                         T.C. Memo. 1999-342



                        UNITED STATES TAX COURT



     ESTATE OF SAM HOMER MARMADUKE, DECEASED, JOHN H. MARMADUKE,
                INDEPENDENT EXECUTOR, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17047-97.             Filed October 14, 1999.



     William R. Cousins III, Robert Don Collier, and Robert M.

Bolton, for petitioners.

     Audrey M. Morris, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:     Respondent determined a deficiency of

$1,809,921 in the Federal estate tax of the Estate of Decedent

Sam Homer Marmaduke.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect as of September 7, 1993 (the
                                - 2 -


date of decedent's death or the valuation date), and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     After settlement of some issues, the sole remaining issue

for decision is the fair market value, as of the date of

decedent's death, of 366,385 shares of common stock of a closely

held corporation.


                          FINDINGS OF FACT

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

     At the time of decedent's death, decedent resided in

Amarillo, Texas.    At the time the petition was filed, John H.

Marmaduke, the executor of decedent's estate, resided in

Amarillo, Texas.

     Upon his death in 1993, decedent owned 366,385 shares or

approximately 22 percent of the total outstanding common stock in

Hastings Books, Music & Video, Inc. (Hastings).   Other members of

the Marmaduke family owned another 957,685 shares or 57 percent

of the total outstanding common stock in Hastings.    Together, the

Marmaduke family (including decedent's wife, children, and

grandchildren) owned 79 percent of the total common stock in

Hastings.

     Shareholders unrelated to the Marmaduke family, comprising

Hastings employees and a qualified employee benefit plan covering
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Hastings employees (the ESOP), owned the remaining 21 percent of

the total outstanding shares of common stock in Hastings.

     The stock in Hastings is not listed on any stock exchange

and is not traded over the counter.

     As of the valuation date, Hastings was engaged throughout

the Southern and Southwestern United States in the business of

operating 103 retail stores that sold prerecorded music, books,

and video cassettes.

     Hastings was originally created in the 1960's as a retail

subsidiary of Western Merchandisers, Inc. (Western).   Western, in

turn, was a wholesaler and distributor of similar merchandise to

stores such as Wal-Mart Stores, Inc. (Wal-Mart).   In 1991,

Hastings was split off from Western in a tax-free reorganization.

Following the reorganization, Western was sold to Wal-Mart, and

Western's former shareholders held stock in both Hastings and

Wal-Mart.   Pursuant to a 5-year branch service agreement,

however, Hastings' management remained dependent upon Western's

headquarters and distribution facilities, information systems,

and accounting functions.

     From the date of the 1991 reorganization until the valuation

date of September 7, 1993, Hastings was in excellent financial

condition with both sales and profits increasing significantly.

     In January of 1993, A.G. Edwards & Sons, Inc. (A.G.

Edwards), a valuation company, prepared a valuation report of the
                               - 4 -


fair market value of common stock in Hastings.    The purpose of

the A.G. Edwards' report was to establish the fair market value

of an approximate 3-percent interest in Hastings common stock

held by the ESOP plan.   When ESOP plan participants purchased a

new home, needed money for a child's education, or terminated

employment, they had the right to direct the plan to sell shares

of Hastings stock back to Hastings at the then current fair

market value.   This "put" option provided liquidity for small

blocks of stock in Hastings held by the ESOP.

     Before any discount for lack of marketability, the A.G.

Edwards' report calculated the total value of Hastings as of

January of 1993 to be $100 million.    The A.G. Edwards' report

then applied a 40-percent discount for lack of marketability that

would have reflected a value for Hastings stock of $35.45 per

share.   However, due to the above-described liquidity of ESOP

plan shares provided by the put option, the A.G. Edwards' report

reduced the 40-percent lack-of-marketability discount in half to

20 percent and opined that the fair market value of Hastings

stock held by the ESOP was $47 per share.

     In 1993, 18 separate transactions involving small blocks of

Hastings stock occurred between employees, officers, and other

individuals with an ongoing relationship with Hastings or

Western, cumulatively representing approximately 1 percent of the

total issued and outstanding shares of stock in Hastings.    All
                                 - 5 -


but two of these transactions occurred at a price per share of

$47.

       In June of 1993, decedent sold 7,000 shares of his common

stock in Hastings at $47 per share.      Decedent sold 2,000 of these

shares to an officer and treasurer of Western who possessed full

knowledge of the financial affairs of Hastings.     In November of

1993, petitioner, who is decedent's son and president and CEO of

both Western and Hastings, sold 2,000 shares of his stock in

Hastings at $47 per share.

       On June 7, 1994, petitioner timely filed decedent's Federal

estate tax return.    Based on a valuation report of Gibbs, Smith &

Schwartzman, a valuation company, the fair market value of

decedent's 366,385 shares of stock in Hastings was reported on

decedent's estate tax return at $13,384,044, or $36.53 per share.

       On audit, based largely on the transactions in Hastings

stock that occurred in 1993, respondent determined that the total

fair market value of decedent's shares of stock in Hastings was

$17,220,095, or $47 per share.    Based thereon, respondent

determined an increase in the value of decedent's gross estate of

$3,836,050.


                               OPINION

       For Federal estate tax purposes, property is generally

included in a gross estate at its fair market value on the date
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of death.   See sec. 2031(a); sec. 20.2031-1(b), Estate Tax Regs.

Fair market value is defined as the price at which property would

change hands between a willing buyer and a willing seller,

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

reasonable knowledge of relevant facts.   See United States v.

Cartwright, 411 U.S. 546, 551 (1973); Estate of Brookshire v.

Commissioner, T.C. Memo. 1998-365; sec. 20.2031-1(b), Estate Tax

Regs.

     Fair market value involves a question of fact, and facts

reasonably known on the valuation date are particularly relevant.

See Estate of Newhouse v. Commissioner, 94 T.C. 193, 217-218

(1990); Estate of Brookshire v. Commissioner, supra.   Arm's-

length sales of stock within a reasonable time before and after

the appropriate valuation date are strong indicators of fair

market value.   See Estate of Andrews v. Commissioner, 79 T.C.

938, 940 (1982); Estate of Brookshire v. Commissioner, supra.

     Additional factors that are relevant in valuing shares of

stock in closely held corporations are:   The financial condition

of the corporation, the value of listed stock of corporations

engaged in similar lines of business, the corporation's net

worth, the size of the block of stock to be valued, and the

earning and dividend paying capacity of the corporation.   See

Estate of Newhouse v. Commissioner, supra at 217-218; Estate of

Hall v. Commissioner, 92 T.C. 312, 336 (1989); Estate of Wright
                               - 7 -


v. Commissioner, T.C. Memo. 1997-53; sec. 20.2031-2(f)(2), Estate

Tax Regs.; Rev. Rul. 59-60, 1959-1 C.B. 237, 238-239.   Also, in

valuing closely held corporations, discounts may be warranted to

reflect the stock's lack of marketability and limitations on

transferability.   See Estate of Newhouse v. Commissioner, supra

at 249; Estate of Andrews v. Commissioner, supra at 953; Estate

of Brookshire, supra.

     We weigh expert witness testimony offered by the parties in

light of particular facts and circumstances of each case.   See

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

Seagate Tech., Inc. & Consol. Subs. v. Commissioner, 102 T.C.

149, 186 (1994); United Parcel Serv. of Am., Inc. v.

Commissioner, T.C. Memo. 1999-268.

     Petitioner's first expert, using a 60-percent discount for

lack of marketability, values the shares of decedent's stock in

Hastings at $9,210,000, or $25.15 per share.   Petitioner's first

expert reached this opinion by:   (1) Using the guideline company

method of valuation and comparing Hastings to several publicly

traded corporations engaged in similar lines of business;

(2) using the guideline merged-and-acquired company method and

comparing similar corporations that were bought or sold within a

reasonable time of the valuation date; and (3) using the

discounted cash-flow method.   Due to alleged lack of independent

bargaining and negotiations relating to the $47 price reflected
                                 - 8 -


in the 1993 transactions involving Hastings stock, petitioner's

first expert entirely rejects the transaction method.

     Petitioner's second expert, using a 40-percent lack-of-

marketability discount, values the shares of decedent's stock in

Hastings at $12,658,602, or $34.55 per share.   Petitioner's

second expert relies solely on the guideline company and

discounted cash-flow methods while rejecting the transaction and

other valuation methods as inappropriate indicators of value.

     Respondent's expert, using a 15-percent lack-of-

marketability discount, values decedent's shares of stock at

$17,220,095, or $47 per share.    Respondent's expert utilizes the

guideline company, the discounted cash-flow, and the transaction

methods of valuation.

     In the schedule below, we summarize the total equity value

of the Hastings corporation, the discount for lack of

marketability, and the per-share value of the Hastings stock as

reflected in the 1993 A.G. Edwards' report and in the reports of

the parties' expert witnesses.    With regard to the A.G. Edwards'

report, in the schedule we reflect separately the indicated value

for the Hastings shares of stock owned in general and for those

stocks held by the ESOP.1


1    At trial and on brief, neither party relies on the $36.53
per-share value of decedent's Hastings stock reflected on
decedent's Federal estate tax return. Accordingly, we do not
                                                    (continued...)
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                A.G. Edwards    A.G. Edwards     Petitioner's    Petitioner's    Respondent's
                   General          ESOP         First Expert    Second Expert      Expert

Equity Value    $100,000,000*   $100,000,000*    $106,000,000*   $97,740,000* $115,175,500*
Discount             40%             20%             60%            40%            15%
Value Per Share    $35.45            $47            $25.15        $34.55           $47


                     *   Represents the approximate average
                         equity value for Hastings from all
                         methods utilized by each expert.



        We conclude that the total equity value of Hastings was $100

 million on the valuation date.                This falls within the range for

 the estimated equity value of Hastings reflected in the reports

 of each of the experts and in particular is supported by the 1993

 A.G. Edwards' report.

        As indicated, in determining the fair market value of

 decedent's 366,385 shares of stock in Hastings, the parties'

 experts all agree that some discount reflecting lack of

 marketability is appropriate.             They disagree, however, as to the

 percentage -– suggesting 15 to 60 percent.

        With regard to the appropriate marketability discount for

 small blocks of stock in Hastings, the testimony of the officer

 and treasurer of Western is significant.                  He testified that $47

 per share (reflecting a 20-percent discount) was a fair and

 accurate price for the 2,000 shares of stock he purchased from




 (...continued)
reflect that valuation in the schedule, nor do we refer to it
again in the opinion.
                              - 10 -


decedent shortly before the valuation date.    He stated that at no

time was he under compulsion to buy or sell the shares of stock.

     The value, however, of decedent's large, minority block of

366,385 shares of stock in Hastings is not controlled by the

value of 2,000 shares nor by the other 1993 transactions

involving small blocks of Hastings stock.    Respondent's expert

relies heavily on transactions cumulatively representing less

than 1 percent of Hastings common stock.    Decedent's stock, on

the other hand, represents some 14 times the total number of

shares of stock exchanged during 1993.

     We note that the A.G. Edwards' report reduced the 40-percent

discount for lack of marketability that it would use for Hastings

stock in general to a 20-percent discount only because of the

liquidity available to the Hastings stock held by the ESOP.

     We regard a 15- or 20-percent lack-of-marketability discount

as inadequate in valuing decedent's shares.    It is clear that

decedent's large, minority block of Hastings stock was not

readily marketable and that a significant lack-of-marketability

discount is appropriate.   Several studies in evidence confirm

that discounts for lack of marketability of stock in closely held

corporations often exceed 30 percent.

     In reaching our conclusion as to the appropriate lack-of-

marketability discount to apply to decedent's stock in Hastings,

we regard the following factors as supporting a significant
                              - 11 -


discount:   The lack of a ready market for the Hastings shares,

the comparatively small size of prior transactions relative to

the size of decedent's block of stock, the continued dependence

of Hastings on the branch service agreement with Western, and the

general credibility of the A.G. Edwards' report.

     Other factors, however, also indicate to us a marketability

discount considerably less than the 40- and 60-percent discounts

suggested by petitioner's experts.     The several transactions of

Hastings stock that did occur in 1993 at $47 per share were not

in any way factored into the calculations of petitioner's

experts, and Hastings was in excellent financial condition as of

the valuation date.

     Based on the evidence, we conclude that the appropriate

discount for lack of marketability of decedent's 366,385 shares

of common stock in Hastings is 30 percent.

     Applying the 30-percent lack-of-marketability discount to

the $100 million total equity value of Hastings yields a fair

market value of $41.51 per share.    We conclude that, as of

September 7, 1993, the value of decedent's 366,385 shares of

common stock in Hastings was $15,208,641 ($41.51 times 366,385

equals $15,208,641).

     To reflect the foregoing,

                                           Decision will be entered

                                     under Rule 155.
