B.

Shillington, C.P.A. (Mr. Shillington), as its outside accountant,

to assist in tax and financial accounting matters.      Mr.

Shillington was a principal of Shillington & Fay (S&F), a Coral

Gables, Florida, accounting firm.     Mr. Shillington served as

outside accountant to other Burger King franchisees and had been

recommended to FIC by BKC.    S&F reviewed3 FIC's annual financial

statements, including financial statements for FIC's fiscal years

ending September 30, 1979, 1980, and 1981 (FY 1979, FY 1980, and

FY 1981).    Mr. Shillington, who advised FIC to retain its

financial records for 7 years, died in 1995.

     2.     Louis B. Tishler, Jr.

     Louis B. Tishler, Jr. (Mr. Tishler), is an attorney who has

been practicing law in the Chicago area since his graduation from

     3
       S&F annually reviewed the balance sheets, income
statements, and statements of changes in financial position of
FIC (the financial statements) in order to provide an opinion
letter of limited assurance that S&F was aware of no material
modifications that should be made to the financial statements in
order for them to be in conformity with generally accepted
accounting principles. The scope of a review is substantially
less than that of an audit.
                                 - 9 -

Northwestern University School of Law in 1959.    Mr. Tishler's

primary area of practice is franchising, in which he has been

engaged since 1962.   Mr. Tishler has represented many well-known

franchisors, including Dunkin’ Donuts and McDonald's, among

others.   Mr. Tishler has also represented numerous franchisees of

Burger King and Church's Fried Chicken.    In the 1960's and

1970's, he represented Burger King franchisees in the acquisition

of more than 100 restaurants.    Mr. Tishler began his

representation of FIC in 1966 or 1967.    Both Messrs. Tishler and

Shillington had assisted FIC in the making of its decision to

allocate $200,000 of the purchase price of the 1976 Purchase to

the Territorial Agreement.

D.   1980 Gift

     By 1976, when the Territorial Agreement was executed, BKC

had adopted a new policy requiring that corporate franchisees be

operated by a shareholder with voting control of the corporation

(the Control Requirement).   FIC did not then satisfy the Control

Requirement, but Robert made an oral promise to BKC to acquire a

controlling interest in FIC.    Despite Robert's promise, no such

action was taken until 1980, when BKC demanded that Robert

acquire voting control of FIC.    To satisfy BKC's demand, on

February 2, 1980, decedents each transferred by gift 6 shares of

FIC's common stock to Robert (the 1980 Gifts).    By the time of

the 1980 Gifts, neither of decedents was actively participating

in the day-to-day management or operations of FIC.
                              - 10 -

      As of September 30, 1979, the book value of FIC's common

stock was $1,033,601.   As of February 2, 1980, no dividends had

ever been declared or paid on FIC's common stock.   With the

assistance of Robert, Mr. Shillington, and Mr. Tishler, decedents

valued their respective gifts of 6 shares of FIC stock at $62,016

($10,336 per share) and timely filed the requisite gift tax

returns reporting the 1980 Gifts.   The period of limitations on

assessment of additional gift tax on the 1980 Gifts has expired.

     Following the 1980 Gifts, the outstanding common stock of

FIC was owned as follows:

                    Royal      24 shares

                    Maude      24 shares

                    Robert     52 shares

     Following the 1980 Gifts, decedents executed codicils to

their wills providing that their remaining shares of FIC's common

stock would be distributed equally among all their children, to

the exclusion of Robert.

E.   1981 Recapitalization

     In 1980 or 1981, BKC requested that all shareholders of FIC

personally guarantee the debt of FIC to BKC.   Neither decedent

was willing to accede to BKC's request, while Robert was willing

to become liable as the sole guarantor only if decedents agreed

to relinquish their voting rights in FIC.   Robert's reluctance to

be the sole guarantor emanated, in part, from the terms of

decedents' wills, under which Robert's siblings would eventually
                              - 11 -

own all decedents' remaining shares in FIC, while Robert would be

left the sole guarantor of FIC's debt.   Decedents, who were then

over 70 years of age, acknowledged their diminished participation

in FIC's affairs and Robert's leading role and agreed to

relinquish their voting rights only under the following

conditions:   (i) Robert would continue to actively direct FIC;

(ii) FIC would be kept intact; (iii) decedents would receive a

fixed income from their investment in FIC; (iv) decedents would

be released from any obligation to guarantee FIC's debt; and (v)

decedents would receive some kind of equity interest that they

could pass on to their children other than Robert.

     In order to provide Robert with all the voting stock of FIC

and satisfy decedents' conditions, Robert and decedents agreed to

a recapitalization of FIC whereby decedents would exchange their

common stock for preferred stock.   Before the recapitalization,

with the assistance of Mr. Tishler, FIC requested and received a

private letter ruling from the Internal Revenue Service that the

proposed exchange of common stock for preferred stock would

qualify as a reorganization for income tax purposes within the

meaning of section 368(a)(1)(E).

     On August 24, 1981, FIC's articles of incorporation were

amended to authorize 5,000 shares of no-par voting common stock

and 6,000 shares of par value $100, nonvoting, 10-percent

cumulative preferred stock (the Preferred Stock).    The Preferred

Stock contained no participation, conversion or redemption

rights.   On August 24, 1981, each of decedents exchanged 24
                                - 12 -

shares of common stock for 3,000 shares of Preferred Stock (the

Recapitalization).

     While the Recapitalization indirectly addressed BKC's

requirement that each common shareholder personally guarantee the

debt of FIC, the Recapitalization had not been required by any

condition imposed by BKC.

     As of September 30, 1981, the book value of FIC's common

stock was $1,109,400.     Decedents did not file any 1981 gift tax

returns reporting any donative transfers that they may have made

by reason of their participation in the Recapitalization.

     After the Recapitalization, decedents executed new wills

devising their shares of Preferred Stock to their children other

than Robert.4   As of the date of trial, all the Preferred Stock

has remained outstanding, all dividends on the Preferred Stock

have been timely declared and paid, and Robert has been the only

shareholder to personally guarantee the debts of FIC.

F.   Estate Tax Returns

     Royal died on June 29, 1990, and Maude died on June 12,

1992.    Robert, as personal representative, executed and timely

filed the required estate tax returns.    The adjusted taxable

gifts reported on line 4 of the estate tax returns for Royal's


     4
       In a distinction dating from the 19th century, a testator
devises real property to a devisee and bequeaths personal
property to a legatee. Dukeminier, Wills, Trusts, and Estates 36
(1984). However, the Florida Probate Code uses the term "devise"
to describe the transfer at death of personal property as well as
real property. Fla. Stat. Ann. sec. 731.201(8) (West 1995).
                              - 13 -

and Maude's estates reflected the 1980 Gifts as reported by Royal

and Maude on their respective 1980 gift tax returns.    The period

of limitations on assessment of additional estate tax against

Royal's estate has expired.

G.   Notices of Deficiency

     On March 11, 1996, respondent issued three deficiency

notices:   (i) For gift tax for the period ending September 30,

1981, to Maude G. Furman, donor, deceased, Estate of Maude G.

Furman, deceased, and Robert G. Furman, Executor (the Maude Gift

Tax Notice); (ii) for estate tax to the Estate of Maude G.

Furman, deceased, and Robert G. Furman, Executor (the Estate Tax

Notice); and (iii) for gift tax for the period ending

September 30, 1981, to Royal G. Furman, donor, deceased, Estate

of Royal G. Furman, deceased, Robert G. Furman, Executor (the

Royal Gift Tax Notice).

     The Estate Tax Notice determined that the fair market value

of the shares transferred by each decedent in the 1980 Gifts was

$147,600 ($24,600 per share), rather than the $62,016 ($10,366

per share) that they had reported on their 1980 gift tax returns.

Both the Maude Gift Tax Notice and Royal Gift Tax Notice

determined that the fair market value of the 24 shares of FIC

common stock exchanged by each decedent in the Recapitalization

was $540,540 ($22,522 per share), while the 3,000 shares of

preferred stock received by each decedent in the Recapitalization
                             - 14 -

had a fair market value of only $300,000 ($100 per share),5

resulting in gifts by each of them to Robert of $240,540, before

allowance for the $3,000 annual exclusion.6

     After concessions by Maude's estate, the remaining items at

issue in the Estate Tax Notice are respondent's determinations

that for purposes of the estate tax:   (i) The fair market value

on February 2, 1980, of the donative transfer of 6 shares of

FIC's common stock from Maude to Robert was $147,600, rather than



     5
       Respondent has not contested that the preferred shares of
FIC had a fair market value equal to their par value when
received by decedents. Valued at par, FIC's preferred shares,
with no participatory or residual rights beyond the stated
dividend and par value, would yield 10 percent if dividends were
declared and paid in a timely fashion by the directors elected by
the holder(s) of the common stock of this small, closely held
corporation. Inasmuch as the parties have stipulated that
returns on a 20-year Treasury bond (risk-free rate) in 1980 and
1981 were 11.86 percent and 14.4 percent, respectively,
respondent's acceptance of par as the value of the preferred
shares appears to be highly questionable. In addition, the
closely held character of FIC, the nonvoting characteristics of
the preferred, and the resulting inability of the preferred
holders to compel the payment of dividends or bring about
redemption of their preferred shares or liquidation of the
company would have justified substantial minority and lack-of-
marketability discounts for the preferred. Despite our
misgivings, we decline to revalue the preferred shares on our own
motion.
     6
       See sec. 2503(b). The Economic Recovery Tax Act of 1981,
Pub. L. 97-34, sec. 441(a), 95 Stat. 319, which does not apply in
this case, amended sec. 2503(b) by increasing the annual
exclusion to $10,000, for transfers made after Dec. 31, 1981.

     Respondent determined that Royal and Maude had made gifts of
$240,540 before allowance for the $3,000 annual exclusion. Royal
was determined to have made a taxable gift of $237,540, while
Maude was determined to have made a taxable gift of $237,840.
This discrepancy appears to be the result of a computational
error by respondent.
                               - 15 -

the $62,016 reported, so that for purposes of computing the

tentative estate tax, an additional $85,584 in adjusted taxable

gifts should have been added to the taxable estate;7 and (ii) on

August 24, 1981, when Maude exchanged her 24 shares of FIC's

common stock for 3,000 shares of FIC's preferred stock, the fair

market value of the common stock was $540,540 ($22,522 per share)

and the fair market value of the preferred stock, $300,000

($100,000 per share).   Consequently, the Estate Tax Notice

determined that there was a taxable gift in the amount of

$237,540 ($240,540 less $3,000 annual exclusion), thereby

increasing the adjusted taxable gifts that are added to the

reported taxable estate for purposes of computing the tentative

estate tax.

H.   Discounts and Premiums

     1.   Minority Interests

     On both February 2, 1980, and August 24, 1981, each decedent

was a minority shareholder.

     Neither decedent had the power to compel FIC to purchase key

person insurance.

     2.   Absence of Swing Vote

     On February 2, 1980, no FIC shareholder could obtain voting


     7
       Any increase found in the fair market value of the 1980
Gifts will trigger an increase in taxable gifts of like amount,
because decedents' 1980 gift tax return has already taken into
account the annual exclusion provided by sec. 2503(b). Decedents
reported additional taxable gifts to Robert on their respective
gift tax returns for the first quarter of 1980 that are not at
issue in this case.
                                - 16 -

control of FIC through the receipt of 6 shares of issued and

outstanding FIC common stock.    On February 2, 1980, no

shareholder of FIC other than Robert could obtain voting control

of FIC through the receipt of 12 shares of issued and outstanding

FIC common stock.   Because only one person, Robert, could gain

control through the 1980 Gifts, no swing vote premium would have

been paid by a hypothetical third-party buyer of shares of FIC

owned by Maude and Royal.

     On August 24, 1981, voting control of FIC could not be

affected by the transfer of Maude and Royal's respective holdings

of FIC common stock, singularly or collectively.

     3.   Lack of Marketability

     On both February 2, 1980, and August 24, 1981:    (1) BKC had

not established a buy-back program or policy for acquiring Burger

King franchises; (2) high interest rates contributed to a

depressed market for the sale of Burger King franchises; and

(3) there was no readily available market for the stock of FIC.

Each of the foregoing factors contributed to a lack of

marketability of FIC stock.

     4.   Combined Minority and Lack of Marketability Discount

     On February 2, 1980, the fair market value of each

decedent’s gratuitous transfer of 6 shares of FIC's common stock

was subject to a combined minority and marketability discount of

40 percent.   On August 24, 1981, the fair market value of the 24

shares of FIC's common stock transferred by each decedent in the
                              - 17 -

Recapitalization was subject to a combined minority and

marketability discount of 40 percent.

     5.   Robert Furman a Key Person

     At the times of the 1980 Gifts and the Recapitalization,

Robert actively managed FIC, and no succession plan was in

effect.   FIC employed no individual who was qualified to succeed

Robert in the management of FIC.    Robert's active participation,

experience, business contacts,8 and reputation as a Burger King

franchisee contributed to the value of FIC.    Specifically, it was

Robert whose contacts had made possible the 1976 Purchase, and

whose expertise in selecting sites for new restaurants and

supervising their construction and startup were of critical

importance in enabling FIC to avail itself of the expansion

opportunities created by the Territorial Agreement.   The

possibility of Robert's untimely death, disability, or

resignation contributed to uncertainty in the value of FIC's

operations and future cash-flows.   Although a professional

manager could have been hired to replace Robert, the following

risks would still have been present:    (i) Lack of management

until a replacement was hired; (ii) the risk that a professional

manager would require higher compensation than Robert had

received; and (iii) the risk that a professional manager would

not perform as well as Robert.


     8
       Robert developed close friendships with the cofounders of
BKC, especially James McLamore, along with Art Rosewall, BKC's
chief executive officer.
                              - 18 -

     Robert was a key person in the management of FIC.   His

potential absence or inability were risks that had a negative

impact on the fair market value of FIC.   On February 2, 1980, the

fair market value of each decedent's gratuitous transfer of 6

shares of FIC's common stock was subject to a key-person discount

of 10 percent.   On August 24, 1981, the fair market value of the

24 shares of FIC's common stock transferred by each decedent in

the Recapitalization was subject to a key-person discount of 10

percent.

                    ULTIMATE FINDINGS OF FACT

     On February 2, 1980, the fair market value of the gratuitous

transfer of 6 shares of FIC's common stock by each of Maude and

Royal to Robert was $82,859 ($13,810 per share).

     On August 24, 1981, when Maude and Royal each exchanged 24

shares of FIC common stock for 3,000 shares of FIC's preferred

stock, the fair market value of the common stock transferred by

each of them was $424,552 ($17,690 per share).

                              OPINION

A.   Fair Market Value of FIC Stock

     Section 2501(a) provides for a tax on gifts by individuals.

Section 2512(a) provides that the value of a gift of property at

the date of the gift shall be considered the amount of the gift.

     The principal issues we must decide in this case are the

value of the shares of common stock in FIC that decedents

gratuitously transferred to Robert on February 2, 1980, and the
                             - 19 -

amount, if any, of the excess of the value of the shares of

common stock that decedents surrendered in the Recapitalization

of August 24, 1981, over the value of the shares of preferred

stock that they received in the exchange.   The amount of any such

excess, by augmenting the value of Robert's common stock in FIC,

would be a taxable gift from decedents to Robert.   See Estate of

Trenchard v. Commissioner, T.C. Memo. 1995-121 supplemented by

T.C. Memo. 1995-232; sec. 25.2511-1(h)(1), Gift Tax Regs.

     Valuation is a question of fact, and the trier of fact must

weigh all relevant evidence to draw the appropriate inferences.

Commissioner v. Scottish Am. Inv. Co., 323 U.S. 119, 123-125

(1944); Helvering v. National Grocery Co., 304 U.S. 282, 294-295

(1938); Anderson v. Commissioner, 250 F.2d 242, 249 (5th Cir.

1957), affg. in part and remanding in part T.C. Memo. 1956-178;

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

Skripak v. Commissioner, 84 T.C. 285, 320 (1985).

     Fair market value is defined for Federal estate and gift tax

purposes as the price that a willing buyer would pay a willing

seller, both having reasonable knowledge of all the relevant

facts and neither being under compulsion to buy or to sell.

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

sec. 20.2031-1(b), Estate Tax Regs.); see also Snyder v.

Commissioner, 93 T.C. 529, 539 (1989); Estate of Hall v.

Commissioner, 92 T.C. 312, 335 (1989).   The willing buyer and the

willing seller are hypothetical persons, rather than specific
                               - 20 -

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 Curry v. United States, 706 F.2d 1424, 1428-

1429, 1431 (7th Cir. 1983); Estate of Bright v. United States,

658 F.2d 999, 1005-1006 (5th Cir. 1981); Estate of Newhouse v.

Commissioner, supra at 218; see also Estate of Watts v.

Commissioner, 823 F.2d 483, 486 (11th Cir. 1987), affg. T.C.

Memo. 1985-595.    The hypothetical willing buyer and willing

seller are presumed to be dedicated to achieving the maximum

economic advantage.    Estate of Curry v. United States, supra at

1428; Estate of Newhouse v. Commissioner, supra at 218.      This

advantage must be achieved in the context of market and economic

conditions at the valuation date.    Estate of Newhouse v.

Commissioner, supra at 218.

     For Federal gift tax purposes, the fair market value of the

subject property is determined as of the date of the gift;

ordinarily, no consideration is given to any unforeseeable future

event that may have affected the value of the subject property on

some later date.    Sec. 2512(a); sec. 20.2031-1(b), Estate Tax

Regs.; see also First Natl. Bank v. United States, 763 F.2d 891,

893-894 (7th Cir. 1985); Estate of Newhouse v. Commissioner,

supra at 218; Estate of Gilford v. Commissioner, 88 T.C. 38, 52

(1987).

     Special rules apply to the valuation of the stock of a
                              - 21 -

closely held corporation.   While listed market prices are the

benchmark in the case of publicly traded stock, recent arm’s-

length transactions generally are the best evidence of fair

market value in the case of unlisted stock.    Estate of Andrews v.

Commissioner, 79 T.C. 938, 940 (1982); Duncan Indus., Inc. v.

Commissioner, 73 T.C. 266, 276 (1979).   Where the value of

unlisted stock cannot be determined from actual sale prices,

value is determined by taking into consideration the value of

listed stock in comparable corporations engaged in the same or a

similar line of business, as well as all other factors bearing on

value, including analysis of fundamentals.    Sec. 2031(b); Estate

of Newhouse v. Commissioner, supra at 217; Estate of Hall v.

Commissioner, supra at 336.   The factors that we must consider

are those that an informed buyer and an informed seller would

take into account.   Hamm v. Commissioner, 325 F.2d 934, 940 (8th

Cir. 1963), affg. T.C. Memo. 1961-347.   Rev. Rul. 59-60, 1959-1

C.B. 237, "has been widely accepted as setting forth the

appropriate criteria to consider in determining fair market

value", Estate of Newhouse v. Commissioner, supra at 217; it

lists the following factors to be considered, which are virtually

identical to those listed in section 20.2031-2(f), Estate Tax

Regs.:

       (a) The nature of the business and the history of the
     enterprise from its inception.
       (b) The economic outlook in general and the condition
     and outlook of the specific industry in particular.
       (c) The book value of the stock and the financial
     condition of the business.
                                - 22 -

       (d) The earning capacity of the company.
       (e) The dividend-paying capacity.
       (f) Whether or not the enterprise has goodwill or
     other intangible value.
       (g) Sales of the stock and the size of the block of
     stock to be valued.
       (h) The market price of stocks of corporations
     engaged in the same or a similar line of business
     having their stocks actively traded in a free and open
     market, either on an exchange or over-the-counter.
     [Rev. Rul. 59-60, 1959-1 C.B. at 238-239.]

Because valuation may not be reduced to the rote application of

formulas, and because of the imprecision inherent in determining

fair market value of stock that lacks a public market (and the

Solomon-like pronouncements that often follow), we again remind

the parties that these matters are better resolved by agreement

rather than trial by ordeal in which conflicting opinions of the

experts are pitted against each other.   See Estate of Hall v.

Commissioner, supra; Messing v. Commissioner, 48 T.C. 502, 512

(1967); see also Buffalo Tool & Die Manufacturing Co. v.

Commissioner, 74 T.C. 441 (1980).

     As is customary in valuation cases, the parties rely

primarily on expert opinion evidence to support their contrary

valuation positions.   We evaluate the opinions of experts in

light of the demonstrated qualifications of each expert and all

other evidence in the record.    Anderson v. Commissioner, supra;

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 (9th Cir.

1986), affg. in part and revg. in part T.C. Memo. 1983-200),
                               - 23 -

affg. in part and revg. in part T.C. Memo. 1986-318.       Expert

testimony sometimes aids the Court in determining values and

sometimes it does not.   See, e.g., Estate of Halas v.

Commissioner, 94 T.C. 570, 577 (1990); Laureys v. Commissioner,

92 T.C. 101, 129 (1989) (expert testimony is not useful when the

expert is merely an advocate for the position argued by one of

the parties).   We are not bound by the formulas and opinions

proffered by an expert witness and will accept or reject expert

testimony in the exercise of sound judgment.     Helvering v.

National Grocery Co., supra at 295; Anderson v. Commissioner, 250

F.2d at 249; Estate of Newhouse v. Commissioner, 94 T.C. at 217;

Estate of Hall v. Commissioner, 92 T.C. at 338.    Where necessary,

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) (citing Silverman

v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C.

Memo. 1974-285); Ames v. Commissioner, T.C. Memo. 1990-87.          Where

experts offer divergent estimates of fair market value, we decide

what weight to give these estimates by examining the factors they

used in arriving at their conclusions.    Casey v. Commissioner, 38

T.C. 357, 381 (1962).    We have broad discretion in selecting

valuation methods.   Estate of O'Connell v. Commissioner, 640 F.2d

249, 251 (9th Cir. 1981), affg. on this issue and revg. in part

T.C. Memo. 1978-191, and the weight to be given the facts in

reaching our conclusion because “finding market value is, after

all, something for judgment, experience, and reason”, Colonial
                                - 24 -

Fabrics, Inc. v. Commissioner, 202 F.2d 105, 107 (2d Cir. 1953),

affg. a Memorandum Opinion of this Court dated January 22, 1951.

Moreover, while we may accept the opinion of an expert in its

entirety, Buffalo Tool & Die Manufacturing Co. v. Commissioner,

supra at 452, we may be selective in the use of any part of such

opinion, or reject the opinion in its entirety, Parker v.

Commissioner, supra at 561.     Finally, because valuation

necessarily results in an approximation, the figure at which this

Court arrives need not be one as to which there is specific

testimony if it is within the range of values that may properly

be arrived at from consideration of all the evidence.        Silverman

v. Commissioner, supra at 933; Alvary v. United States, 302 F.2d

790, 795 (2d Cir. 1962).

     1.   Respondent's Expert

     Respondent relies on the expert report of Hugh Jackson

Shelton (Mr. Shelton).   Mr. Shelton has been employed by

respondent as a valuation engineer since 1987, in which time he

has completed approximately 10 business valuations.    Mr. Shelton

holds a bachelor of science degree in industrial engineering from

the University of Tennessee and a master of arts degree in

business management from Webster University.

     In the expert report submitted by respondent, Mr. Shelton

represents that he has certain qualifications and credentials to

perform business valuations that he does not in fact have,

including courses on valuation that he has not successfully

completed.   Mr. Shelton's report also suggests that he is a
                               - 25 -

member of the American Society of Appraisers, to which he has

never belonged.    Since Mr. Shelton has not demonstrated that he

is qualified to perform a business valuation, we will evaluate

his opinion accordingly.    See Anderson v. Commissioner, supra at

249.

       Mr. Shelton used a capitalized earnings method to value the

FIC stock at the time of the 1980 Gifts.    Using the capital asset

pricing model (CAPM), Mr. Shelton calculated a cost of equity and

then computed FIC's weighted average cost of capital (WACC).

Earnings before interest, depreciation, and taxes (EBIDT), a

variant of EBITDA (earnings before interest, taxes, depreciation,

and amortization), were then capitalized using the WACC to arrive

at a total enterprise value.    In valuing the 1980 Gifts,

Mr. Shelton projected 12-month earnings from FIC's 10-month

income statement for FY 1979, which he then capitalized to arrive

at a February 1980 enterprise value.    Mr. Shelton determined

August 1981 enterprise value by capitalizing FY 1980 EBIDT and

then adding 5 percent to reflect FIC's value in August 1981.

       After determining that FIC had a beta of 1.0., Mr. Shelton

used the standard CAPM formula to arrive at a cost of equity of

18.44 percent.    See description and discussion of beta infra pp.

28-30.    Finding that Burger King was the number two fast food

chain, Mr. Shelton reasoned that Burger King would be no more or

less volatile than the fast food industry as a whole, justifying

a beta of 1.0 for FIC's common stock.    In his report, Mr. Shelton
                               - 26 -

gave no further explanation of his choice of beta and did not

provide evidence that he had investigated the betas of comparable

public companies, or even of BKC, on which his selection of beta

was based.9

     After determining a cost of equity using CAPM, Mr. Shelton

purported to compute the WACC of FIC in order to arrive at a

capitalization rate.   Without providing any explanation, Mr.

Shelton computed WACC in a manner that did not conform to the

accepted method.   See Brealey & Myers, Principles of Corporate

Finance 465-469 (4th ed. 1991); Pratt et al., Valuing a Business

180, 184, 189-190 (3d ed. 1996).   First, Mr. Shelton modified the

WACC formula by weighting FIC's debt and equity based on book

value, rather than market value, to arrive at a WACC of 11.0

percent.    Considering that the parties have stipulated risk-free

rates of 11.86 percent and 14.4 percent in 1980 and 1981,

respectively, it is obvious that Mr. Shelton's result is

incorrect.

     The calculation of WACC provides an after-tax figure,

because it is computed using an estimate of the firm's marginal

corporate income tax rate.   After finding that FIC had a WACC of

11.0 percent, Mr. Shelton tried to convert WACC to a pretax

figure.    Mr. Shelton calculated what he referred to as a pretax

     9
       At the time of the Recapitalization, as discussed supra,
BKC was a wholly owned subsidiary of Pillsbury. Because BKC
stock did not trade publicly, it did not have a beta. See
discussion and explanation of beta, infra pp. 28-30.
                              - 27 -

WACC of 18.4 percent, which he then used to value FIC.    Not only

is the calculation of pretax WACC not accepted in the financial

community; we are puzzled as to why Mr. Shelton would want to

apply a marginal tax rate to compute an after-tax figure, only to

then attempt to convert it back to a pretax figure.   Finally, we

question Mr. Shelton's use of a 40-percent marginal tax rate in

computing WACC, when the marginal tax rates derived from FIC's

income statements for FY 1979, FY 1980, and FY 1981 are 4.96

percent, 1.25 percent, and 31.69 percent, respectively.

     After capitalizing the FY 1979 and FY 1980 EBIDT’s of FIC,

Mr. Shelton arrived at total enterprise values of $2,764,114,

$3,481,369, and $3,655,427 on February 2, 1980, September 30,

1980, and August 24, 1981, respectively.   Mr. Shelton then

discounted the 1980 and 1981 enterprise values by 17 percent to

reflect a combined minority, lack of marketability, and “control

premium discount [sic]”, to arrive at a fair market value of

$22,942 per share as of February 1980 and $30,340 as of August

1981.   Applying the annual exclusion to the 1981 gifts only,

acceptance of respondent's position would result in taxable gifts

by each decedent of $137,652 and $425,160 in 1980 and 1981,

respectively.   Understatements of taxable gifts by each decedent

would then amount to $75,636 and $425,160 for 1980 and 1981,

respectively.

     With the exception of his assessment of the prospects for

economic growth on the west coast of Florida, we reject, in toto,
                              - 28 -

Mr. Shelton's analysis and conclusions.    Although we do not rely

on any aspect of Mr. Shelton's opinion, we will discuss some of

the major shortcomings for the sake of completeness.

     We do not believe that CAPM and WACC are the proper

analytical tools to value a small, closely held corporation with

little possibility of going public.    CAPM is a financial model

intended to explain the behavior of publicly traded securities

that has been subjected to empirical validation using only

historical data of the two largest U.S. stock markets.    Raabe &

Whittenburg, "Is the Capital Asset Pricing Model Appropriate in

Tax Litigation?", Valuation Strategies 12-15, 36 (Jan./Feb.

1998); see Brealey & Myers, supra at 166 (citing Fama & MacBeth,

"Risk, Return and Equilibrium: Empirical Tests," 81 Journal of

Political Economy 607-636 (1973)).     Contrary to the assumptions

of CAPM, the market for stock in a closely held corporation like

FIC is not efficient, is subject to substantial transaction

costs, and does not offer liquidity.    Mr. Shelton did not

increase our confidence in his choice of method when he computed

the cost of equity using an unsubstantiated risk-free rate and

risk premium that were not in conformance with the amounts

stipulated, and when he arbitrarily assigned a beta to FIC's

common stock.   Beta, a measure of systematic risk,10 is a


     10
       For purposes of capital market theory, risk is defined as
the degree of uncertainty that expected future returns will be
realized. Capital market theory divides risk into two
components: Systematic risk and unsystematic risk. Systematic,
                                                   (continued...)
                               - 29 -

function of the relationship between the return on an individual

security and the return on the market as a whole.     Pratt et al.,

supra at 166.   Betas of public companies are frequently

published, or can be calculated based on price and earnings data.

Because the calculation of beta requires historical pricing data,

beta can not be calculated for stock in a closely held

corporation.    The inability to calculate beta is a significant

shortcoming in the use of CAPM to value a closely held

corporation; this shortcoming is most accurately resolved by

using the betas of comparable public companies.      Id. at 175.

Mr. Shelton's unsubstantiated statement regarding the standing of

BKC in the fast food industry is hardly a sufficient basis for

arriving at a beta of 1.0 for FIC.      Mr. Shelton did not provide

any evidence that he had researched or calculated the betas of

BKC or any other public company.    He seems to have assumed,

without further explanation, that FIC and BKC were comparable



     10
      (...continued)
or market, risk represents the sensitivity of the future returns
from a given asset to the movements of the market as a whole.
Unsystematic, or unique, risk reflects those elements of risk
that are specific to the asset held, such as company
characteristics, industry conditions, and the type of investment
interest held. Capital market theory assumes that investors hold
or have the ability to hold, diversified portfolios that
eliminate, on a portfolio basis, the effects of unsystematic
risk. Consequently, since capital market theory assumes that an
investor holding a diversified portfolio will encounter only
systematic risk, the only type of risk for which an investor can
be compensated, is systematic risk, the degree of which can be
measured by beta. Brealey & Myers, Principles of Corporate
Finance 137-138, 143-144 (4th ed. 1991); Pratt et al., Valuing a
Business 166 (3d ed. 1996).
                               - 30 -

companies for this purpose.   Finally, we reject Mr. Shelton's

methodology for estimating FIC's beta, since it was based on

BKC's industry standing and not on references to the volatility

of stock in FIC in comparison to the market as a whole.11   See

Brealey & Myers, supra at G2 (defining beta as a "measure of

market risk").

     Mr. Shelton's use and application of the WACC fares no

better under our scrutiny.    WACC is generally used to calculate a

discount rate that reflects the weighted average cost of each of

the components of a firm's capital structure.   To compute WACC,

it is necessary to know the market value of the firm's debt and

equity, which if known, would go far toward negating the need to

perform a valuation.   In computing WACC, Mr. Shelton used FIC's

book value weighting of debt and equity, rather than market

value, without justifying his departure.

     We also find fault with Mr. Shelton's computation of EBIDT

and the manner in which he arrives at an enterprise value as of

August 24, 1981.   Since the parties have stipulated the proper

EBIDTA amounts for the periods in question, we abstain from

further comment on Mr. Shelton's computation of EBIDT.   We do,


     11
       Mr. Shelton's conception of beta as a measure of the
relative volatility of a specific security in comparison to an
industry should not be confused with industry beta, which is
often used to calculate discount or capitalization rates.
Industry beta is calculated from the individual betas of a
portfolio of securities within the same industry and reflects the
market risk of that industry portfolio. See Brealey & Myers,
supra at 189. Unlike Mr. Shelton's method, industry beta focuses
on market risk.
                               - 31 -

however, question Mr. Shelton's failure to incorporate the

reported FY 1981 earnings of FIC into his August 24, 1981,

valuation; his estimate of 5-percent growth could hardly be

viewed as reasonable where actual EBIDTA growth for FY 1981 was

61 percent.12   We also fault Mr. Shelton's failure to deduct the

outstanding debt of FIC from his capitalization of EBIDT in

determining FIC's enterprise value.

     Mr. Shelton's report also contains detailed calculations

from which he attempts to determine the replacement cost of

building 10 Burger King restaurants.    We are unsure what

relevance such a calculation has to the valuation of a business

where value is determined by the prospect of future earnings

rather than net asset value.   Moreover, Mr. Shelton's use of 1992

data in computing replacement cost is of no relevance to the

valuation of stock in 1980 and 1981.

     Our final criticism of Mr. Shelton's report has little if

any bearing on his valuation conclusion but has again caused us

to doubt his expertise.   In his report, Mr. Shelton attempted to

analyze the FY 1979 and FY 1980 balance sheets of FIC.    Using the

FY 1979 balance sheet data of FIC, Mr. Shelton "projected" a 12-

month balance sheet for 1979 by substantially increasing the

amounts of some of the balance sheet items, without indicating

what items on the income statement would lead to such growth in

the amounts reported on the projected balance sheet.


     12
       Employing a larger growth factor would have led to a
higher valuation.
                                 - 32 -

     2.    Petitioners' Expert

     Petitioners rely on the expert report of Francis X. Burns

(Mr. Burns) and Brian R. Oliver (Mr. Oliver) of IPC Group, LLC

(IPC).    Messrs. Burns and Oliver are both experienced in business

valuation and, in addition to their undergraduate degrees, hold

master’s degrees in finance from Northwestern University's

Kellogg School of Management.     Although Messrs. Burns and Oliver

are not formally accredited as appraisers, we are satisfied that

they are qualified to perform a business valuation.    Fed. R.

Evid. 702; see Martin Ice Cream Co. v. Commissioner, 110 T.C.

___, ___ (1998) (slip op. at 52).

     IPC valued the FIC shares using two approaches:    A

capitalized income method (income method) and a multiple of

EBITDA method (EBITDA multiple method).

     Applying the income method, IPC determined per-share values

for the stock transferred in the 1980 Gifts and the 1981

Recapitalization of $7,388 and $4,273, respectively.    Value was

determined under the income method by capitalizing a measure of

normalized earnings, adding the fair market value of nonoperating

assets, and then applying a marketability discount to the per-

share value.   IPC determined normalized earnings using net

operating cash-flow available to equity holders (NCF), adjusted

to reflect noncash charges.   In valuing the 1980 Gifts, IPC used

the NCF for FY 1979, a 10-month fiscal year.    A weighted average

of the net operating cash-flows for the previous 3 years was used
                             - 33 -

to compute the August 1981 fair market value of the stock.

     IPC applied CAPM principles to determine the rate of return

an investor would expect in February 1980 and August 1981.   IPC

used market data from Ibbotson Associates13 and determined that

the expected rate of return an investor in FIC stock would demand

would be equal to the sum of the applicable risk-free rate, risk

premium, and small-stock premium, as well as an additional

premium to account for the risk specific to FIC.   To reflect the

effect of nominal long-term earnings growth, IPC subtracted a

growth factor14 from the expected rate of return and determined a

capitalization rate of 21.38 percent for valuing the 1980 Gifts

and a 25.50 percent capitalization rate for valuing the stock

transferred in the Recapitalization.

     After capitalizing normalized earnings to determine

enterprise value from operations, IPC added the market value of

FIC's nonoperating assets to determine total equity value.   IPC

computed a per-share equity value of $11,366 for the 1980 Gifts

     13
       The parties stipulated that the Ibbotson Associates
figures used by IPC were correct for the dates in question. They
have not stipulated: (1) The proper capitalization rate; (2) the
correctness of any FIC specific risk premium; or (3) the
correctness of any particular method of computing a
capitalization rate.
     14
       IPC determined growth factors of 8 percent for the 1980
Gifts and 7 percent for the Recapitalization, on the basis of the
long-term inflation outlook of the Value Line Investment Survey
on Feb. 1, 1980, and Aug. 21, 1981. Apparently, IPC did not take
into account the likelihood of real earnings growth attributable
to FIC's ability to open more restaurants in its expanding
market, as well as the likelihood of increasing sales in the
existing restaurants.
                              - 34 -

and $6,574 per share for the Recapitalization.   IPC then

determined that a marketability discount of 35 percent should be

applied because of the following factors:    (1) The transactions

at issue involved minority interests, which are harder to sell;

(2) the size of FIC precluded the possibility of a public

offering; and (3), as of the relevant dates, no dividends had

ever been paid by FIC on its common stock.   After applying the

marketability discount, IPC determined that the fair market value

of the stock, per share, was $7,388 in 1980 and $4,273 in 1981.

In comparison, book value per share after applying a 30-percent

minority interest discount and a 35-percent marketability

discount was determined to be $4,703 in 1980 and $5,048 in 1981.

Applying book value as a floor in the valuation, IPC determined

that use of the income method resulted in an undervaluation.

     Petitioners have relied upon IPC's second method of

valuation, the EBITDA multiple method.   Under this method, a

multiple of net earnings before interest, taxes, depreciation,

and amortization (EBITDA) was used to determine total enterprise

value.   IPC determined the EBITDA of FIC for the FY 1979 through

FY 1981.   In valuing the 1980 Gifts, IPC used a multiple of FY

1979 EBITDA; a multiple of the weighted average of EBITDA for FY

1979 through FY 1981 was used to value the stock transferred in

the Recapitalization.   The parties have stipulated FIC's EBITDA

for FY 1979 through FY 1981, using the figures determined by IPC.

      IPC determined that a multiple of 4 to 6 times EBITDA was a
                              - 35 -

commonly used valuation guideline that should be applied in this

case.   IPC determined that high interest rates, a sluggish

economy, and the high returns required by investors in small

companies were factors that would depress the value of FIC stock,

leading to a multiple in the order of 4.0 to 4.5, while the

modestly successful sales growth of FIC between 1979 and 1981

suggested a multiple of 5.0 to 5.5.    IPC concluded that FIC

should be valued using an EBITDA multiple of 5.0 for both 1980

and 1981.

     After determining total enterprise value, IPC made various

adjustments, such as subtracting the value of outstanding debt,

to determine total equity value, which was then converted to

equity value per share.   Equity value per share was determined to

be $20,842 in February 1980 and $26,245 in August 1981.    After

applying a 30-percent minority discount, a 35-percent

marketability discount, and a 10-percent key-person discount, or

a total of 59.05 percent in discounts, IPC determined a fair

market value per share of $8,535 in February 1980 and $10,747 in

August 1981; following these conclusions would result in an

overstatement of $10,806 for Royal and Maude's 1980 taxable

gifts, and zero taxable gifts for their transfers in 1981.

     We found Messrs. Burns and Oliver to be qualified,

experienced, and credible expert witnesses.    We agree with them

that valuing FIC using the income method would not be appropriate

inasmuch as the income method produces a value less than book
                              - 36 -

value for August 1981.   While it is odd that the use of an

accepted method like this one would produce a value lower than

book value, this oddity is explained by IPC's incorrect

computation of book value for August 1981,15 and, we suspect, an

overstated capitalization rate.

     Our major criticism of IPC's application of the income

method was their construction of the capitalization rate.     In

deducting a long-term growth factor from the expected rate of

return, IPC deducted 8 percent for the 1980 capitalization rate

and 7 percent for the 1981 rate.   Since these figures are

identical to the inflation estimates of the Value Line Investment

Survey that were cited by IPC in its report, the growth factors

used represented only the expectation of nominal earnings growth:

the growth in earnings caused by price inflation.   FIC was a

growing business; real sales and earnings growth could be

expected, both from increased volume at existing restaurants and

from the construction of new stores in the Exclusive Territory,



     15
       IPC calculated discounted book value for August 1981
using the FY 1981 balance sheet. Discounted book value of the
common stock was calculated as total stockholders' equity, less
$600,000 to reflect the preferred stock issued in the
Recapitalization, and then minority and marketability discounts
were applied. Because the relevant valuation period is
immediately before the Recapitalization, at which time only one
class of stock existed, it was improper to use the unadjusted FY
1981 balance sheet figures reflecting the capital structure of
FIC after it had been recapitalized. Discounted book value
should have been computed as total stockholder's equity, subject
to the minority and marketability discounts, which would have
produced a discounted book value per share of $7,778 per share,
rather than the $5,048 per share determined by IPC.
                               - 37 -

which was an area of rapid population growth.

     We accept IPC's valuation under the EBITDA multiple approach

as the most accurate measurement of value available, but we do

not accept the percentages of minority interest and marketability

discounts that were applied.   We also reject IPC's use of a

multiple rate of 5.0 as unreasonable in light of FIC's growth

potential and the prevailing economic conditions.

     At time of the Recapitalization, FIC had only nine Burger

King restaurants open but held a right of first refusal that

provided FIC with a protected territory in four southwest Florida

counties that were experiencing rapid population growth.     Because

many of the FIC restaurants were new at the time of the

Recapitalization, we think that a prospective purchaser of stock

in FIC would expect earnings from existing restaurants to

increase as an area presence was established and store sales were

increased; the fact that FIC had the ability to block potential

Burger King franchisees from entering its market would only

strengthen such an expectation.   Since the exercise of the right

of first refusal would enable FIC to open additional restaurants

in the Protected Territories, we think that a prospective

purchaser would be bullish regarding FIC's potential for earnings

growth from expansion.

     Because we think that IPC has not properly taken into

account FIC's potential for growth, we find 6.0 times EBITDA to

be the proper multiple to be employed in the valuation of the FIC
                               - 38 -

stock.    We approve petitioners' weighting of EBITDA in

determining an August 1981 value, since we believe that the use

of 3 years of financial statements provided a more accurate

earnings picture than the capitalization of any single year.16

Finally, we approve of the adjustments made by IPC after

calculating a multiple of EBITDA.   We find that the stock in FIC

had an equity value per share of $25,574 in February 1980 and

$32,759 in August 1981.

     3.    Discounts

            a.   Minority Interest Discount

     A minority interest discount reflects the minority

shareholder's inability to compel either the payment of dividends

or liquidation in order to realize a pro rata share of the

corporation's net earnings or net asset value.    Discounts for a

minority interest and for lack of marketability are conceptually

distinct, and the appropriate percentage rate of each of them is

a question of fact.    Estate of Newhouse v. Commissioner, 94 T.C.

at 249.

     Because the blocks of stock transferred in the 1980 Gifts

and in the 1981 Recapitalization were minority interests, it is

appropriate to apply a minority interest discount in their

valuation.    Since the willing buyer-willing seller test is an

objective test, requiring that potential transactions be analyzed



     16
       FY 1979, FY 1980, and FY 1981 EBITDA were weighted 10
percent, 30 percent, and 60 percent, respectively.
                               - 39 -

from the viewpoint of a hypothetical seller, whether a block of

stock is a minority interest must be determined without regard to

the identity and holdings of the transferee.   See Estate of Watts

v. Commissioner, 823 F.2d 483, 486-487 (11th Cir. 1987), affg.

T.C. Memo. 1985-595; Estate of Bright v. United States, 658 F.2d

at 1005-1006.    Consequently, the fact that the 1980 Gifts enabled

Robert Furman to gain control of FIC can not be considered.

     Both parties agree that a minority discount should be

applied in valuing both the 1980 Gifts and 1981 transfers by

decedents in the Recapitalization, although we do not understand

how respondent's expert determined that both a minority discount

and a control premium should be applied, since the two are

essentially opposites.   We recognize that a hypothetical investor

would not be willing to purchase a minority interest in FIC

without a significant discount; no matter how successful the

corporation, a minority interest in a corporation that does not

pay dividends and whose stock does not have a ready market is of

limited value.

     Petitioners' expert cited three articles on minority

discounts.   The first, Bolten, "Discounts for Stocks of Closely

Held Corporations", 129 Tr. & Est. 47 (Dec. 1990), summarized

nine studies regarding discounts for minority interests that

indicated a mean discount of 29.63 percent.    The second article,

"Survey Shows Trend Towards Larger Minority Discounts", 10 Est.

Planning 281 (Sept. 1983), summarized the results of a study
                               - 40 -

conducted by H. Calvin Coolidge that compared the actual sales of

minority interests in closely held corporations to the reported

book value of those corporations.    The Coolidge study found an

average discount of 39.9 percent and a median discount of 39

percent against book value.    The third article cited by IPC,

Pratt, “Discounts and Premia”, in Valuation of Closely Held

Companies and Inactively Traded Securities 38 (Dec. 5, 1989) (on

file with The Institute of Chartered Financial Analysts),

summarized several empirical studies regarding both minority and

marketability discounts.   By analyzing control premium data,

Pratt found an implied minority discount of approximately 33

percent for 1980 and 1981 in the studied transactions.    Based on

the cited articles, IPC determined that a 30-percent minority

interest discount was appropriate.

     We do not believe that any control premium is warranted.      We

reject respondent's argument that a swing vote potential existed,

since we have found that the transferred shares did not have

swing vote potential.   We are required to value the shares as if

they were transferred to a hypothetical buyer and are not

permitted to take into account the circumstances of the actual

transferee in valuing the shares.

          b.   Marketability Discount

     Both petitioners and respondent acknowledge the necessity of

applying a marketability discount in the valuation but disagree

as to the proper percentage.    A lack of marketability discount
                               - 41 -

reflects the fact that there is no ready market for shares in a

closely held corporation.   Ascertaining the appropriate discount

for limited marketability is a factual determination.   Critical

to this determination is an appreciation of the fundamental

elements of value that are used by an investor in making his or

her investment decision.    Some of the relevant factors include:

(1) The cost of a similar company's stock; (2) an analysis of the

corporation's financial statements; (3) the corporation's

dividend-paying capacity and dividend payment history; (4) the

nature of the corporation, its history, its industry position,

and its economic outlook; (5) the corporation's management; (6)

the degree of control transferred with the block of stock to be

valued; (7) restrictions on transferability; (8) the period of

time for which an investor must hold the stock to realize a

sufficient return; (9)the corporation's redemption policy; and

(10) the cost and likelihood of a public offering of the stock to

be valued.   See Estate of Gilford v. Commissioner, 88 T.C. 38, 60

(1987); Northern Trust Co. v. Commissioner, 87 T.C. 349, 383-389

(1986).

     The factors limiting the marketability of stock in FIC in

February 1980 and August 1981 included the following:   (1) FIC

had never paid dividends on its common stock; (2) the corporation

was managed and controlled by one individual; (3) the blocks of

stock to be transferred were minority interests; (4) a long

holding period was required to realize a return; (5) FIC had no
                               - 42 -

custom or policy of redeeming common stock; (6) because FIC's

annual sales were only in the $7 million range, it was not likely

to go public; and (7) there was no secondary market for FIC

stock.    While FIC had significant potential for controlled

growth, a healthy balance sheet, and robust earnings growth, we

find the factors limiting marketability to be significant.

     In concluding that a 35-percent marketability discount

should be applied, petitioners' expert cited four articles,

including three studies on the sale of restricted stock17 that

have been frequently brought to the attention of this Court.

See, e.g., Estate of Jung v. Commissioner, 101 T.C. 412, 435-436

(1993); Mandelbaum v. Commissioner, T.C. Memo. 1995-255 (1995),

affd. without published opinion 91 F.3d 124 (3d Cir. 1996);

Estate of Lauder v. Commissioner, T.C. Memo. 1992-736; Estate of

Friedberg v. Commissioner, T.C. Memo. 1992-310; Estate of Berg v.

Commissioner, T.C. Memo. 1991-279, affd. in part and revd. and

remanded in part 976 F.2d 1163 (8th Cir. 1992); Estate of

O'Connell v. Commissioner, T.C. Memo. 1978-191, affd. in part and

revd. in part 640 F.2d 249 (9th Cir. 1981).    The first restricted

stock study, Gelman, “An Economist-Financial Analyst's Approach

to Valuing Stock of a Closely-Held Company”, 36 J. Taxn. 353

(June 1972), studied the transactions of four large, closed-end


     17
       Restricted stock is stock acquired from an issuer in a
transaction exempt from the registration requirements of the
Federal securities laws. Sales of restricted stock are generally
restricted within the first 2 years after issuance.
                              - 43 -

publicly traded investment companies that specialized in

restricted securities.   The study found mean marketability

discounts of 33 percent after analyzing 89 restricted stock

investments by the four investment companies.    The second study,

Moroney, "Most Courts Overvalue Closely Held Stocks", 51 Taxes

144 (Mar. 1973), is based on 10 registered investment companies

that held a total of 146 blocks of restricted equity securities.

The Moroney study found an average discount on the restricted

stock transactions of 35.6 percent.    The third study, Maher,

"Discounts for Lack of Marketability for Closely Held Business

Interests", 54 Taxes 562 (Sept. 1976), is based on reports filed

with the Securities and Exchange Commission by four mutual fund

companies reporting their restricted stock transactions.    The

Maher study found a mean discount of 34.73 percent.    The final

study cited was an IPO study, Emory, "The Value of Marketability

as Illustrated in Initial Public Offerings of Common Stock

February 1992 through July 1993", Bus. Valuation Rev. 3 (Mar.

1994).   The Emory study found an average marketability discount

of 46 percent after comparing the share price in private

transactions that occurred within 5 months of an IPO by the same

corporation.   We find petitioners’ reliance on the restricted

stock studies to be misplaced, since those studies analyzed only

restricted stock that had a holding period of 2 years.    Inasmuch

as we expect the investment time horizon of an investor in the

stock of a closely held corporation like FIC to be long term, we
                               - 44 -

do not believe that marketability concerns rise to the same level

as a security with a short-term holding period like restricted

stock.18   In light of the foregoing, we find no persuasive

evidence in the record to support our reliance on the restricted

stock studies in determining an appropriate marketability

discount.19

           c.   Combined Minority and Lack of Marketability
                Discount

     Respondent has chosen to apply a combined minority and lack

of marketability discount of 17 percent, while petitioners seek a

minority discount of 30 percent and a marketability discount of

35 percent, which would result in a combined discount of

approximately 54.5 percent.   While we take into account the

articles cited by petitioners, we are by no means bound by the

report of petitioners' expert.   We also recognize that while the

minority and marketability discounts may be conceptually

distinct, Estate of Newhouse v. Commissioner, 94 T.C. at 249

(1990), the boundaries are often less clear in practice, and the

empirical studies cited by petitioners may in fact reflect the



     18
       That all investors have identical investment horizons is
one of the most widely criticized assumptions of CAPM. See
Gilson, "Value Creation by Business Lawyers: Legal Skills and
Asset Pricing", 94 Yale L.J. 239, 252 (1984).
     19
       For further discussion and criticism of the use of the
Moroney, Maher, and Emory studies to support the application of a
marketability discount in the valuation of stock in a closely
held corporation, see Mandelbaum v. Commissioner, T.C. Memo.
1995-255, affd. without published opinion 91 F.3d 124 (3d Cir.
1996).
                               - 45 -

resulting uncertainties; see e.g., Dockery v. Commissioner, T.C.

Memo. 1998-114 (40-percent combined minority and marketability

discount); Estate of Mitchell v. Commissioner, T.C. Memo. 1997-

461 (35-percent combined minority and marketability discount);

LeFrak v. Commissioner, T.C. Memo. 1993-526 (30-percent combined

discount); Estate of Gallo v. Commissioner, T.C. Memo. 1985-363

(36-percent marketability discount, with references to minority

issues).    We reject both respondent's combined discount of 17

percent and petitioners' separate 30-percent minority discount

and 35-percent marketability discount and conclude that a 40-

percent combined minority and marketability discount is

appropriate in this case.

            d.   Key-Person Discount

     Where a corporation is substantially dependent upon the

services of one person, and where that person would no longer be

able to perform services for the corporation by reason of death

or incapacity, an investor would expect some form of discount

below fair market value when purchasing stock in the corporation

to compensate for the loss of that key employee.    See Estate of

Huntsman v. Commissioner, 66 T.C. 861 (1976); Estate of Mitchell

v. Commissioner, supra; Estate of Feldmar v. Commissioner, T.C.

Memo. 1988-429; Estate of Yeager v. Commissioner, T.C. Memo.

1986-448.    Although FIC could have purchased key-person life

insurance on Robert's life, a minority shareholder could not

compel FIC to purchase such insurance, and FIC had no such
                              - 46 -

insurance in effect.

     We have found as facts that Robert was a key person in the

management of FIC, that FIC had no second layer of management,

and that Robert's contacts, experience, and managerial expertise

were critically important to the success of FIC.   While the

operation of a franchised Burger King restaurant might appear to

be formulaic, FIC was a growing organization, and Robert's

responsibilities extended well beyond the operation of existing

restaurants.   Moreover, since BKC had considerable control over

FIC's costs, expansion opportunities, competition, and ultimately

profits, Robert's personal relationships with the founders of BKC

were very helpful to the success of FIC.   We therefore agree with

petitioners and find that a key-person discount of 10 percent was

appropriate in determining the value of FIC stock as of February

1980 and August 1981.

     Accordingly, we allow a total discount of 46 percent in

valuing the FIC common stock transferred by decedents in 1980 and

1981, reflecting a combined minority and marketability discount

of 40 percent and a key-person discount of 10 percent.

     4.   Valuation Conclusions

     On the basis of the foregoing, we find that for purposes of

computing the taxable gifts of Royal and the taxable gifts and

taxable estate of Maude:   (1) The fair market value of 24 shares

of FIC common stock exchanged by each decedent in 1981 for

preferred stock of FIC was $424,552; (2) the fair market value of
                               - 47 -

the 3,000 shares of preferred stock of FIC received by each

decedent in the Recapitalization was $300,000; and (3) after

applying the $3,000 annual exclusion, each decedent made a

taxable gift to Robert in the Recapitalization in the amount of

$121,552.   For purposes of computing Maude's taxable estate, we

also find that the fair market value of 6 shares of FIC common

stock that she transferred to Robert in 1980 was $82,859,

resulting in a taxable gift of the same amount.

B.   Additions to Tax

     1.     Failures To File 1981 Gift Tax Returns

     For the 1981 taxable year, individuals who were required to

file a timely gift tax return but did not do so are subject to an

addition to tax equal to 5 percent of the amount of tax that

should have been shown on the return, for every month in which

the failure to file continues, subject to a maximum of 25

percent.    Sec. 6651(a)(1).

     The addition to tax for failure to timely file a gift tax

return may be avoided if the taxpayer can show that his failure

to file was due to reasonable cause and not due to willful

neglect.    Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241,

245 (1985); Logan Lumber Co. v. Commissioner, 365 F.2d 846, 853

(5th Cir. 1966) (citing Breland v. United States, 323 F.2d 492

(5th Cir. 1963)), affg. in part and remanding in part T.C. Memo.

1964-126; Home Builders Lumber Co. v. Commissioner, 165 F.2d 1009

(5th Cir. 1948); Estate of Reynolds v. Commissioner, 55 T.C. 172,
                              - 48 -

202-203 (1970).   Reasonable cause exists if a taxpayer exercised

ordinary business care and prudence and nevertheless did not

timely file a gift tax return.   Hollingsworth v. Commissioner, 86

T.C. 91, 108 (1986) (citing Estate of Kerber v. United States,

717 F.2d 454, 455 (8th Cir. 1983)); sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.; see Haywood Lumber & Mining Co. v.

Commissioner, 178 F.2d 769 (2d Cir. 1950).    Willful neglect means

a conscious, intentional failure or reckless indifference.

United States v. Boyle, supra at 245-246; sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.   Whether a failure to timely file a gift

tax return was due to reasonable cause, and not to willful

neglect, is a factual matter to be decided on the basis of the

facts and circumstances of each case.    The Commissioner’s

determination of an addition to tax is presumed to be correct and

must be disproven by the taxpayer.     Welch v. Helvering, 290 U.S.

111, 115 (1933); Epstein v. Commissioner, 53 T.C. 459, 477

(1969).

     “Courts have frequently held that `reasonable cause’ is

established when a taxpayer shows that he reasonably relied on

the advice of an accountant or attorney that it was unnecessary

to file a return, even when such advice turned out to have been

mistaken.”   United States v. Boyle, supra at 250 (citing United

States v. Kroll, 547 F.2d 393, 395-396 (7th Cir. 1977));

Commissioner v. American Association of Engg. Employment, Inc.,

204 F.2d 19, 21 (7th Cir. 1953); Burton Swartz Land Corp. v.
                              - 49 -

Commissioner, 198 F.2d 558, 560 (5th Cir. 1952); Haywood Lumber &

Mining Co. v. Commissioner, supra at 771; Orient Inv. & Fin. Co.

v. Commissioner, 166 F.2d 601, 602-603 D.C. Cir. (1948);

Hatfried, Inc. v. Commissioner, 162 F.2d 628, 634 (3d Cir. 1947);

Girard Inv. Co. v. Commissioner, 122 F.2d 843, 848 (3d Cir.

1941); Dayton Bronze Bearing Co. v. Gilligan, 281 F. 709, 712

(6th Cir. 1922)).   Thus in some cases, reliance on the opinion of

a tax adviser may constitute reasonable cause for failure to file

a return.   United States v. Boyle, supra at 250-251; Commissioner

v. Lane-Wells Co., 321 U.S. 219 (1944).

     Reasonable cause based upon reliance on the opinion of a

competent adviser has been found where the reliance concerned a

question of law, such as whether the filing of a return was

required; a taxpayer's reliance on an adviser ordinarily cannot

supplant his personal duty to ensure the timely filing of any

required return.

     When an accountant or attorney advises a taxpayer on a
     matter of tax law * * * it is reasonable for the
     taxpayer to rely on that advice * * *

          By contrast, one does not have to be a tax expert
     to know that tax returns have fixed filing dates and
     that taxes must be paid when they are due. [United
     States v. Boyle, supra at 251.]

Compare Haywood Lumber & Mining Co., supra at 770-771 (reasonable

cause for failure to file personal holding company surtax returns

where corporation had relied on competent certified public

accountant to prepare income tax returns) and Hollingsworth v.

Commissioner, supra at 108-109 (reasonable cause for failure to
                                - 50 -

file a gift tax return where attorneys advised the taxpayer that

no gift tax liability resulted from transfer of property at fair

market value) with Logan Lumber Co. v. Commissioner, supra at 853

(forgetting to file a tax return or failing through inadvertence

to see that it is filed does not constitute reasonable cause),

and Millette & Associates, Inc. v. Commissioner, 594 F.2d 121,

124-125 (5th Cir. 1979) ("responsibility for assuring a timely

filing is the taxpayer's"), affg. T.C. Memo. 1978-180.

     Decedents were advised not to file a gift tax return by

Messrs. Tishler and Shillington in connection with the transfers

made in the Recapitalization.    Messrs. Tishler and Shillington

concluded that the fair market values of the common stock

exchanged and the preferred stock received in the

recapitalization were equal, so that no taxable gift had been

made.

     Respondent argues that the addition to tax is nonetheless

applicable because decedents did not rely on a formal appraisal

of FIC to determine whether they had made taxable gifts.

Respondent's argument is unwarranted on the facts of this case.

As we have discussed in our findings of fact, supra, Mr. Tishler

is highly experienced in restaurant franchising, and at the time

of the Recapitalization, had served as FIC's attorney for

approximately 15 years.   Mr. Tishler's representation of FIC

included tax matters; for instance:      (1) In connection with the

1980 Gifts, he had advised decedents to file gift tax returns,
                                - 51 -

and had signed those returns as preparer; and (2), as discussed,

supra, Mr. Tishler had acted on FIC's behalf in requesting a

private letter ruling in connection with the Recapitalization.

Like Mr. Tishler, Mr. Shillington, a C.P.A., had a longstanding

relationship with FIC at the time of the Recapitalization.

Having prepared FIC's income tax returns and financial statements

since 1959, it is obvious that Mr. Shillington was intimately

familiar with FIC's financial affairs.    Moreover, as the

accountant to other Florida-based Burger King franchisees,

Mr. Shillington could draw on his knowledge of industry trends,

averages, and conventions in valuing FIC.    In sum, in light of

the expertise of Messrs. Tishler and Shillington, we think that

it was not unreasonable for decedents to rely on their advice not

to file a gift tax return.

       That decedents received advice that ultimately proved

erroneous does not alter our conclusion; valuation is an area of

inherent uncertainty.     See United States v. Boyle, 469 U.S. at

250.    Consequently, we conclude that decedents' failure to file

was due to reasonable cause and do not sustain any portion of

respondent's additions to gift tax under section 6651(a)(1).

        2.   Negligence

       Section 6653(a) provides for an addition to tax of 5 percent

of the underpayment if any part of the underpayment of tax is due

to negligence or intentional disregard of rules or regulations.

For purposes of this section, an underpayment generally can be
                               - 52 -

viewed as the equivalent of a deficiency.   Sec. 6653(c)(1).   For

purposes of section 6653(a), negligence is defined as a lack of

due care or failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.    Marcello v.

Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. on this

issue 43 T.C. 168 (1964) and T.C. Memo. 1963-66; Elliott v.

Commissioner, 90 T.C. 960, 974 (1988), affd. without published

opinion 899 F.2d 18 (9th Cir. 1990); Larotonda v. Commissioner,

89 T.C. 287, 292-293 (1987); Neely v. Commissioner, 85 T.C. 934,

947-948 (1985); Bixby v. Commissioner, 58 T.C. 757, 791-792

(1972).   Petitioners bear the burden of proving that the

additions to tax determined by respondent should not be applied.

Pollard v. Commissioner, 786 F.2d 1063 (11th Cir. 1986), affg.

T.C. Memo. 1984-536; Luman v. Commissioner, 79 T.C. 846, 860-861

(1982); Axelrod v. Commissioner, 56 T.C. 248, 258 (1971).

     For the same reasons that we have found that decedents had

reasonable cause for their failures to file gift tax returns, we

do not find them to have been negligent by reason of having

underpaid their gift taxes.   In light of the qualifications and

expertise of Mr. Tishler, FIC's attorney, and Mr. Shillington,

FIC's accountant, we think that decedents acted reasonably in

relying on their opinions.    Finally, although the advice rendered

to decedents by Messrs. Tishler and Shillington has proven to be

erroneous, we do not think, in light of the uncertainty

associated with valuation, that their determination of fair
                              - 53 -

market value was so unreasonable as to render decedents' reliance

thereon negligent.   Consequently, we do not sustain any portion

of respondent's addition to gift tax under section 6653(a).

     To reflect the foregoing,


                                           Decisions will be entered

                                       under Rule 155.
