                        T.C. Memo. 1997-195



                      UNITED STATES TAX COURT




        ESTATE OF PAUL E. BROWN, DECEASED, PETER D. BROWN
          AND MICHAEL BROWN, CO-EXECUTORS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13081-95.             Filed April 28, 1997.



     James L. Malone III, Thomas C. Borders, and Carol A.

Harrington, for petitioner.

     James E. Kagy and Joseph P. Grant, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency in

petitioner's estate tax of $29,885,493.
                                   2

     Paul Brown was the chief operating officer of the Cincinnati

Bengals from 1967 to 1991.    In 1983, he sold 117 of his 118

shares of Bengals stock to John Sawyer, who owned 213 shares of

Bengals stock.   In exchange, Sawyer gave a $3.51 million note to

Brown and sold an option to Brown's sons to buy up to 329 shares

of Bengals stock; i.e., the 117 shares Brown sold to Sawyer and

212 of Sawyer's shares.   The option could be exercised from 1993

to 1996.   Paul Brown died in 1991.     His sons exercised the option

in 1993 for 329 shares of stock.       On Paul Brown's Federal estate

tax return, petitioner reported that Brown owned one share of

Bengals stock when he died.    Respondent determined that his

estate includes 329 shares of Bengals stock.      Respondent now

contends that Paul Brown's estate includes 312 shares of Bengals

stock.1

     The issue for decision is whether Paul Brown's estate

includes 312 shares of Bengals stock, as respondent contends, or

one share, as petitioner contends.      We hold that decedent's

estate includes one share of Bengals stock.

     Section references are to the Internal Revenue Code of 1986.

Rule references are to the Tax Court Rules of Practice and

Procedure.




     1
       We explain respondent's contention that Brown's estate
includes 312 shares of Bengals stock at p. 33 below.
                                 3

                         TABLE OF CONTENTS

Findings of Fact                                                   Page

A.   Paul Brown . . . . . . . . . . . . . . . . . . . . . .    . . 3
B.   Origins of the National Football League . . . . . . .     . . 4
C.   Cincinnati Professional Football Franchise . . . . . .    . . 6
D.   Developments Affecting the NFL and the Bengals in 1982    . 14
E.   1983 Agreements Between Paul Brown and Sawyer . . . .     . 19
F.   NFL Constitution and Bylaws Relating to a Sale of an
     Interest in an NFL Team . . . . . . . . . . . . . . .     .    26
G.   Brown Family Limited Partnership
                                  . . . . . . . . . . . . .    .    27
H.   Paul Brown's Will . . . . . . . . . . . . . . . . . .     .    32
I.   NFL Approval of the Transfer of Bengals Stock From
     Sawyer to Brown Family Members . . . . . . . . . . . .    .    32
J.   1993 Escrow Agreement . . . . . . . . . . . . . . . .     .    33
K.   Valuation Issues . . . . . . . . . . . . . . . . . . .    .    33

Opinion

A.   The Positions of The Parties . . . . . . . . . . .    . . .    34
B.   Section 2036 -- Background . . . . . . . . . . . .    . . .    35
C.   Whether Paul Brown Received Adequate and Full
     Consideration for the Shares of Bengals Stock . .     . . .    37
D.   Whether Decedent Made an Inter Vivos Transfer of
     Sawyer's 212 Shares of Bengals Stock   . . . . . .    . . .    38
E.   Whether Paul Brown Retained an Interest in the 329
     Shares of Bengals Stock Which Were Subject to the
     1983 Agreement . . . . . . . . . . . . . . . . . .   . . .     40
F.   Respondent's Substance Over Form Theory . . . . .    . . .     40
G.   Conclusion   . . . . . . . . . . . . . . . . . . .   . . .     48

                         FINDINGS OF FACT

A.   Paul Brown

     Paul Brown was born on September 7, 1908, and died on August

5, 1991.   He lived in Ohio when he died.    His sons Peter and Mike

Brown are the coexecutors of his estate and lived in Ohio when

the petition in this case was filed.

     Paul Brown was a native of Massillon, Ohio.    He played high

school football there and at Miami University of Ohio.    Brown

coached football at Massillon High School from 1932 to 1941.       The
                                   4

team's record during those years was 96 wins, 9 losses, and 3

ties.     In 1941, Brown became the head football coach at Ohio

State University, which won the national championship that year.

He coached at Ohio State again in 1942 and 1943.     For the 1944

and 1945 seasons, Brown coached the military service football

team at the Great Lakes (Illinois) Naval Training Station.

B.   Origins of the National Football League

        1.   The American Professional Football Association

        The American Professional Football Association (APFA) began

business in 1920.     There were 10 charter franchises.   The

organizational meeting in Canton, Ohio, included the Decatur

Staleys (later, the Chicago Bears), Cleveland Indians, Dayton

Triangles, Akron Professionals, Massillon Tigers, and several

other teams.     The APFA changed its name to the National Football

League (NFL) in 1922.     Eventually, most NFL teams settled in

large metropolitan areas.

        2.   The All-American Football Conference

        The All-American Football Conference (AAFC) was founded

immediately after World War II.     This league included the

Cleveland Browns.

        The Cleveland Browns were named after Paul Brown.   Brown was

the head coach and general manager of the Cleveland Browns from

1946 to 1962.     He spoke for the Browns at NFL meetings and

controlled the team's operations.
                                      5

     The Cleveland Browns won all four AAFC league championships

from 1946 to 1949.       The AAFC stopped operating after the 1949

season.       Three AAFC teams (Cleveland, San Francisco, and

Baltimore) joined the NFL beginning in the 1950 season.         The

Cleveland Browns won the NFL championship in 1950, 1954, and

1955, and lost championship games in 1951, 1952, 1953, and 1957.

     Art Modell (Modell) and a group of investors, including Paul

Brown as a minority investor, bought the Cleveland Browns in

1961.     Modell tried to undermine Brown after the Modell group

bought the Cleveland Browns.        Modell fired Paul Brown in 1963.

Brown moved to California for a short retirement.

     3.        The American Football League

        The American Football League (AFL) was founded in 1959.       The

AFL generally established franchises in cities where the NFL did

not have teams.

        The AFL operated as a separate football league from 1960 to

1969.        The AFL and NFL drafted and competed for the same players,

which led to higher player costs for AFL and NFL teams.         The AFL

and NFL also competed for advertising dollars and television

audiences.        The AFL secured a 5-year, $136 million television

contract from NBC for its 1965 season, which gave it a

substantial economic boost.

        4.      Merger of the NFL and AFL

        On June 8, 1966, the AFL and NFL announced that they would

merge.        The agreement provided that AFL and NFL teams would
                                   6

compete against each other as members of the NFL beginning in

1970.

     The NFL decided to add a team for the 1967 season in New

Orleans.     The AFL decided to expand to one other U.S. city for

the 1968 season.

     5.      NFL Control Person Policy

        Since the 1920's, the NFL has encouraged each of its teams

to be controlled by one person.     In the few teams where no one

had majority ownership, the league encouraged the franchise to

designate one individual (known as the control person) to

represent the franchise in league matters.     The league encouraged

owners of those teams to use devices such as voting trusts to

establish a control person.

C.      Cincinnati Professional Football Franchise

        1.   Actions Preceding Formation of the Cincinnati Bengals

        From the time Paul Brown left Cleveland, he and his son,

Mike, began to seek opportunities for him to return to the NFL.

Paul Brown wanted to be an owner of a team, not just a coach.

Because of his experiences in Cleveland, Paul Brown did not want

to return to professional football unless he was the control

person.

        Paul and Mike Brown wanted to get an NFL franchise for

Cincinnati.     Mike Brown did a survey which showed that Cincinnati

would be an excellent location for a professional football team
                                   7

based on income levels, population within 100 miles, and the fact

that Cincinnati is an area of proven football interest.

     Paul Brown met John Sawyer (Sawyer) through a mutual friend,

Dr. William Hackett (Hackett).    Sawyer owned Orleton Farms in

London, Ohio.    Sawyer decided to invest in a professional

football team in Cincinnati with Brown.    Sawyer highly valued

Brown's experience and prior NFL success.

     2.   Ohio Valley Sports (OVS)

     Mike Brown, Hackett, and Sawyer formed Ohio Valley Sports,

Inc. (OVS), an Ohio corporation, on December 12, 1965, to

acquire, develop, and operate a professional football team.

     In 1966, Commissioner Pete Rozelle (Rozelle) and members of

the AFL's expansion committee visited Cincinnati to meet with

Paul Brown.     At Rozelle's urging, they recommended that the AFL

award a franchise in Cincinnati to OVS.

     On May 24, 1967, the AFL awarded a new franchise to OVS.

The team was to be called the Cincinnati Bengals (Bengals).    Paul

Brown's contacts and participation were critical to the effort to

obtain the franchise.

     On September 26, 1967, OVS was recapitalized.    Paul Brown,

Sawyer, and nine other investors contributed $2 million in

exchange for 1,000 shares of OVS stock with a per share price of

$2,000.   These shares were held as follows:
                                   8

                Name                                   Shares

          Paul Brown                                     100
          John Sawyer                                    200
          J. Barrett Buse                                 45
          Raymond L. Buse                                 45
          Enquirer Enterprises, Inc.                     109
          David G. Gamble                                 33
          William Hackett                                 80
          Austin Knowlton                                300
          Louis Nippert                                   10
          James Williams                                  33
          William S. Williams                             45
               Total                                   1,000

     Sawyer was president of OVS.       Paul Brown was vice president,

general manager, and head coach.       Mike Brown was assistant

general manager and in-house legal counsel.       Sawyer had four

children, but they were not involved in running the Bengals.

     3.   1967 Voting Trust Agreement

     OVS had no majority shareholder when it obtained the Bengals

franchise.   Because of the NFL's control person policy, the OVS

shareholders designated a shareholder to serve as the control

person.

     On September 26, 1967, the OVS shareholders entered into a

voting trust agreement (1967 voting trust), which named Paul

Brown as the voting trustee and control person for a term not to

exceed 10 years, beginning October 16, 1967.       The voting trustee

had the right to exercise all shareholders' rights and powers,

including the right to vote the stock and to take part in or

consent to any corporate or shareholders' action.       The right to

vote included the right to vote to elect directors, and to vote
                                    9

for or against any resolution or proposed action which required

shareholders' consent.    The voting trustee had the right to amend

the certificate of incorporation and to mortgage or pledge all or

part of the property of OVS.     The voting trustee had no authority

to change the terms of his employment contract, to sell, pledge,

hypothecate, mortgage or place a lien or charge on the stock, to

sell all or substantially all the assets of OVS, or take any

action to dissolve, consolidate, merge, reorganize or

recapitalize OVS.

     4.     Riverfront Stadium

     Cincinnati was required to build a new stadium before the

NFL would award a franchise to that city.     This new stadium,

Riverfront Stadium, opened for the 1970 season and has served as

the stadium for the Bengals and the Cincinnati Reds baseball team

until the time of trial.     Riverfront Stadium is one of the

smallest stadia in the NFL.      During the overlap of the baseball

and football seasons, it seats about 55,000.     After the baseball

season, it seats about 60,000.     Riverfront Stadium does not have

skyboxes or luxury boxes.

     5.      Formation of the Cincinnati Bengals, Inc.

     On December 14, 1967, OVS changed its name to the Cincinnati

Bengals, Inc.     Sawyer was president of the Bengals from 1967 to

1994.     Paul Brown was vice president, general manager, and chief

operating officer of the Bengals from 1967 until he died in 1991.
                                 10

He was head coach from 1968 to 1975.   In 1967, Mike Brown became

secretary and James R. Williams became treasurer.

     On April 28, 1970, the Bengals' shareholders extended the

1967 voting trust to April 27, 1980.   In 1973, each Bengals

shareholder exchanged his stock for stock in OVS-Del., a Delaware

corporation, and extended the 1967 voting trust agreement without

change, except that Mike Brown was named successor voting

trustee.

     The Bengals began to play in the AFL in 1968.    When the NFL

and AFL merged for the 1970 season, Cincinnati, Pittsburgh,

Cleveland, and Houston became members of the Central Division of

the American Football Conference (AFC) of the NFL.

     The Bengals lost money in 1968 and 1969.   They did not

receive any national TV contract money during these seasons.

They played at Nippert Stadium in Cincinnati, which had a

capacity of only about 30,000.

     The Bengals won their AFC division in 1970.    From 1968 to

1990, the Bengals had 171 wins, 168 losses, and one tie.

     6.    Sales, Redemptions, and Transfers of Bengals Stock from
           1977 to 1980

     Several shares of OVS-Del. stock were redeemed or sold in

arm's-length transactions from 1977 to 1979.    The price per share

increased gradually from $14,828.13 (in 1977) to $24,000 (in

1979) in these transactions.   On August 4, 1980, OVS-Del.

redeemed 110 shares of its stock owned by Sawyer for all of the
                                 11

shares of Rosemoor Farms, Inc., a 1,000 acre farm located near

Jamestown, Ohio, that OVS-Del. bought in August 1974.      On

September 27, 1979, Paul Brown transferred one share of OVS-Del.

stock to each of his sons Mike and Peter.     As a result, on

October 23, 1980, the stock of OVS-Del. was held as follows:

            Name                Shares              %

     Paul Brown                  118            20.1
     Mike Brown                    1             0.17
     Peter Brown                   1             0.17
     David G. Gamble               1             0.17
     Austin Knowlton             249            42.5
     Louis Nippert                 1             0.17
     John Sawyer                 213            36.5
     James R. Williams             1             0.17
     William J. Williams           1             0.17
          Total                  586           100.00 (100.12%)

     7.     The Bengals' Dividend Payment History

     The Bengals paid no dividends from 1968 to 1976 because Paul

Brown believed that it was essential to increase the Bengals'

reserves.    Beginning in 1976, OVS-Del. or the Bengals paid

dividends as follows:

                                                    Total Amount of
            Year        Dividends Per Share         Dividends Paid

            1976                 $10                     $9,900
            1977                 300                    297,000
            1978                 360                    320,330
            1979                   0                          0
            1980                 500                    348,000
            1981                  20                     11,720
            1982                  10                      5,860
              Total            1,200                    992,810

     From 1977 to 1980, OVS-Del. used $8,162,860 of its corporate

reserves to fund the stock repurchases described above (see par.
                                  12

C-6).     Thus, from 1976 to 1980, OVS-Del. used $9,155,670 of its

corporate reserves to pay dividends and to repurchase stock.

     8.      1980 Shareholder Agreements

     On October 24, 1980, the OVS-Del. shareholders merged OVS-

Del. into the Cincinnati Bengals, Inc.     The Bengals were the

surviving corporation.     Also on that date, the Bengals'

shareholders entered into a 10-year irrevocable voting trust

agreement which provided in part as follows:     (a) Paul Brown was

appointed the sole voting trustee; (b) if he died, resigned, or

became incapacitated, Mike Brown would be the successor trustee;

(c) if Mike Brown died, resigned, or became incapacitated while

serving as successor trustee, the voting trust would terminate;

(d) the trustee could, subject to the provisions of the 1980

voting trust, exercise all shareholders' rights and powers in all

common stock (including the right to mortgage or pledge all or

part of the property of the Bengals); (e) the trustee had no

authority to sell, pledge, mortgage, or place a lien or charge on

Bengals stock, sell all or substantially all of the Bengals'

assets, or dissolve or merge the Bengals; and (f) a sale of all

or substantially all of the Bengals' assets, or its dissolution

or merger, must be approved by a two-thirds vote of the

shareholders, which must include the affirmative vote of the

shares the voting trustee owned in his individual name.

     Also on October 24, 1980, Paul and Mike Brown and Sawyer

entered into an option agreement regarding Paul Brown's and
                                      13

Sawyer's stock.    Sawyer and Paul Brown entered into the 1980

option agreement to give each of them a chance to obtain a

majority interest in the Bengals if the other died.          Neither

wanted any other Bengals shareholder to gain control.

     The 1980 option agreement provided in part as follows:            (a)

Paul Brown received an option to buy Bengals stock owned by

Sawyer at Sawyer's death; (b) Paul Brown's option was not

assignable except to Mike Brown; (c) if Paul Brown died before

Sawyer, Mike Brown could exercise the option; (d) Sawyer received

an option to buy the stock Paul Brown owned when he died if

Sawyer survived Brown, and if such shares would not pass to Mike

or Peter Brown under Paul Brown's will or under State law

applicable to the distribution of the assets of Paul Brown's

estate; (e) Sawyer's option from Paul Brown was not assignable by

him and terminated when he died; and (f) the price of each share

of stock bought under the option was initially set at $28,735.63,

and was to be adjusted each March by Paul Brown and Sawyer.

     The price of stock under the 1980 option agreement was set

as follows:

                  Date Price Set           Price Per Share

                  Oct.   24,   1980          $28,735.63
                  Mar.   16,   1981           28,735.63
                  Mar.   23,   1982           45,000.00
                  Mar.   22,   1983           45,000.00

     Paul and Mike Brown and Sawyer canceled the 1980 option

agreement on May 16, 1983.
                                   14

D.   Developments Affecting the NFL and the Bengals in 1982

     1.   Television and Radio in 1980 and 1981

     NFL television ratings for the 1980 season were the second

best in history, exceeded only in 1976.        Ratings for all three

major networks were higher in 1980 than in 1979.

     In the 1981 season, the NFL had its best year in regular

season combined television ratings.      Both ABC and CBS had record

high ratings.   The NFC playoff game between Dallas and San

Francisco had a record rating for a Conference championship game

and was the eighth most watched sports event in history.

     Television ratings dropped in the 1982 season from the 1981

season for two of the three major networks, as shown below:

                   Television and Radio Ratings

                           Audience Size
                            (millions)

                            1979        1980      1981     1982

NBC-TV                     14           15        13.9     13.9
CBS-TV                     15           15.3      17.5     16.5
ABC-TV Monday Night        19.6         20.8      21.7     20.6
CBS-Radio                                7                  8

     In March 1982, NFL Commissioner Rozelle announced a new

television contract between the NFL and NBC, CBS, ABC, and ESPN

for the 1982-86 seasons.   This agreement increased each NFL

team's shared television revenues from $5,465,000 in the 1981

season to a projected $17.5 million in the 1986 season.        The

agreement provided that a team would not receive national

television revenue for games not played because of a strike.
                                     15

      2.      Game Attendance

      The Bengals were not as successful after Paul Brown stopped

coaching in 1975.      The team's record was 4-12 in both 1978 and

1979.      In 1980, the Bengals had a 6-10 record and finished last

in their division.        This poor performance hurt the Bengals'

season ticket sales and attendance.         From 1978 to 1980, the

Bengals' season ticket sales dropped from 43,712 to 38,527.

      In 1981, the Bengals played in the Super Bowl for the first

time.      In 1982, the Bengals finished second in their division

with a record of 7-2, and lost in the first round of the

playoffs.      Season ticket sales and attendance improved in the

early 1980's.      Season ticket sales increased to 48,273 in 1982.

      The NFL set attendance records in 1979, 1980, and 1981.

Attendance dropped in 1982 because of the players' strike.           NFL

game attendance in those years was as follows:

                             NFL Game Attendance

                   1979             1980            1981        1982
NFL

Total           13,182,039       13,400,000     13,606,990   7,367,438

Average           58,848           59,787          60,745     58,472

% of Stadium
Capacity                            92.4%           93.8%

Bengals

Average                            49,657          54,900      57,397

      NFL gate receipts are shared as follows:         66 percent to the

home team (15 percent of which is to pay stadium rent and day-of-
                                16

the-game expenses), and 34 percent to the visiting team.     Skybox

revenues are not shared with other teams.    A team can earn

millions of dollars from skyboxes.

     3.    Los Angeles Memorial Coliseum Commission v. NFL

     In early 1980, Al Davis (Davis), the general partner of the

Oakland Raiders ownership group, sought to move that team to Los

Angeles.   The other 27 NFL owners opposed the Raiders' move.

     In 1980, a suit entitled Los Angeles Memorial Coliseum

Commission (LAMCC) v. National Football League was pending in the

Federal District Court in Los Angeles.    LAMCC filed that suit

when the Rams left the Los Angeles Memorial Coliseum to play in

Anaheim.

     On March 25, 1980, Davis filed a $160 million antitrust suit

against the NFL and joined that suit to LAMCC v. NFL, supra.      The

District Court set a jury trial to hear LAMCC's and the Raiders'

claims of antitrust violations by the NFL.    The existence of the

litigation was disclosed in the financial statements of the

Cincinnati Bengals, Inc., for the fiscal year ending February 28,

1982, which described the suit and contained the following

statement:

     In the opinion of management and legal counsel, the
     damages alleged by this complaint against the NFL and
     its member clubs are greatly overstated. The effect
     of the final outcome of this litigation on Cincinnati
     Bengals, Inc. is not determinable at present.

     On May 7, 1982, the jury returned a liability verdict

against the NFL in LAMCC v. NFL.     On June 14, 1982, the District
                                  17

Court issued its written judgment on the liability issue.     The

NFL appealed.     As a result of the ruling, the Oakland Raiders

moved to the Los Angeles Coliseum for the 1982 season.

     On April 13, 1983, the jury returned a verdict of about $60

million, including legal fees.     That amount was to be paid by the

other 27 NFL teams.

     The NFL appealed the damages verdict.     The litigation,

including the award of damages, was disclosed in the financial

statement of the Cincinnati Bengals, Inc., for the fiscal year

ending February 29, 1984.     It contained the following statement:

     The judgment awarded damages to the plaintiffs of
     approximately $49 million (as trebled), plus interest.
     In addition, plantiffs can be expected to assert
     substantial claims for attorneys fees if they are
     ultimately successful in this litigation. On February
     28, 1984, the liability judgement was affirmed by the
     Court of Appeals. The National Football League and its
     certain member clubs are in the process of appealing
     the damages award and intend to continue to defend
     their position on the liability issues.

     4.      1982 NFL Players' Strike

     NFL players were on strike from September 20 to November 17,

1982.     Nine of the 16 regular games were played.   Because of the

strike, total attendance was 7,367,438, down 45.9 percent from

the 1981 season.     Average paid attendance per game played for the

1982 season was 58,472, down 3.7 percent from the 1981 season.

The Bengals average paid attendance per game increased from

54,900 for the 1981 season to 57,397 for the 1982 season.
                                 18

     Because seven games were not played, NFL teams lost about

$250 million in revenues from radio and television, and from

sales of tickets, programs, concessions and parking.    For the

1982 season, the Bengals lost $5.3 million in shared television

revenues and about $1.8 million in ticket sales.    The Bengals had

an operating loss of about $1 million and a total loss of about

$2.8 million for its fiscal year 1983 (ending February 28, 1983).

     5.   The United States Football League

     Formation of the United States Football League (USFL) was

announced in 1982.    The USFL planned to play its games in the

spring, not in direct competition with the NFL.    However, it

intended to compete with the NFL for the admissions and radio

revenues in areas where both leagues had teams.

     The USFL secured a national TV contract in May 1982 for its

spring 1983 season.    The USFL formed teams in Birmingham,

Chicago, Denver, Detroit, Los Angeles, New Jersey, New Orleans,

Oakland, Philadelphia, Phoenix, Tampa, and Washington, D.C.      In

the spring of 1983, the USFL announced plans to expand to

Houston, Jacksonville, Memphis, Tulsa, Pittsburgh, and San

Antonio for the 1984 season.

     The USFL sought immediately to sign the best college and

professional football players available.    The USFL's efforts to

sign NFL and college players became a concern for the Bengals

during the 1982 season.    In November 1982, quarterback Jack

Thompson, the Bengals' number one draft choice in 1979, refused
                                 19

to report back to the Bengals after the strike and announced that

he would sign with the Michigan Panthers of the USFL.    USFL teams

were also interested in other Bengals players, such as David

Verser, the Bengals' number one draft choice in 1981.

     On February 22, 1983, the New Jersey Generals of the USFL

announced the signing of 1982 Heisman Trophy winner Herschel

Walker.    Walker's contract provided for payments of $5 million

over 3 years.    The USFL held its first college draft on January

4-5, 1983.    The USFL drafted several star college players in

January 1983; USFL teams tried to sign these players for their

spring 1983 season.

E.   1983 Agreements Between Paul Brown and Sawyer

     1.     Background

     Sawyer began to have financial difficulties in the early

1980's.    Sawyer wanted to receive income from his investment in

the Bengals.    Sawyer and Paul and Mike Brown began negotiations

in the spring of 1981 to increase Sawyer's cash flow from the

Bengals.

     Paul Brown wanted to give his sons an opportunity to control

the Bengals.    However, he was concerned about the Bengals'

finances and prospects.    He knew that Cincinnati was a small

market by NFL standards in the early 1980's.    In the winter of

1982-83, he thought the USFL, the players' strike that had just

ended, the fact that all NFL teams lost money in the 1982 season,
                                  20

and the Davis liability verdict were harmful to NFL teams, and

could be particularly harmful to the Bengals.

     By early 1981, the Browns and Sawyer had been business

partners in the Bengals and friends for about 15 years.       However,

they were not related and had never made any significant gifts to

each other.     The 1983 agreements were negotiated at arm's length

between Sawyer on one side and Paul and Mike Brown on the other.

     During the negotiations between Sawyer and the Browns, Mike

Brown gave Sawyer a projection of Bengals stock dividends for the

8 fiscal years 1984 to 1991 (1983 to 1990 seasons).       He projected

that Paul Brown's 117 shares and Sawyer's 213 shares (total of

330 shares) would pay dividends totaling $19,935,400 in fiscal

years 1983-91 (1982-90 seasons).       Sawyer added 2 years to the

schedules by assuming that projected dividends for fiscal year

1991 would be repeated in fiscal years 1992 and 1993.       Using that

assumption, total dividends for fiscal years 1984 to 1993 (1983

to 1992 seasons) for the 330 shares of stock would be

$25,004,200.2

     2.   1983 Stock Purchase Agreement

     On March 1, 1983, Sawyer agreed to buy 117 shares of Bengals

stock from Paul Brown.3    Sawyer executed a promissory note

     2
       Dividends actually paid for 330 shares of Bengals stock
from March 1, 1983, to February 28, 1993, totaled $37,592,909.08.
     3
       John Sawyer, Paul Brown, and Mike Brown executed a series
of documents, which are dated "March 1, 1983" or "as of March 1,
                                                   (continued...)
                                 21

payable to Paul Brown dated March 1, 1983, in the principal

amount of $3.51 million ($30,000 per share), bearing simple

interest at 9 percent per annum, with all principal and interest

due on February 28, 1993.    Sawyer paid no cash for Brown's stock.

Sawyer secured the promissory note by pledging to Brown 329

shares of Bengals stock owned by Sawyer (including the 117 shares

Sawyer bought from Brown).   Assuming no prepayments, Sawyer would

owe $6,669,000 to Paul Brown under the note on March 1, 1993.

Sawyer and Brown agreed that the transfer would comply with the

1980 voting trust agreement, the 1980 shareholders' agreement,

the controlling shareholder S corporation agreement dated May 16,

1983, and the NFL constitution and bylaws.   Brown and Sawyer

believed that the 1983 agreements met NFL requirements.

     3.   1983 Stock Option Agreement

     Sawyer and Mike and Peter Brown entered into a stock option

agreement dated as of March 1, 1983.    The stock option agreement

provided in part as follows:   (a) Sawyer granted to Mike and

Peter Brown an irrevocable option to buy up to 329 common shares

of Bengals stock owned by Sawyer for $25,000 per share; (b) Mike

and Peter Brown could exercise the option from March 1, 1993, to

February 28, 1996; (c) if Mike and Peter Brown bought less than


     3
      (...continued)
1983". However, because of the time required to get all of the
Bengals shareholders to agree to the S corporation election, the
closing of the sale of Paul Brown's Bengals stock was on May 16,
1983.
                                 22

329 shares, the balance of the shares were released from the

option; (d) upon the exercise of the option, Mike and Peter Brown

were required to either deliver up to $3 million in cash to an

escrow agent plus a promissory note for the balance of any amount

due, with interest at 9 percent, or to offset any cash payments

with any other amounts which Sawyer may then owe Mike and Peter

Brown; (e) the 329 shares (represented by voting trust

certificates) were to be deposited with an escrow agent; and (f)

Mike and Peter Brown could transfer and assign the option,

whether by sale, gift or devise.

     Unlike the 1980 option, the 1983 option did not provide for

revaluing the stock.   Mike and Peter Brown paid Sawyer $1.00 for

the option.

     The total amount due from March 1, 1993, to February 28,

1996, from Mike and Peter Brown upon the exercise of the option

for 329 shares of Bengals stock would be $8,225,000 (329 shares x

$25,000 per share).    If the Browns exercised the option, Sawyer

would get $8,225,000 from the stock sale to the Browns and would

owe $6,669,000 on his note to Paul Brown ($3.51 million of

principal and $3,159,000 in interest).    Thus, Sawyer would

receive a net of $1,556,000.

     Sawyer hoped that Mike and Peter Brown would not exercise

the option to buy the 329 shares.     Sawyer did not want to sell,

and did not offer to sell, his Bengals stock to Paul Brown.

Sawyer wanted to continue to be the Bengals' president and
                                23

majority shareholder.   Paul Brown did not offer to buy Sawyer's

Bengals stock.

     4.   1983 Security and Escrow Agreement

     Sawyer, and Paul, Mike, and Peter Brown signed a security

and escrow agreement around March 1, 1983.   It was accepted on

May 16, 1983, by the Central Trust Co. as escrow agent.   This

agreement secured Sawyer's payment of the note and performance

under the 1983 stock option agreement.   Sawyer gave Paul Brown a

security interest in 329 shares of Bengals stock to secure

Sawyer's payment of the 1983 promissory note.   Sawyer delivered

the voting trust certificates for the 329 shares to the Central

Trust Co. as escrow agent.   Sawyer could not sell, pledge,

bequeath, or gift his Bengals stock while the security and escrow

agreement was in effect.

     5.   1983 All Shareholders Agreement

     An agreement of all Bengals shareholders dated May 16, 1983

(all shareholders agreement), was signed by the Bengals, Sawyer,

Paul Brown, David Gamble, Louis Nippert, William and James

Williams, and Virginia Fite.   The agreement provided that:

(a) By May 15, 1983, each shareholder would execute consents for

the Bengals to be taxed as an S corporation; (b) each signatory

would not conduct any stock transaction that could cause the

Bengals' S corporation election to terminate; (c) the agreement

was to continue until the end of the Bengals' taxable year in

1998; and (d) the Bengals agreed, beginning with their fiscal
                                 24

year 1984, to distribute to each shareholder cash equal to the

amount which each shareholder must report as ordinary income on

his Federal income tax return for that year because of the

Bengals' S corporation election.

     6.   1983 Controlling Shareholder S Corporation Agreement

     The controlling shareholder S corporation agreement, dated

May 16, 1983, was signed by the Bengals, Paul Brown, Sawyer, Mike

and Peter Brown, and Knowlton.   It provided:   (a) Each

shareholder would execute an S corporation election for the

Bengals' tax year beginning March 1, 1983; (b) unless Paul Brown,

Knowlton, or Sawyer died, or unless it is necessary to make

economically feasible the acquisition of their shares if any of

them die, the S corporation election was irrevocable for 10

years, and no shareholder could dispose of the shares in a manner

that would disqualify the election for 15 years; (c) the total

amount distributed to each shareholder for the year would be not

less than the amount which each shareholder must report on his

Federal income tax return for that year; and (d) as long as the

Bengals were an S corporation, the salaries of Paul, Mike and

Peter Brown were limited to the sum of several specified amounts

unless otherwise agreed to by Knowlton and Sawyer.

     The controlling shareholder S corporation agreement also

provided that:   (a) Knowlton, Charles D. Lindberg, and Robert

Fite were to be members of the Bengals' board of directors as

long as Knowlton's stock remained in the voting trust; (b) the
                                25

Bengals' board of directors would have at least seven members;

and (c) Knowlton would chair the board of directors as long as he

owns more than 25 percent of the Bengals' stock.

     The all shareholders and the controlling shareholder

agreements specified:   (a) The disposition of all of the

corporation's income (pursuant to the S corporation election);

(b) that no more shares of stock would be issued unless approved

by two-thirds of the shareholders; (c) the compensation of some

directors and the compensation limit of Brown and his sons; (d)

that the corporation's code of regulations could not be amended

unless approved by two-thirds of the shareholders; (e) the

responsibilities of the corporation's general manager and

chairman of the board; (f) that the ability of the shareholders

to transfer shares (pursuant to the S corporation election) was

restricted; (g) that the Bengals could have only one class of

stock; and (h) that the corporation would make a tax election to

become an S corporation.

     7.   Other Facts Related to the 1983 Agreements

     Sawyer executed an irrevocable proxy on May 16, 1983.   In

it, he authorized Paul and Mike Brown to vote his Bengals shares

to extend the 1980 voting trust for a second 10-year term and to

appoint Peter Brown as successor trustee under the voting trust.

     The Bengals filed an S corporation election on May 14, 1983.

     On June 14, 1983, Paul, Mike and Peter Brown and Sawyer

executed a supplemental voting trust agreement.    It named Peter
                                  26

Brown as the second successor voting trustee.    It also stated

that, if Peter Brown became the sole voting trustee, the

remaining parties would continue to have the voting trust and

would deposit their Bengals shares with the second successor

voting trustee.4

F.   NFL Constitution and Bylaws Relating to a Sale of an
     Interest in an NFL Team

     The NFL's constitution and bylaws (as in effect in 1983)

required anyone wanting to sell an interest in an NFL team to

apply in writing to the NFL Commissioner, and required the

Commissioner to submit the application to NFL members for

approval.   Approval required a vote of three-quarters, or 20,

whichever is more, NFL members.    Approval was not required for

transfers to members of the immediate family of the owner of the

interest by gift or upon the death of the owner of the interest.

     No written request was submitted to the NFL to approve the

1983 transfer of 117 shares of Bengals stock from Paul Brown to

Sawyer.   The Bengals informed the NFL sometime before September

1983 that Sawyer had bought Paul Brown's 117 shares.    The

Commissioner did not ask the other NFL owners to approve the




     4
       On May 7, 1990, Paul, Mike, and Peter Brown, Sawyer,
William J. Williams, Louis Nippert, Harriette Downey, Samuel L.
Barr, Jr., West Shell, Jr., and John Downey agreed to irrevocably
extend the 1980 voting trust for 10 years. The agreement named
Paul Brown voting trustee, Mike Brown successor voting trustee,
and Peter Brown second successor voting trustee.
                                      27

transfer.    The other NFL owners never approved the sale from

Brown to Sawyer.

       Bill Ray, then the NFL treasurer, prepared a memorandum to

the NFL file which showed that on September 29, 1983, the Bengals

were owned as follows:

              Name                                  Shares

       John Sawyer                                   330
       Austin Knowlton                               248
       Paul Brown                                      1
       Mike Brown                                      1
       Peter Brown                                     1
       David G. Gamble                                 1
       Virginia Fite                                   1
       Louis Nippert                                   1
       James R. Williams                               1
       William J. Williams                             1
            Total                                    586

G.     Brown Family Limited Partnership

       1.   Formation, Ownership, and Dissolution of the Brown
            Family Limited Partnership

       On August 17, 1983, Paul, Mike, and Peter Brown formed the

Brown family limited partnership (Brown family partnership).         The

stated value of the capital contribution made by each partner

was:

                             Capital Contribution            Units

       General Partner

       Paul Brown                 $        49,000             49

       Limited Partners

       Paul Brown                 $2,300,000                 2,300
       Mike Brown                        500                    .5
       Peter Brown                       500                    .5
                                  28

     Also on August 17, 1983, Paul, Mike, and Peter Brown took

several other actions related to the Brown family partnership.

First, Paul Brown assigned the $3.51 million promissory note from

Sawyer to the Brown family partnership.5   Second, Mike and Peter

Brown assigned the stock option agreement to the Brown family

partnership.   Third, Paul Brown gave 375 Brown family partnership

units to members of his family as follows:

          Donee                                   Units

          Mike Brown                              20.00

          Peter Brown                            187.50

          Nancy Brown
          (Mike's Wife)                           20.00

          Katherine Brown Trust
          (Mike's Daughter)                       73.75

          Paul H. Brown Trust
          (Mike's Son)                            73.75
               Total                             375.00

Fourth, Paul Brown sold 1,925 Brown family partnership units to

members of his family.    Each of those family members gave Paul

Brown a promissory note (partnership unit notes), bearing 9-

percent interest, for the partnership units they bought from him.

All principal and interest was to be due on December 31, 2001.

At that time, Paul Brown, if living, would be 93 years old.    The




     5
       Sawyer listed on a balance sheet for 1988 the 1983
promissory note in the amount of $3.51 million as a note due to
the Brown family partnership.
                                29

partnership unit notes were nonrecourse.    The number of units and

amount of each partnership unit note are shown as follows:

                                                   Partnership
                               Units               Unit Notes

     Peter Brown               962.5                 $962,500
     Nancy Brown               117.5                  117,500
     Mike Brown                117.5                  117,500
     Paul H. Brown Trust       363.75                 363,750
     Katherine Brown Trust     363.75                 363,750
          Total                1,925                1,925,000

     In 1990, Paul Brown gave 9.496 Brown family partnership

units to members of his family as follows:

          Donee                            Units

          Nancy Brown                      2.374
          Katherine Brown                  1.187
          Paul H. Brown                    1.187
          Mike Brown                       2.374
          Peter Brown                      2.374
               Total                       9.496

     On December 22, 1990, Paul Brown sold his remaining Brown

family partnership units as follows:

          Buyer              Purchase Price               Units

        Mike Brown            $146,412.50                17.378
        Peter Brown            186,412.50                22.126
             Total                                       39.504

     On December 22, 1990, Paul Brown withdrew as general partner

of the Brown family partnership, and Mike Brown, as general

partner, executed a certificate canceling the Brown family

partnership.   The certificate was filed with the Hamilton County

Recorders Office on December 26, 1990.
                                  30

     Sometime from December 22, 1990, to January 2, 1991, Mike

and Peter Brown gave Paul Brown promissory notes for $126,412.50

and $166,412.50, respectively, as partial consideration for the

Brown family partnership units.     Both notes were paid in full,

with interest, in January 1991.

     On January 2, 1991, Paul Brown forgave $20,000 of each of

the debts incurred by Mike and Peter Brown.

     The partnership was later dissolved.     Its assets (the Sawyer

note and option) were distributed to the partners, pro rata,

according to partnership units held.

     2.      Paul Brown's Gifts of Partnership Interests and
             Forgiveness of Related Debt

     Paul Brown and his wife, Mary Brown, filed Federal gift tax

returns (Forms 709) for the tax years 1983 to 1986, 1990, and

1991.     They used the annual per donee exclusions from gifts

(section 2503), and the gift splitting provisions (section 2513)

in each of those years, and the unified credit (section 2010) in

1983-86.

     On their Forms 709 for 1984, 1985, and 1986, Paul and Mary

Brown reported that the donor's adjusted basis was zero for all

gifts.

     Paul Brown reported making the following gifts in 1983-86

and 1990-91:
                                                       31
                                    Gifts By Paul Brown--1983-86 and 1990-91

                          Gifts of Partnership Interests, Debt Forgiveness, and Cash



                   Gifts of
                   Partnership                        Gifts of Debt                                  Gifts of
                   Interests                           Forgiveness                                     Cash

Donees          1983       1990         1983       1984      1985       1986      1991          1990      1991

Mike Brown      $20,000   $20,000    $11,303.50   $20,268   $20,099     $75,069   $20,000

Peter           187,500    20,000     92,592.50   166,000   164,639    615,000    20,000
Brown

Nancy            20,000    20,000     11,303.50    20,268    20,099     75,069
Brown

Mike
Brown,
Trustee of    73,750                  34,997.75    62,732    62,221    232,431
the Katherine
Brown Trust

Mike
Brown,
Trustee of       73,750               34,997.75    62,732    62,221    232,431
the Paul H.
Brown Trust

Grandchildren
Katherine                  10,000                                                           10,000
Brown

Paul H.                    10,000                                                           10,000
Brown

Brian & Donna                                                                               10,000    10,000
Brown

Kevin & Linda                                                                               10,000    10,000
Brown

Scott & Tanya                                                                               10,000    10,000
Brown

Roger & Robin                                                                               10,000    10,000
McDougal

Godchild
Katie Lietch                                                                                10,000    10,000

Stephanie                                                                                             10,000
Fredrich


   Total        375,000    80,000    185,195.00   332,000   329,279   1,230,000    40,000    70,000     60,000

                 3.       Income Tax Returns

                 Paul Brown reported capital gains income from forgiveness of

          debt on the sale of Brown family partnership units on his Federal
                                   32

income tax returns from 1983 to 1986 and 1991 (partial year).       He

paid tax thereon as follows:

                        Capital Gains      Tax Allocable to
                         Income From        Capital Gains
             Year    Forgiveness of Debt        Income

             1983           $185,185            $37,037
             1984            332,000             66,400
             1985            329,728             65,946
             1986          1,078,537            215,707
             1991            330,285             94,275
             Total         2,255,735            479,365

H.   Paul Brown's Will

     On October 26, 1990, Paul Brown executed his will.       He left

any interest he had in the Brown family partnership and any of

his shares of the Bengals stock to Mike and Peter Brown.      He left

to Peter any interest he had in a promissory note from Mike and

to Mike any interest he had in a promissory note from Peter.      He

provided that, if either son died before him, these specific

bequests would transfer to his sons' estates.

I.   NFL Approval of the Transfer of Bengals Stock From Sawyer to
     Brown Family Members

     Before October 20, 1992, Mike, Nancy, Peter, and Katherine

Brown asked the NFL to approve the transfer of 329 shares of

Bengals stock from Sawyer pursuant to the 1983 stock option

agreement.    The NFL's executive committee and the members of the

NFL approved the transfer.     By letter dated February 23, 1993,

Paul Tagliabue, Commissioner of the NFL, told the Browns and

Sawyer that the NFL had approved the transfer.
                                  33

J.   1993 Escrow Agreement

     On February 24, 1993, a 1993 escrow agreement was made by

Sawyer, Mike, Nancy, Peter, Katherine, and Paul H. Brown, and PNC

Bank as escrow agent.     The escrow agreement provided in part

that:     (1) The escrow agent would receive:   (a) voting trust

certificates for 329 shares endorsed for transfer by Sawyer; (b)

a check for $196,274.32 from Mike Brown, and on or before March

1, 1993, a check for $1,359,725.68, both payable to PNC Bank; and

(c) the $3.51 million promissory note from Sawyer to Paul Brown,

marked "Paid in Full"; and (2) on March 1, 1993, the escrow agent

would release:     (a) the voting trust certificates to the Browns;

and (b) a check for $1,556,000 payable to Sawyer and the

promissory note.

     Paul Brown's sons exercised the option on March 1, 1993.

Also on that day, Mike, Peter, and Nancy Brown, Katherine Brown

Blackburn, and Paul H. Brown paid Sawyer $1,556,000.

K.   Valuation Issues

     For purposes of this case the parties agree and we find

that:

     1.      On May 16, 1983, the fair market value of a minority

interest in the Bengals, after all appropriate discounts, was

$28,253 per share.

     2.      On May 16, 1983, the fair market value of Sawyer's 1983

promissory note was $2,029,000.
                                34

     3.   On May 16, 1983, the fair market value of the 1983

option to buy up to 329 shares of Bengals stock from March 1,

1993, to February 28, 1996, was not less than $1.8 million.

     4.   When Paul Brown died on August 5, 1991, the fair market

value of a majority interest in the Bengals was $111,000 per

share and the fair market value of a minority interest was

$76,400 per share.   These amounts include all appropriate

discounts but do not take into account the effect of the 1983

option on the value of the stock.

                              OPINION

A.   The Positions of The Parties

     Respondent argues that, under section 2036(a), Paul Brown's

estate includes 312 shares of Bengals stock.    Respondent contends

that the substance of the 1983 transaction is different from its

form, and that we should treat it according to its substance.

Respondent contends that the substance of the 1983 transaction is

that Paul Brown gave Sawyer the dividends from Paul Brown's 117

shares of Bengals stock for 10 years in exchange for ownership of

Sawyer's 212 shares in 10 years.     More specifically, respondent

argues that, in substance, the 1983 transaction between Sawyer

and Brown was a sale by Sawyer of his 212 shares of Bengals stock

(or a remainder interest therein) to Brown in return for a 10-

year income interest in Brown's 117 shares of Bengals stock, and

an indirect transfer by Brown of 329 shares of Bengals stock to

his sons through Sawyer as a conduit.
                                   35

      In light of the fact that five members of Paul Brown's

family paid $1,556,000 to Sawyer in 1993, respondent concedes

that Sawyer received arm's-length consideration for some of the

Bengals stock.     Thus, respondent concedes that only 312 shares

are included in Paul Brown's estate under section 2036.      Our

analysis is not affected by whether respondent contends that

Brown's estate includes 312 or 329 shares of Bengals stock.

      Petitioner contends that Paul Brown's estate does not

include any of the 329 shares of Bengals stock sold pursuant to

the 1983 agreement between Brown and Sawyer.      Petitioner contends

that the 1983 agreement was a bona fide, arm's-length agreement,

the substance of which is the same as its form.      Petitioner

contends that section 2036 does not apply to the 117 shares of

stock Paul Brown sold to Sawyer because Sawyer paid full

consideration for it, or to Sawyer's 212 shares of Bengals stock

because Paul Brown did not transfer or retain a life interest in

it.

B.    Section 2036 -- Background

      A decedent's gross estate includes the value of an interest

in property that the decedent transferred for less than adequate

and full consideration and in which the decedent retained for

life the right to (or to designate a person or persons to)

possess or enjoy the income.     Sec. 2036(a).6   Section 2036(a)


      6
          Sec. 2036 provides as follows:

                                                       (continued...)
                                36

applies if:   (1) The decedent made an inter vivos transfer of

property; (2) the decedent retained the possession or enjoyment

of, or the right to the income from, the transferred property, or

the right to designate who may use the property or the income

therefrom; and (3) the transfer was for less than adequate and

full consideration.   Sec. 2036(a); National City Bank v. United

States, 371 F.2d 13, 15 (6th Cir. 1966).   Section 2036(a) applies

only if all three of these requirements are met.   Sec. 2036(a).

     Petitioner bears the burden of proof.   Rule 142(a).

     As discussed next, we conclude that section 2036 does not

apply here because Paul Brown (1) received adequate and full

consideration for the 117 shares of Bengals stock, and (2) did



     6
      (...continued)
          (a) General rule.-- The value of the gross estate
     shall include the value of all property to the extent
     of any interest therein of which the decedent has at
     any time made a transfer (except in case of a bona fide
     sale for an adequate and full consideration in money or
     money's worth), by trust or otherwise, under which he
     has retained for his life or for any period not
     ascertainable without reference to his death or for any
     period which does not in fact end before his death--

               (1) the possession or enjoyment of, or the
          right to the income from, the property, or

               (2) the right, either alone or in conjunction
          with any person, to designate the persons who
          shall possess or enjoy the property or the income
          therefrom.

          (b) Voting rights.-- For purposes of subsection
     (a)(1), the retention of the right to vote (directly or
     indirectly) shares of stock of a controlled corporation
     shall be considered to be a retention of the enjoyment
     of transferred property.
                                  37

not make an inter vivos transfer of Sawyer's 212 shares of

Bengals stock.

C.   Whether Paul Brown Received Adequate and Full Consideration
     for the 117 Shares of Bengals Stock He Sold to Sawyer

     Petitioner contends that Paul Brown transferred the 117

shares to Sawyer for adequate and full consideration.

     Receipt of adequate and full consideration in money or

money's worth by a transferor removes property from a gross

estate.     Sec. 2036(a); Merrill v. Fahs, 324 U.S. 308, 311-312

(1945); Commissioner v. Wemyss, 324 U.S. 303, 307 (1945); Estate

of Gregory v. Commissioner, 39 T.C. 1012, 1016 (1963).    Section

2036(a) prevents the depletion of the transferor's gross estate

for Federal estate tax purposes where the transferor retains the

use and enjoyment of transferred assets until death.     Estate of

Frothingham v. Commissioner, 60 T.C. 211, 215-216 (1973).

     Respondent argues that Brown's transfer of the 117 shares to

Sawyer in 1983 was not for adequate and full consideration.    We

disagree.

     Brown's sale of the 117 shares of Bengals stock to Sawyer on

May 16, 1983, was part of a bona fide, arm's-length agreement.

Brown received adequate and full consideration in money or

money's worth for the stock.    On May 16, 1983, the 117 shares had

a fair market value (as stipulated by the parties) of $3,305,601

($28,253 per share).    Sawyer paid Brown for the 117 shares (a) by

giving him an interest-bearing $3.51 million promissory note, and

(b) by granting (at Brown's behest) an option to buy 329 shares
                                 38

of Bengals stock to Brown's sons for $1.00.   The fair market

value (as stipulated by the parties) of the promissory note

Sawyer transferred to Brown was $2,029,000.   The option Sawyer

granted to Brown's sons (at Brown's behest) for $1.00 had a fair

market value in 1983 (as stipulated by the parties) of at least

$1.8 million.    Brown received adequate and full consideration for

the 117 shares because he transferred 117 shares worth $3.3

million to Sawyer in exchange for property worth at least $3.8

million.   Sec. 2036(a).   Thus, section 2036(b) does not apply to

Brown's 117 shares.   Sec. 2036(a); see Hutchens Non-Marital Trust

v. Commissioner, T.C. Memo. 1993-600.

     Respondent does not contend that Brown received less than

adequate and full consideration for Sawyer's 212 shares of

Bengals stock.   Respondent's silence on the application of one of

the elements of section 2036(a) here is consistent with the fact

that Brown never owned Sawyer's 212 shares.   Thus, one of the

three requisites for application of section 2036(a) is not met

for both the 117 shares and the 212 shares of Bengals stock.

D.   Whether Decedent Made an Inter Vivos Transfer of Sawyer's
     212 Shares of Bengals Stock

     Respondent argues that Brown transferred the 329 shares of

Bengals stock under the interpretation of the term "transfer" in

section 2036(a) applied by the U.S. Court of Appeals for the

Sixth Circuit.    Mahoney v. United States, 831 F.2d 641, 646-647

(6th Cir. 1987); Estate of Shafer v. Commissioner, 749 F.2d 1216,

1221-1222 (6th Cir. 1984), affg. 80 T.C. 1145 (1983).   Respondent
                                39

points out that section 2036 applies to a remainder interest a

decedent buys from a third party if the decedent retained a life

interest in the property.   Estate of Shafer v. Commissioner,

supra.

     In Estate of Shafer v. Commissioner, supra, the decedent

bought real property and had the seller convey a life interest to

him and his wife and a remainder interest to their sons.     749

F.2d at 1218, 1221.   The U.S. Court of Appeals for the Sixth

Circuit treated the decedent as having (a) purchased the

property, (b) transferred the remainder to his sons, and (c)

retained a life interest for himself.   It held that the

decedent's estate included the property under section 2036

because the decedent retained possession and enjoyment of the

property while conveying a remainder interest to his sons.      Id.

at 1221.

     Respondent contends that, under Estate of Shafer, section

2036 brings into Paul Brown's estate 312 of the 329 shares

obtained by Paul Brown's sons when they exercised the option.      We

disagree.   The decedent in Estate of Shafer bought a life

interest and a remainder interest in property.   In contrast, Paul

Brown did not buy either a life interest or a remainder interest

in the 329 shares.

     The option granted to the Browns was not a remainder

interest.   A remainder interest arises automatically when a life

interest ends.   The Browns were not automatically entitled to
                                40

possess the shares on March 1, 1993; they had to exercise the

option and pay the option price.

     Unlike Estate of Shafer, where the decedent paid for a

remainder interest that the seller conveyed to the decedent's

sons, Brown did not pay Sawyer for the 212 shares; instead, five

members of his family paid $1,556,000 for the shares when Brown's

sons exercised the option in 1993.7

     Paul Brown did not make an inter vivos transfer of Sawyer's

212 shares of Bengals stock.   Thus, one of the three requisites

for application of section 2036(a) is not met, and section

2036(a) does not apply to those shares.

E.   Whether Paul Brown Retained an Interest in the 329 Shares
     of Bengals Stock Which Were Subject to the 1983 Agreement

     Petitioner contends that the 329 shares of Bengals stock

which were subject to the 1983 agreement are not included in Paul

Brown's estate under section 2036(a) because Brown did not retain

possession or enjoyment of those shares.   We need not reach this

issue in light of our conclusions that Brown received full and

adequate consideration for his 117 shares of Bengals stock and




     7
       This case is also distinguishable on other grounds from
Estate of Shafer v. Commissioner, 749 F.2d 1216 (6th Cir. 1984),
affg. 80 T.C. 1145 (1983). Paul Brown did not acquire the right
to vote Sawyer's 212 shares in exchange for the right to receive
dividends from Brown's 117 shares of Bengals stock for 10 years;
he already had the right to vote Sawyer's 212 shares under the
pre-existing all shareholders, controlling shareholder, and
voting trust agreements. In contrast, the decedent in Estate of
Shafer had no interest of any kind in the property before he
bought it from the seller.
                                41

that he did not make an inter vivos transfer of Sawyer's 212

shares of Bengals stock.

F.   Respondent's Substance Over Form Theory

     Respondent argues that Paul Brown's estate includes 312

shares of Bengals stock on the grounds that the substance of the

1983 agreement does not comport with its form.

     1.   Factual Discrepancies Cited by Respondent to Support
          the Contention that the Form of the Transaction Does
          Not Comport with Its Substance

     Respondent contends that factual discrepancies are present

which show that Brown and Sawyer did not respect the form of the

transaction.   We disagree that there are any significant

discrepancies.

     Respondent points out that, despite the fact that the stock

purchase agreement, signed on March 1, 1983, required the closing

of the sale and purchase to occur immediately after execution of

the agreement, the closing was on May 16, 1983.   We do not find

the delay to be significant.   Petitioner adequately explained

that the parties could not close the transaction until May 16

because of the time required to get the Bengals shareholders to

agree to make the S corporation election.

     Respondent points out that nearly $66,000 in interest

accrued on the promissory note from March 1 to May 16, 1983.

Respondent contends that, if Sawyer had expected to pay that

interest, he would have delayed the accrual of interest until the

transaction closed.   Respondent maintains that Sawyer's failure
                                 42

to change the 1983 agreement to take the delay into account shows

that he knew the option would be exercised and that principal and

interest due on the note would be offset by the option price.      We

disagree.    First, we think the parties did not anticipate that

there would be a 2-½ month delay in closing the transaction.

Second, Sawyer's failure to change the 1983 agreement because of

the delay does not show whether he expected the option to be

exercised.    Assuming that a delay in the accrual of interest

would have entitled Sawyer to pay nearly $66,000 less in interest

to Brown, and that the option was not exercised, Sawyer would

have owed Brown nearly $66,000 less when his note to Brown became

due in 1993.    By the same token, if the accrual of interest had

been delayed and the option was exercised, the $1,556,000 payment

to Sawyer from five members of Brown's family would have been

nearly $66,000 larger because it was the net of the exercise

price and the amount Sawyer owed Brown on the note.    Thus, as a

result of the failure to delay the accrual of interest, Sawyer

would have lost the $66,000 whether or not Brown's sons exercised

the option.

     Respondent points out that the Bengals did not submit a

written request to the NFL to approve Paul Brown's 1983 transfer

of 117 shares of Bengals stock to Sawyer, and the other NFL

owners did not vote to approve the Brown to Sawyer stock

transfer.    The Bengals orally notified the NFL that there had

been an ownership change.    The NFL constitution and bylaws
                                  43

require the NFL Commissioner (then Pete Rozelle), not the buyer

and seller, to present the transaction to the NFL owners for

their approval.     Rozelle did not submit the transaction to the

NFL owners.     Brown and Sawyer each believed that the 1983

transaction complied with NFL requirements.

     Respondent contends that, despite the 1983 transaction, the

NFL and the Bengals shareholders did not recognize Sawyer as the

owner of a majority of the Bengals stock.      Respondent points out

that Sawyer never ran the team, he was not the voting trustee,

and he did not terminate the voting trust.      We disagree that this

shows that Sawyer did not become the majority shareholder in

1983.     The NFL knew that Sawyer was the majority shareholder, as

shown by the September 29, 1983, NFL memo relating to the

Bengals' ownership.     Sawyer knew that Paul Brown had the

expertise to manage the Bengals.       Sawyer reasonably believed that

having Paul Brown manage the team helped to protect his

investment in the team.

     Respondent argues that these facts show that the parties'

actions were inconsistent with the form of the transaction.      We

disagree that these points are significant enough to show that

Brown and Sawyer did not respect the form of the transaction.

     2.      Discussion of Respondent's Substance Over Form Theory

     Respondent points out that the Commissioner may look beyond

the form of a transaction to see if the form comports with its

substance; and, if it does not, the transaction generally may be
                                 44

taxed according to its substance and not its form.    Gregory v.

Helvering, 293 U.S. 465, 469-470 (1935); Mahoney v. United

States, 831 F.2d at 646-647; Patterson v. Commissioner, 810 F.2d

562, 570 (6th Cir. 1987), affg. T.C. Memo. 1985-53; Estate of

Shafer v. Commissioner, 749 F.2d at 1221-1222; Schulz v.

Commissioner, 294 F.2d 52, 55-56 (9th Cir. 1961), affg. 34 T.C.

235 (1960); 1432 Broadway Corp. v. Commissioner, 160 F.2d 885 (2d

Cir. 1947), affg. 4 T.C. 1158 (1945); Lee v. United States, 57

AFTR2d 86-1548, 86-1 USTC par. 13,649 (W.D. Ky. 1985) (substance

determines the character of transactions for purposes of section

2036, regardless of the form), affd. without published opinion

815 F.2d 78 (6th Cir. 1987).

     Respondent contends that Paul Brown gave the dividends from

his 117 shares to Sawyer for 10 years in exchange for an interest

or a remainder interest, i.e., the option, in Sawyer's 212 shares

of stock and that Brown's interest in the 329 shares of Bengals

stock passed from Brown to his children.    Respondent asserts

that, in substance, Brown bought an interest, e.g., a remainder

interest, in Sawyer's 212 shares that passed to Brown's children

from Brown.   We disagree.   The record does not support

respondent's view that the transaction was in substance a sale of

the stock from Sawyer to Brown in 1983.    Brown and Sawyer did not

structure the transaction as a sale of stock to Brown in 1983.

There is no evidence that Sawyer would have agreed to do so.     He
                                45

testified that he enjoyed being the majority shareholder of the

Bengals.

     Respondent contends that the option to buy the 329 shares of

Bengals stock covered by the 1983 agreement was a sham, that it

was certain that Mike and Peter Brown would exercise it, and that

the option is in substance a remainder interest.   Respondent

points out:   (a) Sawyer granted the option, worth at least $1.8

million, to Paul Brown's sons for $1.00; (b) the option price in

1993 ($25,000 per share) was less than the price of the Bengals

stock in 1983 ($30,000 per share); and (c) unlike the 1980 stock

option between Paul Brown and Sawyer, the 1983 option did not

permit the parties to change the option price for the stock each

year.

     Respondent contends that Paul Brown's sons would not have

exercised the option only if the value of the Bengals shares had

fallen from the value of one share included in a majority block

in 1983 ($46,154 to $51,282 per share)8 to less than $25,000 per

share in 1993 to 1996.   Respondent contends that it was even more

certain that Paul Brown's sons would exercise the option because

the option price was not adjusted for the time value of money.



     8
       The option price was $25,000 per share for stock which was
part of a control block of stock. Sawyer bought 117 shares of
Bengals stock from Brown in 1983 for $30,000 per share; the 117
shares were not a control block. Using the $30,000 per share
price for a share of stock not owned in a control block,
respondent's expert estimated that a share of stock in a control
block in 1983 would cost $46,154, and petitioner's expert
estimated that it would cost $51,282.
                                  46

Respondent maintains that the stock could not possibly have lost

that much value.

       We disagree with respondent's contention that the option was

a sham.    We rejected a similar contention in Belz Inv. Co. v.

Commissioner, 72 T.C. 1209, 1224-1228 (1979), affd. 661 F.2d 76

(6th Cir. 1981), where the Commissioner argued that the

taxpayer's exercise of an option was inevitable.    The lease

granted the taxpayer an option to repurchase a motel after 10

years based on the amount the buyer-lessor paid for the motel,

reduced by the excess of rental payments over a specified amount.

We concluded that exercise of the option was not inevitable.      We

noted that the buyer-lessor negotiated the option price at arm's

length.    Id. at 1226, 1229.   Similarly, the option price in the

instant case was negotiated at arm's length as part of the 1983

transaction with Sawyer.    An option is generally not a sham if

purchased as part of an arm's-length transaction.    See Cobb v.

Commissioner, T.C. Memo. 1985-208.

       It was not certain in 1983 that Brown's sons would exercise

the option.    The parties did not know whether the option price

would be less than the value of Bengals stock in 10 years and

could not predict events that would occur in those 10 years that

would affect the value of the stock.    Brown's sons might have

decided to exercise the option for less than 329 shares or not at

all.
                                  47

     Respondent argues that the option gave Brown's sons a

remainder interest in 329 shares of Bengals stock.    We disagree.

An option to buy property is not an ownership interest in the

property.     Helvering v. San Joaquin Fruit & Inv. Co., 297 U.S.

496, 498-499 (1936); May v. McGowan, 97 F. Supp. 326, 328-329

(W.D.N.Y. 1950), affd. 194 F.2d 396 (2d Cir. 1952).    When Sawyer

granted the option to Paul Brown's sons he did not give them an

interest or remainder interest in the Bengals stock; he gave them

an option to buy stock.

     We rejected the Commissioner's argument that an option was

an interest in the underlying property in Cobb v. Commissioner,

supra.     In Cobb, the decedent gave an option to a third party to

buy her farm for $100,000 after she died.    The farm was worth

$270,000 when decedent died.    The Commissioner argued that the

option agreement was a taxable transfer of the underlying

property itself to the third party.    We disagreed, and held that

the decedent had made no inter vivos transfer of the farm or any

interest therein, and that section 2036 did not apply because the

decedent received fair consideration for the option.    Because

Sawyer granted the option to Brown's sons in an arm's-length

agreement between Paul Brown and Sawyer, we do not disregard the

option.9



     9
       Respondent does not contend, and we need not decide,
whether Brown made a constructive gift to his sons in 1983 when
Sawyer granted them the option to buy 329 shares of Bengals
stock.
                                  48

G.   Conclusion

     For the reasons stated above, we hold that section 2036 does

not apply and that one share of Bengals stock is includable in

Paul Brown's estate.

     To reflect the foregoing,



                                          Decision will be entered

                                 for petitioner.
