                         T.C. Memo. 2001-167



                       UNITED STATES TAX COURT



   ESTATE OF H.A. TRUE, JR., DECEASED, H.A. TRUE, III, PERSONAL
REPRESENTATIVE, AND JEAN D. TRUE, ET AL.1, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 10940-97, 3408-98,              Filed July 6, 2001.
                 3409-98.



     Buford P. Berry, Emily A. Parker, and Ronald M. Morris, for

petitioners.

     Richard D. D’Estrada and Robert A. Varra, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

                               Contents

Introduction    . . . . . . . . . . . . . . . . . . . . . . . . . 8



     1
      Cases of the following petitioners are consolidated
herewith: Jean D. True, docket No. 3408-98 and Estate of H.A.
True, Jr., Deceased, H.A. True, III, Personal Representative,
docket No. 3409-98.
                               - 2 -

Issue 1.  Does Book Value Price Specified in Buy-Sell
          Agreements Control Estate and Gift Tax Values of
    Subject Interests in True Companies? . . . . . . . . . .           10

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . .         10

       I.   Background . . . . . . . . . . . . . . . . . . . .         11
            A. True Family    . . . . . . . . . . . . . . . . .        11
            B. Formation and Growth of True Companies . . . .          12
                1. Reserve Drilling   . . . . . . . . . . . . .        12
                2. True-Brown Partnerships . . . . . . . . . .         13
                3. True Oil and True Drilling   . . . . . . . .        14
                4. Belle Fourche Pipeline Co.   . . . . . . . .        15
                5. Black Hills Oil Marketers, Inc./True Oil
                     Purchasing Co./Eighty-Eight Oil Co./Black
                     Hills Trucking, Inc.   . . . . . . . . . .        18
                6. True Ranches   . . . . . . . . . . . . . . .        20
                7. White Stallion Ranch, Inc.   . . . . . . . .        21
                8. Other True Companies   . . . . . . . . . . .        22
            C. Methods of Accounting Used by True Companies .          23
            D. Family Members’ Employment in True Companies .          24
            E. Family Gift Giving and Business Financing
                  Practices   . . . . . . . . . . . . . . . . .        27

      II.   True Family Buy-Sell Agreements . . . . . . . .        .   28
            A. Origin and Purpose . . . . . . . . . . . . .        .   28
            B. First Transfers of Interests in Belle
                 Fourche, True Oil, and True Drilling to
                 True Children   . . . . . . . . . . . . . .       .   30
            C. Wyoming U.S. District Court Cases on Belle
                 Fourche and True Oil Transfers . . . . . .        .   35
            D. Tamma Hatten’s Withdrawal From True Companies       .   39
            E. Use of Similar Buy-Sell Agreements in All
                 True Companies Except White Stallion;
                 Amendments and Waivers . . . . . . . . . .        .   42
            F. Unique Provisions of White Stallion Buy-Sell
                 Agreement   . . . . . . . . . . . . . . . .       .   48
            G. Future of True Family Buy-Sell Agreements . .       .   50

     III.   Transfers in Issue . . . . . . .   . . . . .   . .   . .   51
            A. 1993 Transfers of Partnership   Interests   by
                 Dave True   . . . . . . . .   . . . . .   . .   . .   51
            B. 1994 Estate Transfers . . . .   . . . . .   . .   . .   53
            C. 1994 Transfers by Jean True .   . . . . .   . .   . .   55

     IV.    Subsequent Income Tax Litigation Regarding
               Ranchland Exchange Transactions . . . . . . . .         55
                               - 3 -

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . .      59

       I.   Do Family Buy-Sell Agreements Control
              Estate Tax Value? . . . . . . . . . . . . . . .      59
            A. Framework for Analyzing Estate Tax Valuation
                 Issues . . . . . . . . . . . . . . . . . . .      59
            B. Development of Legal Standards . . . . . . . .      61
               1. Case Law Preceding Issuance of Regulations .     62
               2. Regulatory Authority and Interpretive
                     Rulings . . . . . . . . . . . . . . . . .     67
               3. Case Law Following Issuance of Regulations
                    and Revenue Ruling 59-60    . . . . . . . .    70
                  a. Was Agreement Entered Into for Bona Fide
                        Business Reasons?   . . . . . . . . . .    71
                  b. Was Agreement a Substitute for
                        Testamentary Dispositions? . . . . . .     72
                     1. Testamentary Purpose Test . . . . . .      73
                     2. Adequacy of Consideration Test . . . .     74
               4. Statutory Changes . . . . . . . . . . . . .      79

     II. Do 1971 and 1973 Gift Tax Cases Have Preclusive
           Effect? . . . . . . . . . . . . . . . . . . .   . .     81
         A. Petitioners’ Collateral Estoppel Argument .    . .     81
         B. Legal Standards for Applying Collateral
              Estoppel . . . . . . . . . . . . . . . . .   . .     82
         C. Collateral Estoppel Impact of 1971 and 1973
              Gift Tax Cases . . . . . . . . . . . . . .   . .     85
            1. Bona Fide Business Arrangement Issue . .    . .     86
            2. Whether Book Value Equaled Fair Market
                  Value as of Agreement Date Issue . . .   . .     87

    III.    Do True Family Buy-Sell Agreements Control
              Estate Tax Values? . . . . . . . . . . . . . .   .   90
            A. Was the Offering Price Fixed and Determinable
                 Under the Agreements? . . . . . . . . . . .   .   91
            B. Were Agreements Binding During Life
                 and at Death? . . . . . . . . . . . . . . .   .   91
            C. Were Agreements Entered Into for Bona
                 Fide Business Reasons? . . . . . . . . . .    .   99
            D. Were Agreements Substitutes for Testamentary
                 Dispositions? . . . . . . . . . . . . . . .   . 101
               1. Testamentary Purpose Test . . . . . . . .    . 101
                  a. Decendent’s Health When He Entered Into
                       Agreements . . . . . . . . . . . . .    . 101
                  b. No Negotiation of Buy-Sell Agreement
                       Terms . . . . . . . . . . . . . . . .   . 102
                  c. Enforcement of Buy-Sell Agreement
                     Provisions . . . . . . . . . . . . . .    . 107
                               - 4 -

                  d. Failure To Seek Significant Professional
                      Advice in Selecting Formula Price . . .    109
                  e. Failure To Obtain or Rely on Appraisals
                      in Selecting Formula Price . . . . . . .   112
                  f. Exclusion of Significant Assets From
                      Formula Price . . . . . . . . . . . . .    114
                  g. No Periodic Review of Formula Price . . .   115
                  h. Business Arrangements With True Children
                      Fulfilled Dave True’s Testamentary
                      Intent . . . . . . . . . . . . . . . . .   118
               2. Adequacy of Consideration Test . . . . . . .   120
                  a. Petitioners’ Brodrick v. Gore/Golsen
                       Argument . . . . . . . . . . . . . . .    121
                  b. Petitioners’ Assertion That Respondent
                       Impermissibly Applied Section 2703
                       Retroactively . . . . . . . . . . . . .   124
                  c. Did Tax Book Value Pricing Formula
                       Represent Adequate and Full
                       Consideration? . . . . . . . . . . . .    128
               3. True Family Buy-Sell Agreements Were
                    Substitutes for Testamentary Dispositions    140
            E. Conclusion: True Family Buy-Sell Agreements
                 Do Not Determine Estate Tax Values . . . . .    141

      IV.   Do True Family Buy-Sell Agreements Control
              Gift Tax Values? . . . . . . . . . . . . . . .   . 144
            A. Framework for Analyzing Gift Tax Valuation
                 Issues . . . . . . . . . . . . . . . . . .    . 145
            B. Buy-Sell Agreements Do Not Determine Value
                 for Gift Tax Purposes . . . . . . . . . . .   . 146
            C. Application of Gift Tax Rules to Lifetime
                 Transfers by Dave and Jean True . . . . . .   . 149
               1. True Family Buy-Sell Agreements Do Not
                    Control Gift Tax Values . . . . . . . .    . 149
               2. Lifetime Transfers by Dave and Jean True
                    Were Not in Ordinary Course of Business    . 151

       V.   Impact of Noncontrolling Buy-Sell Agreements
              on Estate and Gift Tax Valuations . . . . . . . 153

Issue 2.    If True Family Buy-Sell Agreements Do Not
            Control Values, What Are Estate and Gift Tax
            Values of Subject Interests? . . . . . . . . . . . 155

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . . 155

       I.   True Oil . . . . . . . . . . . . . . . . . . . . . 156
                                 - 5 -

     II.   Belle Fourche     . . . . . . . . . . . . . . . . . . 158

    III.   Eighty-Eight Oil . . . . . . . . . . . . . . . . . 161

     IV.   Black Hills Trucking . . . . . . . . . . . . . . . 164

      V.   True Ranches . . . . . . . . . . . . . . . . . . . 166

     VI.   White Stallion . . . . . . . . . . . . . . . . . . 168

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

      I.   Expert Opinions     . . . . . . . . . . . . . . . . . 169

     II.   Experts and Their Credentials . . . . . . . .    .   .   171
           A. Petitioners’ Expert, John H. Lax . . . . .    .   .   171
           B. Petitioners’ Expert, Curtis R. Kimball . .    .   .   172
           C. Petitioners’ Expert, Dr. Robert H. Caldwell   .   .   173
           D. Petitioners’ Expert, Michael S. Hall . . .    .   .   174
           E. Respondent’s Expert, John B. Gustavson . .    .   .   174

    III.   Preliminary Matters Regarding Valuation . . . .      . 175
           A. Respondent’s Alleged Concessions Regarding
                Valuation Discounts   . . . . . . . . . . .     . 175
           B. Role of Burdens and Presumptions in
                Cases at Hand   . . . . . . . . . . . . . .     . 180
           C. Petitioners’ Aggregation and Offset Argument      . 183

     IV.   Valuations of True Companies in Dispute . . .    .   .   186
           A. True Oil . . . . . . . . . . . . . . . . .    .   .   186
              1. Marketable Minority Interest Value   . .   .   .   186
                 a. Kimball Reports . . . . . . . . . . .   .   .   186
                 b. Final Lax Report . . . . . . . . . .    .   .   191
                 c. Gustavson Report and Respondent’s
                      Position . . . . . . . . . . . . .    .   .   193
                 d. Court’s Analysis . . . . . . . . . .    .   .   196
              2. Marketability Discounts . . . . . . . .    .   .   204
                 a. Kimball Reports . . . . . . . . . . .   .   .   204
                 b. Final Lax Report . . . . . . . . . .    .   .   207
                 c. Gustavson Report/Rebuttals and
                      Respondent’s Position . . . . . . .   . . 207
                 d. Court’s Analysis . . . . . . . . . .    . . 208
              3. Summary of Proposed Values and Court’s
                    Determinations of Values of Interests   in
                    True Oil . . . . . . . . . . . . . .    . . 215
           B. Belle Fourche   . . . . . . . . . . . . . .   . . 217
              1. Value of Total Equity on a Marketable
                    Basis . . . . . . . . . . . . . . . .   . . 217
                  - 6 -

      a. Kimball Report . . . . . . . . . . .    . . 217
      b. Initial and Final Lax Reports . . . .   . . 218
      c. Gustavson Report and Respondent’s
           Position . . . . . . . . . . . . .    .   .   221
      d. Court’s Analysis . . . . . . . . . .    .   .   224
   2. Marketability Discounts . . . . . . . .    .   .   233
      a. Kimball Report . . . . . . . . . . .    .   .   233
      b. Initial and Final Lax Reports . . . .   .   .   235
      c. Respondent’s Position . . . . . . . .   .   .   235
      d. Court’s Analysis . . . . . . . . . .    .   .   236
   3. Summary of Proposed Values and Court’s
         Determinations of Values of Interests
         in Belle Fourche . . . . . . . . . .    .   .   240
C. Eighty-Eight Oil . . . . . . . . . . . . .    .   .   241
   1. Marketable Minority Interest Value   . .   .   .   241
      a. Kimball Reports . . . . . . . . . . .   .   .   241
      b. Final Lax Report . . . . . . . . . .    .   .   241
      c. Respondent’s Position . . . . . . . .   .   .   242
      d. Court’s Analysis . . . . . . . . . .    .   .   243
   2. Marketability Discounts . . . . . . . .    .   .   246
      a. Kimball Reports . . . . . . . . . . .   .   .   246
      b. Final Lax Report . . . . . . . . . .    .   .   247
      c. Respondent’s Position . . . . . . . .   .   .   247
      d. Court’s Analysis . . . . . . . . . .    .   .   247
   3. Summary of Proposed Values and Court’s
         Determinations of Values of Interests
         in Eighty-Eight Oil . . . . . . . . .   . . 250
D. Black Hills Trucking . . . . . . . . . . .    . . 252
   1. Value of Total Equity on a Marketable
         Basis . . . . . . . . . . . . . . . .   .   .   252
      a. Kimball Report . . . . . . . . . . .    .   .   252
      b. Initial and Final Lax Reports . . . .   .   .   253
      c. Respondent’s Position . . . . . . . .   .   .   255
      d. Court’s Analysis . . . . . . . . . .    .   .   256
   2. Marketability Discounts . . . . . . . .    .   .   261
      a. Kimball Report . . . . . . . . . . .    .   .   261
      b. Initial and Final Lax Reports . . . .   .   .   262
      c. Respondent’s Position . . . . . . . .   .   .   262
      d. Court’s Analysis . . . . . . . . . .    .   .   263
   3. Summary of Proposed Values and Court’s
         Determinations of Values of Interests
         in Black Hills Trucking . . . . . . .   .   .   266
E. True Ranches . . . . . . . . . . . . . . .    .   .   268
   1. Marketable Minority Interest Values . .    .   .   268
      a. H&H Report . . . . . . . . . . . . .    .   .   268
      b. Kimball Reports . . . . . . . . . . .   .   .   270
      c. Final Lax Report . . . . . . . . . .    .   .   270
      d. Respondent’s Position . . . . . . . .   .   .   272
                                 - 7 -

                  e. Court’s Analysis . . . . . . . . . .    .   .   273
               2. Marketability Discounts . . . . . . . .    .   .   274
                  a. Kimball Reports . . . . . . . . . . .   .   .   274
                  b. Final Lax Report . . . . . . . . . .    .   .   275
                  c. Respondent’s Position . . . . . . . .   .   .   275
                  d. Court’s Analysis . . . . . . . . . .    .   .   275
               3. Summary of Proposed Values and Court’s
                     Determinations of Values of Interests
                     in True Ranches . . . . . . . . . . .   .   .   278
            F. White Stallion . . . . . . . . . . . . . .    .   .   280
               1. Marketable Minority Interest Values . .    .   .   280
                  a. Kimball Report . . . . . . . . . . .    .   .   280
                  b. Initial and Final Lax Reports . . . .   .   .   280
                  c. Respondent’s Position . . . . . . . .   .   .   281
                  d. Court’s Analysis . . . . . . . . . .    .   .   281
               2. Marketability Discounts . . . . . . . .    .   .   284
                  a. Kimball Report . . . . . . . . . . .    .   .   284
                  b. Initial and Final Lax Reports . . . .   .   .   284
                  c. Respondent’s Position . . . . . . . .   .   .   285
                  d. Court’s Analysis . . . . . . . . . .    .   .   285
               3. Summary of Proposed Values and Court’s
                    Determinations of Values of Interests
                    in White Stallion . . . . . . . . . .    . . 287

Issue 3.   Did Jean True Make Gift Loans When She Transferred
           Interests in True Companies to Sons in Exchange for
           Interest-Free Payments Received Approximately 90
           Days after Effective Date of Transfers? . . . . . . 288

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . . 289

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 297

       I. Summary of Arguments     . . . . . . . . . . . . . . . 297

      II. Jean True’s Sales Were Completed on Notice Dates       . 300

     III. Sections 483 and 1274 Do Not Prevent Below-Market
            Loan Treatment Under Section 7872   . . . . . . . 308

      IV. Deferred Payment Arrangements Are Below-Market
            Gift Loans Subject to Section 7872 . . . . .     .   .   313
          A. Loan   . . . . . . . . . . . . . . . . . . .    .   .   313
          B. Below-Market Loan . . . . . . . . . . . . .     .   .   314
          C. Gift Loan . . . . . . . . . . . . . . . . .     .   .   315

       V. Amounts of the Gifts--Application of Section 7872 . 317
                                  - 8 -

Issue 4.     Are Petitioners Liable for Valuation Understatement
             Penalties Under Section 6662(a), (g), and (h)?   . 320

FINDINGS OF FACT    . . . . . . . . . . . . . . . . . . . . . . 320

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 322

Appendix    . . . . . . . . . . . . . . . . . . . . . . . . . . 334

       Schedule 1 . . . . . . . . . . . . . . . . . . . . . . . 334
       Schedule 2 . . . . . . . . . . . . . . . . . . . . . . . 335
       Schedule 3 . . . . . . . . . . . . . . . . . . . . . . . 336


       BEGHE, Judge:    Respondent determined Federal gift and estate

tax deficiencies and accuracy-related penalties under sections

6662(a), (g), and (h)2 in the following amounts:

   Docket No.    Tax        Year           Deficiency    Penalties
   10940-97      Gift     12/31/93        $15,201,984   $6,080,794
    3409-98      Estate   06/04/941        43,639,111   17,455,644
    3408-98      Gift     12/31/94         17,094,788    6,791,715
      Totals                               75,935,883   30,328,153
   1
       Date of death.

Introduction

       In each of these consolidated cases, respondent determined a

gift or estate tax deficiency and penalty arising from a gross

valuation understatement.     The deficiencies and penalties relate

to valuations of ownership interests in various corporations and

partnerships (collectively, the True companies), subject to buy-

sell agreements, transferred individually in 1993 by H.A. True,


       2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect as of the date of Dave True’s
death (for estate tax purposes) or dates of Dave and Jean True’s
alleged gifts (for gift tax purposes). All Rule references are
to the Tax Court Rules of Practice and Procedure.
                               - 9 -

Jr., deceased, (docket No. 10940-97),3 reported by the Estate of

H.A. True, Jr., H.A. True, III, personal representative (estate)

by reason of H.A. True, Jr.’s death in 1994 (docket No. 3409-98),

or transferred by Jean True individually in 1994 (docket No.

3408-98) (collectively, petitioners).4   Petitioners timely filed

petitions with this Court contesting the deficiencies and

penalties and claiming a refund of whatever overpayment of estate

tax might arise from payments of administration expenses not

claimed on the estate tax return.   After concessions, the

following issues are to be decided:

     1.   Does the book value price specified in the buy-sell

agreements control estate and gift tax values of the subject

interests in the True companies (buy-sell agreement issue);

     2.   If the True family buy-sell agreements do not control

values, what are the estate and gift tax values of the subject

interests (valuation issue);




     3
      Jean True is a party to docket No. 10940-97 solely because
she elected to be treated as donor of one-half of the gifts H.A.
True, Jr. made during 1993. See sec. 2513.
     4
      We include the estate in the collective term, petitioners,
for ease of reference only. This reference does not suggest
whether we regard the personal representatives’ residences, or
the decedent’s domicile at death, to be controlling for appellate
venue purposes under sec. 7482(b)(1). See Estate of Clack v.
Commissioner, 106 T.C. 131 (1996). The issue is not implicated
in the cases at hand because Dave True and the estate’s personal
representatives were all domiciled in the same jurisdiction
(Wyoming) at all relevant times. See infra pp. 11-12.
                              - 10 -

     3.   Did Jean True make gift loans when she transferred

interests in the True companies to her sons in exchange for

interest-free payments received approximately 90 days after the

effective date of the transfers (gift loan issue); and

     4.   Are petitioners liable for valuation understatement

penalties under section 6662(a), (g), and (h) (penalty issue)?

     We hold in respondent’s favor that the buy-sell agreements

do not control estate and gift tax values.   We value the subject

interests at amounts greater than the prices paid under the buy-

sell agreements and hold that understatement penalties apply to

parts of the resulting deficiencies.   We hold for respondent on

the gift loan issue.

     For convenience and clarity, findings of fact and opinion

are set forth separately under each issue.   The findings of fact

regarding any issue incorporate, by this reference, the facts as

found with respect to any issue previously addressed.

Issue 1. Does Book Value Price Specified in Buy-Sell Agreements
Control Estate and Gift Tax Values of Subject Interests in True
Companies?

                         FINDINGS OF FACT

    Some of the facts have been stipulated by the parties and

are so found.   The stipulation of facts, supplemental stipulation

of facts, associated exhibits, and oral stipulations are

incorporated by this reference.
                              - 11 -

I.   Background

     A.   True Family

     Henry Alphonso True, Jr. (known as H.A. True, Jr. or Dave

True) was born June 12, 1915, and resided in Casper, Wyoming,

from 1948 until his death on June 4, 1994, 1 week before his 79th

birthday.   He was survived by his wife, Jean True, his children,

Tamma True Hatten (Tamma Hatten), H.A. True, III (Hank True),

Diemer D. True (Diemer True), and David L. True (David L. True)

(collectively, the True children), his grandchildren, and great-

grandchildren.

     The Natrona County, Wyoming, probate court (probate court)

appointed Jean True, Hank True, Diemer True, and David L. True

(personal representatives) as co-personal representatives of the

estate.   After approving the estate’s final accounting, the

probate court discharged the personal representatives on

December 13, 1995.

     Dave True’s Last Will and Testament, dated September 14,

1984 (will), provided that the residue of his estate should be

paid to the trustees under the H.A. True, Jr. Trust dated

September 14, 1984 (living trust), as amended.   Under the living

trust, Jean True, Hank True, Diemer True, and David L. True were

appointed as first successor trustees (trustees) upon Dave True’s

death.
                                   - 12 -

    The personal representatives, trustees, and Jean True

individually, resided in Casper, Wyoming, at the times they filed

their petitions with this Court.

    B.     Formation and Growth of True Companies

           1.   Reserve Drilling

    Dave True graduated from college and married Jean True in

1938.    During the next 10 years, he worked in the oil and gas

business for the Texas Co. (later known as Texaco) in various

positions, eventually becoming Wyoming State superintendent of

drilling and production, based in Cody, Wyoming.       During this

time, Tamma (1940), Hank (1942), and Diemer (1946) were born.

    In 1948, Dave True left the Texas Co., moved his family to

Casper, Wyoming, and became manager of Reserve Drilling Co.

(Reserve Drilling), a one-rig contract drilling business.         Dave

and Jean True’s youngest child, David L. True, was born in 1950.

By 1951, Dave True owned 15 percent of Reserve Drilling, Doug

Brown, an attorney, owned 10 percent, and unrelated companies

owned the remaining interests.       Reserve Drilling generated

substantial profits and acquired additional rigs under Dave

True’s management.    Eventually, the unrelated companies sold

their interests to Dave True and Doug Brown, who financed their

purchases with borrowed funds.
                               - 13 -

         2.    True-Brown Partnerships

    Dave True and Doug Brown jointly pursued other business

ventures (collectively, True-Brown partnerships).    Among them was

True & Brown Drilling Co., a partnership formed in 1951 that

engaged in contract drilling and also acquired working interests

in oil and gas properties.   Dave True worked long hours in the

field on the drilling rigs, while Doug Brown worked regular hours

in the Casper office.   Dave True came to believe that he was

contributing more than 50 percent of the efforts required to run

the company.   In 1954, Dave True offered to sell his interest, or

to buy Doug Brown’s interest, at a stated price.    Doug Brown

chose to sell his interests in all the True-Brown partnerships,

and Dave True financed his purchase through an oil payment (bank

loan payable out of oil production).5

    These experiences influenced Dave True’s business philosophy

and generated his interest in using buy-sell agreements.    Dave

True decided that he never again would incur outside debt to

finance acquisitions and that he would allow only family members

to be his partners in future business ventures.




     5
      Other than intimations that the purchases and sales of the
outsiders’ interests in Reserve Drilling and the True-Brown
partnerships were at arm’s length, there is no indication in the
record how the purchase prices in these transactions were
established. See infra pp. 16-17 with respect to purchases-
redemptions of outside shareholders’ interests in Belle Fourche
Pipeline Co.
                                 - 14 -

            3.   True Oil and True Drilling

    Following termination of the True-Brown partnerships in

1954, Dave and Jean True formed True Oil Co. (True Oil) and True

Drilling Co. (True Drilling).     These were Wyoming general

partnerships in which Dave and Jean True initially owned 95-

percent and 5-percent interests, respectively.

    True Oil acquired working interests in oil and gas

properties and looked for new reserves.       In general, True Oil

would do farm-in deals (do exploratory drilling on prospects

identified by others) rather than develop its own deals.       Dave

True was an operator, who actually drilled and operated wells and

arranged to sell production, rather than a promoter, who sells

non-operating royalty interests to third parties.       True Oil’s

customers included both related and unrelated parties; however,

on average, about half of its production was purchased by related

entities.

    True Drilling owned and operated drilling rigs and performed

contract drilling services for related and unrelated customers.

True Oil was one of True Drilling’s largest customers.

    Dave True was a “wildcatter”.     He enjoyed the challenge of

drilling exploratory wells on leased acreage far from established

fields, rather than drilling developmental wells on established

fields.   True Oil’s early efforts were rewarded with discoveries

of fields in the Rocky Mountain region (Wyoming, North Dakota,
                                 - 15 -

Montana).    Dave True was also a pioneer in the successful use of

water flooding to increase recoverable reserves.

    Dave True believed that the only way to perpetuate his

business would be to find and develop replacement reserves and

that doing so would require substantial exploration and

development outlays.     True Oil expended considerable funds

without generating substantial additional production.     From 1972

to 1998, True Oil spent approximately $174 million on exploration

and drilling costs that resulted in dry holes.6    Dave True’s

continuing commitment to exploration for new reserves, and his

aversion to incurring outside debt, required the partners to

channel their profits from True Drilling and other True companies

into True Oil in order to finance continued exploration

activities.

    Effective August 1, 1973, Dave True gave each of his

children 8-percent general partnership interests in True Oil and

True Drilling.     The owners and ownership percentages immediately

after the gifts were:     Dave True (63 percent), Jean True (5

percent), and each of the four True children (8 percent).

            4.   Belle Fourche Pipeline Co.

    In 1957, Dave True and other Wyoming operators organized

Belle Fourche Pipeline Co. (Belle Fourche) as a Wyoming

     6
      True Oil’s total intangible drilling costs from 1972
through 1998 were $301,016,235, which included costs of drilling
on proven properties, developmental drilling, and exploratory
drilling. Fifty-eight percent of total intangible drilling costs
(approximately $174 million) were spent on nonproductive wells.
                              - 16 -

corporation to build and operate a gathering system for the

Donkey Creek field in the Powder River Basin.    Dave True and the

other local operators organized Bell Fourche because they had

encountered difficulty in getting their crude oil to market from

newly discovered, remote fields.    They therefore decided to build

their own pipeline, rather than transport crude oil by truck to

trunk lines or connect new wells to existing gathering pipelines

owned by others.   In later years, Belle Fourche substantially

expanded its operations to serve other fields as a common carrier

gathering system with multiple outlets to trunk lines.

    Belle Fourche generated substantial cash-flow from fees for

transporting crude oil.   Its customers included both True

companies and unrelated entities.    However, the majority of its

business was from unrelated entities.

    In the 1960's, Dave and Jean True acquired full ownership of

the shares of Belle Fourche through redemptions of the share

interests of the other holders.7    There were no buy-sell

agreements that would have dictated the redemption prices for

Belle Fourche stock.   All but one of the redemptions were at

preceding yearend book value (determined on a GAAP basis, see




     7
      Petitioners’ direct testimony characterized these
transactions as stock purchases by Dave and Jean True, while the
appraisal of Standard Research Consultants (SRC)(see infra pp.
37-39) characterized them as corporate redemptions. The SRC
appraisal provided more detailed information regarding the
transactions and appears to be more reliable.
                             - 17 -

infra p. 23); the exception, which amounted to 24 percent8 of the

total shares initially issued, was for more than book value.

    In 1967, after having acquired all outstanding shares, the

Trues caused Belle Fourche to make an S corporation election.

Belle Fourche relied on shareholder loan, rather than equity, as

its main source of financing after electing S status.   Between

March 31, 1971 (the company’s fiscal yearend), and June 15, 1971,

Dave and Jean True received earnings distributions of

approximately $2.8 million,9 thereby reducing reported book value

from $99.90 to $38.69 per share.

    In August 1971, the True children each purchased a 1-percent

interest in Belle Fourche from the corporation.   The True

family’s accountant, Cloyd Harris (Mr. Harris), advised the True

children also to lend money to Belle Fourche so that each

stockholder’s pro rata share of outstanding loans to the

corporation would reflect his or her percentage interest.    This

was intended to preserve Belle Fourche’s S corporation status by

avoiding the appearance of a second class of stock.   The True

children paid $38.69 per share to purchase the stock (476 shares

each) and lent the company $127.26 per share at 8-percent



     8
      29,244 shares (redeemed December 1962 at $17/share vs. book
value of $13.13/share) divided by 120,004 shares (issued at
formation) equals approximately 24 percent (rounded).
     9
      $4,569,000 (book value at 3/31/71) less $1,769,500 (45,734
shares outstanding x $38.69 book value/share at 6/15/71) equals
$2,800,000 (rounded) decrease in book value due to distributions
made within 2-1/2 months after fiscal yearend.
                               - 18 -

interest, payable on demand.   The children financed the

transaction with cash gifts from their parents over the years and

with earnings distributions from their prior investments in other

True companies.   The owners and ownership percentages immediately

after the purchases were:   Dave True (91 percent), Jean True (5

percent), and each of the four True children (1 percent).

         5.    Black Hills Oil Marketers, Inc./True Oil
               Purchasing Co./Eighty-Eight Oil Co./Black Hills
               Trucking, Inc.

    Black Hills Oil Marketers, Inc. (Black Hills Oil), was

formed by Dave True in 1963 to market and transport crude oil.

Initially, the activities of Black Hills Oil centered on

supporting Belle Fourche’s pipeline operation by moving and

accumulating marketable quantities of oil.    However, Black Hills

Oil’s business quickly expanded to include purchasing oil from

unrelated parties and providing shipping services.

    Black Hills Oil’s marketing activities consisted of buying

crude oil from lease operators, shipping it through a pipeline

while retaining title, and reselling it with a markup at the

other end.    In the late 1970's, the True family began conducting

oil marketing activities through True Oil Purchasing Co. (TOPCO)

rather than through Black Hills Oil.    In 1980, one of TOPCO’s

customers could not fulfill a purchase obligation and filed for

bankruptcy.   The Trues became concerned that this default might

adversely affect TOPCO’s ability to meet its own obligations.
                              - 19 -

They therefore liquidated TOPCO and transferred its crude oil

marketing business to a preexisting Wyoming general partnership,

Eighty-Eight Oil Co. (Eighty-Eight Oil).

    Dave and Jean True owned 95 percent and 5 percent,

respectively, of Eighty-Eight Oil when they formed it in 1956.

In 1975, the four True children each purchased an 8-percent

general partnership interest from Dave True, which reduced his

partnership interest to 63 percent.

    The crude oil marketing business operated by Eighty-Eight

Oil and its predecessors generated considerable cash-flows; the

Trues regarded it as a “cash cow”.     Eighty-Eight Oil often served

its partners as a repository of excess cash.    At times, due to

disproportionate capital contributions or withdrawals, the

capital accounts of the partners varied widely from their

interests in profits and losses.    During the 1990's, Eighty-Eight

Oil transacted most of its business with unrelated parties.

    Black Hills Trucking, Inc. (Black Hills Trucking), began as

a division of Black Hills Oil that transported crude oil to

pipelines.   Its services grew to include moving drilling rigs and

hauling water, livestock, products, and pipe for related and

unrelated customers.   As a result of the expansion of the

activities of Black Hills Trucking, and regulatory price caps

imposed on Black Hills Oil, the True family decided to make Black

Hills Trucking a separate entity.
                                 - 20 -

    In 1977, Black Hills Trucking was organized as a Wyoming

corporation; it was initially owned by Dave True (63 percent),

Jean True (5 percent), and the four True children (8 percent

each).    The company elected S corporation status in December

1977.    The market for trucking services was competitive and

depended heavily on demand from the oil industry.     As a result,

Black Hills Trucking generally lost money after the drop in oil

prices that occurred in the mid-1980's.

           6.   True Ranches

    Dave True individually owned and operated cattle ranches as

early as 1957.    In 1976, the True family incorporated the ranches

and their operations as True Ranches, Inc., a Wyoming corporation

that elected to be treated as an S corporation from its formation

(ranching S corporation).      The True children each purchased a 1-

percent interest in the ranching S corporation on formation.

    Later, the True family formed Double 4 Ranch Co., a Wyoming

partnership, to engage in ranching operations in Australia.      The

initial partners and ownership percentages were:     Dave True (63

percent), Jean True (5 percent), and the True children (8 percent

each).    In 1983, the partnership’s name was changed to True

Ranches, a Wyoming partnership (ranching partnership), and it

began leasing ranching assets from the ranching S corporation.

The ranching S corporation was dissolved in 1986; thereafter, all

ranching activities were conducted by the ranching partnership.
                              - 21 -

    True Ranches operated on 350,000 acres of owned and leased

land in Wyoming.   It is a vertically integrated cattle operation,

running herds of cows and their offspring from conception through

finishing ready for slaughter.    True Ranches also operated

feedlots and farmed to produce feed for its own cattle, including

grass hay, alfalfa hay, and corn.

    True Ranches maintained a year-round breeding herd on eight

operational units and cross-bred three breeds of cattle, Angus,

Charolais, and Hereford.   The weaned, heavier steer calves went

into one of the feedlots for finishing, while the lighter steers

were wintered on hay and energy feeds and were subsequently sent

to feedlots at heavier weights.    When finished cattle were ready

for slaughter, True Ranches would sell them to the packers

directly, without using auctions or third parties.    Besides

finishing all its own raised cattle, True Ranches also purchased

outside cattle to maximize the use of its feedlot capacity.

         7.   White Stallion Ranch, Inc.

    White Stallion Ranch, Inc. (White Stallion), an Arizona S

corporation, was formed in 1965 to operate a dude ranch.

Initially, the stock was owned by Dave True (47.5 percent) and

Jean True (2.5 percent), and by Dave True’s brother, Allen True

(25 percent), and his wife, Cynthia True (25 percent).

    The shareholders contracted to restrict the transfer of

White Stallion stock outside the families of Allen True
                                - 22 -

(designated Group 1) and Dave True (designated Group 2).     The

contract required the transferring shareholder first to offer any

shares for sale to the remaining member of his group.     If no such

member remained, the transferring shareholder had to offer the

shares to members of the other group, equally.     In all cases, the

purchase price was book value (excluding intangibles), which was

to be determined by White Stallion’s certified public accountant.

In 1982, the True children each purchased 4-percent interests

from Dave True at book value, thereby becoming members of Group

2.   In the same year, Allen True and Cynthia True gave 12.5-

percent interests to each of their two children, who then became

members of Group 1.

          8.   Other True Companies

     The True family owned and operated at least 19 other

businesses, including a bank holding company (Midland Financial

Corp.), a drilling supplies wholesaler (Toolpushers Supply Co.),

and an environmental cleanup company (True Environmental

Remediating LLC).     Those that were formed as corporations were

incorporated under the laws of Wyoming, except for Midland

Financial Corp., a Delaware corporation.    Those that were formed

as general partnerships (and limited liability companies) were

also organized under Wyoming law.
                               - 23 -

    C.   Methods of Accounting Used by True Companies

    Most of the True companies maintained their books and

records on a tax basis and not in accordance with generally

accepted accounting principles (GAAP).   There were two

exceptions:   (1) Belle Fourche had GAAP basis books before the

Trues obtained 100-percent ownership, and (2) Midland Financial

Corp. kept its books according to bank regulatory requirements,

which approximated GAAP.

    For certain True companies, there were substantial

differences between book value computed on a tax basis and book

value computed on a GAAP basis.   For Black Hills Trucking and

Belle Fourche, the differences resulted primarily from deducting

accelerated depreciation of tangible personal property for income

tax purposes.    No significant tax to GAAP differences existed for

Eighty-Eight Oil (and its predecessors) because the bulk of the

assets held after spinning off the trucking division consisted of

cash and cash equivalents.   True Oil’s tax to GAAP discrepancies

resulted from:   (1) Deduction of intangible drilling costs for

tax purposes versus capitalization under either the successful
                                - 24 -

efforts10 or full cost11 methods permitted by GAAP and (2)

deduction of the higher of cost or percentage depletion for tax

purposes.    In the case of True Ranches, tax to GAAP differences

arose primarily from the deduction of prepaid feed expenses for

tax purposes.    Because feed expenses and other costs of raising

livestock were deducted in the years paid, no cost basis was

allocated to raised (as opposed to purchased) livestock.

    True Oil maintained a qualified profit-sharing plan.        The

contribution formula required that intangible drilling costs not

be deducted in computing annual profit for plan purposes.

Without this adjustment, True Oil might never have reported a

profit and therefore, would not have been required to make any

contributions to the plan to provide retirement benefits for

employees.

    D.    Family Members’ Employment in True Companies

    Jean True worked in the family businesses in various

capacities.     She coordinated construction, renovation, and

maintenance of the True companies’ buildings and managed customer


     10
      The successful efforts method capitalizes oil and gas
exploration costs if they produce commercial reserves but
otherwise currently deducts the cost of dry holes. See Brock et
al., Petroleum Accounting Principles, Procedures, & Issues, at
224-225 (3d ed. 1990).
     11
      The full cost method capitalizes all oil and gas
exploration costs whether or not they result in dry holes. An
annual (downward) adjustment may be required if such capitalized
costs exceed the market value of underlying reserves. See id. at
230, 337-338, 350.
                              - 25 -

and employee relations.   She attended business meetings and

industry functions with Dave True, entertained customers and

business associates in their home, and administered various

employee awards programs.

    The True children, and sometimes grandchildren and

children’s spouses, also worked for the True companies over the

years.   From junior high school through college, the True sons

spent summers, holidays, and weekends working as roustabouts and

lease scouts in the oil fields, roughnecks on the drilling rigs,

and ranch hands on the family ranch.

    After graduating from college, the True sons worked full

time for the family businesses in various capacities.    In 1973,

Hank True became the manager of Black Hills Oil, and eventually

assumed responsibility for Belle Fourche, Eighty-Eight Oil, and

True Environmental Remediating LLC.    Diemer True went to work for

Black Hills Oil’s trucking division in 1971, and thereafter

managed Black Hills Trucking as a separate company.   He also took

charge of Toolpushers Supply Co. in 1980.   David L. True

graduated from college in 1973 and became manager of True Ranches

in 1976 and of True Drilling in 1980.

    While Dave True yielded operating responsibilities to his

sons over time, he retained overall decision-making authority.

However, he exercised this authority by building consensus

through discussions with his wife and sons rather than by edicts.
                              - 26 -

After Dave True died, the True sons added joint management

responsibility for True Oil to their other duties.

    Tamma Hatten briefly worked for the True companies as

personnel coordinator.   Her husband, Donald Hatten (Don Hatten),

worked full time for the True companies from 1973 to 1984.    His

positions included assistant drilling superintendent and

assistant treasurer of True Drilling.

    The True children (including Tamma Hatten before her

withdrawal, see infra pp. 39-42) always owned equal percentage

interests in each True company, regardless of the extent of their

individual participation in managing the various businesses.

    Starting as high school students, the True children

participated in the True companies’ annual supervisors’ meetings

and semiannual family business meetings.   Once they became

owners, the True children and their spouses began attending

monthly Partners, Officers, Directors, and Shareholders meetings

(PODS meetings).   The PODS meetings followed an agenda and kept

the family informed of the True companies’ operations.

    All the True children had children of their own by the time

Dave True died; Tamma Hatten and Diemer True also had

grandchildren.   Only two of Diemer True’s children, out of all of

the grandchildren and great-grandchildren, worked full time for

the True companies.
                              - 27 -

    E.   Family Gift Giving and Business Financing Practices

    Dave and Jean True made gifts to some or all of their

children (and their children’s spouses) every year but one

between 1955 and 1993; gifts were not made in 1984 due to the

oversight of an in-house accountant-bookkeeper.   They gave cash

or ownership interests in various True companies valued at the

maximum allowable amount that would not trigger gift tax (except

for 1973, the only year in which taxable gifts occurred).

    When the True children were minors, the gifts were

administered through a guardianship arrangement established by

Dave True, as guardian.   In later years, cash gifts to True

children and their spouses were deposited into business bank

accounts that were separately designated by recipient.   Gifts to

a spouse were first lent to the True child, and then those

combined funds were invested in the True companies, either by

purchasing ownership interests or by making interest-bearing

loans, or both.   The True companies’ bookkeepers maintained

detailed records of these transactions.

    The True children and their spouses never received their

gifts as cash in hand; however, the donees were generally aware

that their gifts were being invested on their behalf.    They had

no specific knowledge of how or when they acquired their earliest

interests in the True companies.
                              - 28 -

II. True Family Buy-Sell Agreements

    A.   Origin and Purpose

    The True-Brown partnership experience convinced Dave True

not to own businesses with outsiders.   He therefore used buy-sell

provisions to restrict a related owner’s ability to sell outside

the True family.   Such provisions were included in partnership

agreements, for True companies that were partnerships, and in

stockholders’ restrictive agreements, for those that were

corporations (collectively, buy-sell agreements).

    The original Eighty-Eight Oil, True Oil, and True Drilling

partnership agreements, entered into by Dave and Jean True in the

mid-1950's, prohibited a partner from transferring or encumbering

his or her interest.   In addition, they provided that if Jean

True were to die or become disabled, Dave True would be obligated

to purchase her interests at book value.   Alternatively, the

partnership would terminate with Dave True’s death or disability.

These agreements served as prototypes for later buy-sell

agreements.   Dave True incorporated the provisions restricting

transfers to outsiders and setting the transfer price at book

value into all subsequent versions of the True companies’

corporate and partnership buy-sell agreements (except for White

Stallion--see infra p. 48).

    Dave True also felt strongly that owners should actively

participate in the family business to avoid any divergence of
                              - 29 -

interests between active and passive owners.   He had witnessed

the conflicts that arose in other families when active owners

wanted to retain profits and grow the business, while passive

owners sought to distribute and consume profits.   Accordingly, in

1973, after all the True children (or their spouses) were working

full time in the business, Dave True incorporated an active

participation requirement into the True family buy-sell

agreements.   In general, the active participation requirement

provided that if an owner (or owner’s spouse) ceased to devote

all or substantial time to the business, he or she would be

deemed to have withdrawn from the business, absent unanimous

agreement to the contrary by the active owners.

    Dave True’s philosophy was further memorialized in the

August 1988 “Policy for the Perpetuation of the Family Business”

(policy), which was executed by the then-active participants and

spouses.   The policy articulated and adopted Dave True’s goal “to

perpetuate the family business by providing for ownership

succession through family members who qualify as active

participants”.   The policy defined “active participants” as

follows:

     Active participants are those family member-owners who
     actively participate in the decision-making process for
     family business decisions and policies or who work full
     time in the businesses. The goal in designating active
     participants is to avoid fragmentation of the family
     business in future generations and to meld it into a
     rational business organization. A family member who
     limits their involvement principally to disbursing
                               - 30 -

     dividends or cash payments to him or herself or other
     family members shall not be an active participant nor
     retain ownership. * * * A non-active family member-
     owner may designate his or her spouse who does work
     full time in the business to be considered for
     qualification of the family member-owner as an active
     participant. * * *

    B.    First Transfers of Interests in Belle Fourche, True Oil,
          and True Drilling to True Children

    In the early 1970's, the True children acquired interests in

three True companies:   Belle Fourche, True Oil, and True

Drilling.   Dave True’s purpose in enabling his children to

acquire these interests was to perpetuate the family businesses

by fostering the children’s interest in owning and managing them.

Dave True was in good health in 1971 and 1973 when he

orchestrated these acquisitions by his children.

    In August 1971 (as described supra pp. 17-18), Belle Fourche

sold stock, representing a 1-percent ownership interest, to each

True child for a combination of cash and loans made to the

corporation by the child.12   At that time, the True children

ranged from approximately 21 to 31 years of age.   The purchase

price ($38.69 per share) was based on Belle Fourche’s book value

as of the end of the preceding fiscal year, less dividends paid

within 2-1/2 months thereafter.   Subsequently, the stockholders



     12
      Mr. Harris testified that Dave True sold 1-percent
interests in Belle Fourche to each of his four children.
However, the minutes of the Belle Fourche Board of Directors
meeting and the SRC appraisal indicate that the company sold its
stock to the children.
                              - 31 -

executed a Stockholders’ Restrictive Agreement (corporate buy-

sell agreement), which provided that if a stockholder died or

otherwise wished to sell stock, the remaining stockholders would

purchase it in amounts directly proportional to their preexisting

holdings.   The purchase price was to be the book value of the

stock at the end of the preceding fiscal year, less any dividends

paid to stockholders within 2-1/2 months immediately following

the fiscal yearend.   The corporate buy-sell agreement stated that

it was binding upon the heirs and executors of a deceased

stockholder.   It did not include an active participation

requirement because David L. True was still in college when the

agreement was executed.

    Effective August 1, 1973, Dave True gave each of his

children an 8-percent interest in True Oil and in True Drilling.

At that time, the True children ranged from approximately 23 to

33 years of age.   As a result of these gifts, the new partners

made the following identical amendments (among others) to both

companies’ partnership agreements (partnership buy-sell

agreements):

     5. No partner shall in any way attempt to dispose of,
     sell, encumber, or hypothecate his interest in the
     partnership except in accordance with the provisions of
     the Partnership Agreement relating to withdrawal or
     death of a partner, or, except in the normal course of
     business, any of the assets thereof.

     6. If any partner shall resign, become legally
     disabled or bankrupt, assign his interest in the
     partnership for the benefit of his creditors, or
                            - 32 -

institute any proceedings for temporary or permanent
relief from his liabilities, or shall suffer an
attachment or execution to be levied on his share or
interest in the partnership, or a judgment shall be
entered against him and stay of execution thereupon
shall expire, or if he shall attempt to encumber or
hypothecate his partnership interest, he shall be
deemed to have filed a Notice of Intent to Withdraw,
and his interest in the partnership shall be disposed
of as provided in this Agreement.

7. In the event of the death of a partner or the
filing with the partnership by a partner of Notice of
Intent to Withdraw (the deceased partner or the partner
filing such notice shall hereinafter be referred to as
the “Selling Partner”), the Selling Partner shall be
obligated to sell and the remaining partners shall be
obligated to purchase the Selling Partner’s interest in
the partnership for the purchase price described
herein. The remaining partners shall purchase the
Selling Partner’s interest in proportion to their
respective shares in the net profits of the partnership
and the purchase price shall be payable within six
months after death or the filing of the Notice of
Intent to Withdraw. The purchase price of the Selling
Partners’s interest shall be the book value of the
partnership multiplied by the Selling Partner’s
percentage interest in the net profits of the
partnership, [13] said book value to be determined as
of the end of the month immediately preceding the date
of the death or filing of Notice of Intent to Withdraw
less any withdrawals made by the partners subsequent to
end of the preceding month. The book value of the
partnership shall be determined in accordance with the
accounting methods and principles customarily followed
by the partnership. Appropriate adjustments shall be
made for over or under withdrawals by a partner.

8. The partnership shall continue in business and
shall not be terminated unless the holders of 50% or
more of the total interest in partnership capital and
profits sell their interests as provided herein, or
unless all of the partners agree to such termination.




13
     See infra p. 47 and note 20.
                                - 33 -

     9. In the event that a partner or partner’s spouse
     ceases to devote all or a substantial part of his time
     to the business of the partnership, he shall be deemed
     to have filed with the partnership a Notice of Intent
     to Withdraw, unless the remaining partners unanimously
     agree to permit such partner to continue as a partner.

    The True children received no independent legal or

accounting advice when they entered into the buy-sell agreements.

They did not know who drafted the agreements or why, in the case

of Belle Fourche, they were required to structure the purchase

with a combination of stock and debt.    However, the True

children, having been exposed from childhood to Dave True’s

business philosophy, understood his reasons for including the

active participation and book value purchase price requirements

in the buy-sell agreements.

    Dave True consulted with Mr. Harris, the family’s longtime

accountant and principal tax and economic adviser, and C.L.

Tangney (Mr. Tangney), Mr. Harris’s employer, before entering

into the buy-sell agreements.    On one occasion, Dave True also

discussed the True Oil and True Drilling buy-sell agreements with

Claude Maer (Mr. Maer), an attorney who was assisting the True

companies on an unrelated income tax matter.

    Dave True mainly consulted with Mr. Harris regarding using a

tax book value purchase price formula under the buy-sell

agreements.   Mr. Harris was not a professional appraiser and had

no significant practical experience in valuing businesses.
                               - 34 -

    The buy-sell agreements did not provide a mechanism for

periodic review or adjustment to the book value purchase price

formula, other than what would occur as a result of changes in

book value.

    Messrs. Harris and Tangney recommended that Dave True obtain

an appraisal of True Oil’s oil and gas reserves contemporaneously

with the gifts to the children because they expected the book

value gift valuation to be challenged by the Internal Revenue

Service (IRS).    Either the True Companies or Dave and Jean True,

personally, had been audited for income tax purposes regularly in

all tax years preceding the gifts.      The appraisal was prepared by

Bernie Allen14 (B. Allen report), an engineer from Casper,

Wyoming, before Dave True made the gifts of True Oil interests to

his children.    No appraisal of Belle Fourche was prepared

contemporaneously with the sale of 1-percent interests to the

True children.

    The B. Allen report indicated that as of August 1, 1973,

True Oil had reserves of 5,297,528 barrels of proved developed

oil and 8,551,994 thousand cubic feet (Mcf) of proved developed

gas, and that the fair market value of its oil and gas properties



     14
      The B. Allen report was not admitted into evidence because
it could not be located at the time of trial. However, the SRC
appraisal prepared for purposes of the subsequent True Oil gift
tax case cited valuation data derived from the B. Allen report.
We assume that the information contained in the SRC appraisal
accurately reflects the data set forth in the B. Allen report.
                              - 35 -

(including leases) was $9,941,000.     The results of the B. Allen

report were generally discussed at True family meetings; however,

there is no evidence in the record that the True children

reviewed the report in detail before signing the True Oil buy-

sell agreement.   Mr. Harris did not use the B. Allen report to

advise members of the True family (at the time of signing the

True Oil buy-sell agreement) that tax book value was the

appropriate standard; he reviewed the report only in connection

with subsequent gift tax litigation.

    C.   Wyoming U.S. District Court Cases on Belle Fourche
         and True Oil Transfers

    Dave True timely filed a 1973 Federal gift tax return

reporting gifts of an 8-percent interest in True Oil and in True

Drilling to each of his children.    Jean True consented to treat

the gifts as having been made one-half by each spouse.    Each True

Oil gift was reported to have a fair market value of $54,653,

which represented the tax book value of an 8-percent interest as

of August 1, 1973.   The 1971 transfers of Belle Fourche stock to

the True children (valued at $38.69 per share) had not been

reported on a gift tax return because they were structured as

sales by the corporation.

    The Commissioner determined gift tax deficiencies against

Dave and Jean True for the 1971 Belle Fourche transfers.    The

Trues paid the gift taxes assessed and filed a refund suit in the

U.S. District Court for the District of Wyoming, designated as
                              - 36 -

True v. United States, Docket No. C79-131K (D. Wyo., Oct. 1,

1980) (1971 gift tax case).   On October 1, 1980, after a trial,

the District Court (Judge Kerr) issued Findings of Fact and

Conclusions of Law that stated:   “Taking into consideration all

of the facts and circumstances including the reasonable

inferences to be drawn therefrom, * * * the fair market value of

the stock in question as of the date of August 2, 1971 was $38.69

per share”, the book value price at which the sales to the True

children had been made.   Judgment was entered accordingly, and

the United States did not appeal.

    The Commissioner also determined gift tax deficiencies

against Dave and Jean True for the 1973 gifts to the True

children of partnership interests in True Oil and True Drilling.

However, the Commissioner conceded the deficiency relating to

True Drilling.   The Trues paid the True Oil gift tax deficiencies

and filed a refund suit with the same court as the 1971 gift tax

case, designated as True v. United States, Docket No. C81-158,

reported as 547 F. Supp. 201 (D. Wyo. 1982) (1973 gift tax case).

On September 27, 1982, after a trial, Judge Kerr issued a

Memorandum Opinion that concluded:

         Taking into consideration all the facts and
     circumstances and the reasonable inferences to be drawn
     therefrom, * * * the method of valuation used by the
     plaintiffs in this case offers a more complete and fair
     estimation of the fair market value to be used in the
     valuation of the 8% interests given as gifts to
     plaintiffs’ children. Application of plaintiffs’
     valuation method results in a finding * * * that the
                              - 37 -

     fair market value of each 8% interest was properly
     determined at $54,653.

Judgment was entered accordingly, and the United States did not

appeal.

    Although members of the True family asserted at trial that

they believed that the book value buy-sell provisions were valid

and enforceable as a result of the favorable outcomes of the 1971

and 1973 gift tax cases, neither they nor Dave True engaged

counsel to advise them of the legal effects of those cases on

future transfers pursuant to the buy-sell agreements.     In fact,

as described infra pp. 51-52, Dave True saw the 1993 transfers as

his opportunity to test the ability of the buy-sell agreements to

fix Federal gift tax value.

    In preparing for litigation of the 1971 and 1973 gift tax

cases, Dave True obtained appraisals for the transferred

interests in Belle Fourche (valued as of August 2, 1971) and True

Oil (valued as of August 1, 1973) from Standard Research

Consultants (SRC).   The SRC appraisals supported the True family

positions in the 1971 and 1973 gift tax cases.

    After evaluating Belle Fourche’s historical performance,

along with overall economic and industry trends, SRC used the

earnings and book value approaches to derive a “freely traded

value” for the transferred stock.   The earnings approach required

determining various price-earnings multiples for comparable

public companies, adjusting them for Belle Fourche’s unique
                               - 38 -

characteristics, and applying them to Belle Fourche’s actual

earnings data.    Similarly, the book value approach analyzed rates

of return on common stock equity and price-to-book value ratios

of comparable public companies and applied them (after

adjustments) to Belle Fourche’s actual book value at the

valuation date.   After assigning more weight to the earnings

approach, SRC derived a freely traded value for Belle Fourche

stock of $120 per share.   SRC explained that the freely traded

value “would have been * * * [the] fair market value on the

valuation date * * * had there been an active public market for

the stock at that time.”

    SRC opined that, because Belle Fourche lacked a public

market for its stock and the transferred shares represented

minority interests, a willing, knowledgeable buyer would demand a

discount from the freely traded value.   While SRC examined

average marketability discounts15 used in public company

transactions, it did not use this information in its analysis.

Instead, SRC concluded that, because the minority interest

shareholders (the True children) could never look forward to a

public market and were limited to the sales price fixed in the



     15
      SRC described the transferred interests’ lack of
marketability and control as being “infirmities” that must be
accounted for in any sale to a hypothetical purchaser. However,
SRC’s analysis seemed to blend the two concepts, and, ultimately,
referred only to a marketability discount and not to a minority
discount.
                              - 39 -

buy-sell agreement, the fair market value of their shares on

August 2, 1971, was the book value calculated under the buy-sell

agreement, or $38.69 per share.

    SRC generally followed the same methodology in valuing the

partnership interests in True Oil transferred by Dave True as of

August 1, 1973.   However, instead of using the book value

approach, SRC used the net asset value (NAV) approach combined

with the earnings approach.   This required a two-step process:

(1) Marking the balance sheet to market to derive NAV, and

(2) applying a discount to NAV based on comparable public

companies’ ratios of price to NAV.     After again assigning greater

weight to the earnings approach, SRC determined the freely traded

value of an 8-percent interest in True Oil to be $535,000

(rounded) on the valuation date.   Finally, SRC applied the same

lack of public market rationale, as in its Belle Fourche

appraisal, to disregard the freely traded value and to conclude

that fair market value was limited to the buy-sell agreement

formula price, or $54,653 for an 8-percent interest.

    D.   Tamma Hatten’s Withdrawal From True Companies

    Tamma Hatten had never shown an avid interest in

participating in the True family businesses, and her husband had

played a relatively minor role in the management of the True

companies.   On July 23, 1984, when Tamma Hatten was 44 years old,

she notified her family (in writing) of her intent to withdraw
                               - 40 -

from and sell her interests in the True companies, as required

under the buy-sell agreements.   She and her husband were eager to

purchase and independently run their own ranching operation.

Tamma Hatten did not seek separate legal or other professional

counsel in connection with the sale of her interests in the True

Companies.   Instead, she relied on Dave True and his advisers to

determine the sales prices of all those interests under the buy-

sell agreements and to structure the methods of payment.

    Dave True’s legal advisers drafted the Agreement for

Purchase and Sale of Assets, dated August 10, 1984, which

outlined the terms for sale of Tamma Hatten’s business holdings

(including partnership interests, corporate stock, notes, and

lease interests).   The total purchase price was $8,571,296.22,

composed of a cash payment of $4,234,000 and payment to a

specially created escrow account for the balance.   The escrow,

established by Dave True and his advisers, deviated from the

requirements of the True companies’ buy-sell agreements.    Its

purpose was to provide security for payment of Tamma Hatten’s

share of accrued contingent liabilities (if any) and a management

vehicle for her investments.

    Tamma Hatten received over $8.5 million in aggregate value

for her True companies’ interests, but that amount included

certain offsets.    For example, both Eighty-Eight Oil and True Oil

had negative book values at the buy-sell agreements’ valuation
                              - 41 -

dates; as a result, Tamma Hatten in effect was required to pay

the other owners in order to dispose of her interests in those

companies (i.e., her overall sales proceeds were reduced).    The

negative offsets were $1,405,449.35 for Eighty-Eight Oil and

$466,560.35 for True Oil.   In the case of True Oil, the negative

book value was attributable to the deductions, which had been

taken for tax purposes, of intangible drilling and development

costs.

    After the sale, Tamma and Don Hatten moved from Casper to

Thermopolis, Wyoming, where they bought a ranch and were no

longer involved in True family business activities.   Dave and

Jean True thereafter ceased making annual gifts to Tamma and

amended their wills (and other estate planning documents) to

delete any specific provision for Tamma Hatten and her family.16

This was done because the Trues believed that Tamma Hatten was

financially secure as a result of the sale.   Moreover, Dave True

believed that his estate should go to his sons so that they might

invest the assets in the family businesses.   One of Dave True’s

testamentary documents entitled “Appointment of Trust Estate”

(appointment document), see infra p. 53, characterized the

circumstances as follows:



     16
      However, under sec. 5.3 of the Appointment of Trust Estate
dated Sept. 14, 1984, if Dave True were to have been predeceased
by his wife, sons, and his sons’ lineal descendants, then Tamma
Hatten would have been the taker in default of Dave True’s
estate.
                                 - 42 -

         2.5 Advancement. Prior to the time of execution
     [of this Appointment], my daughter, Tamma T. Hatten,
     * * * severed her financial ties with the True
     companies, and thus her potential inheritance has been
     fully satisfied during my lifetime.

There is no current expectation by Tamma Hatten, her mother, or

her brothers, that Jean True or any other member of the True

family will make any further financial provision for Tamma or her

family.17

    E.      Use of Similar Buy-Sell Agreements in All True
            Companies Except White Stallion; Amendments and Waivers

    The buy-sell agreements (and related amendments) used by the

True family were substantially identical, except for White

Stallion.     In general, the partnership buy-sell agreements

mirrored True Oil’s partnership agreement, and the corporate buy-

sell agreements mirrored Belle Fourche’s Stockholders’

Restrictive Agreement.     The buy-sell agreements were not tailored

to the specific type of business or industry in which each True

company operated, and they all shared the following attributes:

(1) Transfer restrictions, (2) mandatory purchase and sale

requirements, (3) book value purchase price formulas derived

using the company’s customary accounting methods (tax basis), and

(4) active participation (by owner or spouse) requirements.


     17
      The only exception is the True Family Education Trust,
created by Dave and Jean True in 1983 (before Tamma Hatten’s
withdrawal) for the benefit of all the True children’s
descendants. Dave and Jean True contributed to this trust, which
is irrevocable, after their daughter’s withdrawal. Therefore,
Tamma Hatten’s descendants have continued to derive financial
benefits from this trust.
                                 - 43 -

    Over the years, the buy-sell agreements were amended on

several occasions.     Generally applicable amendments included:

(1) Clarifying that owners could transfer their interests to

qualified revocable living trusts without triggering the buy-sell

provisions, (2) applying the buy-sell provisions to sales of

partial interests, and (3) making special allowances for an

owner’s legal disability.     In addition, the Belle Fourche buy-

sell agreement was amended as of August 1, 1973, to include,

inter alia, an active participation requirement that previously

had been omitted due to David L. True’s status as a student at

the time of the original sales to the children in 1971.

    All the preexisting buy-sell agreements were amended and

restated as of August 11, 1984 (1984 amendments), to reflect,

among other things, Tamma Hatten’s withdrawal from the True

companies.18     In most cases, the 1984 amendments were the last

amendments made to the buy-sell agreements before Dave True’s

death.19

    The parties to the corporate buy-sell agreements, as amended

and restated by the 1984 amendments, were:     Dave and Jean True,

the True sons, and the subject corporation.     The amended



     18
          Except White Stallion, which was amended on Sept. 20,
1984.
     19
      True Environmental Remediating LLC’s operating agreement
was not entered into until June 30, 1992. However, its
provisions were consistent with the 1984 amendments to the other
True companies’ buy-sell agreements.
                             - 44 -

corporate buy-sell agreements included the following relevant

provisions:

         1. Restriction of Stock. a. Until termination of
     this agreement none of the stock of the company shall
     pass or be disposed of in any manner whatsoever,
     whether by voluntary or involuntary action, to any
     person, partnership or corporation except in accordance
     with the terms of this agreement; * * *. * * *

         b. Each share of stock shall remain subject to
     this agreement, and each corporation (including the
     Company), partnership, trust, and person who now holds
     or may acquire any of the stock, in any manner,
     nevertheless shall hold it subject to the provisions of
     this agreement whenever and as often as any of the
     sales events herein mentioned may occur.

         2. Events requiring the mandatory sale and
     purchase include any attempt to pass or dispose of the
     stock in any manner whatsoever, whether by voluntary or
     involuntary act, specifically including, but not
     limited to, the following events (hereinafter called
     “sales events”):

         2a. Sale. In the event any Shareholder desires
     at any time to sell all or part of his or her stock in
     the Company, he or she shall so notify the Purchasing
     Shareholders in writing. * * * Thereafter, the Selling
     Shareholders shall sell and the Purchasing Shareholders
     shall purchase such stock in accordance with the terms
     of paragraphs 3, 4, and 5 hereof. Such sale and
     purchase shall be consummated within six (6) months
     after receipt by the Purchasing Shareholders of such
     written notice.

         2b. Death of Shareholder. In the event of the
     death of any one of the * * * [Shareholders], the
     deceased Shareholder, as the Selling Shareholder, shall
     sell and the Purchasing Shareholders shall purchase all
     the stock of the Selling Shareholder in accordance with
     paragraphs 3, 4, and 5 hereof. This agreement shall be
     binding upon the heirs and personal representatives of
     such decedent and the trustees of any qualified trust,
     all of which shall be included in the term “Selling
     Shareholder.” The actual transfer relating to such
     sale and purchase as herein provided shall be made
                         - 45 -

within six (6) months after such Shareholder’s death.
* * *

             *   *   *   *   *    *   *

    2d. Shareholders’ Required Activities. In the
event a Shareholder or his or her spouse ceases to
devote all or a substantial part of his or her time to
the business of the company or any one of its
affiliates for any reason, * * * such Shareholder shall
be deemed to be the Selling Shareholder and to have
notified the other Shareholders of a desire to sell his
or her stock as provided in paragraph 2a unless the
remaining Shareholders unanimously agree to permit such
a Shareholder to continue as a Shareholder.

    3. Buy and Sell Agreement. The parties hereto
agree that on the occurrence of each and every sale
event, the Selling Shareholder, shall sell to the
Purchasing Shareholders, and the Purchasing
Shareholders shall purchase, in direct proportion to
the interest which each owns in said corporation
represented by stock ownership in the company * * * all
of the shares of stock owned by or for the benefit of
the Selling Shareholder or all of the shares offered
for sale by the Selling Shareholder for the purchase
price as set forth in paragraph 4 below.

    4. Price. The price of any shares sold hereunder
shall be the book value of the stock at the end of the
preceding fiscal year, less any and all dividends paid
to the Shareholders prior to the effective date of
sale, plus income computed in accordance with the
Internal Revenue regulations generally requiring
allocation on a per share, per day basis. The book
value of the stock shall be determined in accordance
with the accounting methods and principles customarily
followed by the corporation. [Emphasis added.]

    5. Effective Date. The effective date for the
determination of purchase price and transfer of stock
will be the earliest of (A) the date of death of the
Selling Shareholder * * * or (C) the date of notice of
desire to sell as herein defined. Except that for
purposes of (A) * * * above, if such date falls within
two and one-half (2-1/2) months following the end of a
fiscal year, the effective date will be two and one-
half (2-1/2) months after the end of that fiscal year.
                             - 46 -

         6. Termination. This agreement shall remain in
     force until death of the survivor of the Shareholders
     * * * and shall then terminate.

         Before the 1984 amendments, the book value price

formula in the corporate buy-sell agreements was different.

Formerly, the price was computed by taking the stock’s book value

at the end of the preceding fiscal year less dividends paid

within 2-1/2 months immediately following the fiscal yearend.

Furthermore, there was no reference to a per share, per day

allocation of income before the 1984 amendments.

    The partnership buy-sell agreements, as amended and restated

by the 1984 amendments, included substantively identical

provisions to those cited above.   However, the following

modifications, which were unique to partnerships, were included:

         20. Price. The price of any partnership interest
     or portion thereof shall be the book value of the
     Selling Partner’s capital account as of the close of
     business of the day immediately preceding the sales
     event. The book value of such capital account shall be
     determined in accordance with the accounting methods
     and principles customarily followed by the partnership,
     and in accordance with the Internal Revenue Code and
     appropriate regulations relating to the determination
     of the Partner’s distributive share of income, expenses
     and other partnership items. [Emphasis added.]

         21. Effective Date. The effective date for the
     transfer of partnership interest shall be the date of
     death of a Partner, * * * or the date of an event
     requiring a mandatory sale and purchase.

         22. Termination of Partnership. The partnership
     shall continue in business and shall not be terminated
     unless the holders of 50% or more of the total interest
     in partnership capital and profits sell their interests
     within the same year as provided herein, or unless all
                              - 47 -

     of the Partners agree to such termination. In such
     event, the interest of the Partners shall be settled
     and adjusted in the same manner, and upon the same
     basis as provided in the death or disability of a
     Partner.

    Before the 1984 amendments, the book value price formula in

the partnership buy-sell agreements was different.   Formerly, the

purchase price was determined as of the end of the month

immediately preceding the sales event and was computed by

multiplying the book value of the partnership (less any

withdrawals made by the partners after the end of the preceding

month) by the Selling Partner’s percentage interest in

partnership net profits (percentage of total partners’ capital

formula).20

    At times, members of the True family formally waived their

purchase rights under the various True companies’ buy-sell

agreements.   For example, in connection with the merger of Black

Hills Oil into Black Hills Trucking in 1980, the True family

agreed to waive any Black Hills Trucking buy-sell provision that

would restrict the exchange of stock between the two companies.

In April 1981, the True family waived the Belle Fourche buy-sell

provision requiring all purchases to be in proportion to the


     20
      The percentage of total partners’ capital formula first
appeared in the amended partnership agreement between Dave True,
Jean True, and the True children dated Aug. 1, 1973. However,
the original partnership agreement between Dave and Jean True
dated June 1, 1954, calculated the purchase price based on the
selling partner’s capital account balance at the close of the
month closest to the sales event.
                               - 48 -

owners’ preexisting ownership percentages in order to allow Jean

True and the True children (but not Dave True) to purchase

additional shares from the company.     Similarly, Jean True waived

her purchase rights under the Rancho Verdad buy-sell agreement in

July 1983, when Dave True sold 8-percent interests to each of the

True children, thereby allowing them to enter that partnership.

Lastly, in October 1985, the True family waived their purchase

rights under the Toolpushers buy-sell agreement to allow the

trustee of the True Companies Employees’ Profit Sharing Trust

(Employees’ Trust) to sell its Toolpushers stock back to the

company.21

    F.    Unique Provisions of White Stallion Buy-Sell Agreement

    In July 1982, the original White Stallion buy-sell

agreement, see supra p. 22, was amended to reflect the admission

as stockholders of Dave and Jean True’s children and Allen and

Cynthia True’s children.   While the White Stallion buy-sell

agreement shared some of the common characteristics of other True

company agreements, it also contained certain unique provisions.

For example, under the provision entitled “Buy and Sell

Agreement”, if a stockholder were to die, become legally

disabled, or desire to sell all or part of his stock, the


     21
      Under the Nov. 20, 1976, Toolpushers Stockholders’
Restrictive Agreement, Employees’ Trust was specifically exempted
from the buy-sell restrictions. As a result, the October 1985
purchase price for Employees’ Trust’s shares was not limited to,
and in fact exceeded, book value.
                                - 49 -

remaining members of his group (Allen True’s family comprised

group 1, and Dave True’s family comprised group 2) were obligated

to purchase the stock on a pro rata basis.   The stockholder, his

heirs, and trustees, etc., were likewise obligated to sell to

those group members.   Similar to the other True companies’ buy-

sell agreements, the purchase price reflected the transferred

shares’ book value at the end of the preceding fiscal year, less

dividends paid within 2-1/2 months of such fiscal yearend.

    An additional restriction, found only in White Stallion’s

buy-sell agreement, provided:

         13. First Right of Refusal. If the Shareholders
     holding 100% of the stock held in either Group 1 or
     Group 2, above, desire to transfer by lifetime sale all
     of the interests held by Shareholders comprising that
     group (hereinafter “Selling Group”) to someone other
     than the Shareholders comprising the other group
     (hereinafter “Nonselling Group”), the Selling Group
     shall not do so without first offering in writing to
     sell such interests to the Shareholders comprising the
     Nonselling Group on the same terms and conditions as
     any bona fide offer received (in writing) by the
     Selling Group for its interests. The Nonselling Group
     shall have thirty (30) days from the date the written
     offer and proof of the bona fide offer are mailed to
     the Nonselling Group within which to accept such offer
     in writing. Each Shareholder comprising the Nonselling
     Group shall have the right to purchase the Selling
     Group’s interest, in the ratio that his or her stock
     bears to the total stock held by the Nonselling Group.
     If a Shareholder in the Nonselling Group declines to
     exercise his or her rights to purchase a portion of the
     Selling Group’s stock interest, the remaining
     Shareholders comprising the Nonselling Group desiring
     to purchase such portion shall have an additional
     fifteen (15) days to do so in the ratio that their
     stock ownership bears to the total stock ownership of
     the Shareholders comprising the Nonselling Group
     exercising such right to purchase.
                                - 50 -

This provision was included in the White Stallion buy-sell

agreement at Allen True’s request.

    The White Stallion buy-sell agreement was amended and

restated again on September 20, 1984, to reflect, inter alia,

Tamma Hattan’s withdrawal from the partnership.

    G.    Future of True Family Buy-Sell Agreements

    After Dave True’s death and Jean True’s subsequent sale of

most of her interests ,see infra pp. 53-55, the True sons alone

owned a majority of the True companies,22 and they have continued

the preexisting buy-sell agreements.     Under those agreements,

upon a brother’s death, his estate would be required to sell, and

the surviving brothers would be required to purchase, the

deceased brother’s interest at book value.     At the death of the

last surviving brother, the beneficiaries of his estate would

receive 100-percent ownership of the True companies.     This

scenario assumes that none of the True sons’ children become

actively participating owners of the True companies, which may or

may not happen in the future.

    The True sons have considered this problem and discussed it

with Mr. Harris.   They have decided to wait until the conclusion

of this litigation before making any changes to the buy-sell

agreements.



     22
      Jean True retained her interests in only True Drilling,
White Stallion, and Smokey Oil Co.
                                 - 51 -

III.    Transfers in Issue

       A.   1993 Transfers of Partnership Interests by Dave True

       Effective January 1, 1993, Dave True sold part of his

ownership interest in all True companies that were partnerships

to his wife and sons, pursuant to the buy-sell agreements.

Before the transfers, Dave True held a greater than 50-percent

general partnership interest in each company.     Mr. Harris

recommended that Dave True reduce his ownership interest to less

than 50 percent, in order to avoid termination of the

partnerships (for income tax purposes) at his death.     Mr. Harris

was concerned that as a result of such termination, the

partnership agreements, which embodied the buy-sell provisions,

would become subject to new valuation rules under Chapter 14 of

the Internal Revenue Code (Chapter 14).23    To prevent this from

happening, Dave True sold enough of his interests to reduce his

and Jean True’s combined ownership to below 50 percent.     Although

Dave True had health issues before the 1993 transfers, including

back problems and a chronic pulmonary insufficiency that required

him to be on oxygen full time, the True family and Mr. Harris did




       23
      The parties stipulated that the True companies’ existing
partnership agreements and shareholders’ restrictive agreements
were entered into before Oct. 9, 1990 (effective date for Chapter
14 rules), and were not substantially modified after Oct. 8,
1990.
                               - 52 -

not consider Dave True’s ailments to be life threatening or his

death to be imminent at the time of his 1993 transfers.24

    Dave True timely filed a 1993 Federal gift tax return (Jean

True signed as consenting spouse) disclosing the transfers but

treating them as sales, thereby reporting no taxable gifts.

Mr. Harris expected the return to be audited and the transaction

to be challenged by the IRS.   Dave True saw this risk as his

opportunity to test (through litigation) the existing buy-sell

agreements’ ability to fix transfer tax value of the True

companies.

    On March 3, 1997, respondent issued to the estate and to

Jean True, individually, duplicate Notices of Deficiency

(collectively, 1993 gift tax notice), determining that the values

of interests transferred by Dave True in 1993 were higher than

reported book value.25   However, since issuing the original 1993

gift tax notice, respondent has conceded the reported values of

interests in Rancho Verdad and True Drilling that were

transferred by Dave True in 1993.   Appendix schedule 1, infra,




     24
      In response to a question from the Court, Mrs. True
testified that Dave True had been a smoker, but that he hadn’t
smoked for some time before his death. Mrs. True had previously
testified that Dave True was “on oxygen for chronic bronchitis
for about 2-1/2 years before he died.”
     25
      Jean True’s notice of deficiency was identical to the
estate’s and was issued solely because she consented to split
gifts made by Dave True for calendar year 1993.
                                 - 53 -

lists the transferred interests and compares the 1993 gift tax

notice values to amounts paid by the purchasers.

    B.   1994 Estate Transfers

    Dave True died of a heart attack on June 4, 1994.    Before

his death, he had transferred substantially all his assets to his

living trust.   Under section 5.2 of the living trust, Dave True

reserved the power to appoint the trust estate at the time of his

death to “such persons, corporations or other entities and in

such shares and interests as I may specify by appropriate

provisions in any instrument executed and acknowledged by me and

delivered to the [trustees of the living trust].”    On September

14, 1984, Dave True had exercised his power of appointment by

executing the appointment document.

    Under the appointment document Dave True bequeathed to his

sons the maximum amount that could pass without estate tax by

reason of the unified credit (equally and free of trust) and the

remainder of the trust estate to a qualified terminable interest

property trust (QTIP trust) for Jean True.    At Jean True’s death

(or from the beginning, had Jean predeceased Dave), the balance

of the trust estate and any tangible personalty was to be divided

equally among his sons or their heirs.    However, before these

bequests were funded, and pursuant to the terms of the buy-sell

agreements, the trustees of the living trust sold Dave True’s

interests in the True companies to Jean True, Hank True, Diemer
                              - 54 -

True, and David L. True at book value effective June 3, 1994.

The sales were effected by a closing that occurred on or about

September 20, 1994.

    On March 3, 1995, the estate timely filed a Federal estate

tax return (estate tax return) reflecting, inter alia, the cash

proceeds received from the sale of the True companies under the

heading “H.A. True, Jr. Irrevocable [sic] Trust”.

    On January 20, 1998, respondent issued the estate a notice

of deficiency (estate tax notice) determining that the underlying

values of the True companies that were reported on the estate tax

return were higher than book value.    However, since issuing the

estate tax notice, respondent has conceded the reported values of

Dave True’s interests in Rancho Verdad, True Drilling,

Toolpushers Supply Co., Midland Financial Corp., Smokey Oil Co.,

Inc., and Roughrider Pipeline Co. that were sold by the estate in

1994.   Appendix schedule 2, infra, lists Dave True’s interests

and compares the estate tax notice values to amounts paid by the

purchasers.   In addition, respondent has stipulated that the

estate would be entitled to an increased marital deduction under

section 2056 if the value of interests in the True companies that

were sold to Jean True was determined to be greater than the

purchase prices under the buy-sell agreements.
                               - 55 -

    C.    1994 Transfers by Jean True

    After Dave True died, Jean True no longer wished to be

actively involved in all the True companies.   Accordingly, on

June 30 and July 1, 1994, she gave notice to her sons of her

intent to sell most of her interests in the True companies.    Jean

True sold her interests to her sons at book value, pursuant to

the terms of the buy-sell agreements.

    Jean True timely filed a 1994 Federal gift tax return

disclosing the transactions but treating them as sales, thereby

reporting no taxable gifts.

    On January 20, 1998, respondent issued to Jean True a notice

of deficiency (1994 gift tax notice), determining that the values

of interests she sold in 1994 were higher than reported book

values.   However, since issuing the 1994 gift tax notice,

respondent has conceded the reported values of interests in

Roughrider Pipeline Co., Rancho Verdad, Toolpushers Supply Co.,

and Midland Financial Corp. that were sold by Jean True in 1994.

Appendix schedule 3, infra, lists the interests sold and compares

the 1994 gift tax notice values to amounts paid by the

purchasers.

IV. Subsequent Income Tax Litigation Regarding Ranchland
    Exchange Transactions

    During the 1980's, the True family (except Tamma Hatten)

purchased land and operating assets to add to their ranching

operations.   Each purchase took place through the same series of
                                - 56 -

steps, described as follows (generally, ranchland exchange

transactions):    First, instead of True Ranches directly acquiring

the ranchlands, the True family arranged for Smokey Oil Co.

(Smokey Oil) to purchase the parcels of real property for an

aggregate purchase price of over $6.8 million, while True Ranches

acquired the operating assets of each ranch.    At the time, Smokey

Oil (a Wyoming S corporation) was owned by Dave True (72.3935

percent), Jean True (24.1316 percent), and the True sons (1.1583

percent each).    Second, Smokey Oil transferred the ranchlands to

True Oil in exchange for selected productive oil and gas leases,

which the parties treated as a like-kind, tax-free exchange under

section 1031.    Third, True Oil immediately distributed the newly

acquired ranchlands to the individual partners of True Oil (Dave

and Jean True and the True sons) as tenants in common.    Fourth,

the partners then contributed their undivided interests in the

ranchlands to True Ranches by general warranty deed.    The

partnership distribution and contribution transactions were

treated as nonrecognition transactions under sections 721 and

731.

       The intent of the True family in carrying out this series of

acquisitions, transfers, and exchanges was to create income tax

benefits.    Through the operation of section 1031(d), which

essentially provides that the basis of property received in a

nonrecognition exchange is the same as the basis of property
                                - 57 -

transferred, Smokey Oil received depletable oil and gas leases

with the same cost basis as the nondepreciable ranchlands it had

transferred in the exchange with True Oil.    This allowed Smokey

Oil to claim cost depletion deductions for the leases on its tax

returns for 1989 and 1990 under section 612, which, if sustained,

would have resulted in substantial income tax savings to the True

family.    True Oil, on the other hand, received the nondepreciable

ranchlands with a zero basis because the oil and gas leases it

exchanged pursuant to section 1031 were fully cost depleted.

Through subsequent transfers, True Ranches acquired the

ranchlands with the same zero basis as True Oil’s oil and gas

leases.    By so doing, the True family intended to reap the tax

benefits of turning nondepreciable assets (ranchlands) into cost-

depletable assets (oil and gas leases) in the hands of Smokey

Oil.    In addition, the ranchland exchange transactions rid True

Oil of fully cost-depleted assets (oil and gas leases) and gave

True Ranches a zero basis in otherwise nondepreciable assets

(ranchlands).

       If these transactions had been effective for income tax

purposes, they would also have created transfer tax benefits by

reducing the prices payable under the True Ranches and Smokey Oil

buy-sell agreements.    They would have reduced the book value of

the ranchlands to zero and thereby reduced the book value formula

prices to be paid for partnership interests in True Ranches under
                              - 58 -

the terms of the True Ranches buy-sell agreement.   Because of the

transfer of basis to the depletable oil and gas properties, the

ultimate prices to be paid for interests in Smokey Oil under its

buy-sell agreement would have been expected to be reduced to less

than the costs of the purchased ranchlands.

    On audit of the True Oil, Smokey Oil, and True Ranches tax

returns for 1989 and 1990, the IRS determined that the substance-

over-form and step transaction doctrines required that the

various intermediate steps of these transactions be collapsed and

that they be viewed as a unitary transaction in which True

Ranches acquired directly the land and depreciable assets of the

ranch properties.   Because Smokey Oil was deemed not to have

acquired the ranchlands, the IRS treated these transactions as if

there had been no exchange between Smokey Oil and True Oil.     The

IRS disallowed Smokey Oil’s cost depletion deductions claimed on

the leases received in the exchanges, and it allocated the income

from those leases back to True Oil.

    The True family paid the deficiencies and filed

administrative claims for refund.   After the IRS disallowed the

refund claims, the True family filed a refund suit in U.S.

District Court for the District of Wyoming.   The Government filed

motions for partial summary judgment, contending (inter alia)

that under the step transaction doctrine the ranchland exchange

transactions were a single transaction in which True Ranches
                               - 59 -

alone acquired all the ranch property (real property and

operating assets).   The District Court granted the Government’s

motion for summary judgment, designated as True v. United States,

No. 96-CV-1050-J, (Nov. 12, 1997), and held that the step

transaction doctrine required the recharacterization of the

ranchland exchange transactions as the IRS had determined.      On

appeal, the Court of Appeals for the Tenth Circuit affirmed the

District Court’s decision regarding the ranchland exchange

transactions.   See True v. United States, 190 F.3d 1165, 1177-

1180 (10th Cir. 1999).   On November 15, 1999, the Court of

Appeals for the Tenth Circuit denied petitioners’ petition for

rehearing and rehearing en banc.

                              OPINION

I.   Do Family Buy-Sell Agreements Control Estate Tax Value?

     Case law and regulatory authority have interpreted the

general estate tax valuation provisions of section 2031 to

include special rules that allow qualifying buy-sell agreements

to control estate tax fair market value.

     A.   Framework for Analyzing Estate Tax Valuation Issues

     Federal estate tax is imposed on the transfer of the taxable

estate of every United States citizen or resident.   See sec.

2001(a); U.S. Trust Co. v. Helvering, 307 U.S. 57, 60 (1939).

The taxable estate is defined as the gross estate less prescribed

deductions. See sec. 2051.   All property interests owned by the
                                - 60 -

decedent at death are included in the gross estate; the value of

the gross estate generally is determined as of the date of death.

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

    Fair market value is the standard for determining value of

transfers of property subject to Federal estate tax.   See United

States v. Cartwright, 411 U.S. 546, 550 (1973).   Fair market

value is “the price at which the property would change hands

between a willing buyer and a willing seller, neither being under

any compulsion to buy or to sell and both having reasonable

knowledge of relevant facts.”    Id. at 551; see sec. 20.2031-1(b),

Estate Tax Regs.   The willing buyer and seller are hypothetical

persons, rather than specific individuals or entities, and their

characteristics are not necessarily the same as those of the

actual buyer or seller.   See Estate of Newhouse v. Commissioner,

94 T.C. 193, 218 (1990) (citing Estate of Bright v. United

States, 658 F.2d 999, 1006 (5th Cir. 1981)).   The hypothetical

willing buyer and seller are presumed to be dedicated to

achieving the maximum economic advantage.   As stated in Estate of

Newhouse, 94 T.C. at 218: “This advantage must be achieved in the

context of market conditions, the constraints of the economy, and

the financial and business experience of the corporation existing

at the valuation date.”

    Generally, the shares of a closely held corporation for

which there is no public market, in the absence of recent arm’s-
                               - 61 -

length sales, are to be valued by taking into account the

company’s net worth, prospective earning power, dividend-paying

capacity, and other relevant factors.26    See Estate of Andrews v.

Commissioner, 79 T.C. 938, 940 (1982); sec. 20.2031-2(f)(2),

Estate Tax Regs.; Rev. Rul. 59-60, 1959-1 C.B. 237.    Similarly,

the valuation of partnership interests requires (1) a fair

appraisal (as of the valuation date) of all assets of the

business, tangible and intangible, including goodwill, (2) an

analysis of the business’ demonstrated earning capacity, and

(3) consideration of other “relevant factors” noted in the stock

valuation rules.   See sec. 20.2031-3, Estate Tax Regs.

    The value of property as of the decedent’s date of death is

a question of fact requiring the trier of fact to weigh all

relevant evidence of value and to draw appropriate inferences.

See Estate of Newhouse v. Commissioner, supra; Hamm v.

Commissioner, 325 F.2d 934, 938 (8th Cir. 1963), affg. T.C. Memo.

1961-347.

    B.    Development of Legal Standards

    The legal standards for allowing buy-sell agreements to

determine estate tax value have developed over time.    Some cases


     26
      “Other relevant factors” listed in the regulation include:
(1) Goodwill of the business, (2) economic outlook in the
particular industry, (3) company’s position in the industry and
its management, (4) degree of control represented by block of
stock to be valued, and (5) values of securities of corporations
engaged in the same or similar lines of business that are listed
on a stock exchange. See sec. 20.2031-2(f)(2), Estate Tax Regs.
                              - 62 -

laid out fundamental objective requirements that, if met,

permitted the formula price provided by a buy-sell agreement to

establish fair market value under predecessors of section 2031.

Other cases and the estate tax regulations have expanded those

requirements to address such subjective concerns as whether the

buy-sell agreement was a bona fide business arrangement and not

merely a device to make a testamentary disposition at a bargain

price.

         1.   Case Law Preceding Issuance of Regulations

    Before the issuance of regulations under section 2031,

courts addressed the effect of option contracts or buy-sell

agreements on the valuation of business interests by examining

whether restrictions in the agreement put a ceiling on the price

the owner (or his estate) could receive at disposition.

Specifically, buy-sell agreements were required (1) to be

enforceable against the parties, (2) to specify a price, and (3)

to bind transferors both during life and at death in order to be

given dispositive effect for estate tax valuation purposes.   See

Lomb v. Sugden, 82 F.2d 166, 167 (2d Cir. 1936); Wilson v.

Bowers, 57 F.2d 682, 683 (2d Cir. 1932); Estate of Salt v.

Commissioner, 17 T.C. 92, 99-100 (1951) (generally, the Wilson-

Lomb test).   Although these requirements were developed in the

context of corporate buy-sell agreements, they were also applied

to partnership buy-sell agreements.    See Brodrick v. Gore, 224
                                - 63 -

F.2d 892, 896 (10th Cir. 1955); Estate of Weil v. Commissioner,

22 T.C. 1267, 1273-1274 (1954); Hoffman v. Commissioner, 2 T.C.

1160, 1178-1180 (1943), affd. sub nom. Giannini v. Commissioner,

148 F.2d 285 (9th Cir. 1945).

    In addition, courts developed other tests to help decide

whether buy-sell agreements controlled estate tax value.    In

Bensel v. Commissioner, 36 B.T.A. 246 (1937), affd. 100 F.2d 639

(3d Cir. 1938), the arm’s-length nature of the agreement

convinced the Court that a corporate buy-sell agreement

controlled estate tax value.    In Bensel, 36 B.T.A. at 247, a

majority shareholder (father) had granted employee (son) an

option to purchase father’s stock at his death for a fixed price,

in order to retain son’s valuable services.    Father and son were

estranged at all relevant times.    See id.   When son exercised the

option at father’s death, the fair market value of the stock

exceeded the option price.   See id. at 249-250.

    The Commissioner argued, in the alternative, for inclusion

in the gross estate at date of death value under the theory that

decedent (1) retained an interest to alter, revoke, or amend

under section 302(d) of the Revenue Act of 1926, ch. 27, 44 Stat.

71, or (2) made a transfer in contemplation of death under

section 302(c).   See Bensel v. Commissioner, 36 B.T.A. at 251.

However, the hostilities and constant bargaining between father

and son convinced the Court that son was not the natural object
                               - 64 -

of father’s bounty and that the option price was what adverse

parties dealing at arm’s length would have agreed to.   See id. at

252-253.   Accordingly, the Court concluded that the option was

neither a substitute for a testamentary disposition, nor a device

for avoiding estate tax, so that section 302(c) and (d) did not

apply.   See id. at 253-254.   Instead, son’s exercise of the

option was either a bona fide sale for adequate and full

consideration or, like Wilson and Lomb, completely outside the

scope of section 302 of the Revenue Act of 1926.   See id. at 254.

    Similarly, we stated in Estate of Littick v. Commissioner,

31 T.C. 181 (1958), that if “for the purpose of keeping control

of a business in its present management, the owners set up in an

arm’s-length agreement * * * the price at which the interest of a

part owner is to be disposed of by his estate to the other

owners, that price controls for estate tax purposes, regardless

of the market value of the interest to be disposed of”.    Id. at

187 (emphasis added).

    Other facts that courts considered in evaluating whether

buy-sell agreements should determine estate tax value included:

(1) Tax avoidance motives for entering into buy-sell agreements,

see May v. McGowan, 194 F.2d 396, 397 (2d Cir. 1952); Estate of

Littick, 31 T.C. at 186, (2) that the purchasers under the buy-

sell agreement were natural objects of the decedent-seller’s

bounty, see Hoffman v. Commissioner, 2 T.C. at 1179, and (3) that
                                - 65 -

the buy-sell agreement’s price, when originally fixed,

represented full and adequate consideration and was not a

testamentary substitute, see id.; Bensel v. Commissioner, 36

B.T.A. at 254; Baltimore Natl. Bank v. United States, 136 F.

Supp. 642, 654 n.7 (D. Md. 1955).

       The Court of Appeals for the Tenth Circuit indicated, in

Brodrick v. Gore, supra, that if a partnership buy-sell agreement

were entered into in bad faith, that could jeopardize the ability

of the agreement to control value for estate tax purposes.      In

Brodrick v. Gore, 224 F.2d at 894, a father and his two sons

agreed to sell their interests in an oil and gas partnership,

during life or at death, only to each other at book value.      After

the father’s death, the sons petitioned the probate court to be

compelled, as executors, to sell the father’s interest to

themselves at book value.    See id.     After a hearing, the probate

court found that the partnership agreement was valid, the estate

was obligated to sell at book value, the sons were obligated to

purchase, and book value27 was correctly calculated.      See id. at

895.

       The Commissioner determined a deficiency in estate tax on

the ground that the fair market value of the father’s interest


       27
      Neither the published report of Brodrick v. Gore, 224 F.2d
892, 896 (10th Cir. 1955), nor the briefs, which we have
reviewed, specify the basis on which book value was to be
computed (e.g., financial statement, tax, or cash basis) under
the partnership buy-sell agreement.
                                 - 66 -

exceeded book value on his date of death.     See id. at 895.    The

sons paid the deficiency, brought a District Court refund suit,

and prevailed on a motion for summary judgment.     See id.     The

Commissioner appealed to the Court of Appeals for the Tenth

Circuit, which affirmed the judgment in favor of the executor-

sons.   See id. at 897.

    Applying the Wilson-Lomb test, the Court of Appeals for the

Tenth Circuit held that the estate tax value was properly limited

to book value because the sale to the sons at book value was

required under a reciprocal and enforceable agreement.      See id.

at 896.    The Court of Appeals held the probate court’s prior

judgment to be a binding determination that:     (1) The executors

were obligated to sell to the surviving partners at book value

and (2) the calculation of book value was correct.     See id.

    The Court noted that if the Commissioner had pleaded

affirmatively that the partnership agreement was executed in “bad

faith,” or that the probate court proceeding was collusive or

nonadversarial, there might have been a genuine issue of material

fact.     See id. at 897.   However, as stated by the Court:   “With

no such issues of fact joined, the question whether the estate

tax should be computed on the basis of the book value or the

market value was one of law.”      Id.
                                 - 67 -

            2.   Regulatory Authority and Interpretive Rulings

    In 1958, the Treasury issued final regulations under section

2031, concerning the valuation of stocks and bonds for estate tax

purposes, applicable to estates of decedents dying after August

16, 1954.    See sec. 20.2031-2, Estate Tax Regs.   In particular,

section 20.2031-2(h) addresses the valuation of securities owned

by a decedent at death subject to an option or contract to

purchase held by another person.     See sec. 20.2031-2(h), Estate

Tax Regs.    The regulation states that the effectiveness of the

agreement to determine the value of securities for estate tax

purposes depends on the circumstances of the case.     See id.   For

instance, the option or contract price is accorded little weight

if it did not bind the decedent equally during life and at death.

See id.   The regulation further states:

     Even if the decedent is not free to dispose of the
     underlying securities at other than the option or
     contract price, such price will be disregarded in
     determining the value of the securities unless it is
     determined under the circumstances of the particular
     case that the agreement represents a bona fide business
     arrangement and not a device to pass the decedent’s
     shares to the natural objects of his bounty for less
     than an adequate and full consideration in money or
     money’s worth. [Id.; emphasis added.]

Although the regulation as a whole, and this subsection in

particular, have been subsequently amended, the changes do not

affect the cases at hand.28    Cases applying the regulation have


     28
      Sec. 20.2031-2, Estate Tax Regs., was amended June 14,
1965 by T.D. 6826, 1965-2 C.B. 367; Apr. 26, 1974 by T.D. 7312,
                                                   (continued...)
                                - 68 -

interpreted the “bona fide business arrangement” and “not a

testamentary device” tests to be conjunctive (i.e., both tests

must be satisfied independently to give the agreement dispositive

effect).    See Dorn v. United States, 828 F.2d 177, 182 (3d Cir.

1987); St. Louis County Bank v. United States, 674 F.2d 1207,

1210 (8th Cir. 1982); Estate of Lauder v. Commissioner, T.C.

Memo. 1992-736 (Lauder II).     This means that a buy-sell agreement

can be both a bona fide business arrangement and a testamentary

device, with the result that it will not be given dispositive

effect for estate tax valuation purposes.    See Lauder II.

    In 1959, the Commissioner issued Revenue Ruling 59-60, which

was intended to “outline and review in general the approach,

methods and factors to be considered in valuing shares of the

capital stock of closely held corporations for estate tax and

gift tax purposes.”    Rev. Rul. 59-60, 1959-1 C.B. 237.   Revenue

Ruling 59-60 has been widely accepted as setting forth the

appropriate criteria to consider in determining fair market

value.     See Estate of Newhouse v. Commissioner, 94 T.C. at 217.

Section 8 of the ruling addresses the effect of agreements



     28
      (...continued)
1974-1 C.B. 277; Sept. 30, 1974 by T.D. 7327, 1974-2 C.B. 294;
Sept. 13, 1976 by T.D. 7432, 1976-2 C.B. 264, and Jan. 28, 1992
by T.D. 8395 (1992 amendment), 1992-1 C.B. 816. Only the 1992
amendment affected subsec. 20.2031-2(h), Estate Tax Regs., by
adding a cross-reference to sec. 2703 (and the regulations
thereunder) for special rules involving options and agreements
(including contracts to purchase) entered into (or substantially
modified after) Oct. 8, 1990. See infra pp. 79-81.
                              - 69 -

restricting the sale or transfer of stock on estate and gift tax

value.   See Rev. Rul. 59-60, 1959-1 C.B. at 243.

    First, the ruling describes a situation in which stock was

acquired by a decedent subject to an option reserved by the

issuing corporation to repurchase at a certain price.   The ruling

states that the option price usually will be accepted as fair

market value for estate tax purposes, under the rubric of Revenue

Ruling 54-76.   See id.; Rev. Rul. 54-76, 1954-1 C.B. 194.

However, Revenue Ruling 59-60 further states that the option

price does not control fair market value for gift tax purposes.

See Rev. Rul. 59-60, 1959-1 C.B. at 244.

    Second, the ruling provides another formulation of the

Wilson-Lomb test.   It states that if the option or buy-sell

agreement (1) resulted from voluntary action by the stockholders

and (2) was binding during life and at death of the stockholders,

then the agreement may or may not, depending on the circumstances

of each case, fix the value for estate tax purposes.    See id.

The ruling adds, however, that the agreement would be a factor to

evaluate with other relevant factors in determining fair market

value.   See id.

    Third, the ruling lists factors that must always be

considered in valuing closely held stock “to determine whether

the agreement represents a bonafide business arrangement or is a

device to pass the decedent’s shares to the natural objects of
                                  - 70 -

his bounty for less than an adequate and full consideration in

money or money’s worth.”    Id.    The factors mentioned are:   The

relationship of the parties, the relative number of shares held

by the decedent, and other material facts.      See id.

          3.   Case Law Following Issuance of Regulations and
               Revenue Ruling 59-60

    Cases decided after the issuance of section 20.2031-2(h),

Estate Tax Regs., and Revenue Ruling 59-60, supra, reflect new

expressions of the Wilson-Lomb test.       Specifically, the formula

price under a buy-sell agreement was considered binding for

Federal estate tax purposes if: (1) The offering price was fixed

and determinable under the agreement; (2) the agreement was

binding on the parties both during life and after death, (3) the

agreement was entered into for bona fide business reasons,29 and

(4) the agreement was not a substitute for a testamentary

disposition30 (generally, the Lauder II test).      See Lauder II



     29
      We refer to this requirement as the business purpose prong
of the Lauder II test. See Estate of Lauder v. Commissioner,
T.C. Memo. 1992-736 (Lauder II). This is equivalent to the
requirement of sec. 20.2031-2(h), Estate Tax Regs., that the
agreement represent a bona fide business arrangement. See Lauder
II (using the terminology of this Court and the regulation
interchangeably); sec. 20.2031-2(h), Estate Tax Regs.
     30
      We refer to this requirement as the nontestamentary
disposition prong of the Lauder II test. This is equivalent to
the requirement of sec. 20.2031-2(h), Estate Tax Regs., that the
agreement not be a device to pass the decedent’s shares to the
natural objects of his bounty for less than an adequate and full
consideration in money or money’s worth. See Lauder II (using
the terminology of this Court and the regulation
interchangeably); sec. 20.2031-2(h), Estate Tax Regs.
                               - 71 -

(tracing the origins of the test through case law and

regulations).   The first two prongs of the Lauder II test had

been addressed directly by the courts in the Wilson-Lomb line of

cases.   However, after the issuance of section 20.2031-2(h),

Estate Tax Regs., the attention of the courts shifted to the last

two prongs, which had only been adverted to in some early cases.

                a.   Was Agreement Entered Into for Bona Fide
                     Business Reasons?

    In several cases, courts considered whether parties had bona

fide business reasons for entering into buy-sell agreements.      For

example, instituting a buy-sell agreement to maintain exclusive

family control over a business repeatedly has been found to be a

bona fide business purpose.   See Estate of Bischoff v.

Commissioner, 69 T.C. 32, 39-40 (1977); Estate of Littick v.

Commissioner, 31 T.C. at 187; Lauder II; Estate of Seltzer v.

Commissioner, T.C. Memo. 1985-519; Estate of Slocum v. United

States, 256 F. Supp. 753, 755 (S.D.N.Y. 1966).     In addition,

using buy-sell agreements to assure continuity of company

management policies and to retain key employees also have been

held to be bona fide business purposes.    See Estate of Reynolds

v. Commissioner, 55 T.C. 172, 194 (1970); Bommer Revocable Trust

v. Commissioner, T.C. Memo. 1997-380.     However, as we noted in

Lauder II:   “legitimate business purposes are often ‘inextricably

mixed’ with testamentary objectives where * * * the parties to a

restrictive stock agreement are all members of the same immediate
                               - 72 -

family.”   Lauder II, T.C. Memo. 1992-736, 64 T.C.M. (CCH) 1643,

1657, 1992 T.C.M. (RIA) par. 92,736, at 92,3731 (quoting 5

Bittker, Federal Taxation of Income, Estates & Gifts, par.

132.3.10, at 132-54 (1984)).   As a result, courts required

taxpayers independently to satisfy both the business purpose and

nontestamentary disposition prongs of the Lauder II test.

               b.   Was Agreement a Substitute for
                    Testamentary Dispositions?

    In evaluating whether buy-sell agreements were substitutes

for testamentary dispositions, greater scrutiny was applied to

intrafamily agreements restricting stock transfers in closely

held businesses than to similar agreements between unrelated

parties.   See Dorn v. United States, 828 F.2d. 177, 182 (3d Cir.

1987); Lauder II; Hoffman v. Commissioner, 2 T.C. at 1178-1179

(“The fact that the option is given to one who is the natural

object of the bounty of the optionor requires substantial proof

to show that it rested upon full and adequate consideration.”).

     Courts analyzed several factors and employed various tests

to ascertain whether buy-sell agreements were meant to serve as

substitutes for testamentary dispositions.    In Lauder II, we

organized the analysis into two categories:    (1) Factors

indicating that a buy-sell agreement was not the result of arm’s-

length dealing and was designed to serve a testamentary purpose

(testamentary purpose test), and (2) tests to determine whether a

buy-sell agreement’s formula price reflected full and adequate
                                  - 73 -

consideration in money or money’s worth (adequacy of

consideration test).    No particular factor or test was weighted

more heavily than another; but rather, courts considered all

circumstances to determine whether buy-sell agreements were

adopted for the principal purpose of achieving testamentary

objectives.    See St. Louis County Bank v. United States, 674 F.2d

at 1210-1211; Lauder II; Estate of Carpenter, T.C. Memo. 1992-

653.

                       1.   Testamentary Purpose Test

       Under the testamentary purpose test, factors indicating that

a buy-sell agreement was not the result of arm’s-length dealing

and was designed to serve a testamentary purpose included (1) the

decedent’s ill health when entering into the agreement, see St.

Louis County Bank v. United States, 674 F.2d at 1210; Estate of

Lauder v. Commissioner, T.C. Memo. 1990-530 (Lauder I); Estate of

Slocum v. United States, 256 F. Supp. at 755, (2) lack of

negotiations between the parties before executing the agreement,

see Bommer Revocable Trust v. Commissioner, T.C. Memo. 1997-380;

Lauder II; Bensel v. Commissioner, 36 B.T.A. at 253 (finding no

testamentary purpose due to evidence of hostile negotiations),

(3) lack of (or inconsistent) enforcement of buy-sell agreements,

see St. Louis County Bank v. United States, 674 F.2d at 1211;

Estate of Bischoff v. Commissioner, 69 T.C. at 42 n.10 (finding

that agreement was not a testamentary substitute due, in part, to
                                 - 74 -

enforcement when son died),31 (4) failure to obtain comparables or

appraisals to determine the buy-sell agreement’s formula price,

see Bommer Revocable Trust v. Commissioner, supra; Lauder II, (5)

failure to seek professional advice in selecting the formula

price, see Bommer Revocable Trust v. Commissioner, supra; Lauder

II, (6) lack of provision in buy-sell requiring periodic review

of a stated fixed price, see Bommer Revocable Trust v.

Commissioner, supra, (7) exclusion of significant assets from the

formula price, see Lauder II (finding that omission of all

intangible assets from book value formula suggested testamentary

purpose), and (8) acceptance of below market payment terms for

purchase of decedent’s interest, see Bommer Revocable Trust v.

Commissioner, supra.

                      2.   Adequacy of Consideration Test

     Before determining whether the formula price in a buy-sell

agreement represented full and adequate consideration in money or

money’s worth, courts were required to decide, as a preliminary

matter, when and how the adequacy of consideration test would be

applied.   For example, would the adequacy of consideration be

tested when the buy-sell agreement was adopted or when the buy-

sell restrictions were invoked at the decedent-stockholder’s

death?    In addition, the term “adequate and full consideration”,


     31
      But see Bommer Revocable Trust v. Commissioner, T.C. Memo.
1997-380 (disagreeing with the taxpayer’s contention that record
of prior enforcement requires that buy-sell agreement be
respected for estate tax purposes).
                              - 75 -

which was not defined in section 20.2031-2(h), Estate Tax Regs.,

required interpretation.

     In general, courts evaluated the adequacy of consideration

as of the date the buy-sell agreement was executed, rather than

at the date for valuing property to be included in the decedent-

shareholder’s gross estate.   See St. Louis County Bank v. United

States, 674 F.2d at 1210; Lauder II; Estate of Bischoff v.

Commissioner, 69 T.C. at 41 n.9; Bensel v. Commissioner, 36

B.T.A. at 253.   However, in exceptional circumstances, courts

examined the adequacy of consideration and conduct of parties

after the buy-sell agreement date if intervening events within

the parties’ control caused a wide disparity between the buy-sell

agreement’s formula price and fair market value.   See St. Louis

County Bank v. United States, 674 F.2d at 1211; Estate of Rudolph

v. United States, 93-1 USTC par. 60,130, at 88449-88450, 71 AFTR

2d 93-2169, at 93-2176-93-2177 (S.D. Ind. 1993).   In St. Louis

County Bank, supra at 1209, the intervening event (conversion

from moving, storage, and delivery business to real estate rental

business) “had a significant, adverse impact” on the stock’s

value as computed under the buy-sell agreement’s formula price

(computed as 10 times average annual net earnings per share for 5

preceding years).32


     32
      The moving business generated substantial yearly income
(high in 1968 of $1,061.15 per share; low in 1970 of $597 per
share), as defined under the stock purchase agreement’s formula.
                                                   (continued...)
                              - 76 -

     In Estate of Reynolds v. Commissioner, 55 T.C. at 194, we

considered whether the ultimate disparity between unrestricted

market price per share and the formula price could have been

predicted by the parties at the time they executed a voting trust

agreement.   In that case, we found that the restrictive

provisions of the voting trust agreement were not determinative

of estate or gift tax value and were at most a factor to be

considered in valuing the voting trust certificates.33     See id.

at 191.   The decedents’ family entered into the voting trust

agreement to maintain the family’s controlling interest in the

Kansas City Life Insurance Co., a publicly traded company.     See

id. at 174-175.   At the voting trust agreement date in 1946, the

unrestricted, over-the-counter market price of the underlying

stock was 2-1/2 times the voting trust formula price (25 times

the average annual cash dividend paid on a share of common stock

of the company over the preceding 3-year period).   See id.     at


     32
      (...continued)
However, while engaged in the rental real estate business, the
company’s stock value under the formula went down to $0 per share
from 1971 to 1975. See St. Louis County Bank v. United States,
674 F.2d 1207, 1209 (8th Cir. 1982).
     33
      The restrictive provisions were held not to fix estate and
gift tax values because (1) the voting trust certificates could
have been freely given or bequeathed without triggering the
restrictive provisions and (2) this Court considered inapplicable
the approach of the Court of Appeals for the Second Circuit in
the Wilson-Lomb line of cases because of the lack of regard for
the “retention value” of the voting trust certificates. See
Estate of Reynolds v. Commissioner, 55 T.C. 172, 188-192 (1970);
see infra p. 148 regarding gift tax valuation implications of
retention value.
                               - 77 -

193-194.   By 1962 (year of death), the ratio of unrestricted

market price to voting trust formula price had become 10 to 1.

See id. at 194.   The Commissioner argued that the restrictive

provisions should be disregarded in valuing the shares because

the voting trust agreement in Reynolds represented a device and

was not a bona fide business arrangement under section 20.2031-

2(h), Estate Tax Regs.    See id.    However, we found that there

were bona fide business reasons for the Reynolds voting trust

agreement, and that “the large discrepancy between market price

per unrestricted share and formula price per unit was not the

result of any cleverly devised plan to lower the testamentary

value of [decedents’] * * * investments in the company”.       Id. at

194-195.   Therefore, the voting trust agreement was factored into

the determination of fair market value, rather than being

completely disregarded.

     To apply the adequacy of consideration test, courts were

required to determine the meaning of the phrase “adequate and

full consideration in money or money’s worth” used in section

20.2031-2(h), Estate Tax Regs.      In Estate of Bischoff v.

Commissioner, 69 T.C. at 41 n.9, we concluded that consideration

was adequate because the formula price to be paid for a

partnership interest represented the fair market value of

partnership assets.   In Dorn v. United States, 828 F.2d at 181,

the Court of Appeals for the Third Circuit observed that

“Although few cases have relied on Treasury Regulation
                              - 78 -

§20.2031(h) [sic] for support, those which do discuss it support

the position that the option price affects the value of the gross

estate only if the option was granted at arm’s length.”   In

Bensel v. Commissioner, 36 B.T.A. at 253-254, the adequacy of

consideration test was met when the agreement was entered into

because “the price agreed upon between the father and son was not

too low.   That is, it was not lower than the price at which

persons with adverse interests dealing at arm’s length might have

been expected to have agreed.”    Similarly, in Estate of Carpenter

v. Commissioner, T.C. Memo. 1992-653, we held that a book value

price was reasonable (i.e., adequate and full) because it was the

result of arm’s-length negotiations conducted at the time the

buy-sell agreement was created.

     An instructive articulation of the adequacy of consideration

test was presented in Lauder II, 64 T.C.M. (CCH) 1643, 1660, 1992

T.C.M. (RIA) par. 92,736, at 92-3733 through 92-3734, in which we

stated:

          Notably, the phrase “adequate and full considera-
     tion” is not specifically defined in section 20.2031-
     2(h), Estate Tax Regs. In defining the phrase, we
     begin with the proposition that a formula price may
     reflect adequate and full consideration notwithstanding
     that the price falls below fair market value. See,
     e.g., Estate of Reynolds v. Commissioner, 55 T.C. 172,
     194 (1970). In this light, the phrase is best
     interpreted as requiring a price that is not lower than
     that which would be agreed upon by persons with adverse
     interests dealing at arm’s length. Bensel v.
     Commissioner, supra. Under this standard, the formula
     price generally must bear a reasonable relationship to
     the unrestricted fair market value of the stock in
     question.
                                 - 79 -

     In summary, to satisfy the adequacy of consideration test,

given the greater scrutiny applied to intrafamily agreements

restricting transfers of closely held businesses interests, the

formula price under the buy-sell agreement must be comparable to

what would result from arm’s-length dealings between adverse

parties, and it must bear a reasonable relationship to the

unrestricted fair market value of the interest in question.

     4.     Statutory Changes

     In 1990, Congress enacted the Chapter 14 special valuation

rules.     See secs. 2701-2704 (Chapter 14); Omnibus Budget

Reconciliation Act of 1990 (OBRA), Pub. L. 101-508, sec.

11602(a), 104 Stat. 1388-491, 1388-500 (1990).      These rules were

enacted to replace the complex, overly broad estate freeze rules

of recently enacted section 2036(c)34 with targeted rules that

were designed to assure more accurate valuation of property

subject to transfer taxes.      See S. 3209, 101st Cong. 2d Sess.

(1990), 136 Cong. Rec. 30538.

     Chapter 14 includes section 2703, which codifies rules

regarding the impact of restrictions (options, agreements, rights

to acquire or use property at less than fair market value, or

limitations on sale or use of property) on valuation for estate

and gift tax purposes.35     See sec. 2703.   New section 2703


     34
      See Omnibus Budget Reconciliation Act of 1987, Pub. L.
100-203, sec. 10402, 101 Stat. 1330-431.
     35
          SEC. 2703. CERTAIN RIGHTS AND RESTRICTIONS DISREGARDED.
                                                       (continued...)
                             - 80 -

applied to agreements, options, rights, or restrictions entered

into, granted, or substantially modified after October 8, 1990.36

See OBRA sec. 11602(e)(1)(A)(ii), 104 Stat. 1388-500.

     The Senate bill (S. 3209) explained that the rules requiring

options, rights, or restrictions (1) to be bona fide business

arrangements and (2) not to be devices to transfer property to

members of the decedent’s family for less than full and adequate

consideration in money or money’s worth, see secs. 2703(b)(1) and



     35
      (...continued)
          (a) General Rule.--For purposes of this subtitle, the
     value of any property shall be determined without regard
     to--

               (1) any option, agreement, or other right to
          acquire or use the property at a price less than the
          fair market value of the property (without regard to
          such option, agreement, or right), or

               (2) any restriction on the right to sell or use
          such property.

          (b) Exceptions.--Subsection (a) shall not apply to any
     option, agreement, right, or restriction which meets each of
     the following requirements:

               (1) It is a bona fide business arrangement.

               (2) It is not a device to transfer such property
          to members of the decedent’s family for less than full
          and adequate consideration in money or money’s worth.

               (3) Its terms are comparable to similar
          arrangements entered into by persons in an arms’ length
          transaction.
     36
      We summarize sec. 2703 to complete our analysis of the
evolution of legal standards on the ability of buy-sell
agreements to control estate tax value. However, the parties
have stipulated that the provisions of sec. 2703 do not apply to
the cases at hand. See supra note 23.
                                - 81 -

(2), were similar to those contained in section 20.2031-2(h),

Estate Tax Regs.   See S. 3209, supra at 30540-30541.      S. 3209

also emphasized that the business arrangement and device

requirements were independent tests.     See id.    Further, S. 3209

explained that OBRA added a third requirement, that the terms of

the option, agreement, right, or restriction must be comparable

to similar arrangements entered into by persons in an arm’s-

length transaction.   See id.    According to S. 3209, this

requirement was not found in prior law.    See id.

II.   Do 1971 and 1973 Gift Tax Cases Have Preclusive Effect?

      A.   Petitioners’ Collateral Estoppel Argument

      Petitioners argue that under the doctrine of collateral

estoppel, or issue preclusion, we are bound by certain

determinations of the U.S. District Court for the District of

Wyoming in the 1971 and 1973 gift tax cases.       In petitioners’

view, the District Court found, as to True Oil and Belle Fourche,

that (1) their buy-sell agreements were bona fide business

arrangements and (2) book value of the transferred interests

equaled fair market value as of the agreement dates.37


      37
      Petitioners explain that the District Court explicitly
determined that book value equaled fair market value for the two
companies, describing this as an “ultimate” fact in the 1971 and
1973 gift tax cases and an “evidentiary” fact in the cases at
hand. In contrast, petitioners contend that the District Court
implicitly held that the buy-sell agreements were bona fide
business arrangements, because the District Court took the
agreements into account in determining fair market value of the
True Oil and Belle Fourche transferred interests. Petitioners
                                                   (continued...)
                              - 82 -

     Petitioners assert that the requirements for applying

collateral estoppel articulated in Peck v. Commissioner, 90 T.C.

162, 166-167 (1988), affd. 904 F.2d 525 (9th Cir. 1990), have

been met; therefore, respondent is precluded from relitigating

those two issues.   We disagree.   Moreover, petitioners

acknowledge that respondent is not estopped from arguing that the

True companies’ buy-sell agreements were testamentary devices

that were not controlling for estate tax purposes.    We agree.

     B.   Legal Standards for Applying Collateral Estoppel

     The doctrine of collateral estoppel provides that, once an

issue of fact or law is “actually and necessarily determined by a

court of competent jurisdiction, that determination is conclusive

in subsequent suits based on a different cause of action

involving a party to the prior litigation.”    Montana v. United

States, 440 U.S. 147, 153 (1979) (quoting Parklane Hosiery Co. v.

Shore, 439 U.S. 322, 326 n.5 (1979)).    Collateral estoppel is a

judicial doctrine designed to protect parties from unnecessary

and redundant litigation, to conserve judicial resources, and to



     37
      (...continued)
characterize this as an “evidentiary” fact in the 1971 and 1973
gift tax cases and an “ultimate” fact in the cases at hand. An
evidentiary fact is a fact that is necessary for or leads to the
determination of an ultimate fact. See Black’s Law Dictionary
611 (7th ed. 1999). An ultimate fact is a fact essential to the
claim or the defense. See id. at 612. In Meier v. Commissioner,
91 T.C. 273, 283-286 (1988), the Tax Court regarded the
distinction between ultimate and evidentiary facts as irrelevant
in applying collateral estoppel. See infra pp. 84-85.
                             - 83 -

foster certainty in and reliance on judicial action.   See Monahan

v. Commissioner, 109 T.C. 235, 240 (1997).   This Court, in Peck

v. Commissioner, supra at 166-167, prescribed the following five

conditions that must be satisfied before applying collateral

estoppel to a current factual dispute (the Peck requirements):

          (1) The issue in the second suit must be identical
     in all respects with the one decided in the first suit.

          (2) There must be a final judgment rendered by a
     court of competent jurisdiction.

          (3) Collateral estoppel may be invoked against
     parties and their privies to the prior judgment.

          (4) The parties must actually have litigated the
     issues and the resolution of these issues must have
     been essential to the prior decision.

          (5) The controlling facts and applicable legal
     rules must remain unchanged from those in the prior
     litigation. [Citations omitted.]38

     Collateral estoppel may be used in connection with matters

of law, matters of fact, and mixed matters of law and fact.    See

Meier v. Commissioner, 91 T.C. 273, 283 (1988).   Moreover, its

focus is on the identity of issues, not the identity of legal

proceedings, so that it may apply to issues of fact or law

previously litigated even though the claims differ.    See Bertoli

v. Commissioner, 103 T.C. 501, 508 (1994)(citing Meier v.

Commissioner, 91 T.C. at 286).   Collateral estoppel cannot apply



     38
      The Court of Appeals for the Tenth Circuit used a similar
test to determine whether collateral estoppel applied. See Klein
v. Commissioner, 880 F.2d 260, 262-263 (10th Cir. 1989).
                                 - 84 -

if the party against whom it is asserted did not have a full and

fair opportunity to litigate the issue in the earlier proceeding.

See Meier v. Commissioner, 91 T.C. at 286 (citing Allen v.

McCurry, 449 U.S. 90 (1980)).     To determine whether the issue to

be precluded in case 2 was identical to an essential issue

actually litigated in case 1 (Peck requirements 1 and 4), early

cases disagreed over whether the facts found in case 1 had to be

ultimate facts or instead, included both ultimate and evidentiary

facts.     See Meier v. Commissioner, 91 T.C. at 284 (citing The

Evergreens v. Nunan, 141 F.2d 927, 928-929 (2d Cir. 1944)

(Evergreens)).     In Amos v. Commissioner, 43 T.C. 50 (1964), affd.

360 F. 2d 358 (4th Cir. 1965), this Court adopted the Evergreens

“ultimate facts” test, which limited the use of collateral

estoppel to ultimate facts found in the second case.    However,

more recent cases and commentators have criticized the Evergreens

approach and its limitation of collateral estoppel to ultimate

facts.     In Meier v. Commissioner, supra at 284-286, we abandoned

the Evergreens approach and adopted the rationale of Comment j,

Restatement, Judgments 2d, section 27 (1982), which focuses not

on whether the facts to be precluded from being relitigated were

evidentiary or ultimate, but on whether the parties recognized

the issue as important and necessary to the first judgment.39


     39
          The Restatement reads as follows:

                                                      (continued...)
                              - 85 -

     C.   Collateral Estoppel Impact of 1971 and 1973 Gift Tax
          Cases

     We now evaluate the 1971 and 1973 gift tax cases and the

cases at hand, in light of the Peck requirements, to determine

whether we are precluded from deciding whether True Oil’s and

Belle Fourche’s (1) buy-sell agreements were bona fide business



     39
      (...continued)
          Determinations essential to the judgment. It is
     sometimes stated that even when a determination is a
     necessary step in the formulation of a decision and
     judgment, the determination will not be conclusive
     between the parties if it relates only to a “mediate
     datum” or “evidentiary fact” rather than to an
     “ultimate fact” or issue of law. It has also been
     stated than [sic] even a determination of “ultimate
     fact” will not be conclusive in a later action if it
     constitutes only an “evidentiary fact” or “mediate
     datum” in that action. Such a formulation is
     occasionally used to support a refusal to apply the
     rule of issue preclusion when the refusal could more
     appropriately be based on the lack of similarity
     between the issues in the two proceedings. If applied
     more broadly, the formulation causes great difficulty,
     and is at odds with the rationale on which the rule of
     issue preclusion is based. The line between ultimate
     and evidentiary facts is often impossible to draw.
     Moreover, even if a fact is categorized as evidentiary,
     great effort may have been expended by both parties in
     seeking to persuade the adjudicator of its existence or
     nonexistence and it may well have been regarded as the
     key issue in the dispute. In these circumstances the
     determination of the issue should be conclusive whether
     or not other links in the chain had to be forged before
     the question of liability could be determined in the
     first or second action.
          The appropriate question, then, is whether the
     issue was actually recognized by the parties as
     important and by the trier as necessary to the first
     judgment. If so, the determination is conclusive
     between the parties in a subsequent action * * *.
     [Restatement, Judgments 2d, sec. 27 (1982).]
                                - 86 -

arrangements and (2) book values equaled their fair market values

on the agreement dates.

      We preface the inquiry by noting that petitioners properly

raised the collateral estoppel issue in their petition.       See Rule

39.   The jurisdictional competency of the District Court in the

1971 and 1973 gift tax cases has not been questioned.      Judgments

were entered, and the Government did not appeal.       The parties to

the cases at hand were also parties to the 1971 and 1973 gift tax

cases (i.e., both petitioners and respondent were parties or

privies in the earlier gift tax cases and were bound by those

decisions).40    In sum, conditions (2) and (3) of the Peck

requirements are satisfied.

           1.   Bona Fide Business Arrangement Issue

      Petitioners argue that we are precluded from deciding

whether the True Oil and Belle Fourche buy-sell agreements

represented bona fide business arrangements under section

20.2031-2(h), Estate Tax Regs., because the District Court

implicitly made this determination in the 1971 and 1973 gift tax

cases.     We disagree with petitioners, because the issue was not



      40
      Specifically, the taxpayers in the 1971 and 1973 gift tax
cases were: Dave True, Jean True, Tamma Hatten, Hank True,
Diemer True, and David L. True. Petitioners in the cases at hand
are: Dave True’s estate (considered his privy) and Jean True.
The fact that the True children are not parties, in their own
right, to the cases at hand does not cause the remaining parties
to fail Peck requirement 3. See Peck v. Commissioner, 90 T.C.
162, 166-167 (1988), affd. 904 F.2d 525 (9th Cir. 1990).
                              - 87 -

actually litigated and decided in the 1971 and 1973 gift tax

cases and was not essential to those decisions (flunking Peck

requirement 4).   Therefore, we proceed independently to determine

whether the True companies’ buy-sell agreements were entered into

for bona fide business reasons.   See discussion infra pp. 99-101.

        2.   Whether Book Value Equaled Fair Market
             Value as of Agreement Date Issue

     The District Court’s findings that tax book value equaled

fair market value for the True Oil and Belle Fourche interests

transferred as of the buy-sell agreement dates in 1971 and 1973

also do not have preclusive effect in the cases before us.    This

is because the issues in these cases (the fair market value of

the interests in question many years later) are not identical to,

and were not actually litigated in or essential to the District

Court’s decisions in the 1971 and 1973 gift tax cases.

     In the 1971 and 1973 gift tax cases, the District Court

determined the fair market values (as of the agreement dates) of

transferred interests in Belle Fourche and True Oil, explicitly

taking into account the depressive effect that the buy-sell

agreements had on value.   In those cases, the District Court

independently determined that fair market value equaled book

value at the agreement dates without finding that the buy-sell

agreements controlled transfer tax value under a Lauder II type
                               - 88 -

of analysis.41   Without a finding that the agreements were

testamentary devices, the District Court was free to consider the

buy-sell restrictions along with other relevant factors in

determining fair market value.   See Rev. Rul. 59-60, 1959-1 C.B.

at 244.

     In the cases at hand, we also must determine, as part of our

evidentiary findings, fair market value on the agreement dates to

help us decide whether the True companies’ buy-sell agreements

were testamentary devices.   However, in so doing, we would not

take into account any depressive effect that the buy-sell

agreements might have had on value; to do otherwise would be to

indulge in circular reasoning that would assume the answer at the

outset of the inquiry.   Therefore, the facts we must find in the

cases at hand (fair market value at agreement dates without

considering impact of buy-sell restrictions on value) were not

required to be found by the District Court in the 1971 and 1973

gift tax cases, leaving the matter open to our examination in the

cases at hand.

     We analyze the differences between a formula price under a

buy-sell agreement and fair market value on the agreement date to


     41
      The District Court’s approach was similar to that employed
in Estate of Hall v. Commissioner, 92 T.C. 312 (1989), where we
did not decide whether the price determined under an adjusted
book value formula price was dispositive for estate tax purposes.
Instead we held, after reviewing the expert reports, that the
actual date of death fair market value of the shares did not
exceed the formula price. See discussion infra pp. 141-144.
                              - 89 -

help expose any lack of arm’s-length dealings or presence of

testamentary intent.   See Estate of Bischoff v. Commissioner, 69

T.C. at 41 n.9; Bensel v. Commissioner, 36 B.T.A. at 253; Lauder

II.   If the buy-sell agreement is found to be a testamentary

device, it is to be disregarded for purposes of determining

estate and gift tax value.   See discussion infra p. 153.

Accordingly, it would be incorrect to account for a buy-sell

agreement’s effect on value in deriving an evidentiary fact (fair

market value at agreement date) that will be used to decide

whether the agreement should have an effect on value at a later

date.

      In Estate of Bischoff v. Commissioner, supra at 35-36, 41

n.9., we compared the buy-sell formula price to the fair market

value of the underlying partnership assets on the date they were

transferred to the partnership (which was close to the agreement

date), and found consideration to be adequate and the buy-sell

agreement price to be equal to fair market value.   We did not

consider any depressive effect that the buy-sell agreement might

have had on underlying asset values at the agreement date.

      In Lauder II, we analyzed various experts’ valuations,

finding the comparative valuation approach that emphasized

price/earnings ratios of industry competitors to be the most

reliable basis for valuing the decedent’s stock at the buy-sell

agreement dates.   We then allowed a discount for lack of
                               - 90 -

liquidity in computing fair market value; however, we did not

attribute the lack of liquidity to the buy-sell agreements.      See

id.

       In summary, the 1971 and 1973 gift tax cases determined fair

market value of the True Oil and Belle Fourche transferred

interests at the dates of agreement by taking into account the

depressive effect the buy-sell agreements had on value.    The

District Court in those cases did not analyze whether the buy-

sell agreements served as substitutes for testamentary

dispositions and therefore was allowed to consider their effect

on value.    This issue is not the same as the one in the cases

before us, as we are required to disregard the buy-sell

agreements in determining value at the relevant dates in order to

make our determination of whether the True family buy-sell

agreements were substitutes for testamentary devices.    Therefore,

we are not bound by the District Court’s determinations that tax

book value equaled fair market value for the True Oil and Belle

Fourche interests transferred as of the buy-sell agreement dates.

III.    Do True Family Buy-Sell Agreements Control Estate Tax
        Values?

       We now apply the Lauder II test to the True family buy-sell

agreements to determine whether the agreements control Federal

estate tax value.    Because most of the buy-sell agreements at

issue in these cases were modeled on the True Oil partnership

agreement or the Belle Fourche stockholders’ restrictive
                               - 91 -

agreement, we focus attention on the facts surrounding the

creation and implementation of those agreements.

     Petitioners assert that the True family buy-sell agreements

satisfy all four prongs of the Lauder II test, while respondent

contends that they flunk two of the four prongs.

     A.   Was the Offering Price Fixed and Determinable Under the
          Agreements?

     The parties agree that the formula price set forth in the

True family buy-sell agreements (tax basis book value) was both

fixed and determinable.42   Thus, the first prong of the Lauder II

test is satisfied.

     B.   Were Agreements Binding During Life and at Death?

     Petitioners divide this test into two components:   the

agreements must be enforceable under State law and must bind the

transferors both during life and at death.   The True family buy-

sell agreements must satisfy both of these components to fulfill

the second prong of the Lauder II test.   See Lomb v. Sugden, 82

F.2d 166, 167 (2d Cir. 1936); Wilson v. Bowers, 57 F.2d 682, 683

(2d Cir. 1932); Estate of Salt v. Commissioner, 17 T.C. 92, 99-

100 (1951); Lauder II.

     First, respondent argues that the True companies’ buy-sell

agreements were not enforceable under Wyoming law.   We disagree.




     42
      However, respondent challenges the propriety of using tax
basis book value as a measure of fair market value.
                              - 92 -

     Restrictions on transfers of corporate stock are valid and

enforceable if authorized by statute.   See Wyo. Stat. Ann. sec.

17-16-627(b) (Michie 1999).   Authorized restrictions include

those that (1) serve a reasonable purpose and (2) are not against

public policy.   See Wyo. Stat. Ann. sec. 17-16-627(c)(iii)

(Michie 1999); Hunter Ranch Inc. v. Hunter, 153 F.3d 727 (10th

Cir. 1998), 1998 W.L. 380556 (unpublished opinion).   Respondent

equates this requirement with the business purpose and

nontestamentary disposition prongs of the Lauder II test (i.e.,

transfer restrictions must fulfill a business purpose and must

not contravene public policy by serving as substitutes for

testamentary dispositions).   However, respondent provides no

authority for his interpretation of the Wyoming statute, and it

is not self-evident that a Wyoming court would consider transfer

restrictions that served both business and testamentary purposes

to violate public policy.   In fact, the District Court in the

1971 and 1973 gift tax cases treated the Belle Fourche and True

Oil buy-sell agreements as enforceable by factoring the transfer

restrictions into the computation of fair market value.

     Under the Wyoming Uniform Partnership Act (WUPA),

partnership agreements govern relations among partners and

between partners and the partnership.   As such, the WUPA provides

only default rules if the partnership agreement is silent.    See

Wyo. Stat. Ann. sec. 17-21-103(a) (Michie 1999).   However,
                                - 93 -

certain rights cannot be varied by the partnership agreement.

See id. at sec. 17-21-103(b).    Such non-variable rights do not

include the right to impose transfer restrictions on partnership

interests.   See id.

     Respondent further argues that the buy-sell agreements

should be set aside as unconscionable contracts of adhesion.

Respondent points to Tamma Hatten’s lack of legal representation

when she acquired interests in the True companies and entered

into the buy-sell agreements and withdrew from the True

companies, her lack of control over the buy-sell agreement terms,

and her inferior bargaining position to support his

unconscionability argument.   A “contract of adhesion” is a

“standard-form contract prepared by one party, to be signed by

the party in a weaker position, usu. a consumer, who has little

choice about the terms.”   Black’s Law Dictionary 318-319 (7th ed.

1999).   Under Wyoming law, unconscionability is tested at the

time of the agreement and “is considered as a form of fraud

recognized in equity, but such fraud should be ‘apparent from the

intrinsic nature and subject of the bargain itself; such as no

man in his senses and not under delusion would make on the one

hand, and no honest and fair man would accept on the other’”.      In

re Estate of Frederick, 599 P.2d 550, 556 (Wyo. 1979).    We do not

believe that conditions present at the inception of the True

companies buy-sell agreements would meet these definitions.    The
                              - 94 -

buy-sell agreements were not boilerplate documents and, in all

likelihood, the weaker parties (the True children, according to

respondent) would benefit the most from the non-arm’s-length

terms.   The fact that Tamma Hatten may ultimately have suffered

financial detriment because she withdrew from the True companies

at the time she did has no bearing on whether the agreements were

unconscionable at inception or would be so regarded as of the

times they were given effect in 1993 and 1994.   Accordingly, we

conclude that the True family buy-sell agreements were

enforceable under Wyoming law.

     Second, respondent asserts that the buy-sell agreements,

although binding by their explicit terms, were often modified and

were not always followed by the parties, suggesting that they did

not actually bind the parties during life.   On the contrary, we

find that the amendments to and waivers of the buy-sell

provisions were formally documented and were consistent with the

terms and general intent of the agreements (i.e., to maintain

family ownership).   For example, waivers to allow non pro rata

purchases of interests by True family members, exchanges of stock

incident to a merger, and sales of stock by the Toolpushers’

Employees’ Trust back to the company were normal responses to

business exigencies.   Similarly, amendments allowing transfers to

owners’ revocable living trusts, clarifying the mechanics of the

buy-sell provisions, and introducing the active participation
                              - 95 -

requirement were all in keeping with the general purpose of

maintaining control of the True companies among family members

who were active in the businesses.     Moreover, the invocation of

the buy-sell provisions when Tamma Hatten withdrew from the True

companies is persuasive evidence that the parties treated the

agreements as binding.   See Estate of Bischoff v. Commissioner,

69 T.C. at 42 n.10.   Accordingly, the waivers and amendments do

not jeopardize the binding nature of the buy-sell agreements.

See Lauder II.

     Third, respondent suggests that the corporate buy-sell

agreements (except the White Stallion agreement) are not binding

because Dave True had substantial power, as controlling

shareholder, to alter their terms during his lifetime.

Petitioners counter that Dave True did not have the ability

unilaterally to alter the agreements by virtue of his majority

ownership of the corporations.   They argue that control of the

corporation is irrelevant because the buy-sell agreements were

agreements among the shareholders that could not be amended or

terminated without the shareholders’ unanimous consent.

Respondent and petitioners cited no cases to support their

positions on this matter.   For the reasons stated below, we agree

with petitioners.

     In Bommer Revocable Trust v. Commissioner, T.C. Memo. 1997-

380, we found that a buy-sell agreement was not binding on the
                               - 96 -

decedent during his lifetime because it explicitly gave the

decedent unilateral power to alter or amend its terms, and the

natural objects of the decedent’s bounty were the other

shareholders.   In the cases at hand, we agree with petitioners

that Dave True could not unilaterally terminate the agreements

because, by their terms, the buy-sell agreements would not

terminate until the death of the last surviving shareholder.

However, contrary to petitioners’ assertions, we note that each

corporation was listed as a party to its own amended and restated

buy-sell agreement dated August 11, 1984.

     Notwithstanding this inconsistency, we believe that Dave

True’s controlling ownership did not give him unilateral

authority to alter or amend the corporate buy-sell agreements so

that they would be considered non-binding.   First, the agreement

in Bommer explicitly conferred on the decedent the unilateral

power to amend.   See id.   This is not true in the cases at hand.

Second, it appears that the primary parties to the instant

agreements were the shareholders and that the corporation was

included only to ensure that the stock certificates were marked

with transfer restrictions.   Therefore, contrary to respondent’s

assertions, we conclude that Dave True’s majority ownership of

the True corporations did not confer on him the unilateral

authority to alter or amend the buy-sell agreements, which would
                               - 97 -

have been sufficient to render the agreements non-binding for

estate tax purposes.

     However, we note that the White Stallion buy-sell agreement

allowed a different pricing formula for certain types of lifetime

transfers, and thereby did not equally bind transferors during

life and after death.   Specifically, under the “Buy and Sell

Agreement” provision, if a stockholder were to die, become

legally disabled, or desire to sell all or part of his stock, the

remaining members of his group would be obligated to purchase the

stock on a pro rata basis for a price equal to book value at the

end of the preceding fiscal year, less dividends paid within 2-

1/2 months of such fiscal yearend.      The transferring stockholder,

his heirs, trustees, etc., reciprocally would be obligated to

sell to those group members.   Alternatively, under the “First

Right of Refusal” provision, if all the shareholders of one group

(selling group) wanted to transfer all their interests by

lifetime sale to a third party who was unaffiliated with the

other shareholder group (nonselling group), they could do so at

any price.   But, the selling group would be required first to

offer the nonselling group the opportunity to purchase the stock

on the same terms and conditions as any bona fide third party

offer received by the selling group.     Thus, a lifetime sale of

all the selling group’s stock could generate a higher price than

would a transfer at death under the book value formula price.
                              - 98 -

     Section 20.2031-2(h), Estate Tax Regs., states:   “Little

weight will be accorded a price contained in an option or

contract under which the decedent is free to dispose of the

underlying securities at any price he chooses during his

lifetime.”   Similarly, in Estate of Weil v. Commissioner, 22 T.C.

1267, 1274 (1954), we explained:

     where the agreement made by the decedent and the
     prospective purchaser of his property fixed the price
     to be received therefor by his estate at the time of
     his death, but carried no restriction on the decedent’s
     right to dispose of his property at the best price he
     could get during his lifetime, the property owned by
     decedent at the time of his death would be included as
     a part of his estate at its then fair market value.
     [Citations omitted; see also United States v. Land, 303
     F.2d 170, 173 (5th Cir. 1962); Baltimore Natl. Bank v.
     United States, 136 F. Supp at 654.]

     In the cases at hand, a complete, lifetime buy-out of one

family group’s interests in White Stallion could be achieved at

the highest price the market would bear, while a transfer at

death (or during life by less than all group members) would be

limited to a book value purchase price.   This runs afoul of the

Lauder II requirements.

     Because the buy-sell agreements for the True companies other

than White Stallion were enforceable under State law and were

binding on the transferors both during life and at death, we find

that the second prong of the Lauder II test is satisfied as to

those companies.   However, the White Stallion buy-sell agreement
                               - 99 -

fails to satisfy the second prong of the Lauder II test because

it was not equally binding during life and at death.

     C.    Were Agreements Entered Into for Bona Fide Business
           Reasons?

     The buy-sell agreements in these cases were adopted and

maintained to ensure continued family ownership and control of

the True Companies.    Dave True’s experiences of owning and

operating businesses with outsiders (and then having to buy them

out) motivated him to use buy-sell provisions (even when Jean

True was his only co-owner) to restrict a related owner’s ability

to sell outside the family.    As previously stated, courts

consistently have recognized the goal of maintaining exclusive

family control over a business to be a bona fide business

purpose.    See supra p. 71.

     By maintaining family control and ownership, Dave True was

able to continue his policy of channeling profits from the True

companies into True Oil to fund the costs of searching for

additional reserves through exploratory drilling.    In addition,

the buy-sell agreements were used to secure active participation

from owners of the True family businesses, because Dave True

feared that passive owners would not share his long-term vision

for the success and perpetuation of the True companies.    Under

the buy-sell agreements, an owner who with his or her spouse

ceased to devote all or a substantial part of his or her time to

the business would be required to sell his or her interest in the
                              - 100 -

business.   Thus, the buy-sell agreements enforced the active

ownership requirements that played a central role in Dave True’s

business philosophy.   In this regard, courts have found that

using buy-sell agreements to assure continuity of company

management policies or to retain key employees are bona fide

business purposes that satisfy this prong of the Lauder II test.

See supra pp. 71-72.

     The parties generally agree that the True family buy-sell

agreements were entered into for bona fide business reasons.43

Thus, for the reasons stated above, we find that the third prong

(business purpose prong) of the Lauder II test is satisfied.


     43
      However, respondent disagrees with petitioners’ suggestion
that a finding of business purpose could preclude a finding of
testamentary intent. Petitioners cite dicta in St. Louis County
Bank v. United States, 674 F.2d 1207, 1210 (8th Cir. 1982), which
stated that the “fact of a valid business purpose could, in some
circumstances, completely negate the alleged existence of a tax-
avoidance testamentary device as a matter of law”. Petitioners’
brief states: “In this case, the business purposes for the
agreements are sufficient to establish that the agreements are
bona fide business arrangements. Petitioners do not rely solely
on those business purposes, however, to show that the agreements
are bona fide business arrangements.”

     We agree with respondent that established case law and
regulatory authority require that the bona fide business purpose
and nontestamentary disposition prongs of the Lauder II test must
be satisfied independently. However, we acknowledge that in some
instances, the presence of a business purpose (e.g., a desire to
vest control of a company in an employee who is not related to
the testator by blood or marriage) may indicate that testamentary
motives are absent. This is not the situation in the cases at
hand. Alternatively, if the business purpose is to keep control
within the family, it is fully consistent with a testamentary
objective. In such a case, the presence of a business purpose
does not negate the testamentary purposes.
                                - 101 -

     D.   Were Agreements Substitutes for Testamentary
          Dispositions?

     We now consider whether the True companies’ buy-sell

agreements were adopted for the purpose of achieving testamentary

objectives.    As previously stated, greater scrutiny applies to

intrafamily agreements restricting stock transfers in closely

held businesses.     This analysis requires us to apply the

appropriate common law tests (along with other relevant factors)

to the particular facts of the cases at hand.     No one test or

factor is determinative; rather, we must consider all relevant

factors to decide whether the buy-sell agreements were used as

substitutes for testamentary dispositions.

          1.   Testamentary Purpose Test

     Respondent argues that the True companies’ buy-sell

agreements were not the result of arm’s-length dealings and were

designed to serve testamentary purposes.     After evaluating the

following factors, we agree with respondent that Dave True had

testamentary objectives (conflated with the legitimate business

reasons mentioned above) for adopting and maintaining the True

family buy-sell agreements.

               a.   Decedent’s Health When He Entered Into
                    Agreements

     Dave True was in good health when he entered into the first

buy-sell agreements (Belle Fourche, True Oil, True Drilling) with

his children in 1971 and 1973.     However, by the time he made the
                               - 102 -

1993 transfers in issue, Dave True had a history of back problems

and a chronic pulmonary insufficiency that required him to be on

oxygen full time.

     Courts have found that a decedent’s ill health at the time

he entered into a restrictive agreement indicated that he had

testamentary purposes for doing so.      See, e.g., St. Louis County

Bank v. United States, 674 F. 2d at 1210; Lauder I; Estate of

Slocum v. United States, 256 F. Supp. at 755.     Therefore, Dave

True’s good health in 1971 and 1973 does not lead to any

inference of testamentary motive for his entry into those

agreements.   The subsequent decline in Dave True’s health has no

direct bearing on the likelihood of testamentary purpose when the

agreements were originally entered into.

              b.   No Negotiation of Buy-Sell Agreement Terms

     Petitioners have provided little evidence to show that the

parties negotiated the terms of the buy-sell agreements.

Although the True children in their testimony consistently

characterized communications with their father regarding the buy-

sell agreements as discussions, rather than as negotiations,

there is no evidence that any changes were made to the buy-sell

agreements as a result of those discussions.     The True children

did not receive independent legal or accounting advice when they

entered into the agreements, nor did they know who drafted them.

Further, certain facts suggest that the buy-sell agreement terms

were determined unilaterally by Dave True, based on his strong
                                - 103 -

beliefs concerning how his family should own and operate their

businesses, beliefs that he ingrained in his children so that

they readily consented to any ownership conditions proposed by

their father.

     Dave True’s control over his children’s interests in the

True companies indicates that he had absolute discretion to set

the buy-sell agreement terms.    Before the True children had

reached majority, Dave True transferred gifts of cash and minor

interests in the True companies to the children’s guardianship

accounts, which he managed for their benefit.    The children were

unaware of how or when they acquired those early interests in the

True companies.   When the True children were in their early 20's

and 30's, Dave True transferred to them (either by gift or sale)

interests in three principal True companies, Belle Fourche, True

Drilling, and True Oil.   The True children’s purchases of their

interests in Belle Fourche were financed with cash gifts from

their parents over the years and with earnings distributions from

other True companies.   They did not know why, in connection with

their stock purchase, they also had to lend money to Belle

Fourche.   Although the True children (except Tamma Hatten)

received gifts from Dave and Jean True every year but one between

1955 and 1993, they never received cash in hand.    Instead,

amounts were transferred (under Dave True’s direction) to

accounts that were accumulated for the children’s benefit,

monitored by the True companies’ bookkeepers, used to purchase
                              - 104 -

interests in the True companies, and lent to relatives and the

family businesses.

     These facts indicate that Dave True exerted significant

control over the True children’s investments in the True

companies.   He determined the extent of their ownership, the

timing of their acquisitions, and the methods of payment for the

children’s debt and equity interests.   We conclude that Dave

True’s control over the means of conveying ownership to the

children also allowed him unilaterally to determine the terms of

the buy-sell agreements.

     The specific terms of the buy-sell agreements also reflected

Dave True’s dominance over their creation.    For instance, key

provisions restricting transfers to outsiders and setting the

transfer price at book value were included in the earliest buy-

sell agreements between Dave and Jean True.    Similar versions of

those same provisions were incorporated into all subsequent buy-

sell agreements with the True children.   Moreover, Dave True’s

imposition of the active participation requirements was actuated

by his strong personal bias against passive ownership.    While the

True children may have understood and even agreed with their

father’s reasons for imposing these requirements, it is clear

that he had unfettered ability to do so, which he exercised,

without the need for negotiations.

     It also follows from the events surrounding the sale of

Tamma Hatten’s interests in the True companies that there was a
                              - 105 -

lack of negotiations among the parties.   Tamma Hatten did not

seek separate legal or other professional counsel in connection

with the sale.   Instead, she relied on Dave True and his advisers

to determine the sales price under the buy-sell agreements and to

structure the methods of payment.   Accordingly, Dave True’s

advisers drafted an agreement outlining the terms of sale and set

up an escrow account for Tamma Hatten to receive roughly half of

the sales proceeds.   The escrow arrangement, which departed from

the requirements of the buy-sell agreements, was meant to reserve

assets to pay Tamma’s share of contingent liabilities and to

provide a management vehicle for her investments.   Finally, Tamma

Hatten was required (effectively) to pay the other owners in

order to sell her interests in certain profitable companies that

had negative book values at the buy-sell valuation date.

     As previously discussed, Tamma Hatten, once she gave notice

that she and her husband would no longer be active participants,

was bound to sell her interests in the True companies pursuant to

the terms of the buy-sell agreements.   However, it is likely that

an unrelated party in similar circumstances would have hired

separate counsel to interpret the buy-sell agreement terms,

review the sales agreements, and question the reasonableness of

being required to pay (i.e., take an offset against sales

proceeds) to sell interests in profitable companies.   In

addition, an unrelated seller would want to hire her own
                                - 106 -

investment manager, rather than agree to an escrow arrangement

that was not required under the buy-sell agreements.

     In other cases involving related party buy-sell agreements,

we focused on the existence and extent of meaningful negotiations

between the parties to determine whether the agreements were

designed to serve testamentary purposes.     See Bensel v.

Commissioner, 36 B.T.A. at 253 (finding no testamentary purpose

due to evidence of extensive and hostile negotiations); Bommer

Revocable Trust v. Commissioner, T.C. Memo. 1997-380 (finding no

bona fide negotiations among related parties because family’s

attorney represented all parties to the buy-sell); Lauder II

(finding that no negotiations and unilateral determination of

formula price by decedent’s son evidenced testamentary

purpose).44     Petitioners argue that proving family members sought

     44
      In Lauder II, supra, 64 T.C.M. (CCH) 1643, 1658-1659 n.20,
1992 T.C.M. (RIA) par. 92,736, at 92-3732 n.20, and accompanying
text, we observed:

     the record is devoid of any persuasive evidence that
     the Lauders negotiated with respect to the formula
     price. To the contrary, the record indicates that
     Leonard [decedent’s son] unilaterally decided upon the
     formula price. Ronald [decedent’s son] could not
     remember who decided upon the formula and only recalled
     that Leonard had explained the formula to him. Estee
     [decedent’s wife] had no specific recollection of
     either of the agreements. Given these circumstances,
     it appears that the parties never intended to negotiate
     the matter, fully recognizing that an artificially low
     price would provide estate tax benefits for all.* * *

     20
          Presumably, if decedent and Estee were pursuing an
                                                       (continued...)
                              - 107 -

independent advice regarding buy-sell terms is not essential to

showing that an agreement is a bona fide business arrangement and

not a testamentary device.   We agree that such a showing is not

crucial to proving petitioners’ case.   As previously stated, the

presence or absence of any particular factor is not dispositive

on the question of testamentary intent.   However, lack of

independent representation among related parties to a buy-sell

agreement reasonably suggests less than arm’s-length dealings.

See Lauder II.

             c.   Enforcement of Buy-Sell Agreement Provisions

     Courts have found the lack of enforcement of buy-sell

provisions at the death or withdrawal of a party to evidence a

testamentary purpose for the buy-sell arrangement.   See, e.g.,

St. Louis County Bank v. United States, 674 F. 2d at 1211.

However, the record in the cases at hand indicates that the True

family generally complied with the terms of the buy-sell

agreements, or executed formal waivers when circumstances made it




     44
      (...continued)
     identical agreement with unrelated parties in the place
     of Leonard and Ronald, they would have been motivated,
     by virtue of their advanced age, to negotiate a formula
     ensuring as high a price as possible for their shares
     balanced against their desire to maintain continuity of
     management and control.
                                - 108 -

appropriate for them to deviate from those terms.45       Thus, this

factor does not apply to the True companies’ buy-sell agreements.

     Petitioners cite our opinion in Estate of Bischoff v.

Commissioner, 69 T.C. 32 (1977), for the proposition that

enforcement of a buy-sell agreement against the estate of a son

who predeceased his parents was strong evidence that the

agreement was a bona fide business arrangement and not a device.

Petitioners assert that Tamma Hatten’s sale to her parents and

brothers under the buy-sell agreements should be viewed as

equally strong evidence of Dave True’s lack of testamentary

purpose.

     Petitioners misconstrue the facts of Estate of Bischoff v.

Commissioner, supra, and our comment in that case.        In Estate of

Bischoff v. Commissioner, supra at 33-36, the partner-parties to

the buy-sell agreement included Bruno Bischoff, who died in 1967;

Bertha, his wife, who died in 1969; Herbert, their son, who died

in 1973; and Frank Brunckhorst, Bertha’s brother, who died in

1972.     Thus, Herbert did not predecease his parents.     Moreover,

our comment addressed the Commissioner’s assertion that the

Bischoff partnership agreement could have been amended to

circumvent the restrictive buy-sell provisions, so that those

provisions should have been ignored for purposes of determining


     45
      But see supra pp. 105-106 regarding escrow set up for the
Tamma Hatten sale that departed from requirements of buy-sell
agreements.
                               - 109 -

value.   See id. at 42 n.10.   We disagreed and noted that the buy-

sell provisions had been adhered to following the deaths of Bruno

and Bertha Bischoff, Frank Brunckhorst, and “more importantly,

following the death of decedent’s son, Herbert.”      Id.   Thus, the

comment concerned whether the buy-sell agreement was enforceable

during life and at death, see supra p. 91, or whether decedent

had the ability to alter its terms at any time, see Bommer

Revocable Trust v. Commissioner, supra (explaining and

distinguishing Bischoff based on Bommer decedent’s unilateral

ability to amend buy-sell agreement).    We did not say that an

agreement would be respected for estate tax purposes in all

circumstances as long as the parties adhered to its terms.      See

id.

              d.   Failure To Seek Significant
                   Professional Advice in Selecting
                   Formula Price

      Dave True consulted Mr. Harris, the family’s accountant and

longtime financial adviser, about using a tax book value purchase

price formula under the buy-sell agreements.    Dave True’s

expressed purposes for using book value were (1) to avoid the

need for appraisals and (2) to provide an easily determinable

price in order to prevent future conflicts within the family.

When consulted, Mr. Harris indicated that he did not object to

using a book value purchase price in the case of True Oil;

however, in general, he believed that book value would not be

representative of fair market value in the case of a stand-alone,
                              - 110 -

oil and gas exploration company.    In his opinion, book value

would not reflect fair market value because the current value of

proven oil and gas reserves would not be accounted for on the

company’s books.   However, in True Oil’s situation, revenues

generated through production extracted from those reserves, and

revenues from other True companies, were being plowed back into

True Oil.   He believed that the constant expenditure of True

Oil’s (and other True companies’) resources to fund new and often

unsuccessful exploratory drilling absorbed the unbooked value of

the oil and gas reserves over time.     Mr. Harris reasoned that on

a going-concern basis, True Oil’s book value closely approximated

fair market value at the date of the gifts.    He indicated that

this would not be the case if True Oil were being valued on a

liquidating basis.

     Mr. Harris’s expertise was in accounting, and he was well

acquainted with the True companies’ operations.    The record

indicates that Mr. Harris was the only professional with whom

Dave True consulted in selecting the book value formula price.

However, Mr. Harris stated that he did not have a detailed

understanding of valuation methodologies, as he had no academic

or practical experience in the valuation area.    On Mr. Harris’s

recommendation, Dave True obtained the B. Allen report, which

appraised True Oil’s reserves, before transferring 8-percent

interests to the True children.    However, Mr. Harris indicated
                              - 111 -

that he only reviewed the B. Allen report in connection with

subsequent litigation, not at the time of the gifts.

     We reject any notion that Mr. Harris was qualified to opine

on the reasonableness of using the tax book value formula in the

True family buy-sell agreements.   Mr. Harris was closely

associated with the True family; his objectivity was

questionable.   More importantly, he had no technical training or

practical experience in valuing closely held businesses.    The

record shows no technical basis (in the form of comparables,

valuation studies, projections) for Mr. Harris’s assertion that

tax book value represented the price at which property would

change hands between unrelated parties.   In Lauder II, we were

troubled by the fact that the decedent’s son settled on a book

value formula after having consulted with only a close family

financial adviser.   Similarly, in Bommer Revocable Trust v.

Commissioner, T.C. Memo. 1997-380, we found it significant that

the decedent consulted only with his attorney, who spent 1 day

calculating the buy-sell agreement’s fixed transfer price.     On

the basis of the record evidence, we find that Dave True’s

discussions with Mr. Harris were insufficient to assess

objectively and accurately the reasonableness of using a tax book

value formula price for the True companies’ buy-sell agreements.
                              - 112 -

               e.   Failure To Obtain or Rely on Appraisals
                    in Selecting Formula Price

     Dave True obtained an appraisal (the B. Allen report) of

True Oil’s oil and gas reserves contemporaneously with the 1973

gifts to his children.   Mr. Harris had suggested the appraisal

because he expected the tax book value gift valuation to be

challenged by the IRS.   Petitioners provided no evidence of

contemporaneous appraisals of any of the other True companies.

The B. Allen report found that, as of August 1, 1973, the fair

market value of True Oil’s oil and gas properties was $9,941,000.

SRC later used this information to prepare its forensic appraisal

of True Oil in connection with the 1973 gift tax case.   SRC

determined that the freely traded value of an 8-percent interest

in True Oil (as of August 1, 1973) would have been $535,000, as

compared with the tax book value of $54,653.   The results of the

B. Allen report were discussed at family meetings, but there is

no clear evidence that the children reviewed the report in detail

before signing the True Oil buy-sell agreement.

     Petitioners suggest that the logical inferences to be drawn

from the procurement of the B. Allen report were that:   (1) Dave

True wanted to assure that his children had sufficient knowledge

of True Oil’s asset values so that their consent to the book

value price was informed, and (2) he obtained the report to help

determine whether to use a tax book value formula price in True

Oil’s buy-sell agreement.   While these may have been secondary
                              - 113 -

considerations, we find that the B. Allen report was obtained

primarily in anticipation of litigation and was not relied on by

the parties to arrive at the buy-sell agreement’s formula price.

     First, because Dave True only obtained a contemporaneous

appraisal of True Oil’s assets, it is clear that the parties did

not rely on appraisals before adopting the other True companies’

buy-sell agreements.   Second, as illustrated in the SRC report

(which was not available, however, at the time of the gift), the

appraised value of the reserves showed a significant disparity

between tax book value ($54,653) and fair market value ($535,000)

of an 8-percent interest in the assets of True Oil.   Even without

the benefit of the SRC report, petitioners should have assumed

that almost $10,000,000 of unbooked asset value would increase

the market price of an interest in the partnership.   There is no

evidence in the record of any attempt to reconcile this

difference, except for Mr. Harris’s rationalization that the

unbooked reserve value would be consumed over time to fund oil

and gas exploration.   Third, petitioners have failed to show that

the True children reviewed the report in detail before executing

the True Oil buy-sell agreement, or that it made any difference

in the terms of the agreement or their entry into it.

     Our impression is that Dave True was predisposed toward

using a tax book value formula because he had used it before in

his buy-sell agreements with Jean True, and because he saw it as

a relatively quick and easy way to determine price.   He presented
                               - 114 -

the idea to Mr. Harris, who “did not object” to the use of tax

book value in the special case of the True companies.   Dave True

then obtained the B. Allen report to fulfill his due diligence

requirements, given the perceived threat of gift tax litigation.

Even petitioners qualified their assertion that Dave True relied

on the B. Allen report to assess whether to use a tax book value

formula by stating on brief:   “but, in reality, Dave True likely

relied primarily on his own knowledge of the value of True Oil.”

     We have often found that failure to obtain comparables or

appraisals to determine a buy-sell agreement’s formula price

indicates testamentary intent.   See, e.g., Bommer Revocable Trust

v. Commissioner, supra; Lauder II; cf. Estate of Hall v.

Commissioner, 92 T.C. 312 (1989)(holding that the buy-sell price

reflected fair market value, due in part to the efforts expended

by the corporation to test the reasonableness of the adjusted

book value formula).   Moreover, cases in which the lack of

outside appraisals did not evidence a testamentary intent

involved buy-sell agreements between persons that were not the

natural objects of the decedent’s bounty.   See, e.g., Estate of

Bischoff v. Commissioner, 69 T.C. at 42 n.10.; Bensel v.

Commissioner, 36 B.T.A. at 252-254.

               f.   Exclusion of Significant Assets From
                    Formula Price

     In Lauder II, we questioned the propriety of expressly

excluding the value of all intangible assets from the book value
                                 - 115 -

formula, because we thought that much of the company’s value was

attributable to goodwill.     Similarly, we question the

reasonableness of omitting the value of proven oil and gas

reserves from True Oil’s buy-sell pricing formula, given that

those reserves represent the focus of the business and its most

valuable asset.    Dave True’s stated reasons for using book value

were to avoid the need for appraisals and to provide an easily

determinable price in order to prevent future conflicts within

the family.   However, as we stated in Lauder II, supra:     “while

we appreciate that an adjusted book value formula may provide a

simple and inexpensive means for evaluating shares in a company,

we cannot passively accept such a formula where, as here, it

appears to have been adopted in order to minimize or mask the

true value of the stock in question.”      Lauder II, T.C. Memo.

1992-736, 64 T.C.M. (CCH) 1643, 1659, 1992 T.C.M. (RIA) par.

92,736, at 92-3732 (citing Estate of Trammell v. Commissioner, 18

T.C. 662 (1952)).

                  g.   No Periodic Review of Formula Price

     The True companies’ buy-sell agreements did not provide a

mechanism for periodic review or adjustment to the tax book value

formula.   Over the years, the buy-sell agreements were amended on

several occasions.     The 1984 amendments, which affected all buy-

sell agreements and related to Tamma Hatten’s withdrawal, made

only minor changes to the tax book value formula price
                              - 116 -

computation.   Since then, the tax book value formula price has

not been altered.

     We have found that buy-sell agreements were not testamentary

substitutes if, inter alia, the agreements contained provisions

for periodic review of the formula price.    See Estate of

Carpenter v. Commissioner, T.C. Memo. 1992-653 (dealing with buy-

sell agreement among unrelated parties).    We have also been

persuaded that agreements without periodic review provisions were

designed to serve testamentary purposes.    See Bommer Revocable

Trust v. Commissioner, T.C. Memo. 1997-380, 74 T.C.M. (CCH) 346,

355, 1997 T.C.M. (RIA) par. 97,380, at 97-2424 (“We find it

unrealistic to assume that the decedent, as the majority

shareholder, would have negotiated a fixed price for the

agreements if he had been bargaining with unrelated parties”).

Under the circumstances of the cases at hand, we believe that

unrelated parties dealing at arm’s length would have included a

provision requiring periodic revaluation, or would have at least

considered amending the tax book value formula price, for two

reasons.

     First, Mr. Harris opined, at the time of the agreement, that

a tax book value pricing formula would be appropriate for True

Oil only because of its history of expending the value of proven

oil and gas reserves to discover new ones.    If this were not the

case, tax book value would not be a reliable indicator of value

because the reserves’ value would be omitted.    Thus, we would
                               - 117 -

expect that unrelated parties dealing at arm’s length would have

included a provision requiring periodic redetermination of the

pricing formula to allow for the future possibility that the

value of new reserves might outstrip the costs of finding and

developing them.

     Second, when Tamma Hatten withdrew from and sold her

interests in the True companies pursuant to the buy-sell

agreements, it was clear that tax book value did not correspond

to the intrinsic value of some of the companies.    For instance,

Eighty-Eight Oil, which was referred to as a “cash cow”, had

negative tax book value that required Tamma Hatten to offset the

sales proceeds to which she was entitled in order to sell her

interests.    We would expect that unrelated parties dealing at

arm’s length would have re-evaluated the tax book value formula

price in light of these anomalous results, especially if the

agreements already had to be amended to reflect Tamma Hatten’s

withdrawal.

     Petitioners argue that the lack of a periodic revaluation

provision is legally irrelevant because unanimous agreement was

required to amend the True companies’ buy-sell agreements.

Presumably, this means that the parties could always agree to

amend the formula price even absent a specific provision granting

revaluation authority.    This argument ignores whether it was

reasonable for the True family not to reconsider the tax book

value pricing formula, given the actual and potential changes in
                               - 118 -

circumstances mentioned above.    Petitioners counter that they did

not amend the formula when they amended the agreements for other

reasons because they believed that the agreements produced a fair

and reasonable price.    On the contrary, we believe that

petitioners did not alter the formula price because the sons

would benefit (taxwise and pricewise) from leaving in place a

formula transfer price that was as low as possible.

                h.   Business Arrangements With True Children
                     Fulfilled Dave True’s Testamentary Intent

     Dave True’s business arrangements with his children

fulfilled his testamentary intent, as evidenced by his will and

ancillary estate planning documents.     At his death, Dave True’s

estate plan provided equally for his children, except Tamma

Hatten.   Dave and Jean True amended their estate planning

documents to delete any specific provisions for Tamma Hatten and

her family after her withdrawal from the family businesses.      The

advancement language in Dave True’s appointment document

explained that Tamma Hatten’s “potential inheritance” had been

fully satisfied when his daughter severed her financial ties with

the True companies.

     Since the 1970's, each of the True sons has managed one or

more of the True companies.    Hank True assumed responsibility for

the oil and gas marketing, pipeline, and environmental cleanup

businesses; Diemer True managed the trucking and tool supply

companies; and David L. True ran the ranching and drilling
                               - 119 -

operations.    Tamma Hatten worked only briefly for the True

companies and not in a management capacity, and her husband never

had more than a subordinate role in management of any of the True

companies.    However, the True children (including Tamma Hatten

before her withdrawal) always owned equal percentage interests in

each True company, regardless of the degrees of skill and effort

required to manage the various businesses.

     These facts suggest that Dave True’s testamentary objectives

were fulfilled, in large part, through lifetime transfers to his

children of interests in the True companies.    The buy-sell

agreements ensured that those testamentary objectives were met by

restricting transfers outside the family.    The equality of the

percentage interests, in spite of the different management

responsibilities borne by each child, indicates that the

transfers were based on family relationships, provided the

minimal threshold participation requirement continued to be

satisfied.

     The True sons are now the only individual parties to most of

the True companies’ buy-sell agreements.    Under the existing

agreements, a predeceasing brother’s interest would be sold to

his surviving brothers at tax book value, and would not pass to

his heirs.    This assumes that the predeceasing brother had no

heirs who actively participated in the family business.    The True

sons have discussed this “problem” with Mr. Harris and have

decided not to make any changes to the existing buy-sell
                               - 120 -

agreements until the current estate and gift tax litigation is

concluded.

     We believe that the current buy-sell structure poses a

problem only if the True sons consider tax book value not to

fairly represent market value.    Otherwise, it should not be a

problem that their heirs, who did not actively participate in the

True companies, might receive cash equal to the value of the True

sons’ business interests, as determined under the buy-sell

agreements.    The True sons were the natural objects of Dave

True’s bounty; they are not the natural objects of each other’s

bounty; their own children and grandchildren are the natural

objects of their respective bounties.    These facts lead us to

infer that Dave True used the business arrangements with his

children to fulfill his own testamentary objectives.

          2.    Adequacy of Consideration Test

     The adequacy of consideration paid and received pursuant to

a buy-sell agreement is generally measured at the date the

agreement is executed.    See supra p. 75.   However, courts have

also evaluated the adequacy of consideration and conduct of

parties after the agreement date when intervening events within

the parties’ control caused a wide disparity between the formula

price and fair market value.     The standard for determining

adequacy of consideration requires the formula price (1) to be

comparable to what persons with adverse interests dealing at

arm’s length would accept and (2) to bear a reasonable
                                - 121 -

relationship to the unrestricted fair market value of the

interest in question.     See Lauder II.   Again, these standards

must be applied with the heightened scrutiny imposed on

intrafamily agreements restricting transfers of closely held

businesses.   See Hoffman v. Commissioner, 2 T.C. at 1178-1179.

     Petitioners argue that the book value formula price used in

the True companies’ buy-sell agreements reflected adequate and

full consideration as required in section 20.2031-2(h), Estate

Tax Regs., and as interpreted by relevant case law.      For the

reasons stated below, we disagree.

                 a.   Petitioners’ Brodrick v. Gore/Golsen Argument

     Petitioners argue that the proper standard for determining

whether consideration was adequate and full can be found in

Brodrick v. Gore, 224 F.2d 892 (10th Cir. 1955).      They contend

that the Court of Appeals for the Tenth Circuit held in Brodrick

v. Gore that, as a matter of law, an agreement containing legally

binding and mutual obligations among family members to sell and

purchase partnership interests at book value constitutes adequate

and full consideration, absent a showing of bad faith.      See supra

pp. 65-66.    Petitioners further argue that, under Golsen v.

Commissioner, 54 T.C. 742, 756 (1970), affd. 445 F.2d 985 (10th

Cir. 1971), we must follow Brodrick v. Gore because the cases at

hand are appealable to the Court of Appeals for the Tenth

Circuit.
                              - 122 -

     Respondent counters that petitioners mischaracterize the

Brodrick v. Gore holding.   According to respondent, Brodrick v.

Gore did not hold that mutual buy-sell agreements are always

binding and efficacious for estate tax valuation purposes as a

matter of law.   Instead, the Court of Appeals for the Tenth

Circuit held that the Government’s failure to allege that the

State court proceeding was collusive or otherwise invalid was

fatal to the Government’s case.   We agree with respondent’s

interpretation of Brodrick v. Gore.

     Golsen v. Commissioner, 54 T.C. at 757, established the rule

that this Court will “follow a Court of Appeals decision which is

squarely in point where appeal from our decision lies to that

Court of Appeals” (the Golsen rule).    We later clarified the

reach of the Golsen rule by emphasizing that it should be

construed narrowly and applied only if “a reversal would appear

inevitable, due to the clearly established position of the Court

of Appeals to which an appeal would lie”.    Lardas v.

Commissioner, 99 T.C. 490, 494-495 (1992).     This is because “our

obligation as a national court does not require a futile and

wasteful insistence on our view.”   Id.   In the cases at hand, an

appeal would lie to the Court of Appeals for the Tenth Circuit.

Therefore, under the Golsen rule, we are bound to follow the

clearly established positions of that Court.    We conclude,

however, that petitioners’ formulation of the holding in Brodrick
                                - 123 -

v. Gore, supra, overstates the position of the Tenth Circuit

Court of Appeals.

     First, we note the peculiar procedural posture of Brodrick

v. Gore.    It was decided on motion for summary judgment and

relied on a prior, unappealed determination by a State court.

See Brodrick v. Gore, 224 F.2d at 894-896.    Accordingly, because

there was no genuine issue as to any pleaded, material fact,

decision was rendered as a matter of law.    See Fed. R. Civ. P.

56(c).     Second, Brodrick v. Gore was decided before section

20.2031-2(h), Estate Tax Regs., which set out the bona fide

business arrangement and not a testamentary device requirements,

had been promulgated.46    Third, the Court of Appeals for the

Tenth Circuit has not revisited this question since the issuance

of section 20.2031-2(h), Estate Tax Regs.    We therefore conclude

that Brodrick v. Gore is not “squarely in point” with the cases

at hand and that its holding is not dispositive under the Golsen

rule.

     The taxpayers won in Brodrick v. Gore because (1) they

showed that the agreement was equally binding on the estate and

surviving partners, based on the facts found in the probate

proceeding, and (2) the Government had failed to plead that the

partnership agreement was tainted by bad faith or that the


     46
      Brodrick v. Gore, 224 F.2d 892 (10th Cir. 1955), was
decided July 22, 1955, and sec. 20.2031-2(h), Estate Tax Regs.,
was promulgated June 23, 1958. See id.; sec. 20.2031-2(h),
Estate Tax Regs.
                                - 124 -

probate court proceeding was collusive or nonadversarial.     Since

the issuance of the section 20.2031-2(h), Estate Tax Regs., in

1958, courts have focused on whether a buy-sell agreement was a

bona fide business arrangement and/or a testamentary device.      See

supra p. 70.   For instance, in Lauder II, T.C. Memo. 1992-736, 64

T.C.M. (CCH) 1643, 1659, 1992 T.C.M. (RIA) par. 92,736, at 92-

3733, we stated:

     the assumption that the formula price reflects a fair
     price is not warranted where * * * the shareholders are
     all members of the same immediate family and the
     circumstances show that testamentary considerations
     influenced the decision to enter into the agreement.
     In such cases, it cannot be said that the mere
     mutuality of covenants and promises is sufficient to
     satisfy the taxpayer’s burden of establishing that the
     agreement is not a testamentary device. Rather, it is
     incumbent on the estate to demonstrate that the
     agreement establishes a fair price for the stock. * * *

     Here, the True family buy-sell agreements and the transfers

in issue all arose after the issuance of section 20.2031-2(h),

Estate Tax Regs.     Respondent essentially has pleaded the

equivalent of bad faith (i.e., that the buy-sell agreements were

substitutes for testamentary dispositions).     Thus, different

procedural settings and the intervening regulations prevent us

from being constrained, under the Golsen rule, by the decision of

the Court of Appeals for the Tenth Circuit in Brodrick v. Gore.

                b.   Petitioners’ Assertion That Respondent
                     Impermissibly Applied Section 2703
                     Retroactively

     Petitioners argue on brief:     “Prior to the enactment of

section 2703, no court had ever required a taxpayer to
                               - 125 -

demonstrate that the buy-sell agreement was comparable to similar

arm’s-length arrangements between unrelated parties” (arm’s-

length requirement) (emphasis added).    They support this

statement by citing the legislative history of section 2703,

which states that the arm’s-length requirement of section

2703(b)(3) was not present in prior law.    See supra p. 81.

According to petitioners, the heightened scrutiny that respondent

has applied to the True companies’ intrafamily buy-sell

agreements amounts to a presumption of testamentary intent that

could be rebutted only by meeting the arm’s-length requirement.

Petitioners characterize this as an impermissible, retroactive

application of section 2703.

     Respondent counters that petitioners misconceive the import

of section 2703.   To respondent, “the effect of section

2703(b)(3) was to elevate the arm’s-length nature of the terms of

the agreement from a factor to consider in determining

[testamentary] intent to an absolute requirement.”    Thus,

respondent insists that the arm’s-length requirement was present

before the enactment of section 2703, citing cases that antedated

section 2703 and applied section 20.2031-2(h), Estate Tax Regs.

We agree with respondent.

     As already shown, courts often have considered whether buy-

sell agreements were comparable to arm’s-length arrangements

between unrelated parties in cases that both predated and

postdated issuance of section 20.2031-2(h), Estate Tax Regs., and
                              - 126 -

in cases that preceded the enactment of section 2703.    See, e.g.,

Dorn v. United States, 828 F.2d 177 (3d Cir. 1987); Estate of

Littick v. Commissioner, 31 T.C. 181 (1958); Bensel v.

Commissioner, 36 B.T.A. 246 (1937); Lauder II; Estate of

Carpenter v. Commissioner, T.C. Memo. 1992-653.   Thus, although

this requirement was not explicitly set out in section 20.2031-

2(h), Estate Tax Regs. (as noted in the legislative history of

section 2703), the arm’s-length requirement has always been a

factor used by courts to decide whether a buy-sell agreement’s

price was determinative of value for estate tax purposes.

     Further, we do not believe that the heightened scrutiny

applied to intrafamily buy-sell agreements essentially creates a

presumption of testamentary purpose that can only be rebutted by

a showing that the agreement satisfied the arm’s-length

requirement.   As we have stated many times, no one factor is

dispositive, and all circumstances must be evaluated to determine

whether a buy-sell agreement is intended to serve as a substitute

for a testamentary disposition.

     Even if we were to treat the arm’s-length requirement as a

“super factor” in our analysis, an impermissible, retroactive

application of section 2703 would not result.   The arm’s-length

requirement played the same role in pre-section 2703 case law.

After surveying the cases that apply (either implicitly or

explicitly) the section 20.2031-2(h), Estate Tax Regs.,

requirement that a buy-sell agreement cannot be a testamentary
                             - 127 -

device, we see that certain patterns emerge.   The cases in which

the test was satisfied (i.e., no testamentary device found), and

the buy-sell agreement’s price was held to determine fair market

value, involved buy-sell agreements that (1) were between

unrelated parties or related parties who were not the natural

objects of the decedent’s bounty and (2) were either implicitly

or expressly found to be done on an arm’s-length basis.47   Thus,

case law preceding the enactment of section 2703 shows that

courts were more likely to find that a buy-sell agreement’s price

determined estate tax value under section 20.2031-2(h), Estate

Tax Regs., if the agreement was comparable to that which would be


     47
      Cases involving intrafamily buy-sell agreements that were
held not to determine estate tax value include: Dorn v. United
States, 828 F.2d 177 (3d Cir. 1987); St. Louis County Bank v.
United States, 674 F.2d 1207 (8th Cir. 1982); Estate of Reynolds
v. Commissioner, 55 T.C. 172 (1970); Hoffman v. Commissioner, 2
T.C. 1160 (1943); Bommer Revocable Trust v. Commissioner, T.C.
Memo. 1997-380; Lauder II; Slocum v. United States, 256 F. Supp
753 (S.D.N.Y. 1966). But see Estate of Rudolph v. United States,
93-1 USTC par. 60,130, 71 AFTR 2d 93-2169 (S.D. Ind. 1993).
Cases involving buy-sell agreements that (1) were between
unrelated parties or parties that were not the natural objects of
decedent’s bounty, (2) were implicitly or explicitly found to
have been transacted on an arm’s-length basis, and (3) were held
to determine estate tax value include: Estate of Bischoff v.
Commissioner, 69 T.C. 32 (1977) (brother and sister not
considered natural objects of each other’s bounty; implicitly
arm’s length); Estate of Littick v, Commissioner, 31 T.C. 181
(1958)(three of five parties to agreement were brothers;
explicitly arm’s length); Bensel v. Commissioner, 36 B.T.A. 246
(1937), affd. 100 F.2d 639 (3d Cir. 1938) (son was not natural
object of decedent’s bounty due to hostile relationship;
explicitly arm’s length); Estate of Carpenter v. Commissioner,
T.C. Memo. 1992-653 (unrelated parties to agreement; explicitly
arm’s length); Estate of Seltzer v. Commissioner, T.C. Memo.
1985-519 (only two of five parties to agreement were related;
implicitly arm’s length).
                              - 128 -

derived (or actually was derived) from arm’s-length dealings

between adverse parties.

               c.   Did Tax Book Value Pricing Formula Represent
                    Adequate and Full Consideration?

     Petitioners make various arguments to support their

contention that the tax book value pricing formula used in the

True family buy-sell agreements represented adequate and full

consideration under section 20.2031-2(h), Estate Tax Regs., and

the Lauder II test.   They contend that tax book value was

adequate and full consideration because (1) it equaled fair

market value at the dates of agreement for True Oil and Belle

Fourche; (2) book value was a common pricing formula among

related and unrelated parties at the dates of agreement; (3) the

parties testified that they thought the price was realistic when

they entered into the agreements; (4) there were bona fide

business reasons for using a tax book value formula price; and

(5) book value was not required to bear a predictable

relationship to the fair market value of underlying assets,

inasmuch as the True family had no plans to liquidate the True

companies.

     First, petitioners observe that no court has required a

taxpayer to prove that a buy-sell agreement’s formula price

represented fair market value at either the date of agreement or

at the time of the transfers at issue.   Moreover, petitioners

cite St. Louis County Bank v. United States, supra, for the
                              - 129 -

proposition that adequacy of the formula price is only one factor

to consider in evaluating whether a buy-sell agreement is bona

fide and not a device.   They further contend that, under Estate

of Bischoff v. Commissioner, 69 T.C. 32 (1977), if the formula

price equaled fair market value at the agreement date, it was

strong evidence of a fair or realistic buy-sell agreement price.

Thus, petitioners argue that tax book value was a fair price

because tax book value equaled fair market value at the dates of

agreement for the True Oil and Belle Fourche interests

transferred to the True children (as determined by the 1971 and

1973 gift tax cases).

     We disagree with petitioners’ contention.   As previously

discussed, see supra pp. 85-90, we are not bound by the District

Court’s determinations in the 1971 and 1973 gift tax cases that

the tax book value of interests in True Oil and Belle Fourche

equaled fair market value at the agreement dates.   As a result,

we are free to determine independently the fair market value of

True Oil and Belle Fourche transferred interests at those dates,

without taking into account the depressive effect of the buy-sell

agreements.   To do this, we refer to the valuation information

provided in the SRC appraisals.

     In the True Oil and Belle Fourche appraisals, which were

prepared for litigation, SRC ostensibly used recognized valuation

methods to derive a “freely traded value” for the transferred

interests as of the agreement dates.    The freely traded value for
                              - 130 -

Belle Fourche stock was $120 per share (or $57,120 per each 1-

percent interest sold) on August 2, 1971.   The freely traded

value for each 8-percent partnership interest in True Oil was

$535,000 on August 1, 1973.

     SRC then examined average marketability discounts of

comparable companies to determine the appropriate discount from

freely traded value.   In the Belle Fourche appraisal, the average

marketability discount for investment companies48 subject to

investment letter restrictions ranged from 15 to over 50 percent,

with an average discount of 33 percent.   In the True Oil

appraisal, which was performed 2 years later, the average

marketability discount was within the same range, with an average

discount of 34 percent.

     SRC ultimately disregarded the average marketability

discount information and opined that the buy-sell restrictions in

the True Oil and Belle Fourche agreements absolutely precluded

sales in the public market.   As a result, SRC limited fair market

value to the buy-sell formula prices, which amounted to discounts

of 90 percent and 68 percent, respectively, from the freely

traded value of the True Oil and Belle Fourche transferred

interests.   SRC effectively treated the buy-sell agreements as if

they controlled Federal gift tax value; rather than solely as


     48
      Described as public companies that as a policy invested in
stock subject to investment letter restrictions. Investment
letter restrictions prevented the holder from selling shares to
the public for a fixed period of time (generally 2 to 3 years).
                               - 131 -

factors to be considered with other relevant factors in

determining fair market value, as required under Rev. Rul. 59-60,

1959-1 C.B. 237.

     As previously discussed, the proper approach to determining

fair market value at the agreement date is to disregard the

depressive effect of the buy-sell agreement on value.

Accordingly, we do not follow SRC’s methodology, which

essentially treated the buy-sell agreements’ formula prices as

dispositive.    Instead, we apply the average marketability

discounts for comparable companies to the freely traded values

determined by SRC to compute fair market value at the agreement

dates.    For Belle Fourche, fair market value of a 1-percent

interest on August 2, 1971, was $38,270 (or $80.40 per share),49

whereas tax book value on that date was $18,416 (or $38.69 per

share).    For True Oil, fair market value of an 8-percent

partnership interest on August 1, 1973, was $353,100,50 whereas

tax book value on that date was $54,653.    We therefore conclude

that tax book value did not equal fair market value of the

transferred interests in Belle Fourche and True Oil as of the

buy-sell agreement dates.




     49
      Freely traded value of $120 per share multiplied by 476
shares transferred, the product of which is then discounted by 33
percent (average marketability discount averted to by SRC).
     50
      Freely traded value of $535,000 discounted by 34 percent
(average marketability discount averted to by SRC).
                              - 132 -

     Second, petitioners assert that book value was the most

common formula pricing provision in agreements between related

and unrelated parties when the True family adopted the buy-sell

agreements at issue in these cases.     Petitioners cite Estate of

Anderson v. Commissioner, 8 T.C. 706, 720 (1947), Estate of

Carpenter v. Commissioner, T.C. Memo. 1992-653, Brodrick v. Gore,

224 F.2d at 897, Estate of Hall v. Commissioner, 92 T.C. 312

(1989), Estate of Bischoff v. Commissioner, 69 T.C. at 34-36, and

Luce v. United States, 4 Cl. Ct. 212, 222-223 (1983), to support

their position.

     We acknowledge that these are cases in which courts have

equated book value to fair market value.    These cases involved

transfers subject to buy-sell agreements between related parties,

Brodrick v. Gore, supra; Estate of Bischoff v. Commissioner,

supra, between unrelated parties, Estate of Carpenter v.

Commissioner, supra; Estate of Anderson v. Commissioner; supra,

and between related and unrelated parties, Estate of Hall v.

Commissioner, supra, and transfers not subject to buy-sell

agreements at all, Luce v. United States, supra.     However, this

information is not helpful in determining whether the True

companies’ tax book value pricing formula is comparable to a

formula derived from arm’s-length dealings between adverse

parties.   The Lauder II test requires scrutiny of the facts of

each case.   On brief, respondent distinguished most of

petitioners’ cited cases from the cases at hand on their facts,
                                - 133 -

procedural settings, or standards of law applied.   Indeed, we

have found no decided cases in which a tax book value buy-sell

agreement formula determined fair market value.51   Moreover,

there are contrary cases holding book value to be an unreliable

basis from which to determine a stock’s fair market value.      See,

e.g., Estate of Andrews v. Commissioner, 79 T.C. 938, 948 n.16

(1982); Biaggi v. Commissioner, T.C. Memo. 2000-48 (income tax

case), affd. without published opinion __ F.3d __ (2d Cir. April

20, 2001); Estate of Ford v. Commissioner, T.C. Memo. 1993-580,

affd. 53 F.3d 924 (8th Cir. 1995); Brown v. Commissioner, T.C.

Memo. 1966-92; Estate of Cookson v. Commissioner, T.C. Memo.

1965-319.   Thus, petitioners do not persuade us that the True

family’s use of a tax book value pricing formula in their buy-

sell agreements was comparable to what unrelated parties would

use in similar circumstances.

     Third, petitioners rely on Estate of Carpenter v.

Commissioner, T.C. Memo. 1992-653, to claim that tax book value

was a fair and realistic price because the True family testified

that they considered it to be so.    However, that case involved

arm’s-length negotiations among unrelated parties to transfer

interests at book value, whereas the True companies’ buy-sell


     51
      Again, we note that in the 1971 and 1973 gift tax cases,
the District Court held that tax book value equaled fair market
value, taking into account the depressive effect of the buy-sell
agreements. However, the District Court did not hold that the
tax book value formula price determined gift tax value. See
discussion supra pp. 85-90.
                              - 134 -

agreements were among family members and there was no convincing

evidence of arm’s-length dealing.    Moreover, the record shows

that Dave True exerted significant control over his children’s

investments in the True companies.    Although the True children

may have agreed to the formula price provisions and other

restrictions imposed by Dave True, that does not prove, under the

circumstances, that those restrictions would be considered

reasonable from an arm’s-length perspective.

     Fourth, petitioners argue that valid business reasons,

rather than testamentary designs, motivated the True family’s

decision to use a tax book value pricing formula.    They explain

that the formula had to be (1) understandable to the parties, (2)

predictable, and (3) easily determinable to avoid future

conflicts and to accommodate the short timeframe (6 months from

date of withdrawal) within which tax book value had to be

computed and payments had to be made under the agreements.    While

there might have been valid business reasons for choosing a tax

book value formula price, we note that legitimate business

purposes are often mixed with testamentary objectives in the

family context.   See Lauder II.   Thus, petitioners’ argument does

not dispose of the testamentary device and adequacy of

consideration issue.

     Fifth, petitioners contend that tax book value was not

required to bear a predictable relationship to fair market value
                                - 135 -

of the underlying assets because the True family had no plans to

liquidate the True companies.    Petitioners argue on brief:

     book value likely would not have represented the fair
     market value of * * * [True Oil’s and Belle Fourche’s]
     assets upon liquidation. If the price under a buy-sell
     agreement * * * [were] the fair market value of the
     business in liquidation, then one of the primary
     purposes of a buy-sell agreement would be undermined.
     Since the primary business purpose of a buy-sell
     agreement is continuation of the business by its
     current owners, the agreed price likely will not equate
     to the value of the business in liquidation. * * *

At the same time, they argue that because True Oil’s and Belle

Fourche’s tax book values equaled fair market values at the

agreement dates, this is strong evidence that tax book value was

a fair price.

     To the contrary, respondent argues (citing St. Louis County

Bank v. United States, supra) that the reasonableness of the

formula price should be analyzed both at the date of agreement

and at later dates to determine whether the agreement was a

testamentary substitute.   If the buy-sell agreement’s formula

could be expected to minimize the transfer price, this would

indicate an intent to transfer the interest for less than

adequate and full consideration.    We agree.

     As we stated in Lauder II, adequate and full consideration

requires a formula price (1) to be comparable to that which would

be negotiated by persons with adverse interests dealing at arm’s

length and (2) to bear a reasonable relationship to the

unrestricted fair market value of the interest in question.
                                - 136 -

Under item (2), we must consider whether disparities (at the

interest owner’s death) between the fair market value of

unrestricted interests and the buy-sell agreement’s formula price

could have been predicted by the parties at the time the

agreements were executed.   See Estate of Reynolds v.

Commissioner, 55 T.C. at 194.

     Certain facts indicate that the True companies’ tax book

value formula price was lower than the formula price that would

have been negotiated by unrelated parties dealing at arm’s

length.   For instance, petitioners concede that tax book value

does not reflect the fair market value of underlying assets.

They justify this disparity by saying that value should not be

determined on a company-by-company, liquidating basis, but

instead on an aggregate, going concern basis.   Thus, petitioners

contend that the value of True Oil’s proven oil and gas reserves

was properly omitted from the tax book value pricing formula

because the reserves essentially were purchased with earnings

from the other True companies and their value likely would be

dissipated in the unsuccessful search for replacement reserves.

We find it unreasonable to assume that Dave True, in a comparable

situation with unrelated parties, would have agreed to a formula

price that assumed that the value of True Oil’s reserves would be

expended indefinitely on dry holes resulting from unsuccessful

efforts to locate additional reserves.
                              - 137 -

     Moreover, the True family sometimes chose not to use tax

book value pricing formulas in their dealings with unrelated

parties.   Petitioners highlight the fact that unrelated

stockholders sold their stock in Belle Fourche to Dave and Jean

True (not pursuant to buy-sell agreements) at a book value price.

However, we note that one unrelated shareholder sold stock, which

amounted to 24 percent of the stock initially issued by the

corporation, for more than book value; in addition, the book

value used in buying out unrelated shareholders of Belle Fourche

was GAAP book value rather than tax book value.   See supra p. 23.

Also, the White Stallion buy-sell agreement, which included

parties that would not be considered natural objects of Dave

True’s bounty (Dave True’s brother and his family), was the only

buy-sell agreement that departed from a pure tax book value

pricing formula (see “First Right of Refusal” provision described

supra p. 49).   Similarly, the Toolpushers Employees’ Trust was

specifically exempted from Toolpushers’ buy-sell agreement, thus

allowing the Employees’ Trust to sell its shares back to the

company for more than book value.   In an analogous situation, the

True Oil employee profit-sharing plan’s contribution formula

required intangible drilling costs (IDC’s), which were deducted

for tax book purposes, to be added back to determine annual

profits for the purpose of determining the employer’s

contribution obligations.
                              - 138 -

     The True family’s use of tax book value formula pricing for

companies that engage in ranching and exploratory drilling for

oil and gas further suggests an intention to transfer interests

for less than adequate and full consideration.   Congress has

granted various tax incentives to the oil and gas industry, which

include the current write-off of IDC’s and the deduction of cost

or percentage depletion, whichever is higher.    Those incentives

reduce book value for tax purposes, sometimes creating anomalous

results such as True Oil’s negative book value at the time of

Tamma Hatten’s sale.   Some of the incentives create only short-

term timing differences between books reported on tax versus

financial accounting bases (e.g., accelerated depreciation),

while others create long-term or permanent differences (compare

current deduction of IDC’s to full cost method of accounting for

exploration costs).

     Additionally, tax incentives granted to the farming and

ranching industries also create distortions between tax book

value and underlying fair market value.   Because True Ranches

deducted (when paid) feed and other costs incurred to raise

livestock, none of those costs were capitalized as basis.

Therefore, raised livestock had no book value on True Ranches’

tax basis books.

     These facts suggest that the True family should have known,

at the time the buy-sell agreements were executed, that tax book

value would probably not bear a reasonable relationship to
                              - 139 -

(indeed be substantially less than) unrestricted fair market

value.

     Respondent also argues that the ranchland exchange

transactions among True Oil, True Ranches, and Smokey Oil,

discussed supra pp. 55-59, reflected petitioners’ attempts

artificially to reduce tax book value through aggressive tax

planning (i.e., petitioners were “double-dipping”).   Respondent

suggests that even if these transactions were efficacious income

tax planning techniques--which the Court of Appeals for the Tenth

Circuit held they were not--their effect was to minimize or

eliminate tax book value of certain assets so that Dave True

could transfer interests in the affected True companies for less

than adequate and full consideration.   We agree.

     Courts have evaluated conduct after the agreement date when

intervening events within the parties’ control caused a wide

disparity between the buy-sell agreement’s formula price and fair

market value.   See St. Louis County Bank v. United States, 674 F.

2d at 1211; Estate of Rudolph v. United States, 93-1 USTC par.

60,130, at 88449-88450, 71 AFTR 2d 93-2169, at 93-2176 through

93-2177 (S.D. Ind. 1993).   Here, the ranchland exchange

transactions were clearly within the True family’s control.    In

addition, because of those transactions, True Ranches received

ranchland properties with substantial fair market value and a

zero tax book value, while the high basis assets received by

Smokey Oil could be expected to be written down for tax purposes.
                                - 140 -

Thus, petitioners could have predicted that the ranchland

exchange transactions would create a disparity in which actual

fair market value would exceed the tax book value formula price

under the True Ranches buy-sell agreement.52

          3.     True Family Buy-Sell Agreements Were Substitutes
                 for Testamentary Dispositions

     To summarize, we have found facts indicating that the buy-

sell agreements at issue in these cases (1) were not the result

of arm’s-length dealings and served Dave True’s testamentary

purposes and (2) included a tax book value formula price that was

not comparable to a price that would be negotiated by adverse

parties dealing at arm’s length and would not, over time, be

expected to bear a reasonable relationship to the unrestricted

fair market value of the ownership interests in the True

companies.     In Lauder II, certain facts regarding how the

agreement was entered into allowed us to infer that the buy-sell

agreements served testamentary purposes.     We then went on to



     52
      The Trues argued that evidence of legitimate business
purposes for the ranchland exchange transactions should render
the step transaction doctrine inapplicable. They advanced an
analogous argument in the cases at hand. The Court of Appeals
for the Tenth Circuit acknowledged the evidence of business
purposes, but held that such evidence was not dispositive and
that the step transaction doctrine should still apply. See True
v. United States, 190 F.3d 1165, 1176-1177 (10th Cir. 1999). We
also note the following observation of the Court of Appeals for
the Tenth Circuit: “None of the individual steps in the
ranchland [exchange] transaction is the type of business activity
we would expect to see in a bona fide, arm’s length business deal
between unrelated parties”. True v. United States, 190 F.3d at
1179.
                                - 141 -

determine whether consideration was full and adequate, to resolve

whether the formula price was binding for estate tax purposes.

See id.   After considering all the circumstances, and

particularly the arbitrary manner in which the formula price was

selected, we concluded that the agreements were adopted for the

principal purpose of achieving testamentary objectives and were

not binding for estate tax purposes.      See id.

     Similarly, in the cases at hand we have weighed all material

facts and conclude that the True companies’ buy-sell agreements

were substitutes for testamentary dispositions.     Therefore, the

fourth prong (nontestamentary disposition prong) of the Lauder II

test has not been satisfied.

     E.   Conclusion: True Family Buy-Sell Agreements Do Not
          Determine Estate Tax Values

     The True family buy-sell agreements do not satisfy the

Lauder II test, because they are substitutes for testamentary

dispositions.   As a result, under section 2031 and the related

regulations, the tax book value buy-sell agreement price does not

control estate tax values of interests in the True companies at

issue in the estate tax case.

     Petitioners cite Estate of Hall v. Commissioner, 92 T.C. 312

(1989), in support of their position that the buy-sell agreement

price should control estate tax value.     In Estate of Hall, the

estate of Joyce C. Hall, the founder of Hallmark Cards, Inc.,

reported the value of his Hallmark shares for estate tax purposes
                              - 142 -

at “adjusted book value”, as determined under various buy-sell

and option agreements.   We did not decide whether the price

determined under the adjusted book value formula in those

agreements was dispositive for estate tax valuation purposes;

instead, we held, after careful review of the experts’ reports,

that the actual date of death fair market value of the shares did

not exceed the price determined under the adjusted book value

formula, as reported on the estate tax return.    In so doing, we

did two things:   (1) We found no evidence to support respondent’s

intimations that the agreements “were merely estate planning

devices [that served] no bona fide business purpose”; and (2) we

concluded that “the transfer restrictions * * * and the prices

set in the buy-sell and option agreements” could not be ignored

in arriving at value because, among other things, “there [was] no

persuasive evidence to support a finding that the restrictions,

or the offers to sell set forth in the agreements, were not

susceptible of enforcement or would not be enforced by persons

entitled to purchase under them.”    Estate of Hall v.

Commissioner, supra at 334-335.

     The differences between the cases at hand and Estate of Hall

are significant and substantial.    In these cases we have found

the buy-sell agreements to be testamentary devices,

notwithstanding that they also served valid business purposes.

As a result, the depressing effect on value that the buy-sell

agreements may have had in these cases is to be ignored, rather
                              - 143 -

than taken into account and given some effect, as in Estate of

Hall.   See infra p. 153.

     An important factor that supports our conclusion in these

cases and distinguishes Estate of Hall is the profound difference

between the tax book value formula in the True family buy-sell

agreements and the adjusted book value formula in Estate of Hall.

Book value in the cases at hand is income tax basis book value,

which gives effect to the income tax subsidies for the oil and

gas and cattle industries, and accelerated depreciation, which

have the effect of substantially reducing book value as compared

with book value determined under generally accepted accounting

principles.   “Adjusted book value” in Estate of Hall was book

value using financial statements prepared in accordance with

generally accepted accounting principles, adjusted to reflect the

value of intangibles arising from above-average earnings.   In

contrast, the tax basis book value formula in the True family

buy-sell agreements ignores all intangibles, which, Lauder II

indicated, suggests that an unadjusted book value formula has a

testamentary purpose.   It ignores the current “discovery value”

of proven reserves, which would increase the price that a well-

informed buyer would be willing to pay.   It even ignores historic

actually paid for costs, such as drilling costs and exploration

expenditures attributable to proven reserves, and feed expense

and other costs of homeraised calves that would enter into cost

of goods on hand under generally accepted accounting principles,
                              - 144 -

as well as the basis reductions associated with accelerated

depreciation for income tax purposes.

      Petitioners’ opening brief says:   “Under the facts in this

case, there is no reason to believe that any buyer of an interest

in the True companies would pay more than the book value price of

such interest”, preceded by a quote from Estate of Hall v.

Commissioner, 92 T.C. at 337, that “there was [not] even a remote

possibility that any investor, including a permitted transferee,

would purchase Hallmark shares at a price higher than adjusted

book value.”   This is just not true in the cases at hand.   There

were instances of sales of higher than book value for profit

sharing purposes and by unrelated parties.   In any event, even

if, as could have been expected, all of the sales in the

transactions at issue between family members were at tax basis

book value in accordance with the provision in the buy-sell

agreements, there is no reason to believe, if the buy-sell

agreements are disregarded, as they must be as a result of our

testamentary device finding, that a hypothetical buyer would not

have been willing to pay higher prices than the tax basis book

values at which the subject interests changed hands between

members of the True family.

IV.   Do True Family Buy-Sell Agreements Control Gift Tax Values?

      We now consider whether the buy-sell agreements at issue in

these cases determine gift tax values for lifetime transfers of
                               - 145 -

interests in the True companies made by Dave and Jean True in

1993 and 1994, respectively.

     A.   Framework for Analyzing Gift Tax Valuation Issues

     Federal gift tax is imposed on transfers of property by gift

by any individual during a calendar year.   See sec. 2501(a)(1).

The gift is measured by the value of property passing from the

donor and not by the resulting enrichment of the donee.    See sec.

25.2511-2(a), Gift Tax Regs.   The value of property transferred

at the date of gift is considered to be the amount of the gift.

See sec. 2512(a); sec. 25.2512-1, Gift Tax Regs.

     The value of property for gift tax purposes is determined in

the same manner as for estate tax purposes, see supra p. 60, by

applying the hypothetical willing buyer and seller standard.    See

Estate of Reynolds v. Commissioner, 55 T.C. at 187-188

(explaining that the estate and gift tax regulations provide

identical definitions of value); compare sec. 25.2512-1, Gift Tax

Regs., with sec. 20.2031-1(b), Estate Tax Regs.    Identical

factors are used for gift and estate tax purposes to determine

fair market value of a closely held business for which there is

no public market or recent arm’s-length sale.   See Ward v.

Commissioner, 87 T.C. 78, 101 (1986); secs. 25.2512-2(a),

25.2512-2(f), 25.2512-3, Gift Tax Regs.

     Transfers that are subject to Federal gift tax include

sales, exchanges, and other dispositions of property for

consideration.   See sec. 2512(b).   If property is transferred for
                              - 146 -

less than adequate and full consideration, the amount by which

the value (as defined above) of property exchanged exceeds the

value of consideration received is deemed to be a gift.   See sec.

2512(b); Commissioner v. Wemyss, 324 U.S. 303, 306-307 (1945)

(“The section taxing as gifts transfers that are not made for

‘adequate and full (money) consideration’ aims to reach those

transfers which are withdrawn from the donor’s estate.”); sec.

25.2512-8, Gift Tax Regs.   However, a sale, exchange, or other

transfer of property made in the ordinary course of business,

meaning a transaction that is bona fide, at arm’s length, and

free from any donative intent, will be considered as made for

adequate and full consideration.   See Commissioner v. Wemyss, 324

U.S. at 306-307; sec. 25.2512-8, Gift Tax Regs.   As previously

stated in the estate tax context, transactions within a family

group are subject to special scrutiny, such that there is a

presumption that intrafamily transfers are gifts.   See Harwood v.

Commissioner, 82 T.C. 239, 259 (1984)(citing Estate of Reynolds

v. Commissioner, 55 T.C. at 201), affd. without published opinion

786 F.2d 1174 (9th Cir. 1986).

     B.   Buy-Sell Agreements Do Not Determine Value for Gift Tax
          Purposes

     It is well settled that restrictive agreements, such as the

buy-sell agreements at issue in the cases at hand, generally do
                              - 147 -

not control value for Federal gift tax purposes.53    At most, a

buy-sell agreement may be a factor to consider in determining

gift tax value.   See Ward v. Commissioner, 87 T.C. at 105;

Harwood v. Commissioner, 82 T.C. at 260; Berzon v. Commissioner,

63 T.C. 601, 613 (1975), affd. 534 F.2d 528 (2d Cir. 1976);

Estate of Reynolds v. Commissioner, 55 T.C. at 189; Rev. Rul. 59-

60, 1959-1 C.B. 237.   Many reasons have been advanced by this

Court and others for the disparate treatment accorded buy-sell

agreements for gift tax versus estate tax purposes.

     In estate tax cases, the purchasing individuals or entities

have immediately exercisable, valid, and irrevocable rights to

purchase the decedent’s interest from the estate as of the

valuation date.   The critical event (death) that subjects the

stock to the purchase right has occurred, and it is clear that

the seller-estate can receive no more than the formula price.

See Spitzer v. Commissioner, 153 F.2d 967, 970-971 (8th Cir.



     53
      See Spitzer v. Commissioner, 153 F.2d 967, 971 (8th Cir.
1946); Krauss v. United States, 140 F.2d 510, 511 (5th Cir.
1944); Commissioner v. McCann, 146 F.2d 385, 386 (2d Cir. 1944),
revg. 2 T.C. 702 (1943); Ward v. Commissioner, 87 T.C. 78, 105
(1986); Harwood v. Commissioner, 82 T.C. 239, 260 (1984), affd.
without published opinion 786 F.2d 1174 (9th Cir. 1986); Berzon
v. Commissioner, 63 T.C. 601, 612-613 (1975), affd. 534 F.2d 528
(2d Cir. 1976); Estate of Reynolds v. Commissioner, 55 T.C. 172,
189-190 (1970); James v. Commissioner, 3 T.C. 1260, 1264 (1944),
affd. per curiam 148 F.2d 236 (2d Cir. 1945); Moore v.
Commissioner, 3 T.C. 1205, 1211 (1944); Rev. Rul. 59-60, 1959-1
C.B. 237; Hood et al., Closely Held Corporations in Business and
Estate Planning, Vol. II, sec. 9.13.2, p. 151-152 (1982); Bittker
& Lokken, 5 Federal Taxation of Income, Estates & Gifts, par.
135.3.10 at 135-57 through 135-59 (2d ed. 1993).
                                - 148 -

1946).     However, in gift tax cases, the transferring stockholder

or partner (putative donor) is under no immediate obligation to

sell.    See Commissioner v. McCann, 146 F.2d 385, 386 (2d Cir.

1944), revg. 2 T.C. 702 (1943); James v. Commissioner, 3 T.C.

1260, 1264 (1944).     Instead, he merely agrees to offer his

interest to the other owners on stated terms if and when he

decides to sell or transfer his interest.    Thus, the obligation

to sell has not matured in the gift tax cases and therefore

cannot set a ceiling on transfer tax value.

     Resale value is not the only factor to consider in

determining fair market value for gift tax purposes.    Until the

transferor actually disposes of his interest, he is entitled to

all the rights and privileges of ownership (e.g., rights to

receive dividends and to decide when to dispose of his interest).

See Harwood v. Commissioner, 82 T.C. at 261; Estate of Reynolds

v. Commissioner, 55 T.C. at 190; Baltimore Natl. Bank v. United

States, 136 F. Supp. 642, 654 (D. Md. 1955).     Thus, courts found

that gift tax fair market value should include this “retention

value”, which the buy-sell agreement price does not adequately

capture.
                                 - 149 -

     C.   Application of Gift Tax Rules to Lifetime Transfers by
          Dave and Jean True

          1.     True Family Buy-Sell Agreements Do Not Control Gift
                 Tax Values

     The weight of authority establishes that the True family

buy-sell agreements do not fix values for Federal gift tax

purposes.      However, petitioners contend that identical standards

should apply to determine whether buy-sell agreements control

values for both estate and gift tax purposes.     We disagree, for

the reasons stated below.

     First, petitioners argue that “fair market value” has the

same meaning for estate tax and gift tax purposes; therefore, the

standard for determining whether a buy-sell agreement controls

fair market value should be the same under both regimes.

Although petitioners’ argument has superficial appeal, it does

not reflect the development of the law in this area.

     Second, petitioners attempt to distinguish the cases at hand

from the many cases in which restrictive agreements were found

not to determine gift tax value.     Petitioners suggest that in

those cases, courts emphasized that the event giving rise to an

obligation to sell had not occurred as of the date of gift (i.e.,

gift transfers of stock or partnership interests did not trigger

option or first-offer provisions).     As a result, it was not

certain whether or when the buy-sell provisions would be

triggered.     Petitioners contrast this with the treatment of

transfers at death, stating that courts allowed buy-sell
                              - 150 -

agreements to determine estate tax value because death gave rise

to the obligation to sell.   Petitioners argue that the events

giving rise to the obligation to sell under the True buy-sell

agreements were Dave and Jean True’s decisions to sell their

respective interests in 1993 and 1994; therefore, their lifetime

transfers made subject to the buy-sell agreement restrictions

should be treated under the same standard as transfers at death

and not by the standard applied to gift transfers that do not

trigger the buy-sell provisions.   We disagree.

     Petitioners’ analysis strikes us as mechanical and

unreflective of the law’s development in this area.   In Harwood

v. Commissioner, 82 T.C. at 260, we said:   “Restrictive

provisions in a partnership agreement which limit the amount

received from the partnership by a withdrawing partner or the

estate of a deceased partner to the book value of his partnership

interest are not binding upon respondent for gift tax purposes.”

The fact that the operation of the buy-sell agreements was

triggered by Dave and Jean True’s decisions to sell their

interests in the True companies does not substantively

distinguish these cases from those in which the transferor was

not required first to offer his interest to others before making

a gift to his family.   In either situation, the transferor has

retained the right to choose when and if a disposition would

occur.   In the meantime, the transferor is entitled to receive

dividends or partnership distributions, and to enjoy the other
                                - 151 -

benefits associated with his or her investment.   The estate

executor has no such discretion at the decedent-stockholder’s or

decedent-partner’s death.

     In any event, the same buy-sell agreements are at issue for

both estate and gift tax purposes, and we have found them to be

substitutes for testamentary dispositions under Lauder II and

section 20.2031-2(h), Estate Tax Regs.    Therefore the True family

buy-sell agreements at issue in the cases at hand do not control

values for gift tax purposes.

        2.   Lifetime Transfers by Dave and Jean True Were Not
             in Ordinary Course of Business

     As previously discussed, sales or exchanges for less than

adequate and full consideration constitute gifts.   See sec.

2512(b); Commissioner v. Wemyss, 324 U.S. 303 (1945); sec.

25.2512-8, Gift Tax Regs.   However, a sale made in the ordinary

course of business (bona fide, at arm’s length, and free from

donative intent) is considered to have been made for adequate and

full consideration.   See Commissioner v. Wemyss, 324 U.S. at 306-

307; sec. 25.2512-8, Gift Tax Regs.

     Dave and Jean True’s sales of interests in the True

companies were not made in the ordinary course of business.    In

1993, Dave True sold partial interests in the various True

companies that were partnerships to ensure that, on his death,

his estate would secure the benefits of pre-Chapter 14 rules

regarding the determinative nature of buy-sell agreements for
                              - 152 -

estate tax valuation purposes.   Likewise, Jean True’s sales to

her sons in 1994, shortly after her husband’s death, fulfilled

the couple’s overall testamentary plan to pass the family

businesses to their sons.   These motivations for the sales were

not devoid of testamentary (or donative) intent.   In addition, we

have already discussed at length how the creation and continued

enforcement of the True companies’ book value buy-sell agreements

lacked indicia of arm’s-length dealing.   See supra pp. 101-144;

Harwood v. Commissioner, 82 T.C. at 258 (“We do not believe that

a transfer by a mother to her sons of her interest in the family

partnership, structured totally by the family accountant, with no

arm’s-length bargaining, can be characterized as a transaction in

the ordinary course of business.”).

     Petitioners erroneously argue that section 2512(b) does not

apply to the lifetime sales by Dave and Jean True; therefore,

they provide no evidence and only conclusory statements to

support their conclusion that the sales were made in the ordinary

course of business.

     In conclusion, because the buy-sell agreements do not

establish gift tax fair market value, we must independently

determine value and compare that value to consideration paid in

the 1993 and 1994 lifetime transfers to decide whether interests

in the True companies were transferred for less than adequate and

full consideration.   Any excess of the value of interests
                              - 153 -

transferred over the value of consideration received will

constitute gifts under section 2512(b).

V.   Impact of Noncontrolling Buy-Sell Agreements on Estate and
     Gift Tax Valuations

     Having held that the True companies’ buy-sell agreements do

not control fair market value for either estate tax or gift tax

purposes, we must decide whether noncontrolling buy-sell

agreements are factors to consider in valuing the subject

interests under sections 2031 and 2512.

     For estate tax purposes, section 20.2031-2(h), Estate Tax

Regs., explicitly states that a buy-sell agreement price will be

disregarded in determining the value of securities unless it is

found that the agreement represents a bona fide business

arrangement and not a device to pass the decedent’s shares to the

natural objects of his bounty for less than adequate and full

consideration.   Therefore, only if the agreement is both a bona

fide business arrangement and not a testamentary device would its

price have an effect on estate tax value.   See Lauder II.

     We applied this principle in Estate of Lauder v.

Commissioner, T.C. Memo. 1994-527, 68 T.C.M. (CCH) 985, 998-999,

1994 T.C.M. (RIA) par. 94,527, at 94-2741 (Lauder III), in which

we stated:

         We agree with respondent that, in light of our
     holding in * * * [Lauder II], it would be anomalous if
     particular portions of the shareholder agreement are
     now deemed relevant to the question of the fair market
     value of decedent’s stock. At the risk of belaboring
     the point, our responsibility is to determine the fair
                              - 154 -

     market value of decedent’s stock on the date of his
     death. In our prior opinion, we resolved that the
     formula price was intended to serve a testamentary
     purpose, and thus would not be respected for Federal
     estate tax purposes. It is worth noting at this point
     that we have not had the opportunity to address the
     validity of each and every aspect of the shareholder
     agreement. Nonetheless, we repeat the observation made
     earlier in these proceedings that there is no evidence
     in the record that the Lauders engaged in arm’s-length
     negotiations with respect to any aspect of the
     shareholder agreement. Absent proof on that point, we
     presume that all aspects of the agreement, particularly
     those tending to depress the value of the stock, are
     tainted with the same testamentary objectives rendering
     the formula price invalid. [Fn. ref. omitted.]

         In light of our holding in * * * [Lauder II] we
     hold that the specific provisions of the shareholder
     agreement are not relevant to the question of the fair
     market value of decedent’s stock on the valuation date.
     Simply put, the willing buyer/willing seller analysis
     that we undertake in this case would be distorted if
     elements of such testamentary origin are injected into
     the determination.

    Although we did not hold the buy-sell agreement in Lauder

III invalid per se, the only evidentiary weight we accorded it

was to recognize that it demonstrated the Lauders’ commitment to

maintaining family control over the business.   That fact, among

others, justified the use of a lack of a marketability discount

in the valuation analysis.   See Estate of Godley v. Commissioner,

T.C. Memo. 2000-242 (disregarding option provision in valuing

partnership interests because it served as substitute for

testamentary disposition).

    In the cases at hand, we hold for similar reasons that the

restrictive provisions of the buy-sell agreements (including but
                                - 155 -

not limited to the formula price) are to be disregarded in

determining fair market value for estate tax purposes.

    Rev. Rul. 59-60, 1959-1 C.B. 237, which provides valuation

guidance for both estate and gift tax purposes, states that a

buy-sell agreement is a factor to consider with other relevant

factors in determining fair market value.      It further provides

that it is always necessary to determine whether the agreement

represents a bona fide business arrangement or is a testamentary

device.    See id.   We take these statements, together with Lauder

III and its interpretation of section 20.2031-2(h), Estate Tax

Regs., to mean that the same rule should apply to disregard

noncontrolling buy-sell agreements for gift tax and estate tax

valuation purposes.    Cf. Estate of Reynolds v. Commissioner, 55

T.C. at 194 (holding that voting trust agreement preemption

provisions should not be disregarded in consolidated gift and

estate tax cases because the agreement was not a testamentary

device).

Issue 2. If True Family Buy-Sell Agreements Do Not Control
Values, What Are Estate and Gift Tax Values of Subject Interests?

                           FINDINGS OF FACT

    After respondent’s concessions, the transferred interests

whose values remain in dispute are:       True Oil, Eighty-Eight Oil,

and True Ranches, to be valued as of January 1, 1993, June 4,

1994, and June 30, 1994; Belle Fourche and Black Hills Trucking,

to be valued as of June 4, 1994, and June 30, 1994; and White
                              - 156 -

Stallion, to be valued as of June 4, 1994 (disputed companies).

See Appendix schedules 1-3.   The parties have stipulated that the

fair market values of the assets owned by the disputed companies,

except White Stallion, were the same on June 30, 1994, as they

were on June 4, 1994.

     Financial information for the disputed companies was

compiled and analyzed in the expert reports, which derived the

data from the companies’ Federal partnership and S corporation

income tax returns for tax years 1988 through 1994.   The disputed

companies maintained tax basis books and records for management

purposes and did not have financial statements that had been

audited or otherwise reviewed by certified public accountants.

See supra pp. 12-22 for historical background of disputed

companies.

I.   True Oil

     True Oil’s proved oil reserves equaled 5,297,528 barrels

(bbl) as of August 1, 1973, and 7,389,000 bbl as of June 4, 1994.

Proved gas reserves were 8,551,994 thousands of cubic feet (Mcf)

as of August 1, 1973, and 9,075,000 Mcf as of June 4, 1994.     The

parties have stipulated that the total fair market value of all

oil and gas properties and related facilities owned by True Oil

was $39,650,000 as of January 1, 1993, and $34,200,000 as of June

4, 1994.   In addition, respondent agreed not to dispute

petitioners’ position that True Oil’s reserves were 8.9 million
                                   - 157 -

barrels of oil-equivalent (boe)54 on January 1, 1993, and on June

4, 1994.

    During the period 1988 through 1993, True Oil’s revenues

declined from a high of $25.8 million in 1990 to a low of $17.6

million in 1993.       In addition, operating margins declined from

44.2 percent of revenues in 1990 to 35.8 percent of revenues in

1993.        These declines can be attributed to increased competition

within the industry and to True Oil’s unsuccessful attempts to

find new reserves.       True Oil spent over $300 million on

intangible drilling costs from 1972 through 1998; approximately

58 percent of those costs related to nonproductive wells.

    True Oil’s ordinary income also declined from a high of

approximately $12.2 million in 1990 to a loss of $4.7 million in

1993.        For the period 1988 through 1993, True Oil sustained net

losses only in 1992 and 1993.        In those 2 years, True Oil

deducted extraordinary exploration costs of approximately $23

million on an unsuccessful venture in Honduras.

    For the 6 months ending June 30, 1994, True Oil’s revenues

decreased sharply from approximately $11.3 million (for 6 months

ending June 30, 1993) to $7.5 million.        Likewise, net income was

lower than for the same 6-month period in 1993.



        54
      Barrels of oil-equivalent takes into account both oil and
gas reserves. Gas is converted to boe units either based on a
heating ratio (usually 6,000 cubic feet of gas to a barrel of
oil) or on a current price ratio (about 9,000 to 1 in the 1993-94
period).
                               - 158 -

    True Oil’s fixed assets increased from $28.4 million in 1988

to $36.6 million in 1993.    Total assets decreased from a high in

1991 of approximately $41.4 million to $18.4 million in 1993.

Current liabilities increased from $7.8 million in 1990 to $8.1

million in 1993.    True Oil carried no funded debt during the

period being examined, so that current liabilities represented

total liabilities.

    During the period 1988 through 1994, withdrawals from

partners’ capital exceeded contributions by approximately $26.8

million.   However, in the last 4 of those years (1991 to 1994),

total contributions exceeded distributions by almost $2.5

million.

    General partnership interests in True Oil have never been

traded in public markets.

II. Belle Fourche

    Belle Fourche’s primary asset is a network of pipelines it

uses to gather and transport crude oil.    At the valuation dates,

Belle Fourche had approximately 1,740 miles of gathering line and

870 miles of main line.    Crude oil was collected into the

gathering line system from the production point (e.g., wellhead

or stock tank) and eventually reached a main line for

distribution to the market via oil storage facilities or

transportation to other pipelines.

    Throughput is the standard measure for pipeline operations

that describes the amount of fluid transported through the system
                               - 159 -

in a given period of time.    During the period 1979 through 1993,

Belle Fourche’s throughput ranged from approximately 26 to 36

million barrels per year;55 the highest volume was in 1993 (36.2

million barrels), while the lowest volume was in 1988 (26.2

million barrels).   Since 1990, the company’s throughput has

steadily increased.

    Belle Fourche earned revenue from its pipeline system by

charging tariffs for transportation, delivery, and testing of

crude oil.   Amounts charged by Belle Fourche were regulated by

Federal and State agencies.

    During the period 1988 through 1993, revenues increased at a

compounded annual growth rate of 11 percent, from a low of $10.5

million in 1988 to a high of $17.5 million in 1993.   Belle

Fourche was profitable from 1988 to 1993, generating the highest

pre-tax income of $8.2 million in 1990 and the lowest of $3.7

million in 1993 (As an S corporation, Belle Fourche is not

required to pay corporate level income taxes.).   However, pre-tax

income margins have declined from a high of 61 percent in 1990 to

a low of 21 percent in 1993.   This trend is attributable to a




     55
      Petitioners’ experts’ reports stated that Belle Fourche’s
historical average throughput was 25,000 barrels per day.
Annualizing that figure would result in average throughput of
just over 9 million barrels per year. The parties did not
address this discrepancy at trial or on brief. We find the 26 to
36 million barrels per year average to be more reliable because
it was derived from respondent’s expert’s analysis of filings
with regulatory agencies.
                               - 160 -

decline in production, which was expected to continue as of the

valuation dates.

    For the 6 months ending June 30, 1994, Belle Fourche’s

revenues declined from approximately $8.8 million (for 6 months

ending June 30, 1993) to $7.3 million.     Likewise, net income was

lower than for the same 6-month period in 1993.

    Belle Fourche’s fixed assets increased steadily from $57.6

million in 1988 to $78.6 million in 1993.     In 1992, Belle Fourche

paid approximately $16 million to purchase a smaller crude oil

common carrier system (the Thunderbird pipeline) located near its

preexisting pipelines.

    During the period 1988 through 1993, Belle Fourche carried

long-term debt to shareholders, which rose most sharply from 1991

($1.3 million) to 1992 ($18 million).     Shareholder debt was

$17,115,350 as of December 31, 1993.     However, the corporation

repaid $1.2 million of the debt in May 1994, resulting in

shareholder debt of $15,915,350 on May 31, 1994, and June 30,

1994.   Interest on shareholder debt was calculated based on the

greater of a Colorado bank’s prime rate or the short-term

applicable Federal rate.   The interest rate for 1994 ranged from

6 to 6.75 percent.

    During the period 1988 through 1993, Belle Fourche

distributed total cash or other property worth over $36 million

to its shareholders, with average total distributions of over $5

million annually.    On average, these distributions exceeded the
                                - 161 -

shareholders’ tax obligations on their distributive shares of

taxable income.

       Belle Fourche stock has never been traded in public markets.

III.    Eighty-Eight Oil

       On brief, respondent adopted Mr. Kimball’s marketable

minority value for Eighty-Eight Oil of $25,174,683 as of

January 1, 1993; Mr. Lax’s marketable minority value was $40

million as of June 3, 1994.

       During the period 1988 through 1993, Eighty-Eight Oil’s

revenues increased from $191.7 million in 1988 to $558.6 million

in 1992, then decreased to $466.7 million in 1993.     Operating

margins varied over the analyzed period from 2 percent of

revenues in 1988 to .8 percent in 1993.

       Eighty-Eight Oil generally was profitable from 1988 to 1993,

generating the highest ordinary income of $4.1 million in 1992

and the lowest of $623,000 in 1988; however, the company

sustained a $7 million loss in 1991.      During the period, Eighty-

Eight Oil annually deducted, in arriving at ordinary income, an

average of $1.2 million in total guaranteed payments to partners.

       For the 6 months ending June 30, 1994, Eighty-Eight Oil’s

revenues declined from $242 million (for 6 months ending June 30,

1993) to $161 million.     However, Eighty-Eight Oil so managed its

expenses that ordinary income increased as compared with the same

6-month period in 1993.
                              - 162 -

    Eighty-Eight Oil’s fixed assets increased from $714,000 in

1988 to approximately $13 million in 1993, as the company

acquired buildings, equipment, and land.   Current assets

increased from $20.6 million in 1988 to approximately $46 million

in 1993, which is attributable to an increase in cash, cash

equivalents, and prepaid crude oil purchases.   At the end of 1992

and 1993, current assets (i.e., cash, cash equivalents, accounts

receivable, inventories, prepaid crude oil purchases) constituted

more than 85 percent of Eighty-Eight Oil’s total assets.    Total

current liabilities decreased from $35.4 million in 1989 to $16.8

million in 1993.   A large reduction in current liabilities

occurred between 1988 and 1989 after the company paid off $30.9

million in debt.   Eighty-Eight Oil carried no funded long-term

debt during the period being examined, so that current

liabilities represented total liabilities.

    Eighty-Eight Oil’s financial ratios improved over the

analyzed period and were strong relative to the median oil

industry ratios.   Between 1988 and 1993, the company’s current

ratio increased from .3 to 2.7, as compared with the industry

average of 1.3 in 1993.   Eighty-Eight Oil’s working capital

increased significantly from $8.5 million in 1989 to $29.3

million in 1993.   The company’s accounts receivable turnover

ratio improved from 19.2 in 1990 to 24.5 in 1993, which is

substantially above the industry average of 6.5.   Thus, during
                               - 163 -

the analyzed period, Eighty-Eight Oil increasingly became more

liquid than the industry.

    During the period 1988 through 1994, overall partners’

capital contributions exceeded withdrawals by approximately $60

million. However, in the most recent of those years (1993 and

1994) total withdrawals exceeded contributions by over $36

million.   Under the partnership agreement, additional capital

contributions were to be made in the same percentages as the

profit and loss sharing ratios.    However, the partners’ capital

account balances were often not in proportion to their profit and

loss sharing ratios.   For example, Dave True’s capital account

balance at the end of 1992 was $7,046,509, while total partners’

capital was $43,590,998.    This gave Dave True a 16.17-percent

interest in total partners’ capital, as compared with his yearend

profit and loss sharing ratio of 68.47 percent, according to the

partnership agreement dated August 11, 1984, and the 1992

schedule K-1.   Petitioners explained that disproportionate

capital accounts were unique to Eighty-Eight Oil, which operated

as a bank that held excess cash for the True family, and did not

reflect the operations of the other True family partnerships.

    The day before selling part of his interest in Eighty-Eight

Oil to his sons as of January 1, 1993, Dave True contributed over

$6 million to partners’ capital.    In accordance with the

partnership agreement, he then sold 24.84 percent of his Eighty-

Eight Oil partnership interest to his sons based on the book
                               - 164 -

value of his capital account as of the close of business on

December 31, 1992, or $7,046,509.   Thus, he sold 24.84 percent

out of his 68.47-percent interest in profits, losses, and capital

for $2,556,379.    The consideration paid by the True sons for an

aggregate 24.84-percent interest in Eighty-Eight Oil represented

5.86 percent of total partners’ capital as of December 31, 1992.

As a result of the sales, the True sons’ profit and loss sharing

ratios each increased by 8.28 percent, for a total increase of

24.84 percent.56   If Dave True had not made the $6 million

capital contribution to Eighty-Eight Oil on December 31, 1992,

the price he would have been entitled to receive for the 24.84-

percent partnership interest would have been less than $400,000.

      General partnership interests in Eighty-Eight Oil have never

been traded in public markets.

IV.   Black Hills Trucking

      Respondent has adopted the final Lax report’s controlling

equity value (using the net asset value method) of $10,933,730 as

of June 3, 1994.

      Black Hills Trucking engaged in interstate transport of

oilfield and drilling equipment, specializing in on-road and off-

road hauling of heavy equipment.    From 1988 to 1994, Black Hills

Trucking conducted 75 percent of its business with unrelated



      56
      Because of the state of the record, we were unable to
perform a similar analysis of partners’ capital account balances
in connection with the June 4 and June 30, 1994, transfers.
                               - 165 -

companies.    Black Hills Trucking’s assets fell into three

categories:    Power equipment, trailer equipment, and

miscellaneous and office equipment.      Power equipment included

trucks, tractors, cranes, forklifts, heavy construction

equipment, and small vehicles; trailer equipment included

flatbed, float, lowboy, tanker and dump trailers, and accessory

trailers such as jeeps, boosters, dollies, light trailers, a

barbeque pit, and other towed equipment; miscellaneous and office

equipment included computers, maintenance and shop equipment, and

furniture.    The ages of the various types of equipment ranged

from 1 to 40 years.

    During the period 1989 through 1993, revenues increased

slightly from $15.1 million to $16.8 million.      Black Hills

Trucking suffered losses over the analyzed period that ranged

from a high of $6.1 million in 1990 to a low of $178,000 in 1992.

On average, the company annually deducted approximately $2.1

million of depreciation expense in computing its losses.

    For the 6 months ending June 30, 1994, revenues increased

from $9.086 million (for 6 months ending June 30, 1993) to $9.436

million.   Net losses for the period decreased from $2.628 million

in 1993 to $220,680 in 1994.    However, management indicated that

the company’s outlook was bleak due to excess supply and

insufficient demand in the trucking industry.

    Total net fixed assets (tax basis) drastically declined over

the period from $8.9 million in 1989 to $3.1 million in 1993 due
                             - 166 -

to the company’s selloff of buildings and equipment.     Total

assets decreased over the period from $13.2 million in 1989 to

$6.7 million in 1993.

     During the period 1989 through 1993, Black Hills Trucking

carried long-term shareholder debt that ranged from a high of

$13.9 million in 1990 to a low of $855,000 in 1992.      Shareholder

debt was roughly $2.8 million at the end of 1993.

     During the period 1988 through 1994, Black Hills Trucking

distributed cash or other property to its shareholders only in

1989, in the amount of $213,000.    On the other hand,

shareholders’ contributions to paid-in or capital surplus

increased during the analyzed period, spiking from $1.4 million

in 1990 to $16.7 million in 1991.

     The stock of Black Hills Trucking has never been traded in

public markets.

V.   True Ranches

     Respondent adopts the entity values derived by Mr. Kimball

under the net asset value method.    Accordingly, the parties agree

that the controlling equity value of True Ranches was
                                   - 167 -

$41,003,00057 as of January 1, 1993, and $45,297,509 as of June

30, 1994.

    During the period 1989 through 1993, revenues fluctuated

from a low of $23.3 million in 1991 to a high of $31.3 million in

1992.        Ordinary income also fluctuated from a high of $2.1

million in 1992 to a loss of $3.6 million in 1991.        The company

incurred losses in 2 out of the 5 years being examined.

    For the 6 months ending June 30, 1994, revenues decreased

from $12.7 million (for 6 months ending June 30, 1993) to $9.3

million.        Net losses for the period increased from $842,179 in

1993 to $1.9 million in 1994.

    True Ranches had no current liabilities during the analyzed

period.        However, net working capital steadily declined from

roughly $7 million in 1990 to $4.8 million in 1993.

    During the period 1988 through 1994, partners’ capital

contributions exceeded withdrawals by approximately $64.4

million.

    Partnership interests in True Ranches have never been traded

in public markets.




        57
      Originally, the Kimball       report computed True Ranches’ net
asset value to be $40,863,000       as of Jan. 1, 1993; however,
Mr. Kimball later revised his       estimate to $41,003,000, based on
clarifying data received from       the ranch property appraisers. On
brief, respondent agreed with       Mr. Kimball’s original value as of
Jan. 1, 1993. We assume that        respondent also adopts Mr.
Kimball’s revised value.
                              - 168 -

VI.   White Stallion

      Respondent adopts the final Lax report’s controlling equity

value (using the net asset value method) of $1,139,080 as of

June 3, 1994.

      White Stallion operates a dude ranch near Tucson, Arizona,

consisting of 250 acres of land and improvements.    During the

period 1989 through 1992, revenues increased from $677,224 in

1989 to $1,042,260 in 1992.   The compounded annual growth rate

for the period was approximately 15 percent.   Revenues for 1993

showed no substantial percentage growth.   Ordinary income

increased during the period from $2,771 in 1989 to $166,922 in

1993.

      During the period 1988 through 1993, the company carried

long-term shareholder debt that ranged from roughly $46,000

(early years) to $92,000 (ending balance in 1993).

      During the period 1988 through 1994, White Stallion made no

distributions of cash or other property to its shareholders.      On

the other hand, shareholders’ contributions to paid-in or capital

surplus slightly increased during the analyzed period.

      White Stallion stock has never been traded in public

markets.
                              - 169 -

                              OPINION

I.   Expert Opinions

     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 their demonstrated qualifications and all other evidence

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

Cir. 1957), affg. in part and remanding in part on another ground

T.C. Memo. 1956-178; Parker v. Commissioner, 86 T.C. 547, 561

(1986).   We have broad discretion to evaluate “‘the overall

cogency of each expert’s analysis.’”     Sammons v. Commissioner,

838 F.2d 330, 334 (9th Cir. 1988)(quoting Ebben v. Commissioner,

783 F.2d 906, 909 (9th Cir. 1986), affg. in part and revg. in

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

another ground T.C. Memo. 1986-318.     Although expert testimony

usually helps the Court determine values, sometimes it does not,

particularly when the expert is merely an advocate for the

position argued by one of the parties.     See, e.g., Estate of

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

Commissioner, 92 T.C. 101, 129 (1989).

     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.   See Helvering v. National

Grocery Co., 304 U.S. 282, 295 (1938); Anderson v. Commissioner,

250 F.2d at 249; Estate of Newhouse v. Commissioner, 94 T.C. at
                               - 170 -

217; Estate of Hall v. Commissioner, 92 T.C. at 338.     We have

rejected expert opinion based on conclusions that are unexplained

or contrary to the evidence.   See Knight v. Commissioner, 115

T.C. 506 (2000); Rose v. Commissioner, 88 T.C. 386, 401 (1987),

affd. 868 F.2d 851 (6th Cir. 1989); Compaq Computer Corp. v.

Commissioner, T.C. Memo. 1999-220.

    Where necessary, we may reach a determination of value based

on our own examination of the evidence in the record.    See 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, affd.

without published opinion 937 F.2d 616 (10th Cir. 1991).    Where

experts offer divergent estimates of fair market value, we decide

what weight to give those estimates by examining the factors they

used in arriving at their conclusions.    See Casey v.

Commissioner, 38 T.C. 357, 381 (1962).    We have broad discretion

in selecting valuation methods, see 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 in determining

the weight to be given the facts in reaching our conclusions,

inasmuch as “finding market value is, after all, something for

judgment, experience, and reason”, Colonial Fabrics, Inc. v.

Commissioner, 202 F.2d 105, 107 (2d Cir. 1953), affg. a

Memorandum Opinion of this Court.    While we may accept the

opinion of an expert in its entirety, see Buffalo Tool & Die Mfg.
                              - 171 -

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

in the use of any part of such opinion, or reject the opinion in

its entirety, see Parker v. Commissioner, supra at 561.    Finally,

because valuation necessarily results in an approximation, the

figure we arrive at need not be directly attributable to specific

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

be arrived at from consideration of all the evidence.   See

Silverman v. Commissioner, supra at 933; Alvary v. United States,

302 F.2d 790, 795 (2d Cir. 1962).

II. Experts and Their Credentials

    A.   Petitioners’ Expert, John H. Lax

    Before filing the estate tax return, petitioners obtained an

appraisal (initial Lax report) of the estate’s corporate and

partnership interests in the True companies as of June 3, 1994,

from the Valuation Services Group of Arthur Andersen LLP (AA),

Houston, Texas.   John H. Lax (Mr. Lax), a principal at AA,

participated in the evaluation of the True companies, assisted in

the preparation of the reports, and testified at trial on behalf

of petitioners.   Mr. Lax specializes in financial analysis and

appraisal of business enterprises, individual securities, and

various intangible assets.   He earned a Senior American Society

of Appraisers designation in 1975 and became a Certified

Management Accountant in 1976.

    Petitioners provided a copy of the initial Lax report to the

IRS during the 1993 gift tax return audit, which overlapped with
                              - 172 -

respondent’s audits of the estate tax return and Mrs. True’s 1994

gift tax return.   In preparing the 1993 and 1994 gift tax notices

and the estate tax notice, respondent used most of the entity

values determined by Mr. Lax but entirely disallowed the claimed

discounts.

    Subsequently, Mr. Lax submitted a revised expert witness

report (final Lax report) and testified at trial regarding the

value of the estate’s interests in the True companies as of June

3 and 4, 1994.   The final Lax report differed from the initial

Lax report in several ways; most importantly, the final Lax

report repudiated certain marketability discounts found in the

initial Lax report because AA had decided, subsequent to issuance

of the initial Lax report, that market data did not justify

measurable marketability discounts in connection with controlling

interests.

    B.   Petitioners’ Expert, Curtis R. Kimball

    After petitions had been filed in these cases, petitioners

engaged Willamette Management Associates (WMA) to appraise the

transferred interests in the True companies.   Curtis R. Kimball

(Mr. Kimball), a principal of WMA and its national director for

estate and gift tax matters, participated in the evaluations,

assisted in the preparation of the resulting reports, and

testified at trial on behalf of petitioners.   Mr. Kimball has

performed valuations of business entities and interests, analyzed

publicly traded and private securities, and appraised intangible
                               - 173 -

assets and intellectual property.    He is an Accredited Senior

Appraiser of the American Society of Appraisers and a Chartered

Financial Analyst of the Association for Investment Management

and Research.    Mr. Kimball personally had appraised interests in

three closely held oil and gas companies before True Oil, and WMA

had appraised interests in three others.    Also, WMA had appraised

interests in closely held pipeline and oil tool manufacturing

companies.

    Mr. Kimball submitted two expert witness reports (Kimball

reports) and testified at trial regarding the values of interests

in the True companies as of January 1, 1993, June 4, 1994, and

June 30, 1994.    He also prepared a rebuttal to respondent’s

expert reports.

    Messrs. Lax and Kimball valued many of the same interests as

of the same dates but came to different conclusions regarding

value.   Petitioners introduced both experts’ appraisals of value

into evidence and did not choose between them.

    C.   Petitioners’ Expert, Dr. Robert H. Caldwell

    Dr. Robert H. Caldwell (Dr. Caldwell) is co-founder of The

Scotia Group, Inc., Dallas, Texas, which provides domestic and

international oil and gas advisory services.    He has a Ph.D. in

geology and is a Certified Petroleum Geologist.

    Dr. Caldwell prepared expert witness reports (Scotia

reports) for trial that computed the fair market value of True

Oil’s oil and gas properties as of January 1, 1993, and June 4,
                               - 174 -

1994.    Dr. Caldwell did not testify at trial because the parties

eventually stipulated the values of the oil and gas properties on

the basis of discussions between Dr. Caldwell and respondent’s

expert, Mr. Gustavson, supra p. 156-157.

    D.    Petitioners’ Expert, Michael S. Hall

    Michael S. Hall (Mr. Hall) is president of Hall and Hall

Mortgage Corp., Denver, Colorado, which provides farm real estate

financing and appraisal services.   He is a C.P.A., a Certified

General Appraiser in Colorado and Wyoming, and a qualified expert

witness in U.S. Bankruptcy Court.   Mr. Hall prepared an expert

witness report (H&H report) that valued the land and improvements

of True Ranches as of January 1, 1993, and June 3, 1994; he also

testified at trial.

    E.    Respondent’s Expert, John B. Gustavson

    Respondent’s only expert witness with respect to interests

in the disputed companies was John B. Gustavson (Mr. Gustavson),

of Gustavson Associates, Inc., Boulder, Colorado.    Mr. Gustavson

is a minerals appraiser and a Certified Professional Geologist

who has valued over 100 oil and gas properties.    He is not an

expert in business valuations.

    Mr. Gustavson submitted an expert witness report (Gustavson

report) regarding the fair market values of oil and gas

properties and assets owned by True Oil and assets owned by Belle

Fourche as of January 1, 1993, and June 4, 1994.    The Gustavson

report did not value 100 percent of the equity interests or the
                                - 175 -

subject interests in True Oil and Belle Fourche.     Mr. Gustavson

testified at trial regarding the fair market value of Belle

Fourche assets only, due to the parties’ agreement on the value

of True Oil’s oil and gas properties.     In addition, Mr. Gustavson

prepared reports (Gustavson rebuttals) and testified in rebuttal

to the final Lax report and the Kimball reports.58    Mr.

Gustavson’s rebuttal testimony solely dealt with the valuations

of interests in True Oil and in Belle Fourche.

III.    Preliminary Matters Regarding Valuation

        A.   Respondent’s Alleged Concessions Regarding Valuation
             Discounts

       In a telephone conference on January 8, 1999, the Court

asked the parties to submit schedules, before trial, setting

forth their positions on the fair market values of the interests

still in dispute.     The parties responded by jointly submitting

schedules, attached to a cover letter dated January 14, 1999,

entitled “Comparison of Values of Transferred Interests”

determined as of January 1, 1993, June 4, 1994, and June 30, 1994

(Exhibit 262-P).

       Exhibit 262-P contained information about each company under

the following headings:     Return Value/Book Value, IRS Value per



       58
      Mr. Gustavson also prepared rebuttal reports to the Scotia
reports and the SRC appraisals. As a result of the parties’
agreement regarding the value of True Oil’s reserves, Mr.
Gustavson did not testify in rebuttal to the Scotia reports.
However, those rebuttal reports, as well as Dr. Caldwell’s
rebuttal to the Gustavson report, were admitted into evidence.
                               - 176 -

Notice, AA Hypothetical Value, WMA Hypothetical Value, and

Current IRS Value.   A footnote to the “Current IRS Value” column

in each schedule stated:   “These values reflect respondent’s

agreement to allow combined minority interest and marketability

discounts of up to 40 percent.”   For the most part, petitioners

prepared Exhibit 262-P and then furnished it to respondent for

his review and approval.   However, respondent provided

petitioners with the “Current IRS Value” information and text for

the related footnote.

    On February 16, 1999, the first day of trial, the parties

filed a stipulation of facts and a supplemental stipulation of

facts.    The stipulations did not refer to “Current IRS Value[s]”

or the combined minority and marketability discounts mentioned in

Exhibit 262-P.   However, the stipulations stated that respondent

was no longer asserting adjustments in the value of transferred

interests in certain companies, each of which had a “Current IRS

Value” that approximated its “Return Value/Book Value”.

    Respondent’s trial memorandum, dated January 28, 1999,

stated:

        In [his] notice of deficiency respondent allowed no
    discounts to the underlying values of the transferred
    interests. Respondent has indicated to petitioners that
    minority and marketability discounts of up to 40% should
    be applied in determining the fair market values of the
    transferred interests.

In addition, “Current IRS Value[s]” differed from values reported

in the statutory notices because the “Current IRS Value[s]”
                               - 177 -

incorporated Mr. Gustavson’s underlying asset values for Belle

Fourche and True Oil, rather than those of Mr. Lax, and reflected

approximately $16 million of debt owed by Belle Fourche that had

not been accounted for previously.

    At trial, respondent’s counsel characterized as a

“concession” the position in Exhibit 262-P and the trial

memorandum that allowed minority and marketability discounts.

Both petitioners’ counsel and the Court indicated that they did

not understand exactly how “Current IRS Value[s]” were derived in

all cases.    Respondent’s counsel stated that the combined

discounts were different for each company and that the exact

amounts would be fleshed out through further testimony59 and on

brief.    Respondent’s counsel also stated that the combined

discounts were less than 40 percent in some cases and that

respondent never intended the 40-percent figure to serve as a

starting point for negotiation.

    At trial’s end, respondent’s counsel asserted that “Current

IRS Value[s]” had been put forth as a settlement position only,

in an effort to resolve the case, and that respondent had not

conceded that petitioners were entitled to combined, across-the-

board discounts of no less than 40 percent as to all the disputed

companies.    Petitioners’ counsel objected to respondent’s


     59
      However, respondent presented no additional testimony to
explain the derivation of the discounts included in the “Current
IRS Value[s]” figure or the amount of any discounts respondent
was proposing in lieu thereof.
                              - 178 -

settlement position characterization, and the Court instructed

the parties to address the issue in their arguments on brief.

    Petitioners argue that respondent’s concessions, presented

at and before trial, indicating combined minority and

marketability discounts of up to 40 percent to the True companies

still in dispute, constituted admissions--clear, deliberate, and

unequivocal statements regarding questions of fact.    Claiming

they relied on these admissions in presenting their case,

petitioners argue that they would be prejudiced if respondent

were allowed to change his position to claim that combined

minority and marketability discounts are less than 40 percent of

the prediscount values of any of the subject interests.    We

disagree.

    Statements made by respondent’s counsel during trial were

not clear, deliberate, or unequivocal as to the level of

discounts that respondent was or might be conceding.    It is clear

that respondent had abandoned the determinations of value in the

statutory notices and had acknowledged that some minority and

marketability discounts were appropriate.   However, respondent’s

counsel indicated that “Current IRS Value[s]” represented

different levels of combined discounts that could not be computed

by simply applying a 40-percent discount to the entity values

determined in the statutory notices or otherwise modified by the

Gustavson reports.   Before the end of trial, respondent’s counsel

explained that different discounts applied for each company,
                               - 179 -

combined discounts were less than 40 percent in some cases, and

that a more detailed breakdown was pending.    Indeed, the only

“Current IRS Value[s]” that incorporated combined discounts of 40

percent were for interests in Eighty-Eight Oil and Black Hills

Trucking.    Thus, as of the end of trial, the discounts that

respondent was conceding remained unclear.    This lack of clarity

is further evidenced by the failure of the parties to include

stipulations regarding combined discounts in the joint

stipulations introduced by the parties after they had submitted

Exhibit 262-P to the Court.

    More importantly, we do not believe that petitioners relied

on respondent’s statements regarding “Current IRS Value[s]” and

combined discounts in presenting their case.    In Ware v.

Commissioner, 92 T.C. 1267, 1268 (1989), affd. 906 F.2d 62 (2d

Cir. 1990), we said:

         The rule that a party may not raise a new issue on
     brief is not absolute. Rather, it is founded upon the
     exercise of judicial discretion in determining whether
     considerations of surprise and prejudice require that a
     party be protected from having to face a belated
     confrontation which precludes or limits that party’s
     opportunity to present pertinent evidence. * * *
     [Citations omitted; see also Estate of Andrews v.
     Commissioner, 79 T.C. 938, 952 (1982).]

    Petitioners obtained expert appraisals for the subject

interests in all disputed companies, and their experts testified

at trial in support of their findings on entity values and

discounts.    Petitioners appear to have accepted respondent’s

concessions regarding companies with “Current IRS Value[s]” that
                               - 180 -

roughly equal “Return Value/Book Value[s]”, but have continued to

litigate the values of the subject interests in other companies,

proposing combined discounts exceeding 40 percent in most cases.

Petitioners also presented rebuttal reports and expert testimony

addressing Mr. Gustavson’s criticisms of the Kimball and Lax

reports.    Finally, petitioners devoted large portions of their

reply brief to rebutting respondent’s posttrial valuation

positions.    All this indicates that petitioners continued to

marshal their evidence and arguments to support valuation

discounts greater than those reflected in the “Current IRS

Value[s]” figures.    Petitioners have not persuaded us that they

would have presented their case any differently if respondent had

made no statements regarding “Current IRS Value[s]”.

Accordingly, we find that respondent’s disavowal or clarification

of his pretrial statements of “Current IRS Value[s]” did not

prejudice petitioners’ ability to present valuation evidence.

    B.     Role of Burdens and Presumptions in Cases at Hand

    Petitioners have also argued that if respondent is allowed

to revert to the adjustments reflected in the deficiency notices,

respondent should have the burden of proof on any adjustment that

increased the value of a transferred interest to more than the

“Current IRS Value”.    Moreover, petitioners contend that

respondent did not sustain such burden, because he did not offer

any expert testimony regarding the value of the subject

interests.    We disagree.
                              - 181 -

    First, in all but two cases (Dave True’s date of death

interests in Black Hills Trucking and White Stallion), the values

of the subject interests advanced by respondent on brief were

lower than those determined in the deficiency notices.

Therefore, respondent is not reverting to the deficiency notice

values.   Second, the mere fact that the position of one party is

not supported by expert testimony does not require that the other

party’s position, which is so supported, will prevail.    See Tripp

v. Commissioner, 337 F.2d 432, 434-435 (7th Cir. 1964), affg.

T.C. Memo. 1963-244; Wyoming Inv. Co. v. Commissioner, 70 F.2d

191, 193 (10th Cir. 1934), remanding on other grounds a

Memorandum Opinion of the Board of Tax Appeals; Cupler v.

Commissioner, 64 T.C. 946, 955-956 (1975); Estate of Scanlan v.

Commissioner, T.C. Memo. 1996-331, affd. in an unpublished

opinion 116 F.3d 1476 (5th Cir. 1997); Brigham v. Commissioner,

T.C. Memo. 1992-413.

    The presumption of correctness and the burden of proof have

no bearing on our decisions in the cases at hand.   There is

sufficient evidence in the record to arrive at supportable

positions on entity values and appropriate discounts, bearing in

mind that opinions of value may legitimately differ within a

reasonable range.   See Silverman v. Commissioner, supra at 933;

Alvary v. United States, 302 F.2d 790, 795 (2d Cir. 1962).
                                - 182 -

    The peculiar circumstances of the cases at hand warrant our

inquiries into, and ultimate findings of, intermediate values for

the True companies that exceed tax book values but are less than

the values determined by respondent in the notices.    As discussed

at length under issue 1 of this opinion, petitioners’ buy-sell

agreements requiring sales of interests in the True companies at

tax book value virtually assured unrealistically low entity

values for certain companies.    This was due to the use of (1)

accelerated depreciation methods by capital intensive companies

and (2) enhanced write-offs of substantial asset costs and

capital expenditures of the ranching and oil and gas companies.

Thus, the method of accounting used to derive tax book values

provided a basis for our holding that the buy-sell agreements

were testamentary devices and for our hypothesis--without regard

to the presumption of correctness or the burden of proof in

sustaining or overturning the determinations in the notices--that

petitioners’ values did not accurately represent fair market

value and that higher values would be appropriate.

    Accordingly, we have not relied on the presumption of

correctness or the burden of proof to decide the cases at hand.

We have based our findings of value on our own examination of

evidence in the record, including expert reports, published

studies, witness testimony, exhibits, and joint stipulations of

fact.   See infra pp. 186-287; see also Burns v. Commissioner, 36
                               - 183 -

AFTR 2d 75-6235, 75-2 USTC par. 9774 (10th Cir. 1975), affg. T.C.

Memo. 1974-220.

    C.   Petitioners’ Aggregation and Offset Argument

    The transferred interests whose values remained in dispute

at the date of trial are listed in the Appendix.    The values of

transferred interests in the other companies (undisputed

companies) were not in controversy by the time of trial either

because (1) respondent had not adjusted their values in the

statutory notices or (2) the parties stipulated that respondent

would no longer assert an adjustment in connection with those

interests.    Even so, petitioners submitted appraisal information

into evidence that valued some, but not all, of the undisputed

companies as of the valuation dates.

    In a footnote to their opening brief, petitioners argue that

if the Court finds that the book value buy-sell price was not

controlling for estate and gift tax purposes, an offset should be

allowed in determining the overall value of the gross estate and

taxable gifts to the extent that the value of any interest

included in the gross estate or subject to gift tax is less than

book value.   Petitioners reason that the estate tax is imposed on

the fair market value of the total taxable estate, and that the

gift tax is imposed on the fair market value of all taxable gifts

during the taxable period.   Therefore, according to petitioners,

any overreported value should offset any underreported value in
                               - 184 -

calculating the overall estate tax or gift tax liability.    We

believe that petitioners’ argument oversimplifies the issue; we

do not agree that petitioners would be entitled to an offset for

estate tax or gift tax purposes for the reasons set forth below.

    First, petitioners reported on the 1993 and 1994 gift tax

returns and on the estate tax return that the fair market value

of every subject interest was the book value, as determined under

each company’s buy-sell agreement, at which the subject interest

was sold.    See supra pp. 51-55.   Reported values are considered

to be an admission by petitioners, so that lower values cannot be

substituted without cogent proof that the reported values were

erroneous.   See, e.g., Estate of Hall v. Commissioner, 92 T.C.

312, 337-338 (1989).   Here, petitioners did not provide evidence

of value contrary to book value with regard to transferred

interests in True Geothermal Energy, True Mining, and True

Environmental Remediating LLC as of January 1, 1993, and Clareton

Oil, Donkey Creek Oil, Pumpkin Buttes Oil, Sunlight Oil, and Wind

River Oil as of June 4 and June 30, 1994.    Therefore, the record

does not contain sufficient evidence to determine the aggregate

fair market value of all the transferred interests.

    Second, with respect to the gift tax, we have found no

authority that would allow petitioners to offset sales of some

companies for allegedly excess consideration (i.e., buy-sell

formula price exceeded fair market value) against unrelated sales
                               - 185 -

of other companies for inadequate consideration (i.e., fair

market value exceeded buy-sell formula price) to produce a lower

net deemed gift.   Section 2512(b) provides:

    SEC. 2512(b). Where property is transferred for less
    than an adequate and full consideration in money or
    money’s worth, then the amount by which the value of the
    property exceeded the value of the consideration shall
    be deemed a gift, and shall be included in computing the
    amount of gifts made during the calendar year.

The language of the statute suggests that the gift amount is

reduced only by consideration received for the transferred

property that constitutes the gift.      See Robinson v.

Commissioner, 75 T.C. 346, 351 (1980), affd. 675 F.2d 774 (5th

Cir. 1982).   However, petitioners are in effect proposing that

sales of certain True companies for excessive consideration

served as consideration for sales of other True companies.    The

facts do not support this proposition.

    Each of the True companies was subject to a separate buy-

sell agreement.    The parties could pick and choose which of the

companies they would sell and which they would retain.     Each sale

was a separate, independent transaction.     Accordingly, we see no

reason why consideration for the transfer of one interest should

serve as consideration for another separate transfer.

    Third, with respect to estate tax, we are skeptical of

petitioners’ claim that book values exceeded fair market values

for interests in certain True companies owned by Dave True at his

death.   We have said many times that a buy-sell agreement that
                                - 186 -

constitutes a testamentary device will not fix estate and gift

tax value.    More precisely, however, we would say that the buy-

sell formula price does not set a ceiling on value, but that it

does set a floor.     The mandatory buy-sell provisions in the cases

at hand effectively gave the estate a put, which set a minimum

value for Dave True’s interests owned at death.    Even assuming

that the buy-sell agreement does not set a floor on value, we

doubt that book value actually and substantially exceeded estate

tax fair market value.     Petitioners generally base their claims

of overreported value on appraisal information provided in the

final Lax report.     However, we often note in our analysis of the

disputed companies, infra, that the final Lax report’s valuation

conclusions were unsubstantiated and result-oriented.

    Therefore, we find that there is insufficient evidence to

support lower fair market values for any of the undisputed

companies than those originally reported on the 1993 and 1994

gift and estate tax returns.

IV. Valuations of True Companies in Dispute

    A.   True Oil

         1.   Marketable Minority Interest Value

              a.    Kimball Reports

    The Kimball reports determined the so-called hypothetical

fair market value of the subject interests in the disputed

companies by using generally accepted valuation procedures and by
                              - 187 -

disregarding the book value buy-sell price, but otherwise taking

into account all other provisions of the buy-sell agreement.     The

reports outlined four generally accepted approaches for valuing

closely held companies:   (1) The guideline company method, (2)

the discounted cash-flow method, (3) the asset accumulation

method, and (4) the transaction method.

    The guideline company method is a market-based valuation

approach that estimates the value of the subject company by

comparing it to similar public companies.    First, a group of

comparable “guideline” companies is selected and analyzed; then

market multiples are derived and applied to the financial

fundamentals of the subject company.    Financial fundamentals

include various measures of operating revenue, income, underlying

asset values, and unit volume of production.    This method yields

the value of a marketable minority interest because value is

determined based on publicly marketable minority interests in

companies that have registered and traded securities.

    The discounted cash-flow method is an income approach based

on the premise that the subject company’s market value is

measured by the present value of future economic income it

expects to realize for the benefit of its owners.    This approach

analyzes the subject company’s revenue growth, expenses, and

capital structure, as well as the industry in which it operates.

The subject company’s future cash-flows are estimated, and the
                              - 188 -

present value of those cash-flows is determined based on an

appropriate risk-adjusted rate of return.

    The asset accumulation method is a cost approach that

estimates fair market value of the subject company based on the

assets and liabilities reflected on its balance sheet.   The fair

market values of each company’s assets and liabilities are first

determined and accumulated; then the subject company’s total

equity is calculated by subtracting total liabilities from total

assets.   A closely held business owner must have the ability to

liquidate the company to realize fully the value produced by this

method.   Thus, the asset accumulation method yields the value of

a controlling interest, because a minority shareholder could not

force liquidation.

    The transaction method, another market-based approach,

identifies and analyzes actual transactions (e.g., mergers and

acquisitions) of companies with operations similar to those of

the subject company.   As with the guideline company method,

market multiples are derived from the comparable companies and

applied to the financial fundamentals of the subject company.

This method yields the value of a controlling interest because

mergers and acquisitions typically are accompanied by a complete

change of control.

    After considering these valuation approaches, Mr. Kimball

concluded that a market-based approach, specifically the
                                - 189 -

guideline company method, would be used most appropriately to

value the True Oil interests.    Mr. Kimball rejected the

discounted cash-flow method because he believed it was too

difficult to forecast the future prices of oil and gas needed to

estimate future revenues and cash-flows.    He also rejected the

transaction method because he found no data on transactions of

companies with operations similar to True Oil.    Mr. Kimball did

not apply the asset accumulation approach; instead, he used the

stipulated physical volume of True Oil’s proved reserves,

measured in barrels of oil-equivalent, to derive the reserve

multiple used in the guideline company method.

    Mr. Kimball first identified eight guideline companies from

the crude oil and natural gas industries, focusing on companies

generally in the same geographic area (Rocky Mountain territory)

as True Oil.

    Mr. Kimball then focused his analysis on five market

multiples:   Earnings before interest and taxes (EBIT); earnings

before depreciation, interest, and taxes (EBDIT); revenues;

tangible book value of invested capital (TBVIC); and reserves

(BOE).   He calculated these multiples and True Oil’s financial

fundamentals over two time periods, the latest fiscal year and a

simple average of the preceding 5 fiscal years.    Mr. Kimball

placed a weight of 20 percent on each earnings multiple (EBIT,

EBDIT, and revenues), 30 percent on the reserves multiple, and 10
                               - 190 -

percent on the TBVIC multiple.    Thus, earnings-based multiples

were weighed more heavily in aggregate.

    Mr. Kimball selected low (rather than mean or average)

multiples of the guideline companies to apply against True Oil’s

financial fundamentals, because he found that True Oil had low or

negative growth relative to the guideline companies.    He also

chose lower multiples because of the depressive effect of True

Oil’s buy-sell agreement terms (other than the book value price

term).    Mr. Kimball did not adjust True Oil’s actual earnings

over the valuation period to reflect differences in accounting

for intangible drilling costs, saying that such adjustments would

not be made by a hypothetical buyer of a closely held business.60

Instead, he made qualitative adjustments to the market multiples

to reflect such differences.    Mr. Kimball did not quantify the

effect of those adjustments on the market multiples.

    Lastly, Mr. Kimball multiplied True Oil’s financial

fundamentals by the selected multiples derived from guideline

company data, and he ascribed different weights to each product.

Because True Oil had no long-term debt, the sum of these amounts

represented the market value of its equity.




     60
      As previously stated, True Oil deducted intangible
drilling costs in arriving at taxable income. In contrast,
public companies would be required to capitalize some of those
costs under either the successful efforts or full cost method of
accounting required by SEC rules or GAAP. See supra p. 23.
                                - 191 -

    Mr. Kimball concluded that fair market value of True Oil’s

total equity on a marketable minority basis was $37,253,000 on

January 1, 1993, and $34,623,000 on both June 4 and June 30,

1994.

             b.    Final Lax Report

    The final Lax report calculated fair market value of

interests in the disputed companies without considering any

obligations or restrictions imposed by the book value buy-sell

agreement.   Mr. Lax valued the subject interests as of June 3,

1994, the day before Dave True’s death.     However, he opined that

the value remained unchanged on June 4, 1994.

    The final Lax report employed two market-based valuation

approaches, the guideline company method and the reserves method,

to determine the value of True Oil.61     First, Mr. Lax used the

guideline company method to arrive at a marketable, minority

value of $24,500,000.    He identified six publicly traded

companies that he considered to be comparable to True Oil; four

of those companies also were used by Mr. Kimball.     Mr. Lax

applied EBDIT, EBIT, pretax earnings, and book value multiples to

True Oil’s financial results for the 12-month period ending

May 31, 1994.     Unlike the Kimball reports, the final Lax report

did not provide detailed supporting schedules showing how Mr. Lax


     61
      Mr. Lax stated that he did not employ the income approach
for any of the True entities because, like Mr. Kimball, he
believed that it was too difficult to forecast the future prices
of oil and gas needed to estimate future revenues and cash-flows.
                               - 192 -

calculated guideline company multiples and True Oil’s financial

fundamentals.    In addition, the relative weight Mr. Lax placed on

each multiple and whether he adjusted the data for differences in

accounting methods are also unclear.

    Second, Mr. Lax valued True Oil based on an estimated value

of its reserves on June 3, 1994.    Mr. Lax adopted the conclusions

of the Scotia report that fair market value of True Oil

properties on the valuation date was $34,800,000, based on both a

discounted cash-flow and comparative sales approach.    Mr. Lax

weighted this value at 80 percent because he believed that a

reserve analysis based on discounted cash-flows was the best

indication of value for an exploration and production company.

Next, Mr. Lax reviewed exploration and production industry

acquisitions in the Rocky Mountain region that occurred within 1

year of the valuation date to establish an implied range of

dollars per barrels of oil-equivalent, which he applied to the

Scotia report’s estimated reserve volume to arrive at a value of

$27,000,000.    He weighted this value at 20 percent.   Mr. Lax did

not update his conclusions after the parties agreed to the value

and volume of True Oil’s oil and gas properties.

    After combining the weighted results of the two reserves

methods, Mr. Lax computed a marketable, controlling value for

True Oil of $33,200,000.    He converted this to a marketable

minority value by applying a 25-percent minority discount,
                              - 193 -

resulting in a reserves value of $24,900,000.   The final Lax

report explained that AA relied on data from acquisition

transactions and real estate investment trusts (REIT’s) to

compute the minority discounts applied to the subject interests.

The report did not include either a description of the studies or

their findings.

    Mr. Lax compared the two indications of value, $24,500,000

under the guideline company method and $24,900,000 under the

reserves method, and concluded that True Oil’s marketable

minority value was $24,820,000 on June 3, 1994.

            c.    Gustavson Report and Respondent’s Position

    The Gustavson report valued major assets owned by True Oil

as of January 1, 1993, and June 4, 1994, which included producing

oil and gas properties, the Red Wing Creek gas plant, the Little

Knife gas plant, and the Grampian pipeline.   Mr. Gustavson did

not value the company as a whole.   He explained that industry

practice would treat the value of proved reserves as the most

important (if not the only) indicator of value for a small,

independent oil and gas producer such as True Oil.

    Mr. Gustavson used the discounted cash-flow method (income

approach) to value producing properties, and he used the boe

method (market approach) to verify those values because he

considered the boe method to be the least reliable valuation
                               - 194 -

approach.   Mr. Gustavson also used an investment recovery method

to value plant and pipeline facilities.

    The Gustavson report valued True Oil’s major assets at

$48,000,000 on January 1, 1993, and $33,700,000 on June 4, 1994.

Subsequently, Mr. Gustavson reconciled his valuation

methodologies with those of Dr. Caldwell62 to arrive at the True

Oil stipulated asset values of $39,650,000 as of January 1, 1993,

and $34,200,000 as of June 4, 1994.      See supra p. 156.   According

to respondent, the value of True Oil’s major assets represented

the 100-percent equity value of the company.

    Because Mr. Gustavson is not an expert in business

valuations, he did not value the subject interests in any True

company.    Instead, respondent argues on brief that the True Oil

interests transferred by Dave and Jean True to their sons as of

January 1, 1993 (Dave transferred an 8.28-percent interest to

each son), and June 30, 1994 (Jean transferred a 5.74-percent

interest to each son), were entitled to minority discounts of no

more than 10 percent.63   Respondent bases his conclusions on a


     62
      The Scotia reports also valued oil and gas properties
owned by True Oil as of Jan. 1, 1993, and June 4, 1994. Dr.
Caldwell primarily relied on the discounted cash-flow method to
value True Oil’s proved reserves and other facilities, and
applied the comparative sales method to test the reasonableness
of those results. The Scotia reports concluded that the fair
market value of True Oil’s major assets was $34,800,000 on both
valuation dates.
     63
      Petitioners interpreted respondent’s statements on brief
to mean that respondent was allowing combined minority and
                                                   (continued...)
                              - 195 -

student note published near the time of the transactions at issue

in these cases, which found 10-percent discounts to be the

starting point for minority discounts that had been upheld by

courts.   See DenHollander, Note, “Minority Interest Discounts and

the Effect of the Section 2704 Regulations”, 45 Tax Law. 877

(1992).

    Respondent also argues that the 38.47-percent interest owned

by Dave True at his death is not entitled to a minority discount,

because it represents a significant ownership block that had

swing vote potential.   Respondent argues, on the ground that Dave

True held the largest single block of voting rights in True Oil,

that his block could be combined with any other single block to

control the company, even though he did not own a stand-alone

controlling interest.   Accordingly, respondent contends that no

minority discount should be allowed in valuing Dave True’s

interest in True Oil as of June 4, 1994.

    In summary, respondent computed marketable minority values

for the True Oil interests transferred as of January 1, 1993, and

June 30, 1994, of $35,685,000 and $30,780,000, respectively.




     63
      (...continued)
marketability discounts of 20 percent for transfers of interests
in True Oil by Dave True and Jean True as of Jan. 1, 1993, and
June 30, 1994, respectively, and for the transfer of Jean True’s
interest in Belle Fourche as of June 30, 1994. We interpret
respondent’s statements to mean that separate minority and
marketability discounts of 10 percent each should apply.
                                - 196 -

Respondent derived a marketable controlling value for the

interest valued as of Dave True’s death at $34,200,000.

               d.   Court’s Analysis

    The positions of the parties and the Court’s determination

of the marketable minority values of True Oil’s total equity at

each of the valuation dates are summarized infra pp. 215-216.

    In the cases at hand, we find that exclusive use by

petitioners’ experts of the guideline company method to calculate

True Oil’s marketable minority value is inappropriate.    We

recognize that market-based approaches are helpful tools for

determining fair market value of unlisted stock.   See sec.

20.2031-2(f), Estate Tax Regs; Rev. Rul. 59-60, sec. 3.03, 1959-1

C.B. at 238.    However, in the case of an ongoing business, courts

generally will not restrict consideration to only one valuation

approach.   See Hamm v. Commissioner, 325 F.2d 934, 941 (8th Cir.

1963), affg. T.C. Memo. 1961-347; Ward v. Commissioner, 87 T.C.

78, 102 (1986); Estate of Andrews v. Commissioner, 79 T.C. at

945; Portland Mfg. Co. v. Commissioner, 56 T.C. 58, 80 (1971),

affd. without published opinion (9th Cir. 1975); Trianon Hotel

Co. v. Commissioner, 30 T.C. 156, 181 (1958); Hooper v.

Commissioner, 41 B.T.A. 114, 129 (1940).

    We find it unreasonable to assume that a hypothetical

willing buyer would rely entirely on public company multiples to
                                - 197 -

compute the purchase price of a closely held, family business64

that derived all its value from its ability to discover and

exploit oil and gas reserves.    See Zukin, Financial Valuation:

Businesses and Business Interests, par. 19.2[6] at 19-9, par.

19.2[8] at 19-13 (1990).   If a company is primarily in the

business of selling its assets, then hypothetical buyers most

likely would be interested in the company’s net asset value.    See

Ward v. Commissioner, 87 T.C. at 102 (citing Harwood v.

Commissioner, 82 T.C. 239, 265 (1984), affd. without published

opinion 786 F.2d 1174 (9th Cir. 1986)(concerning company engaged

in selling timber)); see also Estate of Jameson v. Commissioner,

T.C. Memo. 1999-43.   True Oil’s proved oil and gas reserves are

its most significant asset and its sole source of revenue, so it



     64
      Dr. Shannon Pratt (founder of WMA) and his colleagues
articulated some of the fundamental differences between large and
small companies that would diminish the value of the guideline
company approach as follows:
          Public companies are run by boards of directors
     and professional managers. These executives make
     operating decisions based on a different set of
     corporate objectives than private companies typically
     have. Private companies are more likely to have
     relationships with family members, employees,
     suppliers, customers, and the local community that have
     developed over a long period of time. These
     relationships can present the board and the management
     of the private company with corporate objectives that
     are different than a strict duty to maximize
     shareholder value. As an additional example, in
     private companies, the analyst is more likely to
     observe a strategy that is designed to minimize income
     taxes, compared with strategies of public companies.
     [Pratt et al., Valuing Small Businesses and
     Professional Practices 289 (3d ed. 1998).]
                                - 198 -

is appropriate to use the net asset value method (or what Mr.

Kimball called the asset accumulation method), in conjunction

with the guideline company method, to determine the value of True

Oil.    Accordingly, we treat the stipulated value of True Oil’s

major assets65 as the company’s net asset value.

       Petitioners argue that the Kimball reports properly

accounted for the value of True Oil’s reserves by using the

reserves multiple in the guideline company analysis.    We disagree

for two reasons.    First, Mr. Kimball’s reserves multiple was

based on the stipulated physical volume of proved reserves

measured in barrels of oil-equivalent, known as the boe method;

however, the geological experts’ reports of both parties favored

the discounted cash-flow method to value True Oil’s proved

reserves and used the less reliable boe method only as a

reasonableness test.    Second, Mr. Kimball weighted the reserves

multiple at only 30 percent, which we would consider low given

the nature of True Oil’s business.

       Petitioners also contend that we should disregard altogether

the net asset value method in determining True Oil’s entity value

because the subject interests carried no liquidation rights so

that holders of such interests could not access the underlying

asset values.    We disagree.   Although the net asset value method

yields the value of a controlling interest, a minority discount


       65
      True Oil had no long-term debt on or around the valuation
dates, and current assets generally offset current liabilities.
                               - 199 -

would be applied to reflect the constraints imposed on minority

owners.    Moreover, True Oil is primarily in the business of

selling its assets; thus, liquidation is not the only means by

which an owner would have access to the company’s net asset

value.    Here it is likely that a hypothetical purchaser would

give substantial weight to True Oil’s underlying asset values

even though he would not have the ability immediately to realize

those values in their entirety by forcing liquidation.    See

Estate of Andrews v. Commissioner, 79 T.C. at 945; Estate of Dunn

v. Commissioner, T.C. Memo. 2000-12.

    Turning to the guideline company method, the Kimball reports

present a clear and adequately documented approach to determining

True Oil’s marketable minority value.    However, we note a few

areas of concern.    First, we could not trace any adjustments made

to either the guideline companies’ earnings multiples or True

Oil’s financial fundamentals to reflect the fact that intangible

drilling and dry hole costs were being accounted for differently.

This omission could lead to significant distortions in value

given True Oil’s substantial intangible drilling (including

nonproductive well) costs over the years.    Second, Mr. Kimball’s

consistent choice of only the lowest guideline company multiples

suggests a lack of comparability between the selected companies

and True Oil.    Third, the restrictive provisions (other than

price) of True Oil’s buy-sell agreement inappropriately
                              - 200 -

influenced Mr. Kimball’s choice of multiples.    As stated earlier,

restrictive provisions of buy-sell agreements that are deemed to

be testamentary devices should be disregarded in determining fair

market value for estate and gift tax purposes.    See supra p. 153.

Adjustments for these errors would result in marketable minority

values higher than those derived by Mr. Kimball.

    The final Lax report’s guideline company analysis was even

more questionable.   It provided no data to support the

calculations of EBDIT, EBIT, pretax earnings, and book value for

either the comparable companies or True Oil.    Further, Mr. Lax

did not explain the relative weight placed on each factor.    The

Lax report also applied market multiples to only 1 year’s worth

of financial data.   We believe that using a 5-year average of

True Oil’s financial fundamentals (as Mr. Kimball did) would have

provided more representative results.   Without more data and

explanations, we cannot rely on the final Lax report’s valuation

conclusions using the guideline company method.

    We need not discuss the strengths or weaknesses of Mr. Lax’s

reserves method because the parties stipulated the value of True

Oil’s reserves as of the relevant measurement dates.

    Regarding the issue of minority discounts, this Court

recognizes that a minority interest in a company usually is worth

less than a proportionate share of the company’s total value, see

Ward v. Commissioner, 87 T.C. at 106; Estate of Andrews v.
                                - 201 -

Commissioner, 79 T.C. at 953, because a minority interest holder

lacks control over company policy, cannot direct payment of

dividends, and cannot compel a liquidation of company assets, see

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

Commissioner, 82 T.C. at 267.    Applicability of minority

discounts depends on the type of interest being appraised (i.e.,

degree of control the interest confers) and on any assumptions

regarding control that are implicit in the entity-level

valuation.

    For estate tax purposes, the property being valued is the

interest decedent owned at death.    See sec. 2031.   We arrive at

this value by examining the degree of control inherent in the

decedent’s interest and not the control conveyed to the

decedent’s legatees.   See Estate of Chenoweth v. Commissioner, 88

T.C. 1577 (1987).   We determine whether a block of stock is a

minority interest without considering the identity and prior

holdings of the transferee, because the hypothetical willing

buyer-willing seller test is an objective test.    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 999, 1005-1006 (5th Cir. 1981).

    We find the 25-percent minority discount applied in Mr.

Lax’s reserves method analysis to be unsubstantiated and

unreliable.   The final Lax report vaguely described studies of
                                - 202 -

acquisition transactions and REIT’s to support the chosen

discount, but it did not cite specific studies, describe the

studies’ assumptions and findings, or analyze the control

features of the True oil subject interests.       We therefore

disregard the final Lax report’s proposed minority discount.

    We also disagree with respondent’s argument that the 38.47-

percent interest Dave True owned at death would be combined with

any other single ownership block to control True Oil so that a

minority discount is unjustifiable.       In determining whether a

minority discount applies, we do not assume that the hypothetical

buyer is a member of decedent’s family.       See Propstra v. United

States, 680 F.2d 1248, 1251-1252 (9th Cir. 1982); Estate of Hall

v. Commissioner, supra; Minahan v. Commissioner, 88 T.C. 492, 499

(1987).   Here, we assume that the buyer is an unrelated party,

but we are free to recognize Jean True and the True sons as the

other general partners as of Dave True’s death.       See Estate of

Davis v. Commissioner, 110 T.C. 530, 559 (1998).       Given these

assumptions, we find it unlikely that a member of Dave True’s

family would join forces with an unrelated purchaser to gain

voting control over True Oil.    See id.     In addition, the concept

of voting control does not apply to True Oil, a general

partnership that is jointly managed by all of its owners.        Cf.

Estate of Winkler v. Commissioner, T.C. Memo. 1989-231

(distinguishing voting from nonvoting stock for valuation
                                 - 203 -

purposes and denying minority discount to voting stock because of

swing vote potential).

    A comparison of the marketable minority values for True Oil

proposed by Mr. Kimball and by respondent follows:


                             Kimball reports’
                                                 Respondent’s net
             Valuation      guideline company
                                                asset value method
                date              method
          January 1, 1993      $37,253,000         $35,685,000
           June 4, 1994        $34,623,000             N/A
           June 30, 1994       $34,623,000         $30,780,000


    We have acknowledged the merits of both parties’ valuation

methods and believe that some combination of the two methods

would most accurately measure True Oil’s marketable minority

value.    However, Mr. Kimball’s values would require adjustments

for our stated concerns, which are likely to result in higher

values.    As it is, we need not compute Mr. Kimball’s adjusted

guideline company values because respondent’s marketable minority

values (shown above) are less than Mr. Kimball’s as of January 1,

1993, and June 30, 1994.      Thus, we accept respondent’s marketable

minority values as of January 1, 1993, and June 30, 1994, and

treat them as concessions.

    Respondent did not determine True Oil’s marketable minority

value as of June 30, 1994, because he treated Dave True as owning

a controlling interest at death.      However, we treat Dave True’s
                                - 204 -

38.47-percent interest in True Oil as a minority interest, and we

assume that True Oil’s marketable minority value on June 4, 1994,

was equal to its value on June 30, 1994 (i.e., $30,780,000).

           2. Marketability Discounts

               a.   Kimball Reports

    The Kimball reports discussed two types of empirical studies

that WMA relied on to quantify marketability discounts for

closely held companies.     Those studies analyzed discounts on

sales of restricted shares of publicly traded companies

(restricted shares studies) and discounts on private transactions

that preceded public offerings (pre-IPO studies).

    The restricted shares studies sought to isolate

marketability from all other value-affecting factors by analyzing

the price differential between freely traded stock of a public

company and stock that is otherwise identical except for certain

time period restrictions on trading in the open market.     The

Kimball reports discussed the results of eight studies that

covered the years 1966 through 1988, and found average

marketability discounts ranging from approximately 26 to 45

percent.

    The Kimball reports also discussed two pre-IPO studies that

used data from SEC registration statements to compare share

prices of companies before and after they had gone public.     The
                             - 205 -

studies generally covered the years 1975 through 1995, and found

marketability discounts ranging from 40 to 63 percent.66

    Next, the Kimball reports generally addressed aspects of all

the True companies’ partnership agreements and Wyoming’s general

partnership law that made the subject partnership interests less

liquid than publicly traded stock or limited partnership

interests.   Mr. Kimball testified that he factored all the

partnership agreement provisions (other than the book value buy-

sell price) into his determination of marketability discounts.

    First, the Kimball reports noted that transfer or assignment

of a partnership interest would not terminate the partnership, so

that a hypothetical buyer would have to litigate to force

liquidation of a True partnership.

    Second, the Kimball reports stated that Wyoming law required

a buyer to obtain consent from the existing partners to be

admitted as a new partner; otherwise, the buyer would be treated

as a transferee with rights limited to receiving his or her pro

rata share of current and liquidating distributions.   As a

result, the Kimball reports concluded that potential purchasers

would be discouraged from buying an interest in a True

partnership without the assurance of gaining such consent.

    Third, the Kimball reports observed that the mandatory buy-

sell provisions would have a chilling effect on the market for


     66
      One of the studies specifically omitted natural resource
companies from the group of companies being examined.
                              - 206 -

interests in the True partnerships.     The reports stated that

potential buyers would not want to spend time analyzing an offer

price if there were other buyers with prior purchase rights,

especially if those buyers were current owners and operators of

the business.   Additionally, the universe of potential purchasers

would be reduced by (1) the requirement that all partners (or

their spouses) actively participate in the business and (2) the

prohibition against encumbering partnership interests (treated as

a sales event triggering mandatory buy-sell), because purchasers

would have difficulty obtaining financing without pledging the

subject interests.

    Fourth, the Kimball reports suggested that potential

investors would hesitate to expose themselves to personal

liability as general partners given the environmental and

business risks associated with the oil and gas industry.

    Fifth, the Kimball reports observed that none of the True

partnerships had made section 754 elections, so that a

hypothetical purchaser of the subject interests would recognize

built-in gain on sales by the partnerships of their assets.       The

Kimball reports explained that this would adversely affect

marketability because a hypothetical purchaser could avoid such

built-in gain through an outright purchase of assets similar to

those owned by the partnership.
                              - 207 -

    Based on the foregoing, the Kimball reports concluded that

the subject interests in True Oil were not readily marketable and

applied 40-percent marketability discounts to the marketable

minority values as of January 1, 1993, June 4, 1994, and June 30,

1994.

             b.   Final Lax Report

    The final Lax report contained only a brief justification

for the marketability discounts applied to minority interests in

True Oil.   The report said that AA gathered data on discounts

that have been realized on private market sales of restricted or

illiquid ownership interests and also examined the cost of

creating a public market for closely held interests.   However,

the underlying data from those studies was not included in the

report.   The final Lax report concluded that a minority interest

in True Oil was relatively illiquid, because the company was

closely held and its interests were unregistered; therefore,

Mr. Lax applied a 45-percent marketability discount to the

marketable minority value calculated as of June 3, 1994.

             c.   Gustavson Report/Rebuttals and Respondent’s
                  Position

    Respondent did not provide expert testimony regarding

marketability discounts for any True company; instead, the

Gustavson rebuttals criticized only the discounts applied in the

Kimball and final Lax reports.
                                - 208 -

    Respondent characterizes the True Oil interests as being

marketable and therefore proposes a 10-percent discount for

interests being valued as of January 1, 1993, and June 30, 1994,

and no discount (due to swing vote potential) for the interest

being valued as of June 4, 1994.

            d.   Court’s Analysis

    A discount for lack of marketability reflects the absence of

a ready market for interests in closely held businesses.    See

Estate of Andrews v. Commissioner, 79 T.C. at 953.    The benchmark

for marketability of minority interests is the active public

securities market, where a security holder can quickly and easily

sell a minority interest at a relatively low cost.   The minority

owner of a closely held company does not have similar liquidity,

because the pool of potential purchasers is substantially smaller

and securities registration requirements impose substantial

delays and transaction costs.

    To determine appropriate marketability discounts, this Court

has considered fundamental elements of value that investors use

to make investment decisions.    Some of the 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)
                               - 209 -

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), affd. sub nom. Citizens Bank & Trust Co. v. Commissioner,

839 F.2d 1249 (7th Cir. 1988); Mandelbaum v. Commissioner, T.C.

Memo. 1995-255, affd. without published opinion 91 F.3d 124 (3d

Cir. 1996).

    The factors limiting marketability of True Oil general

partnership interests on the valuation dates included:   (1) The

True family’s commitment to keep True Oil privately owned; (2)

the risk that a purchaser would not obtain unanimous consent to

be admitted as a partner; (3) True Oil’s declining revenues due

to increased competition and failure to find new reserves or to

increase production; (4) the subject interests’ lack of control;

(5) a purchasing partner’s exposure to joint and several

liability; and (6) the long holding period required to realize a

return.

    Under Issue 1 of this opinion, we have held that the

restrictive provisions of the buy-sell agreements are to be

disregarded in determining fair market value for estate and gift
                              - 210 -

tax purposes.   See supra pp. 153-155.   We concur with the

reasoning of Lauder III, which found that all aspects of the buy-

sell agreement, and particularly those tending to depress value,

were tainted by the same testamentary objectives that made the

formula price irrelevant for transfer tax purposes.

    The Lauder III shareholders’ agreement was a stand-alone

document separate from the corporation’s governing instruments

(i.e., articles of incorporation, bylaws), much like the

Stockholders’ Restrictive Agreements of the True corporations.

Accordingly, we disregard the Belle Fourche, Black Hills

Trucking, and White Stallion buy-sell agreements entirely in

determining fair market value of the subject interests in those

companies.   By contrast, the True partnerships incorporated buy-

sell restrictions among the governing provisions of the

partnership agreements.   As a result, we disregard only the buy-

sell provisions67 of the True Oil, Eighty-Eight Oil, and True

Ranches partnership agreements in determining fair market value

of the subject interests in those companies.   We consider the

buy-sell agreements only to recognize that their existence

demonstrates the True family’s commitment to maintain family

control over the True companies.


     67
      The buy-sell provisions in the True Oil, Eighty-Eight Oil,
and True Ranches partnership agreements are titled: Par. 17.
“Restriction on Partnership Interest”; Par. 18. “Sales Events”;
Par. 19. “Buy and Sell Agreement”; Par. 20. “Price”; Par. 21.
“Effective Date”, and Par. 25. “Binding on Heirs”.
                              - 211 -

    The Kimball reports determined the so-called hypothetical

fair market value of the subject interests by ignoring the book

value buy-sell price, but otherwise regarding all other

provisions of the buy-sell agreements.     Mr. Kimball factored the

buy-sell agreement terms into his determination of both entity

values and marketability discounts.     This is a major flaw in

methodology that reduces the reliability of the conclusions of

the Kimball reports.

    While we ignore buy-sell restrictions for valuation purposes

if they are deemed to be testamentary devices, we do not ignore

State law transfer restrictions.    In determining the value of an

asset for transfer tax purposes, State law determines what

property is transferred.   See Morgan v. Commissioner, 309 U.S.

78, 80 (1940); Estate of Bright v. United States, 658 F.2d 999,

1001 (5th Cir. 1981); Estate of Nowell v. Commissioner, T.C.

Memo. 1999-15.   Under the Wyoming Uniform Partnership Act (WUPA),

a person may become a partner only with the consent of all

partners.   See Wyo. Stat. Ann. sec. 17-21-401(j) (Michie 1999).68

A partner’s only transferable interest in the partnership is his

or her interest in distributions.   See Wyo. Stat. Ann. sec. 17-

21-502(a) (Michie 1999).   The transfer, in whole or in part, of a

partner’s transferable interest does not entitle the transferee


     68
      All referenced sections of the Wyoming Uniform Partnership
Act (WUPA) were in effect at the time of the subject transfers in
1993 and 1994.
                              - 212 -

to participate in the management or conduct of partnership

business, to require access to information about partnership

transactions, or to inspect or copy the partnership books and

records.   See Wyo. Stat. Ann. sec. 17-21-503(a) (Michie 1999).     A

transferee of a partner’s transferable interest is entitled to

receive current or liquidating distributions to which the

transferor would otherwise be entitled.   The transferor retains

the rights and duties of a partner other than an interest in the

distributions transferred.   See Wyo. Stat. Ann. sec. 17-21-503(b)

and (c) (Michie 1999).

    The denial of management rights to a transferee interest

would make it less marketable than a partnership interest.    See

Adams v. United States, 218 F.3d 383 (5th Cir. 2000).     A

hypothetical purchaser could not count on being admitted into

partnership with the close-knit True family and would factor any

uncertainty regarding his ownership rights and privileges into

his offering price.   See Estate of Newhouse v. Commissioner,

supra at 230-233.   Thus, we agree with the conclusion of the

Kimball reports that this is a value-depressing factor.

    On the other hand, we are troubled by the lack of any clear

connection between the Kimball reports’ general discussion of

restricted stock and pre-IPO studies and the marketability

discounts applied to the True Oil subject interests.    For

instance, there was no showing that the industries represented in
                               - 213 -

the studies had risks and other attributes similar to the oil and

gas industry.    In fact, one of the pre-IPO studies specifically

excluded natural resource companies from the companies being

examined.

       In addition, Mr. Kimball did not explain how his analysis of

True Oil’s historical financial data, see supra pp. 156-158,

affected the marketability discounts.    We believe his analysis,

by choosing comparison years that emphasized downward trends in

True Oil’s financial performance (e.g., extraordinary losses in

Honduras), painted a bleaker picture than is appropriate.       On the

positive side, True Oil replaced and slightly increased its

proved reserves from 1973 to 1994 and did so without incurring

outside debt.    Even allowing for this, we find that True Oil’s

substantial exploration expenditures, declining revenues, and

inability to make significant net distributions to partners would

adversely affect the marketability of an interest in the company.

       We are dissatisfied completely with both Mr. Lax’s and

respondent’s treatment of marketability discounts.    First,

neither provided empirical data for average discounts in the

market or an analysis of marketability factors particular to True

Oil.    Second, the final Lax report applied higher marketability

discounts than the Kimball reports, even though the final Lax

report did not consider any value-depressing aspects of the True

Oil buy-sell agreement.    Third, respondent’s marketability
                              - 214 -

discounts are either unreasonably low (given the factors limiting

marketability discussed above) or nonexistent, due to

respondent’s incorrect assumptions regarding swing vote

potential.

    Based on the record before us, we apply a 30-percent

marketability discount to the minority interests in True Oil

valued as of January 1, 1993, June 4, 1994, and June 30, 1994.

We derive this figure first by acknowledging that the subject

interests in True Oil are less marketable than actively traded

interests, for reasons previously stated.    We then use Mr.

Kimball’s discount as a starting point.   Mr. Kimball did not

explain clearly how he used market data to compute his

marketability discounts.   It appears that he chose a 40-percent

discount to fall within the high range of discounts observed in

the restricted stock studies (26 to 45 percent).    We believe that

the restricted stock studies provide more relevant data than the

pre-IPO studies, because True Oil interests are subject to State

law transfer restrictions and because True Oil is not comparable

to a company on the verge of going public.    Finally, we reduce

the proposed 40-percent discount to 30 percent, because Mr.

Kimball improperly considered the True Oil buy-sell agreement in

developing his marketability discounts.
                                                    - 215 -

         3. Summary of Proposed Values and Court’s Determinations of Values of Interests
            in True Oil

Value as of                  Book value     Statutory      Kimball       Final Lax     Respondent’s     Court’s
January 1, 1993              reportd on   notice value     reports        report         position       values
                               return
Entity Value
  (Controlling Basis)           N/A           N/A            N/A            N/A        $39,650,000        N/A
                                                                                       (3,965,000)
Less: Minority Discount         N/A           N/A            N/A            N/A            10%            N/A
Marketable Minority
  Value                         N/A           N/A         $37,253,000       N/A        35,685,000      $35,685,000
Less: Marketability                                      (14,901,200)                  (3,568,500)    (10,705,500)
  Discount                      N/A           N/A             40%           N/A            10%             30%
Nonmarketable Minority
  Value                         N/A           N/A         22,351,800        N/A        32,116,500     24,979,500
Value of 24.84%
  Interests (total)
  Transferred to True Sons   5,226,006    13,940,210      5,552,187         N/A         7,977,739      6,204,908

Value as of
June 4, 1994

Entity Value
  (Controlling Basis)           N/A           N/A            N/A            N/A        34,200,000         N/A

Less: Minority Discount         N/A           N/A            N/A            N/A            N/A            N/A

Marketable Minority
  Value                         N/A           N/A         34,623,000     24,820,000        N/A        30,780,000
Less: Marketability                                      (13,849,200)   (11,169,000)                  (9,234,000)
  Discount                      N/A           N/A             40%            45%           N/A            30%
Nonmarketable Minority
  Value                         N/A           N/A        20,773,800     13,651,000         N/A        21,546,000
Value of 38.47% Interest
  Owned at Dave True’s
  Death                      5,538,423    20,041,717      7,991,681      5,251,540     13,156,740      8,288,746
                                                   - 216 -
Value as of              Book value    Statutory        Kimball      Final Lax   Respondent’s    Court’s
June 30, 1994            reported on    notice          reports       report       position      values
                           return        value
Entity Value
  (Controlling Basis)       N/A          N/A              N/A          N/A       $34,200,000       N/A
Less: Minority                                                                   (3,420,000)
  Discount                  N/A          N/A              N/A          N/A           10%           N/A
Marketable Minority
  Value                     N/A          N/A          $34,623,000      N/A       30,780,000     $30,780,000

Less: Marketability                                   (13,849,200)               (3,078,000)    (9,234,000)
  Discount                  N/A          N/A               40%         N/A           10%            30%
Nonmarketable Minority
  Value                     N/A          N/A           20,773,800      N/A       27,702,000     21,546,000
Value of 17.23%
  Interests (total)
  Transferred to True
  Sons                   2,528,315     8,976,312       3,579,326       N/A        4,773,055     3,712,376
                                 - 217 -

    B.    Belle Fourche

          1.   Value of Total Equity on a Marketable Basis

               a.   Kimball Report

    Mr. Kimball applied the guideline company method to value

the subject interests in Belle Fourche as of June 4 and June 30,

1994.    He rejected the discounted cash-flow method, reasoning

that the cash-flow projections and discount rate determinations

required would be too difficult to compute and would not reflect

investors’ attitudes toward these types of companies.

    First, Mr. Kimball identified four guideline companies from

the crude petroleum pipeline and refined petroleum pipeline

industries, which are similar but not identical to Belle

Fourche’s line of business.      Mr. Kimball could not identify any

publicly traded companies that were engaged in crude oil

gathering.

    Mr. Kimball then analyzed six market multiples:      EBIT,

EBDIT,    debt-free net income (DFNI), debt-free cash-flow (DFCF),

revenues, and TBVIC.      As with True Oil, he used data from the

latest year and an average of the 5 preceding years to calculate

the multiples.      Mr. Kimball weighted the EBDIT and DFCF multiples

at 30 percent each and the rest at 10 percent each.     Mr. Kimball

explained that he chose low multiples to apply to Belle Fourche’s

financial fundamentals because the guideline companies were

larger and more successful than Belle Fourche.
                              - 218 -

    After subtracting debt owed to shareholders of $17,115,350,

Mr. Kimball concluded that the fair market value of Belle

Fourche’s total equity on a marketable minority basis was

$13,654,361 on both June 4 and June 30, 1994.

    Mr. Kimball calculated total equity on a minority basis even

though he was valuing a 68.47-percent interest as of June 4,

1994, because he found that the Belle Fourche buy-sell agreement

eliminated any premium for control that might otherwise have

attached to a block of stock representing voting control.

    Relying on the opinion of a Wyoming attorney, Mr. Kimball

explained that a hypothetical purchaser (other than a current

stockholder) would not be recognized as a stockholder unless he

or she complied with the buy-sell agreement terms or gained

consent of the other stockholders.   Mr. Kimball stated that a

hypothetical purchaser who was not recognized as a stockholder

would not have the right to vote, the right to distributions, or

any other rights against the company, unless he or she

successfully challenged enforcement of the buy-sell agreement in

court.   For these reasons, Mr. Kimball concluded that a

hypothetical purchaser would not pay a premium for such

questionable control.

             b.   Initial and Final Lax Reports

    The initial Lax report also used the guideline company

method and compared Belle Fourche’s financial results to those of

six pipeline companies (none of which operated gathering lines).
                              - 219 -

Mr. Lax applied EBDIT, EBIT, and pre-tax earnings (EBT) multiples

to Belle Fourche’s financial results for the 12-month period

ending May 31, 1994.   The initial Lax report did not disclose the

selected guideline company multiples, Belle Fourche’s financial

fundamentals, or the weight assigned to each multiple to arrive

at total equity value.

    The initial Lax report concluded that the fair market value

of Belle Fourche’s equity as of June 3, 1994, on a marketable

controlling basis, was $10 million, which included a 25-percent

control premium.   According to the report, the premium was based

on the specific control features of the subject interest (e.g.,

control over the company’s distributions, assets, and management

decisions) and on public market acquisition transactions.

    As described in more detail later, the initial Lax report

applied a 40-percent marketability discount to arrive at a

nonmarketable controlling value for the 68.47-percent interest of

$4,108,200 as of June 3, 1994.

    Similarly, the final Lax report used the guideline company

method and the same public company comparisons as the initial Lax

report.   However, Mr. Lax stated that he did not compute an

entity value for Belle Fourche in the final Lax report.   Instead,

he purported to value the specific 68.47-percent interest without

first deriving the total equity value of Belle Fourche on either

a controlling or a noncontrolling basis.
                              - 220 -

    Mr. Lax explained that even though a 68.47-percent interest

wielded voting control over Belle Fourche, a hypothetical buyer

would not pay a premium for the interest because of the

interrelatedness of the True companies.   According to Mr. Lax,

Belle Fourche is part of a network of interdependent, family-

owned companies engaged in all aspects of the oil and gas

business.   He emphasized that these companies shared management

and administrative resources and relied on each other for

success, so that it would be difficult for Belle Fourche to stand

alone profitably.   He observed that as a pipeline company with no

dedicated reserves, Belle Fourche depended on True Oil, True

Drilling, and especially on Eighty-Eight Oil, as the shipper, to

ensure continued operation of its pipeline.   Mr. Lax concluded

that a hypothetical buyer would not assign additional value to

voting control over Belle Fourche because the buyer could not

obtain similar control over the related True companies.

    The valuation analysis of the final Lax report concluded:

     Using the 12 months ended [May 31, 1994] EBDIT of
     $9,000,000 and multiples of 2, 2.5 and 3.0 less the
     interest bearing debt of $16,000,000; EBIT of
     $4,057,000 and multiples of 4.5, 5.0 and 5.5 less the
     debt of $16,000,000 and EBT of $2,975,000 and multiples
     of 2, 2.5, 3, we concluded an equity value for the
     68.47 percent [interest] of $4,100,000 as of June 3,
     1994.
The information above represents all the financial data that

Mr. Lax provided to support his valuation conclusion.

    As described infra, the final Lax report stated that no

marketability discount would apply to Dave True’s 68.47-percent
                              - 221 -

interest in Belle Fourche, contrary to the findings of the

initial Lax report.

             c.   Gustavson Report and Respondent’s Position

    Mr. Gustavson applied the discounted cash-flow (DCF) method

to value pipeline assets owned by Belle Fourche as of June 4,

1994; he did not value the company as a whole.   Under this

method, Mr. Gustavson multiplied projected future throughput by

estimated net revenue per barrel to develop annual net cash-

flows, which he then discounted to account for the time value of

money.

    The Gustavson report projected discounted cash-flows for 15

years, assuming half a year’s throughput in years 1 and 16.    He

estimated 1994 throughput based on one-half of actual 1993

throughput, or 18 million barrels.   Mr. Gustavson incorporated an

annual decline rate for throughput (7 percent) that mirrored the

forecasted rate of decline in oil production for the State of

Wyoming.   Mr. Gustavson noted that his analysis of local

production data yielded a 2-percent decline rate; however, he

chose the higher statewide rate to be more conservative.    Mr.

Gustavson stated that he examined Belle Fourche’s throughput data

(derived from filings with regulatory agencies) going back 23

years, and that he found the flow to be fairly uniform.
                              - 222 -

    Mr. Gustavson estimated net revenue per barrel by dividing

Belle Fourche’s historical net revenue69 by its historical

throughput.   He averaged the values for years 1990 through 1993

to derive an average net revenue per barrel of .24, and applied

this to projected throughput in year 1.    Mr. Gustavson

established a 4-percent annual decline rate for net revenue per

barrel by consulting a survey conducted by the Society of

Petroleum Evaluation Engineers (SPEE).    This assumed that

increasing operating costs would decrease the profit margin on

each barrel transported by the pipeline.

    In his report, Mr. Gustavson applied a 14-percent discount

rate to the projected net cash-flows.    He computed this rate by

taking 10 percent, the regulated maximum tariff over cost of

service that a pipeline operator was allowed to charge, and

adding 2 percent, for the risk that new competition might

undercut Belle Fourche’s prices, and another 2 percent, to

account for the risk that Belle Fourche’s throughput might drop

below the average decline rate.   Mr. Gustavson cited industry

personnel as confirming that a 10- to 15-percent discount rate

was typically used to analyze cash-flows of a pipeline company.

    Mr. Gustavson stated that he did not conduct site visits or

discuss his DCF projections with Belle Fourche’s management.     He



     69
      Historical net revenue was composed of gross operating
revenue minus operating expenses, rent/lease payments, State and
local property taxes, other taxes, and interest expense.
                              - 223 -

explained that it was not necessary to interview management in

this case for a number of reasons:   Cash-flow was not influenced

entirely by management; he assumed that management policies would

remain unchanged; the pipeline industry was highly regulated on a

Federal and State level; and public information was available

regarding how much oil could be expected to flow through a

pipeline.

    Mr. Gustavson concluded that the fair market value of Belle

Fourche’s pipeline assets under the DCF method was $34.62 million

on June 4, 1994.   Mr. Gustavson also briefly discussed the

comparable sales and cost approaches to verify his conclusions

under the DCF method.70

    According to respondent, Mr. Gustavson’s gross asset value

of $34,600,000 (rounded) minus outstanding long-term debt of

$17,115,350 represented the company’s net asset value.   Thus,

respondent derived a marketable controlling value for Belle

Fourche of $17,484,650 as of June 4 and June 30, 1994.


     70
      Under the comparable sales method, Mr. Gustavson examined
an unrelated purchase of a Canadian crude oil pipeline in July
1993. He used generally the same DCF analysis as he did for
Belle Fourche; however, he assumed that fair market value equaled
the purchase price and solved for net revenue per barrel of oil.
This resulted in a net revenue figure of .26 per barrel, which
closely approximated the .24 per barrel amount used for Belle
Fourche. Under the cost method, Mr. Gustavson reviewed appraisal
information prepared for tax assessment purposes by the Wyoming
Department of Revenue. For 1995, the Department of Revenue
valued Belle Fourche assets at $27,605,035, on a replacement cost
basis. Because this number was reasonably close to the DCF
method’s value, Mr. Gustavson stated that this validated his
conclusions.
                                - 224 -

    Respondent allowed a 10-percent minority discount in

valuing the 17.23-percent interest transferred by Jean True as of

June 30, 1994.     Therefore, respondent asserts that Belle

Fourche’s marketable minority value was $15,736,185 on that date.

              d.   Court’s Analysis

    The positions of the parties and the Court’s determination

regarding the marketable value of Belle Fourche’s total equity at

each of the valuation dates are summarized infra p. 240.

    As with True Oil, we find it inappropriate to use only the

guideline company method to value the subject interests in Belle

Fourche.    We believe that a hypothetical buyer would consider the

company’s underlying asset value in negotiating a purchase price,

especially if purchasing a controlling interest.     We therefore

consider both the guideline company and net asset value methods

to value the Belle Fourche interests at issue in these cases.

First, however, we address the strengths and weaknesses of the

experts’ reports.

    We have serious reservations about Mr. Lax’s approach to

valuing Belle Fourche; thus, for the reasons stated below, we

reject the final Lax report’s valuation conclusions.

    First, the final Lax report’s guideline company analysis

suffers from the same lack of substantiation as its True Oil

analysis.   As the quoted material on page 220, supra, indicates,

Mr. Lax provided no data showing:     (1) How he computed the
                              - 225 -

guideline company multiples or the Belle Fourche financial

fundamentals, (2) which of three multiples he applied to Belle

Fourche’s fundamentals, or (3) how he weighed each resulting

product.   Without more information we cannot evaluate the

reliability of Mr. Lax’s results.

    Second, the final Lax report calculated the equity value of

Dave True’s 68.47-percent interest in Belle Fourche on a fully

marketable noncontrolling basis without first valuing the company

as a whole.   This significantly departed from the initial Lax

report’s guideline company approach, which first valued the

company on a marketable controlling basis, and then applied a 40-

percent marketability discount.   Even though both reports used

the guideline company method, we believe the approaches were

substantially different and find it remarkable that both reports

arrived at the same ultimate value of roughly $4,100,000 for Dave

True’s interest.   This suggests that the final Lax report was

result-oriented.

    Third, while Mr. Lax conceded that Dave True’s 68.47-percent

interest had voting control over Belle Fourche, he averred that a

hypothetical buyer would not pay more for such voting control

because he could not control the related True companies that

Belle Fourche depended on for its business (e.g., True Oil, True

Drilling, and especially Eighty-Eight Oil).   We disagree.
                              - 226 -

    Hank True testified that during the period 1992 through

1994, Belle Fourche’s business primarily consisted of moving oil

for unrelated companies.   Further, Mr. Gustavson observed that

Belle Fourche’s average annual throughput substantially exceeded

the quantities of oil actually produced by the True companies.

Therefore, we are not persuaded that the value of a controlling

interest in Belle Fourche would be diminished by its

interrelatedness with the True companies.

    Turning to the Kimball report, we find various errors in the

computation of Belle Fourche’s financial fundamentals,

specifically EBDIT.   According to respondent, Mr. Kimball

computed EBDIT by taking ordinary income reported on page 1 of

Form 1120S (line 21) and by adding back interest expense (line

13) and depreciation (line 14c).   However, line 14c did not

account for depreciation that was included in the computation of

cost of goods sold, reported on Schedule A.   Respondent argues

that total depreciation reported on line 14a, which included

depreciation reported on Schedule A and elsewhere on the return,

should have been added back to arrive at Belle Fourche’s EBDIT.71


     71
      Arguably, it is possible that Mr. Kimball’s computation of
debt-free cash-flow (DFCF) omitted the same adjustment for
depreciation that was included in cost of goods sold. It also
appears that cost of goods sold for some of the years being
analyzed included amortization expense that should have been
added back to DFCF and earnings before depreciation, interest,
and taxes (EBDIT). We do not adjust for these items, however,
because respondent did not raise them and petitioners did not
have the opportunity to respond to them.
                                                   (continued...)
                                 - 227 -

    The omitted Schedule A depreciation adjustments are listed

by year in the table below.

                                    Schedule A
                     Tax year
                                   depreciation
                       1989         $2,333,216
                       1990         $1,857,056
                       1991         $1,955,040
                       1992         $2,523,597
                       1993         $4,924,213

    On brief, petitioners explain this omission by assuming that

Mr. Kimball added back the smaller depreciation number to reflect

differences in the methods used by Belle Fourche and the public

companies to compute cost of goods sold.     This explanation is

unpersuasive.     First, Schedule A reports cost of goods sold

and/or cost of operations.      Belle Fourche did not sell goods, it

rendered services.     Therefore, the costs reported by Belle

Fourche reflected its cost of operations, which included

depreciation, amortization, operating expenses, vehicle expenses,

operating rents, fuel and power.     We are aware of no accounting

method issues that would prevent Mr. Kimball from adjusting net

income for substantial depreciation deductions in order to arrive

at multiples that served as proxies for cash-flows.     Second, if

such accounting method issues existed, it seems that adjustments



     71
          (...continued)
                               - 228 -

also should have been made to the other multiples that had

incorporated Schedule A depreciation deductions into the

computation of net income.    Third, we find it unlikely that Mr.

Kimball would make adjustments for accounting method differences

for Belle Fourche when he assumed that a hypothetical buyer would

not make such adjustments for True Oil.

    Respondent asserts that adjusting Mr. Kimball’s numbers by

the aforementioned depreciation amounts would result in the

following values (rounded to the nearest $1,000):

                              Kimball     Respondent’s
                               report       revisions
         EBDIT latest 12
         months              $4,957,000    $9,881,000
         EBDIT 5-year
         average             $6,538,000    $8,837,000


We agree with respondent’s revision to EBDIT latest 12 months,

but we find that the 5-year average amount should have been

$9,257,000.   Adjusting for these changes, and using the same

selection of multiples and weighting factors employed by Mr.

Kimball, we find that the Kimball report’s market value of

invested capital (debt and equity) should have been $37,240,000,

rather than $30,770,000.

    Another apparent error in Mr. Kimball’s computations relates

to debt owed by Belle Fourche to its shareholders as of the

valuation dates.   Mr. Kimball subtracted $17,115,350 of interest-
                               - 229 -

bearing shareholder debt in computing market value of equity as

of June 4 and June 30, 1994.   However, Belle Fourche’s

shareholder debt had been paid down in May 1994, and was only

$15,915,350 at the valuation dates.      Therefore, Mr. Kimball

understated market value of equity by $1,200,000.72     Correcting

for the debt, Mr. Kimball’s fair market value of total equity on

a marketable minority basis should have been $21,325,000

(rounded) on both June 4 and June 30, 1994.

    Finally, we disagree with Mr. Kimball that Dave True’s

68.47-percent interest in Belle Fourche, valued as of June 4,

1994, should be treated as a noncontrolling interest.      Mr.

Kimball considered this interest as being equivalent in value to

a minority interest in a public company, because a hypothetical

buyer would expect the buy-sell agreement to impede his or her

free exercise of voting control.   See supra p. 218.     However,

under Lauder III, we disregard the Belle Fourche buy-sell

agreement in determining fair market value of the subject

interests.   As a result, we reject Mr. Kimball’s reasoning for

treating Dave True’s 68.47-percent interest as noncontrolling.



    Having disregarded the buy-sell agreement, we look to

Wyoming law to determine the rights accorded a 68.47-percent



     72
      Respondent made the same error in his computation of Belle
Fourche’s net asset value. Mr. Lax’s $16,000,000 debt
subtraction presumably reflected the correct debt amount rounded
to the nearest $100,000.
                               - 230 -

interest in Belle Fourche.    Unless the articles of incorporation

provide otherwise, the Wyoming Business Corporation Act requires

the following, in relevant part:   (1) Each outstanding share of

stock is entitled to one vote, see Wyo. Stat. Ann. sec. 17-16-

721(a) (Michie 1999)73; (2) all corporate powers are exercised by

the board of directors, see Wyo. Stat. Ann. sec. 17-16-801(b)

(Michie 1999); (3) directors are elected by a plurality of votes

cast by the shares entitled to vote, see Wyo. Stat. Ann. sec. 17-

16-728(a) (Michie 1999); (4) sales of assets other than in the

regular course of business must be approved by a majority of all

votes cast by shares entitled to vote, see Wyo. Stat. Ann. sec.

17-16-1202(e) (Michie 1999); and (5) dissolution of the

corporation must be approved by a majority of all votes cast by

shares entitled to vote, see Wyo. Stat. Ann. sec. 17-16-1402(e)

(Michie 1999).

    Belle Fourche’s articles of incorporation and bylaws were

not introduced in evidence.   We therefore assume that Belle

Fourche’s governing documents do not vary from the Wyoming

corporate law requirements described above.   At his death, Dave

True’s 68.47-percent interest represented a majority of the

shares entitled to vote, which allowed him to control the board

of directors, sell corporate assets, or dissolve the corporation




     73
      All referenced sections of the Wyoming Business
Corporation Act were in effect at the time of the subject
transfers in 1993 and 1994.
                              - 231 -

entirely.   Accordingly, we find that Dave True owned a

controlling interest in Belle Fourche at his death.

    Turning to respondent’s proposed values, we find that the

net asset value method yielded reliable controlling values for

Belle Fourche’s total capital as of June 4 and June 30, 1994.

Mr. Gustavson used the discounted cash-flow method to value Belle

Fourche’s pipeline assets, and verified his results with both the

comparable sales and cost approaches.   Under the DCF method, he

computed net cash-flows based on 23 years of Belle Fourche’s

operating data and on published information from regulatory

authorities and industry surveys.   Even though Belle Fourche’s

actual throughput had increased in the early 1990's, to be

conservative in his estimates, Mr. Gustavson assumed the higher

throughput decline rates projected by the State of Wyoming.

Although cash-flow projections are inherently speculative, we

find Mr. Gustavson’s estimates to be sufficiently supported by

Belle Fourche’s past performance and by industry data.

    Mr. Kimball criticized Mr. Gustavson’s use of a 14-percent

cost of capital to discount projected net cash-flows, claiming

that the rate was unsubstantiated and that it was wrongly based

on the pipeline industry’s regulated profit margin (10-percent

maximum tariff over cost of service).   We disagree with

petitioners and accept Mr. Gustavson’s proposed discount rate for

the following reasons.
                               - 232 -

    Generally, a regulated company may only charge customers

what the regulatory authority deems to be a fair rate of return

on the company’s investment.   Such companies usually are

regulated because they have a captive market and are in a

monopoly position to supply needed services; thus, their cost of

capital should be considerably lower than that of an average

company.   Therefore, allowed rates of return for regulated

companies are viewed as reasonable benchmarks for a minimum

boundary of the overall cost of capital.   See Pratt et al.,

Valuing a Business 179 (3d ed. 1996).

    In addition, we find Mr. Gustavson’s 14-percent discount

rate to be reasonable given that the Scotia reports used a 10-

percent discount rate to value True Oil under the DCF method and

that Mr. Gustavson’s rate is substantially higher than the 6- to

6.75-percent interest rate charged to Belle Fourche by its

shareholders for outstanding debt during the relevant period.

    Finally, we agree, in theory, with petitioners’ observation

that Mr. Gustavson should have consulted with management to

support his throughput, net revenue, and discount rate estimates.

However, in this case, Mr. Gustavson’s oversight does not

significantly undermine his conclusions of value because he was

conservative in his estimates, and he reasonably relied on public

information from a highly regulated industry to derive his

projections.
                                      - 233 -

    Accordingly, we accept Mr. Gustavson’s gross asset value of

$34,600,000 (rounded) and subtract the corrected amount of

shareholder debt of $15,915,350, to arrive at respondent’s

marketable controlling value on a net asset value basis of

$18,684,650 as of June 4 and June 30, 1994.

    A comparison of the parties’ adjusted marketable values for

Belle Fourche follows:

                  Kimball reports’       Respondent’s         Respondent’s
                 guideline company      net asset value      net asset value
                  method (adjusted)    method (adjusted)    method (adjusted)
   Valuation         marketable           marketable       marketable minority
     date          minority value      controlling value          value
 June 4, 1994         $21,325,000         $18,684,650             N/A
 June 30, 1994        $21,325,000               N/A           $16,816,185



    Again, we believe that some combination of both parties’

valuation methods would most accurately measure Belle Fourche’s

marketable value.        However, because respondent’s marketable

values (shown above) are less than Mr. Kimball’s on both

valuation dates, we accept respondent’s values and treat them as

concessions.

        2.       Marketability Discounts

                 a.   Kimball Report

    In the True Oil section of this opinion, see supra p. 204,

we described the Kimball report’s general discussion of empirical

studies on marketability discounts.             This information seems to

have informed Mr. Kimball’s choice of marketability discounts for
                                - 234 -

all the True companies he valued; therefore we do not repeat that

discussion here.

    The Kimball report also addressed aspects of the

Stockholders’ Restrictive Agreements that made the subject shares

in the True companies less liquid than publicly traded shares.

In general, Mr. Kimball found that the corporate buy-sell

agreements had the same negative impact on marketability of

corporate shares as the identical partnership agreement

restrictions had on marketability of partnership interests.

    Mr. Kimball also observed that S corporations in general,

and Belle Fourche, Black Hills Trucking, and White Stallion in

particular, had features that affected the fair market value of

their stock.    The Kimball report explained that limitations on

the number and types of investors in S corporations reduced

marketability by restricting the pool of willing buyers.    On the

other hand, the Kimball report noted that the lack of corporate

level income taxes allowed S corporations to distribute more cash

to shareholders, thus enhancing marketability.

    Based on the foregoing, the Kimball reports concluded that

the subject interests in Belle Fourche were not readily

marketable and applied 40-percent marketability discounts to the

marketable minority values as of June 4 and June 30, 1994.



               b.   Initial and Final Lax Reports
                               - 235 -

    The initial Lax report concluded that a 40-percent

marketability discount was appropriate even for a controlling

interest in a company because of the substantial time and expense

required to sell an interest in the absence of an established

market.   For instance, Mr. Lax noted that the sale of an interest

in Belle Fourche would require preparation of a selling

memorandum and audited financial statements, location of a buyer,

drafting of legal documents, and coordination of financing

arrangements.

    The final Lax report disclaimed the initial Lax report’s

conclusions and did not apply a marketability discount in valuing

Dave True’s 68.47-percent interest in Belle Fourche.   Mr. Lax

explained that there was no empirical evidence suggesting that a

marketability discount would apply to an interest of greater than

50 percent.   In fact, AA’s research showed that in many cases,

buyers placed a premium on control that fully offset the

illiquidity problems identified in the initial Lax report,

thereby resulting in a net premium.

              c.   Respondent’s Position

    Respondent relied on Mr. Lax’s final conclusions to argue

that a marketability discount would not apply to Dave True’s

controlling interest in Belle Fourche valued as of June 4, 1994.

However, respondent allowed a 10-percent marketability discount
                              - 236 -

for Jean True’s minority interest transferred as of June 30,

1994.

             d.   Court’s Analysis

    As stated earlier, under Lauder III we disregard the buy-

sell agreement in determining fair market value of the subject

interests in Belle Fourche.   See supra pp. 209-210.    We consider

the agreement only to recognize that its existence demonstrates

the True family’s commitment to maintain control over Belle

Fourche.   Accordingly, we reject Mr. Kimball’s justifications for

marketability discounts that derive from the buy-sell agreement

restrictions.

    We also find that the restricted shares and pre-IPO studies

referenced by Mr. Kimball are not useful in determining

marketability discounts applicable to controlling interests,

because those studies analyzed marketability of noncontrolling

interests.

    In the past, we have said that controlling shares in a

nonpublic corporation could suffer from a lack of marketability

because of the absence of a ready private placement market and

the costs of floating a public offering.    See Estate of Andrews

v. Commissioner, 79 T.C. at 953.     Therefore, we disagree with the

positions of Mr. Lax and respondent that marketability or

illiquidity discounts are never justified in the case of

controlling interests in private corporations.
                              - 237 -

    In Estate of Jameson v. Commissioner, T.C. Memo. 1999-43, 77

T.C.M. (CCH) 1383, 1397, 1999 T.C.M. (RIA) par. 99,043, at 269-

99, we noted that the terms marketability and illiquidity are

closely related but are not interchangeable.     Liquidity is a

measure of the time required to convert an asset into cash and

may be influenced by marketability.     On the other hand,

marketability is not a temporal measure--it is a measure of the

probability of selling goods at specified terms, based on two

variables:   Demand for the asset and existence of an established

market for buyers and sellers of that asset type.     See id.     Thus,

if the interest being valued had the power to liquidate the

corporation, then demand for the corporation’s assets (rather

than its stock) and existence of a market for such assets are

most relevant to our analysis of marketability.     See id.

    In the cases at hand, Dave True’s 68.47-percent interest

could control liquidation of Belle Fourche; therefore, we must

examine the marketability of Belle Fourche’s pipeline assets.

Petitioners did not address directly the demand for pipeline

assets in the region during the relevant period.     However, based

on Mr. Gustavson’s conservative projections, a buyer could expect

the Belle Fourche pipeline to continue to generate cash-flow for

another 15 years.   Moreover, the stiff competition in the region

suggests that larger pipeline owners might consider buying out

smaller pipeline operations rather than building new lines.       This
                               - 238 -

might explain why Belle Fourche purchased the Thunderbird

pipeline in 1992.    For these reasons, we find that Belle

Fourche’s pipeline assets were marketable.

       Based on the record, we apply a 20-percent marketability

discount in valuing Dave True’s 68.47-percent interest in Belle

Fourche as of June 4, 1994.    This level of marketability discount

on a controlling interest is within the range previously allowed

by this Court.    See, e.g., Estate of Jones v. Commissioner, 116

T.C. 11 (2001) (allowing an 8-percent marketability discount on a

83.08-percent controlling interest); Estate of Maggos v.

Commissioner, T.C. Memo. 2000-129 (allowing a 25-percent

illiquidity discount on a 56.7-percent interest conveying

effective operational control);    Estate of Hendrickson v.

Commissioner, T.C. Memo. 1999-278 (allowing a 30-percent

marketability discount on a 49.97-percent effectively controlling

interest); Estate of Jameson v. Commissioner, supra (allowing a

3-percent marketability discount on a 98-percent controlling

interest).

       To determine the appropriate marketability discount for Jean

True’s 17.23-percent interest in Belle Fourche transferred as of

June 30, 1994, we draw from our earlier discussion of

marketability discounts applicable to minority interests in True

Oil.    In our True Oil analysis, see supra pp. 213-214, we began

with Mr. Kimball’s 40-percent discount, presumably derived from
                               - 239 -

the restricted shares studies, and reduced it to 30 percent to

eliminate the effects on value of the buy-sell agreement

restrictions.

    We find that a minority interest in Belle Fourche, like a

minority interest in True Oil, is less marketable than actively

traded interests because:   (1) The True family is committed to

keeping Belle Fourche privately owned, (2) the subject interest

lacks control, and (3) Federal tax rules limit the pool of

potential investors in S corporations.   However, certain facts

suggest that a minority interest in Belle Fourche would be more

marketable than an equivalent interest in True Oil.   First, Belle

Fourche historically has been profitable, unlike True Oil.

Second, on average Belle Fourche’s distributions substantially

exceeded the shareholders’ tax obligations on their distributive

shares of income, while True Oil’s net distributions were not

significant.    Third, a purchaser of Belle Fourche stock would not

be subject to joint and several liability.

    Based on the foregoing, we conclude that a minority interest

in Belle Fourche is more marketable than the same percentage

interest in True Oil.   Therefore, to remain within the 26 to 45-

percent range of discounts observed in the restricted shares

studies, we assign a 27-percent marketability discount to Jean

True’s 17.23-percent interest in Belle Fourche transferred as of

June 30, 1994.
                                                    - 240 -

         3. Summary of Proposed Values and Court’s Determinations
            of Values of Interests in Belle Fourche

Value as of                 Book value      Statutory     Kimball      Final Lax   Respondent’s    Court’s
June 4, 1994                reported on   notice value    reports       report       position      values
                              return
Entity Value
  (Controlling Basis)          N/A            N/A             N/A        N/A       $17,484,650    $18,684,650
Less: Minority Discount        N/A            N/A             N/A        N/A           N/A            N/A
Marketable Minority Value      N/A            N/A        $13,654,361     N/A           N/A            N/A
Less: Marketability                                      (5,461,744)                              (3,736,930)
  Discount                     N/A            N/A            40%         N/A           N/A            20%
Nonmarketable Minority
  Value                        N/A            N/A        8,192,617       N/A           N/A        14,947,720
Value of 68.47% Interest
  Owned at Dave True’s
  Death                      747,723      19,801,518     5,609,485     4,100,000   11,971,740     10,234,704


Value as of
June 30, 1994

Entity Value
  (Controlling Basis)          N/A            N/A             N/A        N/A       17,484,650     18,684,650
                                                                                   (1,748,465)    (1,868,465)
Less: Minority Discount        N/A            N/A             N/A        N/A           10%            10%
Marketable Minority
  Value                        N/A            N/A        13,654,361      N/A       15,736,185     16,816,185
Less: Marketability                                      (5,461,744)               (1,573,618)    (4,540,370)
  Discount                     N/A            N/A            40%         N/A           10%            27%
Nonmarketable Minority
  Value                        N/A            N/A        8,192,617       N/A       14,162,567     12,275,815
Value of 17.23%
  Interests (total)
  Transferred to True
  Sons                       183,593       4,982,916     1,411,588       N/A       2,440,210      2,115,123
                                  - 241 -



         C.   Eighty-Eight Oil

              1.    Marketable Minority Interest Value

               a.    Kimball Reports

    Mr. Kimball applied the guideline company method to value

the subject interests in Eighty-Eight Oil as of January 1, 1993,

June 4, 1994, and June 30, 1994.         First, Mr. Kimball identified

five guideline companies that devoted some or all of their

business to the marketing of crude oil and gas.         Mr. Kimball then

analyzed four market multiples:         EBIT, EBDIT, Revenues, and

TBVIC.    He used data from the latest year and an average of the 5

preceding years to calculate the multiples.         Mr. Kimball weighted

the EBDIT and TBVIC multiples at 40 percent each and the rest at

10 percent each.

    Mr. Kimball concluded that the fair market value of Eighty-

Eight Oil’s total equity on a marketable minority basis was

$25,174,683 on January, 1, 1993, and $31,069,285 on both June 4

and June 30, 1994.

               b.    Final Lax Report

    The final Lax report also used the guideline company method

and compared Eighty-Eight Oil’s financial results to those of six

companies.     As a group, the chosen guideline companies engaged in

all aspects of the oil and gas business, including acquisition of

properties, exploration and production, and transportation and
                              - 242 -

marketing.   Mr. Lax used the same group of companies to value

True Oil, Eighty-Eight Oil, and Smokey Oil.

    Mr. Lax applied EBDIT, EBIT, EBT, and book value multiples

to Eighty-Eight Oil’s financial results for the 12-month period

ending May 31, 1994.   As with the other True companies, Mr. Lax

did not provide supporting schedules showing how he calculated

the guideline company multiples and Eighty-Eight Oil’s financial

fundamentals.

    The final Lax report concluded that the fair market value of

Eighty-Eight Oil’s total equity on a marketable minority basis

was $40 million on June 3, 1994.

             c.   Respondent’s Position

    Respondent offered no expert testimony or other evidence

regarding Eighty-Eight Oil’s total equity value on the relevant

dates.   Instead, respondent agrees with Mr. Kimball’s marketable

minority value of $25,174,683 as of January 1, 1993, and with Mr.

Lax’s “entity value” of $40 million as of June 3, 1994.

Respondent did not explain why he rejected Mr. Kimball’s June 4,

1994, value or how he justified the large disparity in entity

values between proximate valuation dates.

    Respondent also argues, as he did with True Oil, that Dave

True’s 38.47-percent interest owned at death is not entitled to a

minority discount, because it represented a significant ownership
                               - 243 -

block that had swing vote potential.74

            d.    Court’s Analysis

    The positions of the parties and the Court’s determinations

of the marketable minority values of Eighty-Eight Oil’s total

equity at each of the valuation dates are summarized infra pp.

250-251.

    We accept the agreement of the parties that the marketable

minority value of Eighty-Eight Oil’s total equity was $25,174,683

on January 1, 1993.    However, we have reservations regarding the

reliability of this value, which we explain later.

    We are critical of respondent’s reliance on the final Lax

report to establish marketable minority value as of June 4 and

June 30, 1994.    First, as noted several times in this opinion,

the final Lax report’s guideline company analyses lack adequate

substantiation.    In contrast, the Kimball reports are well

documented, and the amounts reported therein are traceable to the

various companies’ Federal income tax returns.    We are unable to

reconcile Eighty-Eight Oil’s financial fundamentals as reported


     74
      This argument is inconsistent with respondent’s acceptance
of Mr. Lax’s entity value as of June 3, 1994, which was derived
on a marketable minority basis. Respondent explicitly argued, in
connection with Dave True’s controlling interests in Belle
Fourche and Black Hills Trucking, that if those entities were
valued on a minority basis, a control premium of 25 percent
should have been applied to derive entity value. It is unclear
whether respondent is making the same argument regarding Dave
True’s significant, but not controlling, ownership of Eighty-
Eight Oil. We need not resolve this issue, however, because we
reject respondent’s swing vote argument infra p. 244.
                               - 244 -

in the Lax and Kimball reports, even though the reports covered

roughly the same period and allegedly relied on the same tax

return information.    Because of the Lax report’s substantiation

problems, we conclude that the Kimball reports provide more

reliable conclusions of value.    Second, we find that the Kimball

reports used guideline companies that were more comparable to

Eighty-Eight Oil.    Three of the six guideline companies chosen by

Mr. Lax engaged in oil and gas exploration and production and not

in oil and gas marketing activities.     These companies may have

been appropriate comparables for True Oil or Smokey Oil, but not

for Eighty-Eight Oil.    Third, respondent provides no reasoned

justification for choosing Mr. Kimball’s January 1, 1993, value,

but using Mr. Lax’s significantly higher June 3, 1994, value.

       We also reject respondent’s swing vote argument concerning

Dave True’s 38.47-percent interest owned at death, for the

reasons stated in our analysis of True Oil.     See supra pp. 201-

202.

       On the basis of the foregoing, we accept Mr. Kimball’s

marketable minority value for Eighty-Eight Oil of $31,069,285 as

of June 4 and June 30, 1994.

       Although we have accepted Mr. Kimball’s marketable minority

values, based on the agreement of the parties and our problems

with respondent’s reliance on the final Lax report, we note

certain facts that cast doubt on the reliability of Mr. Kimball’s
                              - 245 -

entity values.   First, as of January 1, 1993, Eighty-Eight Oil’s

total equity on a book basis was more than $43.5 million, which

was primarily composed of cash, cash equivalents, and accounts

receivable.   Given the lack of any substantial book to fair

market value disparities for these liquid assets, we question the

accuracy of Mr. Kimball’s total equity value of just over $25

million.   If this difference only related to the fact that Mr.

Kimball derived a minority value, and not a controlling value,

that would suggest an implied minority discount of approximately

43 percent, which would be excessive.

    Second, we are troubled by the differences in the way

petitioners derived the sales price for the interest transferred

by Dave True to his sons on January 1, 1993, compared to Mr.

Kimball’s method for valuing the subject interest.   The Eighty-

Eight Oil buy-sell agreement required the selling partner to sell

all or some of his interest for book value, as reflected by his

capital account, as of the day immediately preceding the sales

event.   As previously stated, the sales price under the buy-sell

agreement amounted to approximately 5.86 percent of total

partners’ capital as of December 31, 1992.   However, Mr. Kimball

valued the subject interests by computing total equity value on a

minority basis, by applying a marketability discount, see infra,

and then by multiplying total discounted equity by 24.84 percent.

Because Eighty-Eight Oil routinely allowed its partners to
                                - 246 -

maintain disproportionate capital accounts, the two approaches

are fundamentally inconsistent.       To the extent that the

partnership agreement defines the interest being transferred, we

doubt that Mr. Kimball has valued the correct interest.        As a

general matter, we are also concerned with the anomalous economic

results75 that have occurred due to the allowance of

disproportionate capital accounts.

    We account for the abovementioned concerns in our

determination of marketability discounts.

          2.   Marketability Discounts

               a.   Kimball Reports

    Mr. Kimball treated the subject interests in Eighty-Eight

Oil as not being readily marketable for the same reasons



     75
      We note again that in 1984, Tamma Hatten had to reduce her
proceeds from the sales of other True companies in order to sell
her interest in “cash cow” Eighty-Eight Oil because of her
negative ending capital account. Also, Dave True’s unusually low
capital balance at the effective date of the 1993 transfers
arguably created an additional gift to his sons, because the True
sons only paid what amounted to 5.86 percent of total partners’
capital ostensibly to purchase the right to an additional 24.84
percent of profits, losses, and partners’ capital. It would
appear that Dave True’s unusual (the day before the sale)
contribution to partners’ capital of more than $6 million was
intended to avoid a sale at a price so low in relation to overall
book value of partners’ capital and the percentage interest in
profits being sold as to be impossible to justify with even a
semblance of a straight face. Petitioners argue on brief that
Dave True “substantially restored” his disproportionate capital
account before the 1993 transfers because Eighty-Eight Oil
required the extra cash to conduct its business. We are
unconvinced by petitioners’ justifications, and we note that Dave
True’s capital account remained disproportionately low even after
the allegedly “substantial” restoration.
                                  - 247 -

described in the True Oil section of this opinion.       See supra pp.

204-206.    Accordingly, Mr. Kimball applied 35-percent

marketability discounts to the marketable minority values as of

January 1, 1993, June 4, 1994, and June 30, 1994.

               b.    Final Lax Report

       The final Lax report concluded that a minority interest in

Eighty-Eight Oil was relatively illiquid, for the same reasons

described in the True Oil section of this opinion.       See supra p.

207.    Therefore, Mr. Lax applied a 45-percent marketability

discount to the marketable minority value calculated as of

June 3, 1994.

               c.    Respondent’s Position

       Respondent characterizes the Eighty-Eight Oil interests as

being marketable and therefore proposes a 10-percent discount for

interests being valued as of January 1, 1993, and June 30, 1994,

and no discount (due to swing vote potential) for the interest

being valued as of June 4, 1994.

               d.    Court’s Analysis

       First, we reject Mr. Kimball’s justifications for

marketability discounts that derive from the buy-sell agreement

restrictions.       Second, we reject Mr. Lax’s and respondent’s

proffered marketability discounts for the same reasons stated in

the True Oil section of this opinion.        See supra p. 213.
                               - 248 -

    We find that a minority interest in Eighty-Eight Oil was not

fully marketable at the valuation dates because:   (1) The True

family was committed to keeping Eighty-Eight Oil privately owned;

(2) there were risks that a purchaser would not obtain unanimous

consent to be admitted as a partner; and (3) a purchasing partner

would be exposed to joint and several liability.

    However, a minority interest in Eighty-Eight Oil would be

more marketable than an equivalent interest in True Oil or in

comparable public companies.   Unlike True Oil, Eighty-Eight Oil

was profitable and consistently made guaranteed payments to its

partners, who considered the company to be a “cash cow”.

Furthermore, during the period being examined, Eighty-Eight Oil

was more liquid than the industry, and the concepts of liquidity

and marketability are closely related.   Finally, a general

partner in Eighty-Eight Oil would exert more control over the

business than a shareholder would in a comparable public company.

Under the WUPA, partnership agreements generally govern relations

among the partners and between the partners and the partnership.

See Wyo. Stat. Ann. sec. 17-21-103(a) (Michie 1999).   Eighty-

Eight Oil’s partnership agreement required the partners to manage

jointly the partnership’s affairs.   Thus under Wyoming law, each

partner had an equal vote in (among other things) appointing

management, setting business policies, making distributions,

buying and selling assets, and amending the partnership
                              - 249 -

agreement.   A minority shareholder could not exercise equivalent

control over a public company because voting power is generally

proportional to a shareholder’s ownership interest.

    On the basis of the foregoing, we conclude that minority

interests in Eighty-Eight Oil are more marketable than either

minority interests in True Oil or restricted shares in a publicly

traded oil and gas marketing company.   In addition, as previously

stated, we doubt the reliability of the entity values derived by

the parties due to the widely disproportionate capital accounts.

See supra pp. 244-246.   These facts suggest that no more than

nominal discounts, if any, would be appropriate for the subject

interests.   We, therefore, adopt and apply respondent’s position

allowing no more than 10-percent marketability discounts from

minority value for the Eighty-Eight Oil interests valued as of

January 1, 1993, June 4, 1994, and June 30, 1994.
                                                    - 250 -



         3. Summary of Proposed Values and Court’s Determinations of Values of Interests
            in Eighty-Eight Oil

Value as of                 Book value      Statutory      Kimball       Final Lax     Respondent’s     Court’s
January 1, 1993             reported on   notice value     reports        report         position       values
                              return
Marketable Minority Value       N/A           N/A        $25,174,683        N/A        $25,174,683    $25,174,683
Less: Marketability                                      (8,811,139)                   (2,517,468)    (2,517,468)
  Discount                     N/A            N/A            35%            N/A            10%            10%
Nonmarketable Minority
  Value                        N/A            N/A         16,363,544        N/A        22,657,215     22,657,215
Value of 24.84% Interests
  (total) Transferred to
  True Sons                 2,556,378     13,248,002      4,064,704         N/A         5,628,052      5,628,052



Value as of
June 4, 1994

Marketable Minority Value      N/A            N/A        31,069,285     40,000,000     40,000,000     31,069,285

Less: Marketability                                      (10,874,250)   (18,000,000)                  (3,106,928)
  Discount                     N/A            N/A             35%            45%           N/A            10%
Nonmarketable Minority
  Value                        N/A            N/A        20,195,035     22,000,000     40,000,000     27,962,357
Value of 38.47% Interest
  Owned at Dave True’s
  Death                     9,546,285     26,505,830      7,769,030      8,463,400     15,388,000     10,757,119
                                                  - 251 -



Value as of                Book      Statutory      Kimball       Final   Respondent’s    Court’s
June 30, 1994              value      notice        reports        Lax      position      values
                         reported      value                     report
                         on return
Marketable Minority
  Value                    N/A          N/A       $31,069,285     N/A     $40,000,000    $31,069,285
Less: Marketability                               (10,874,250)            (4,000,000)    (3,106,928)
  Discount                 N/A          N/A            35%        N/A         10%            10%
Nonmarketable Minority
  Value                    N/A          N/A       20,195,035      N/A     36,000,000     27,962,357
Value of 17.23%
  Interests (total)
  Transferred to True
  Sons                   4,400,744   11,871,469    3,479,605      N/A      6,202,800     4,817,914
                                - 252 -

    D.   Black Hills Trucking

         1.   Value of Total Equity on a Marketable Basis

              a.   Kimball Report

    Mr. Kimball applied a combination of the guideline company

and net asset value methods to value the subject interests in

Black Hills Trucking as of June 4 and June 30, 1994.

    Under the guideline company method, Mr. Kimball identified

10 companies from the trucking industry and analyzed revenue and

TBVIC multiples, weighting each multiple equally.   He used data

from the latest year and an average of the 5 preceding years to

calculate the multiples.    Mr. Kimball selected revenue multiples

that were lower than the lowest guideline company multiples;

however, he selected a TBVIC multiple that approximated the

median value among the guideline companies.   After subtracting

debt to shareholders of $2.8 million, Mr. Kimball concluded that

the fair market value of Black Hills Trucking’s total equity on a

marketable minority basis was $5,953,417, under the guideline

company method.

    Mr. Kimball calculated total equity on a minority basis even

though he was valuing a 58.16-percent interest as of June 4,

1994, because he found, consistent with his analysis of Belle

Fourche, see supra p. 218, that the Black Hills Trucking buy-sell

agreement eliminated any premium for control that might otherwise

have attached to a block of stock representing voting control.
                              - 253 -

    Under the net asset value method, Mr. Kimball estimated the

market value of Black Hills Trucking’s individual assets by

category.   First, he adjusted the company’s book value balance

sheet to eliminate tax basis accumulated depreciation.     Second,

he reduced the cost basis of fixed assets to approximately 70

percent of book value.   Third, Mr. Kimball subtracted liabilities

to arrive at an adjusted NAV of $10,933,730 as of June 4 and June

30, 1994.

    Mr. Kimball applied a 10-percent lack-of-control discount to

adjusted NAV as of June 4 and June 30, 1994, for the same reasons

mentioned above in the guideline company section.     Thus, Mr.

Kimball concluded that the fair market value of Black Hills

Trucking’s total equity on a marketable minority basis was

$9,840,357, under the net asset value method.

             b.   Initial and Final Lax Reports

    The initial Lax report used only the net asset value method

to value the subject interests in Black Hills Trucking, because

the company consistently operated at a loss.      Mr. Lax physically

inspected only a few of the several hundred vehicles, trailers,

and miscellaneous equipment owned by Black Hills Trucking; when

inspection was infeasible, he relied on information provided by

the company’s representatives such as fixed asset records,

vehicle maintenance logs, and depreciation schedules.     In

computing net asset value, Mr. Lax assumed that Black Hills
                              - 254 -

Trucking equipment could be sold in orderly fashion over a long

period of time, rather than in a forced liquidation.

    Mr. Lax used the market approach to value assets in the

power and trailer equipment categories by gathering information

on recent sales of similar property and by determining the most

probable selling price of the subject property.   In the process,

Mr. Lax consulted auction guides, trade magazines, and new and

used equipment dealers.   He made no adjustments to market values

to reflect physical depreciation or functional or economic

obsolescence, assuming that these factors were incorporated into

the market data.

    Mr. Lax used the cost approach to value assets in the

miscellaneous and office equipment category.    He determined the

cost of new replacement assets by contacting original

manufacturers or by applying inflation factors to historical

costs and verifying the results with vendors.   He then made

adjustments to each replacement cost figure to reflect

depreciation and obsolescence.

    After reducing the fair market value of underlying assets by

total liabilities, the initial Lax report concluded that the

controlling marketable value of a 100-percent interest in Black

Hills Trucking was $10,933,730 as of June 3, 1994.

    As described in more detail infra, the initial Lax report

applied a 50-percent marketability discount to arrive at a
                               - 255 -

nonmarketable controlling value for Dave True’s 58.16-percent

interest of $3,179,530.

    The final Lax report calculated the same controlling

marketable equity value on a net asset value basis as the initial

Lax report.   However, Mr. Lax reduced the controlling value by 50

percent to reflect the fact that a 58.16-percent interest in

Black Hills Trucking would not be entitled to a control premium.

    Mr. Lax explained that the 50-percent reduction was not a

marketability discount; instead it reflected Mr. Lax’s impression

that a willing buyer would not pay a price based on a

proportional value of the company’s underlying assets.   He

reasoned that because Black Hills Trucking operated at a loss, a

hypothetical buyer with a controlling interest would liquidate

the company’s assets as soon as possible to stem further losses.

Such a rapid disposition of specialized equipment within a

limited geographic region generally would depress value by 50

percent, according to Mr. Lax.

    Thus, the final Lax report concluded that the fair market

value of a 58.16-percent equity interest in Black Hills Trucking

was $3,179,530 as of June 3, 1994.

              c.   Respondent’s Position

    Respondent offered no expert testimony or other evidence

regarding Black Hills Trucking’s total equity value on the

relevant dates.    Instead, respondent adopted the net asset value

conclusions of the final Lax report and treated $10,933,730 as
                             - 256 -

the controlling equity value of Black Hills Trucking on June 4

and June 30, 1994.

    Respondent argues that Dave True’s 58.16-percent interest

owned at death should be valued as a controlling interest,

contrary to Mr. Kimball’s minority interest treatment under both

the guideline company and net asset value methods.   Respondent

contends that if Mr. Kimball’s minority values are accepted by

the Court, a 25-percent control premium should be added to

reflect Dave True’s control at death.   Respondent derived the

premium amount from the initial Lax report, which applied a 25-

percent control premium to compute the marketable controlling

value of Belle Fourche, see supra p. 219.

    Respondent also argues, as he did with True Oil, see supra

pp. 194-195, that Jean True’s 37.63-percent interest transferred

as of June 30, 1994, was not entitled to a minority discount,

because it represented a significant ownership block that had

swing vote potential.

            d.   Court’s Analysis

    The positions of the parties and the Court’s determinations

of the marketable value of Black Hills Trucking’s total equity at

each of the valuation dates are summarized infra pp. 266-267.

    We accept the final Lax report’s controlling equity value on

a net asset value basis of $10,933,730 as of June 3, 1994.   We

believe that a hypothetical buyer would consider underlying asset

value in negotiating a purchase price, especially if purchasing a
                               - 257 -

controlling interest.   Mr. Lax’s approach to valuing the

different categories of fixed assets was reasonable and well

documented.   Furthermore, Mr. Kimball and respondent agreed with

Mr. Lax’s net asset value conclusions.

    We disagree, however, with the conclusion of the final Lax

report that a 50-percent discount should be applied to arrive at

the fair market value of Dave True’s 58.16-percent interest.    Mr.

Lax provided no empirical evidence to support this reduction.    At

trial, Mr. Lax tried to distinguish this discount from the 50-

percent marketability discount taken in the initial Lax report.

He explained that a reduction was necessary because a

hypothetical buyer would be forced to sell immediately the

company’s assets to avoid additional operating losses.   However,

this statement contradicted Mr. Lax’s earlier testimony, in which

he explained that he had computed Black Hills Trucking’s net

asset value assuming an orderly disposition of assets, not a

forced liquidation.   If we accept that a hypothetical buyer would

compute entity value under the orderly disposition premise, there

is no reason for us to assume that the buyer would value a 58.16-

percent interest in Black Hills Trucking under any other

valuation premise.    Moreover, the initial and final Lax reports

both arrived at the same ultimate value of $3,179,530 for Dave

True’s interest using very different assumptions regarding

marketability.   This suggests that the final Lax report was

result-oriented.
                               - 258 -

    Turning to the Kimball report, we doubt the reliability of

the guideline company method values.     First, we question whether

the relationship between revenues, TBVIC, and market value of the

selected public companies has any bearing on the market value of

Black Hills Trucking.   The guideline companies were all

profitable over the 5-year period, whereas Black Hills Trucking

sustained losses every year.   Also, most of the guideline

companies had significantly higher average revenues over the

analyzed period than Black Hills Trucking.    As a result, Mr.

Kimball applied multiples to Black Hills Trucking’s revenues that

were lower than the lowest industry multiples.    These facts

suggest a lack of comparability between the selected companies

and Black Hills Trucking.

    Second, Mr. Kimball did not adjust the TBVIC multiple to

reflect differences in accounting methods between Black Hills

Trucking and the public companies.   TBVIC is a debt-free measure

of a company’s book value.   Black Hills Trucking’s book value was

computed on a tax basis, which allowed more accelerated

depreciation deductions than GAAP basis financials.    Annually,

the company deducted approximately $2.1 million in depreciation

expense.   There is no evidence in the record indicating that Mr.

Kimball adjusted the TBVIC multiples of either the guideline

companies or Black Hills Trucking to reconcile any discrepancies

in accumulated depreciation.
                                - 259 -

    Third, contrary to the Kimball report’s emphasis on the

TBVIC multiple, we find that it is not a meaningful measure of

value in this case.   In general, book value of tangible assets

would serve as a meaningful measure of value only if book value

was close to market value on the valuation date.    Thus, tangible

asset values first should be adjusted to their respective fair

market values to make price-to-asset-value ratios more relevant.

Moreover, equipment varies from one company to another in age,

condition, and importance to the operations, so that price-to-

asset-value measures are difficult to implement on a comparison

basis and frequently are not helpful.     See Pratt et al., Valuing

a Business 217 (3d ed. 1996).

    Black Hills Trucking owned a variety of heavy specialized

equipment that was purchased anywhere from 1 to 40 years before

the valuation date.   Mr. Kimball calculated the fair market value

of equipment (under the NAV method) to be $11.5 million as of

December 31, 1993, while net book value was $2.5 million.    Such a

large disparity between book value and fair market value suggests

that TBVIC is not an appropriate basis for valuing Black Hills

Trucking.

    Fourth, we disagree with Mr. Kimball that Dave True’s 58.16-

percent interest in Black Hills Trucking, valued as of June 4,

1994, should be treated as a noncontrolling interest.    As we said

in the Belle Fourche section of this opinion, see supra pp. 229-

230, we disregard the buy-sell agreement in computing fair market
                               - 260 -

value and look to Wyoming law to determine the rights accorded a

58.16-percent interest in Black Hills Trucking.

    Wyoming law allows the holder of a majority of the shares

entitled to vote to control the board of directors, sell

corporate assets, or dissolve the corporation.    See discussion of

Wyoming law supra p. 230.    No articles of incorporation or bylaws

were introduced in evidence for Black Hills Trucking.    Therefore,

we assume that the company’s governing documents do not vary from

Wyoming law.    Dave True’s 58.16-percent interest represented a

majority of the shares entitled to vote; therefore, Dave True

owned a controlling interest in Black Hills Trucking at his

death.    Accordingly, Mr. Kimball should have added a control

premium to compute entity value under the guideline company

method.

    For the reasons stated above, we reject Mr. Kimball’s

valuation conclusions under the guideline company method.    We

need not discuss the merits of Mr. Kimball’s net asset value

approach because his controlling interest value equaled that of

Mr. Lax, which we have already adopted.    However, we reject Mr.

Kimball’s 10-percent lack of control discount to adjusted NAV as

of June 4, 1994, because Dave True owned a controlling interest

at death.

    Turning to respondent’s position, we agree that Dave True’s

58.16-percent interest valued at June 4, 1994, is not entitled to

a minority discount.    However, we disagree with respondent’s
                                  - 261 -

swing vote argument regarding Jean True’s 37.63-percent interest

transferred as of June 30, 1994, for the reasons stated in our

analysis of True Oil, see supra pp. 202-203, and we find that a

minority discount is warranted.         We apply Mr. Kimball’s proposed

10-percent lack-of-control discount to Mr. Lax’s net asset value

to arrive at a marketable minority value as of June 30, 1994, of

$9,840,357 for the interest sold by Jean True to her sons.

    A summary of our determinations regarding marketable entity

values for Black Hills Trucking follows:

                            Net asset value     Net asset value
             Valuation     method marketable   method marketable
               date        controlling value    minority value
            June 4, 1994      $10,933,730             N/A
        June 30, 1994             N/A             $9,840,357

        2.     Marketability Discounts

               a.   Kimball Report

    Based on the reasoning described in the Belle Fourche

section of this opinion, see supra pp. 233-234, Mr. Kimball

concluded that the subject interests in Black Hills Trucking were

not readily marketable, and he applied 45-percent marketability

discounts to the marketable minority values as of June 4 and June

30, 1994.

    The table below summarizes the nonmarketable minority values

of the subject interests in Black Hills Trucking calculated using

the guideline company and NAV methods.
                                - 262 -

                         Guideline company       NAV method
                              method           nonmarketable
         Valuation         nonmarketable     minority value of
            date         minority value of    subject interest
                         subject interest
         June 4,            $1,904,000          $3,147,733
        1994
        June 30,            $1,232,149          $2,036,609
        1994


    Mr. Kimball then applied a 30-percent weight to the

guideline company method valuation conclusions and a 70-percent

weight to the NAV method conclusions, resulting in final

nonmarketable minority values (rounded) for the subject interests

of $2,775,000 as of June 4, 1994, and $1,795,000 as of June 30,

1994.

             b.    Initial and Final Lax Reports

    As previously stated, the initial Lax report concluded that

a 50-percent marketability discount was appropriate even for a

controlling interest in a company because of the substantial time

and expense required to sell an interest in the absence of an

established market.

    However, the final Lax report applied no marketability

discounts to Dave True’s 58.16-percent interest in Black Hills

Trucking for the reasons described in the Belle Fourche section

of this opinion.     See supra p. 235.

             c.    Respondent’s Position

    Respondent relied on Mr. Lax’s final conclusions to argue

that a marketability discount would not apply to Dave True’s
                                  - 263 -

controlling interest in Black Hills Trucking valued as of June 4,

1994.    Similarly, respondent denied any marketability discount to

Jean True’s 37.63-percent interest valued as of June 30, 1994,

because the transferred interest had swing vote potential.

               d.    Court’s Analysis

       As stated earlier, under Lauder III, we disregard the buy-

sell agreement in determining fair market value of the subject

interests in Black Hills Trucking.      See supra pp. 209-210.

Accordingly, we reject Mr. Kimball’s justifications for

marketability discounts that derive from the buy-sell agreement

restrictions.

       We find that the restricted shares and pre-IPO studies

referenced by Mr. Kimball are not useful in determining

marketability discounts applicable to controlling interests,

because those studies analyzed marketability of noncontrolling

interests.

       We also disagree with the positions of Mr. Lax and

respondent that marketability or illiquidity discounts are never

justified in the case of controlling interests in private

corporations.       See Estate of Andrews v. Commissioner, 79 T.C. at

953.

       In the cases at hand, Dave True’s 58.16-percent interest

could control liquidation of Black Hills Trucking; therefore, we

must examine the marketability of Black Hills Trucking’s assets.

Mr. Lax valued Black Hills Trucking’s power and trailer equipment
                              - 264 -

by consulting auction guides, trade magazines, and new and used

equipment dealers.   This suggests an active market for these

types of assets.   However, Black Hills Trucking’s fixed assets

had a low tax basis relative to their resale value, which would

trigger a tax liability on sale.   Also, a willing seller would

incur other transaction costs to dispose of the company’s assets

either on a bulk sale or an item-by-item basis.

    Based on the record, we apply a 20-percent marketability

discount in valuing Dave True’s 58.16-percent interest in Black

Hills Trucking as of June 4, 1994.   This level of marketability

discount on a controlling interest is within the range previously

allowed by this Court.   See cases cited supra p. 238.

    To determine the appropriate marketability discount for Jean

True’s 37.63-percent interest in Black Hills Trucking transferred

as of June 30, 1994, we draw from our discussion of discounts

applicable to minority interests in Belle Fourche.   See supra pp.

238-239.

    We find that a minority interest in Black Hills Trucking,

like a minority interest in Belle Fourche, is less marketable

than actively traded interests because:   (1) The True family is

committed to keeping Black Hills Trucking privately owned, (2)

the subject interest lacks control, and (3) Federal tax rules

limit the pool of potential investors in S corporations.

Moreover, certain facts suggest that a minority interest in Black

Hills Trucking would be less marketable than a minority interest
                              - 265 -

in Belle Fourche.   First, Black Hills Trucking was unprofitable,

unlike Belle Fourche.   Second, Black Hills Trucking’s shareholder

distributions were negligible, while Belle Fourche’s were

significant.   In fact, during the period analyzed, shareholders

lent or contributed substantial amounts to Black Hills Trucking.

    Based on the foregoing, we conclude that a minority interest

in Black Hills Trucking was less marketable than a minority

interest in Belle Fourche.   Therefore, we assign a 30-percent

marketability discount to Jean True’s 37.63-percent interest in

Black Hills Trucking transferred as of June 30, 1994.
                                                    - 266 -

            3.   Summary of Proposed Values and Court’s Determinations of Values of Interests
                 in Black Hills Trucking



Value as of              Book value Statutory      Kimball reports            Final Lax    Respondent’s    Court’s
June 4, 1994             reported on notice                                    report        position      values
                           return     value   Guideline co. NAV method
Entity Value
  (Controlling Basis)        N/A         N/A         N/A        $10,933,730 $10,933,730 $10,933,730 $10,933,730
Less: Minority                                                  (1,093,373)
  Discount                   N/A         N/A         N/A            10%         N/A         N/A         N/A
Marketable Minority
  Value                      N/A         N/A      $5,953,417     9,840,357       N/A           N/A            N/A
Less: Marketability                               (2,679,038)   (4,428,161)                               (2,186,746)
  Discount                   N/A         N/A          45%           45%          N/A           N/A            20%
Nonmarketable Minority
  Value                      N/A         N/A      3,274,379      5,412,196       N/A           N/A        8,746,984
Value of 58.16%                                      30%            70%
  Interest Owned at
  Dave True’s Death        951,467    6,359,055            2,774,727          3,179,5301    6,359,057     5,087,246

1
    Mr. Lax applied a 50-percent reduction to controlling marketable equity value to arrive at the value of
    the subject interest. He did not consider the reduction to be a marketability discount.
                                                  - 267 -

Value as of           Book value   Statutory        Kimball reports          Final   Respondent’s    Court’s
June 30, 1994          reported     notice      Guideline    NAV Method       Lax      position      values
                       on return     value        co.                       report
Entity Value
  (Controlling
   Basis)                N/A         N/A           N/A        $10,933,730    N/A     $10,933,730    $10,933,730
Less: Minority                                                (1,093,373)                           (1,093,373)
  Discount               N/A         N/A           N/A            10%        N/A         N/A            10%
Marketable Minority
  Value                  N/A         N/A        $5,953,417     9,840,357     N/A         N/A         9,840,357
Less: Marketability                            (2,679,038)    (4,428,161)                           (2,952,107)
  Discount               N/A         N/A            45%           45%        N/A         N/A            30%
Nonmarketable
  Minority Value         N/A         N/A        3,274,379      5,412,196     N/A         N/A        6,888,250
Value of 37.63%                                    30%            70%
  Interests (total)
  Transferred to
  True Sons            590,511     4,147,164             1,795,271           N/A      4,114,363     2,952,048
                                  - 268 -

    E.    True Ranches

          1.   Marketable Minority Interest Values

               a.   H&H Report

    Hall and Hall Mortgage Corp. (H&H) prepared a detailed

appraisal of land and improvements owned by True Ranches as of

January 1, 1993, and June 3, 1994.76        Mr. Hall and his colleagues

gathered data from local sources, including ranch owners,

government offices, other appraisers, and real estate agents.

They also personally inspected the True Ranches properties and

examined comparable sales.       Mr. Hall concluded that the highest

and best use of True Ranches’ property was its current use as an

integrated commercial livestock range and finishing operation.

    Mr. Hall found the cost approach to be the most reliable

measure of fair market value for True Ranches’ land and

improvements; however, he also used the income and sales

comparison approaches to corroborate his cost approach values.

Mr. Hall explained that the term “cost approach” was misleading,

because even though the method valued improvements based on

estimated replacement cost, it valued land based on comparable

sales.



     76
      H&H conducted a full appraisal of the subject property as
of June 3, 1994. The H&H report stated that fair market value
did not change between June 3 and June 4, 1994. Mr. Hall
adjusted the June 3, 1994, value to reflect fair market value as
of Jan. 1, 1993, rather than conducting another full appraisal.
These adjustments took into account property acquisitions and
inflation in land values between the two valuation dates.
                              - 269 -

    After computing the total value of land and improvements

under the cost approach, Mr. Hall then reduced this value by a

20-percent size adjustment.   Relying on market data, Mr. Hall

concluded that large or noncontiguous parcels of land generally

sold for lower prices per acre.   The majority of the available

data used in the cost approach related to sales of relatively

small parcels of land (generally less than 20,000 deeded acres).

However, True Ranches’ land holdings consisted of large, mostly

noncontiguous parcels (approximately 265,000 total deeded acres).

Thus, Mr. Hall applied the 20-percent size adjustment to

eliminate this disparity.

    To check the reasonableness of the size adjustment, Mr. Hall

compared the computed per acre value (after size adjustment) of

True Ranches’ largest parcel (Plains Rangeland--183,990 deeded

acres) to the three largest actual sales for which data was

available (each comprising over 30,000 deeded acres) and

concluded that the per acre values were within a reasonable range

of each other.   To further support his discount, Mr. Hall cited a

publication prepared by the University of Wyoming, which stated

that in the mid-1990's, ranches of 600 animal units sold for 16

percent less than ranches with 300 to 400 animal units.    True

Ranches’ estimated capacity was 12,500 animal units.   Finally,

Mr. Hall testified that the 20-percent size adjustment did not

represent a discount for lack of marketability of the land and

improvements.
                              - 270 -

             b.   Kimball Reports

    Mr. Kimball used the net asset value method to compute

controlling equity value of True Ranches.     The company’s major

assets included land and improvements, machinery and equipment,

and feed and livestock inventories.     Mr. Kimball relied on the

following appraisals to derive the company’s net asset value:

(1) Land and improvements appraisal prepared by H&H as of

January 1, 1993, and June 3, 1994, (2) machinery and equipment

appraisal prepared by Don Helberg as of June 1994, and (3) feed

and livestock inventories appraisal prepared by the

superintendent of True Ranches as of January 1, 1993, and June 4,

1994.   With this information, Mr. Kimball adjusted True Ranches’

book value balance sheet to reflect the fair market value of

assets and liabilities and calculated an adjusted net asset value

of $41,003,000 as of January 1, 1993, and $45,297,509 as of

June 4 and June 30, 1994.

    Mr. Kimball then applied a 25-percent minority discount,

reflecting the subject interests’ lack of control, to arrive at a

marketable minority value of $30,752,250 as of January 1, 1993,

and $33,973,132 as of June 4 and June 30, 1994.

             c.   Final Lax Report

    The final Lax report also used the net asset value method to

value True Ranches’ total equity, generally relying on the same

asset appraisals used in preparing the Kimball reports.     However,

Mr. Lax adjusted True Ranches’ balance sheet information as of
                               - 271 -

April 30, 1994, whereas Mr. Kimball adjusted the June 4, 1994,

balance sheet.    As a result, the final Lax report arrived at a

net asset value as of June 3, 1994, of $44,643,191, which was

slightly lower than the amount computed by Mr. Kimball.

    Next, Mr. Lax applied a combined minority and marketability

discount from net asset value of 60 percent.    He derived the

combined discount by examining three published studies containing

economic and market price information on publicly registered real

estate partnerships that traded in secondary markets.      According

to the final Lax report, the studies showed that partnerships

owning income producing properties but not making regular cash

distributions sold at average combined discounts of 43 percent in

1992, 51 percent in 1993, and 76 percent in 1994.

    Mr. Lax noted that the combined discounts reported in the

studies reflected the lack of control of limited partners over

partnership distributions and liquidation.    He explained that the

same lack of control applied to limited partners in private

partnerships.    In addition, Mr. Lax found that private

partnerships were less marketable than the study partnerships,

because private partnerships did not trade on an informal

secondary market.    He also observed that private partnerships

often placed burdensome transfer restrictions on ownership

interests.

    On the basis of the foregoing, Mr. Lax concluded that

general partnership interests in True Ranches were similar to the
                               - 272 -

limited partnership interests reported in the studies.     However,

he found that True Ranches interests were less liquid than the

reported partnerships because True Ranches had not made recent

distributions as of the valuation date and the interests were not

publicly traded.    Thus, Mr. Lax chose a 60-percent combined

discount to reflect the increasing trend of average discounts

reported in the studies.

             d.    Respondent’s Position

    Respondent offered no expert testimony or other evidence

regarding True Ranches’ total equity value as of the relevant

dates.   Instead, respondent has adopted Mr. Kimball’s adjusted

net asset values of $41,003,000 as of January 1, 1993, and

$45,297,509 as of June 4 and June 30, 1994.

    Respondent argues that interests in True Ranches transferred

individually by Dave and Jean True to their sons as of January 1,

1993, and June 30, 1994, respectively, were entitled to minority

discounts of no more than 10 percent.      Additionally, respondent

argues that the 38.47-percent interest owned by Dave True at

death is not entitled to a minority discount, because it

represented a significant ownership block that had swing vote

potential.

    Based on the foregoing, respondent proposes marketable

minority values for the True Ranches interests transferred as of

January 1, 1993, and June 30, 1994, of $36,902,700 and

$40,767,758, respectively.    Respondent argues that the marketable
                               - 273 -

controlling value for the interest valued as of Dave True’s death

was $45,297,509.

              e.   Court’s Analysis

    The positions of the parties and the Court’s determinations

of the marketable minority values of True Ranches’ total equity

at each of the valuation dates are summarized infra pp. 278-279.

    We accept the agreement of the parties that controlling

equity value on a net asset value basis was $41,003,000 as of

January 1, 1993, and $45,297,509 as of June 4 and June 30, 1994.

    However, we reject the parties’ proposed minority discounts.

Mr. Kimball derived a 25-percent minority discount from studies

of premiums offered during tenders for control of publicly traded

companies.    He found that the observed average control premiums

of 30 to 40 percent translated into minority discounts of 23 to

29 percent.   We find this analysis to be unhelpful because a

general partner in True Ranches would exert more control over the

business than a shareholder in a comparable public company.     The

True Ranches partnership agreement required the partners to

manage jointly the partnership’s affairs.   Thus, each partner had

an equal vote in (among other things) appointing management,

setting business policies, making distributions, buying and

selling assets, and amending the partnership agreement.   A

minority shareholder could not exercise equivalent control over a

public company.
                                 - 274 -

    Similarly, we reject Mr. Lax’s combined 60-percent minority

and marketability discount, because the studies that he relied on

dealt with transactions in limited partnership interests, not

general partnership interests.

    We find respondent’s proposed 10-percent minority discounts

for interests transferred by Dave and Jean True to be

unsubstantiated and insufficient.      Even though a general partner

in True Ranches may exert more control than a shareholder in a

public company or a limited partner in a publicly registered

partnership, he would not have unilateral control over business

decisions.      Further, we reject respondent’s swing vote argument

regarding Dave True’s 38.47-percent interest owned at death, for

the reasons stated in our analysis of True Oil.     See supra pp.

202-203.

    Based on the record, we apply a 15-percent minority discount

to the controlling equity values computed by Mr. Kimball to

arrive at a marketable minority value for True Ranches of

$34,852,550 as of January 1, 1993, and $38,502,883 as of June 4,

and June 30, 1994.

           2.   Marketability Discounts

                a.   Kimball Reports

    Mr. Kimball treated the subject interests in True Ranches as

not being readily marketable for the same reasons described in

the True Oil section of this opinion.      See supra pp. 204-206.

Accordingly, Mr. Kimball applied 35-percent marketability
                              - 275 -

discounts to the marketable minority values as of January 1,

1993, June 4, 1994, and June 30, 1994.

            b.   Final Lax Report

    As previously described, see supra p. 271, Mr. Lax applied a

combined minority and marketability discount from net asset value

of 60 percent.   Thus, Mr. Lax’s nonmarketable minority value as

of June 3, 1994, was $6,869,694.77

            c.   Respondent’s Position

    Respondent argues that the size adjustment applied by Mr.

Hall to value True Ranches’ land and improvements reflected the

difficulties associated with marketing such a large ranch.

Respondent contends that the marketability discounts applied my

Messrs. Kimball and Lax incorporated similar considerations.

Therefore, respondent concludes that the marketability discounts

in the Kimball and Lax reports are redundant and allows no

marketability discounts in valuing the subject interests in True

Ranches.

            d.   Court’s Analysis

    We reject Mr. Kimball’s justifications for marketability

discounts that derive from the buy-sell agreement restrictions.

    We also reject respondent’s argument that any marketability

discount used to determine the fair market value of an interest



     77
      Due to a computational error, the final Lax report
incorrectly computed the nonmarketable minority value to be
$7,084,370.
                              - 276 -

in True Ranches would replicate the size adjustment employed to

determine the underlying value of True Ranches’ net assets.

First, Mr. Hall’s size adjustment under the cost approach was

required to account for substantial differences in size between

the comparable sales and the True Ranches properties being

analyzed.   Second, marketability discounts measure the

probability of selling goods at specified terms based on the

demand for those goods and the existence of an established

market.   See Estate of Jameson v. Commissioner, T.C. Memo. 1999-

43, 77 T.C.M. (CCH) 1383, 1397, 1999 T.C.M. (RIA) par. 99,043, at

269-99.   Because the subject interests do not have the ability to

liquidate, we focus on the marketability of general partnership

interests in True Ranches.   The fact that the underlying asset

values incorporate a size adjustment has no bearing on whether

there is demand for or an active market in True Ranches

partnership interests.

    We find that a minority interest in True Ranches was not

fully marketable at the valuation dates because: (1) The True

family was committed to keeping True Ranches privately owned;

(2) there were risks that a purchaser would not obtain unanimous

consent to be admitted as a partner; and (3) a purchasing partner

would be exposed to joint and several liability.

    A minority interest in True Ranches suffered from the same

marketability problems as an equivalent interest in True Oil.

Both companies incurred losses in the years being examined, and
                             - 277 -

neither company made substantial distributions to partners.

Accordingly, we apply the same 30-percent marketability discount

to True Ranches that we applied to True Oil.   See supra pp. 213-

214.
                                                     - 278 -

            3.   Summary of Proposed Values and Court’s Determinations of Values of Interests
                 in True Ranches

Value as of             Book value      Statutory      Kimball       Final Lax     Respondent’s Court’s values
January 1, 1993         reported on   notice value     reports        report         position
                          return
Entity Value
  (Controlling Basis)       N/A            N/A        $41,003,000       N/A        $41,003,000   $41,003,000
Less: Minority                                       (10,250,750)                  (4,100,300)   (6,150,450)
  Discount                  N/A            N/A            25%           N/A            10%           15%
Marketable Minority
  Value                     N/A            N/A        30,752,250        N/A        36,902,700     34,852,550
Less: Marketability                                  (10,763,288)                                (10,455,765)
  Discount                  N/A            N/A            35%           N/A            N/A            30%
Nonmarketable
  Minority Value            N/A            N/A        19,988,962        N/A            N/A        24,396,785
Value of 24.84%
  Interests
  Transferred to True
  Sons                   3,265,647     12,193,990      4,965,258        N/A         9,166,631     6,060,161

Value as of
June 4, 1994

Entity Value
  (Controlling Basis)       N/A            N/A        45,297,509     44,643,191    45,297,509    45,297,509
Less: Minority                                       (11,324,377)   (26,785,915)                 (6,794,626)
  Discount                  N/A            N/A            25%           60%1           N/A           15%
Marketable Minority
  Value                     N/A            N/A        33,973,132        N/A            N/A        38,502,883
Less: Marketability                                  (11,890,596)                                (11,550,865)
  Discount                  N/A            N/A            35%           N/A            N/A            30%
Nonmarketable
  Minority Value            N/A            N/A        22,082,536    17,857,276         N/A        26,952,018
Value of 38.47%
  Interest Owned at
  Dave True’s Death      5,777,943     20,283,447      8,495,152     6,869,694     17,425,952     10,368,441
1
    Combined minority and marketability discount
                                                  - 279 -


Value as of           Book value     Statutory      Kimball      Final Lax   Respondent’s     Court’s
June 30, 1994          reported    notice value     reports       report       position       values
                       on return
Entity Value
  (Controlling
   Basis)                N/A           N/A         $45,297,509     N/A       $45,297,509    $45,297,509
Less: Minority                                    (11,324,377)               (4,529,751)    (6,794,626)
  Discount               N/A           N/A             25%         N/A           10%            15%
Marketable
  Minority Value         N/A           N/A         33,973,132      N/A       40,767,758      38,502,883
Less: Marketability                               (11,890,596)                              (11,550,865)
  Discount               N/A           N/A             35%         N/A           N/A             30%
Nonmarketable
  Minority Value         N/A           N/A         22,082,536      N/A       40,767,758     26,952,018
Value of 17.23%
  Interests (total)
  Transferred to
  True Sons           2,712,212     9,084,581       3,804,821      N/A        7,024,285      4,643,833
                                - 280 -

    F.    White Stallion

          1.   Marketable Minority Interest Values

               a.   Kimball Report

    Mr. Kimball used the net asset value method to compute

controlling equity value of White Stallion.     He relied on an

appraisal of land and improvements performed by Jeffery C. Patch

as of June 9, 1991, to derive the company’s underlying asset

value.    With this information, Mr. Kimball adjusted White

Stallion’s June 4, 1994, balance sheet to reflect the fair market

value of assets and liabilities and calculated adjusted net asset

value of $1,138,698.78

    Mr. Kimball then applied a 20-percent minority discount to

reflect the subject interest’s lack of control.      Mr. Kimball

concluded that the marketable minority value of White Stallion as

of June 4, 1994, was $910,958.

               b.   Initial and Final Lax Reports

    The initial and final Lax reports also used the net asset

value method to value White Stallion’s total equity, relying on

the same asset appraisal used in the Kimball report.      Mr. Lax

adjusted White Stallion’s balance sheet as of April 30, 1994, to

arrive at net asset value of $1,139,080 as of June 3, 1994.




     78
      Mr. Kimball’s calculations contained a mathematical error.
Adjusted net asset value should have been $1,139,000.
                               - 281 -

    In the initial Lax report, Mr. Lax applied a 25-percent

minority discount to net asset value, along with a 45-percent

marketability discount.

    In the final Lax report, however, Mr. Lax applied a combined

minority and marketability discount from net asset value of 60

percent.   He explained that the combined discount was derived

from the studies described in the True Ranches section of this

opinion.   See supra p. 271.   Mr. Lax considered the subject

interests to be less marketable than the interests in the studies

because White Stallion had no history of paying dividends and

there was no active market for investments of this type.

              c.   Respondent’s Position

    Respondent offered no expert testimony or other evidence

regarding White Stallion’s total equity value as of June 4, 1994.

Instead, respondent adopts Mr. Lax’s net asset value of

$1,139,080.

    Respondent argues that the 34.235-percent interest owned by

Dave True at death is not entitled to a minority discount,

because it represented a significant ownership block that had

swing vote potential.

              d.   Court’s Analysis

    The positions of the parties and the Court’s determinations

of the marketable minority values of White Stallion’s total

equity are summarized infra p. 287.
                              - 282 -

    We accept the agreement of the parties that controlling

equity value on a net asset basis was $1,139,080 as of June 3,

1994.   However, we reject respondent’s swing vote argument, for

the reasons stated in our analysis of True Oil.    See supra pp.

202-203.

    We find the final Lax report’s combined discount of 60

percent to be excessive and unsubstantiated.    Mr. Lax solely

relied on sales of registered real estate limited partnership

interests as benchmarks for the discount he applied to White

Stallion.   However, we do not believe that registered real estate

limited partnerships are comparable to White Stallion, an

operating dude ranch organized as an S corporation.    Further, we

cannot evaluate the reasonableness of the final Lax report’s

minority discount relative to Mr. Kimball’s, because of Mr. Lax’s

combined discount approach.   We are not convinced that using a

combined discount is appropriate, inasmuch as marketability and

minority discounts are conceptually distinct.    See Estate of

Newhouse v. Commissioner, 94 T.C. at 249.

    The final Lax report did not discuss the requirements for

control under Arizona law or White Stallion’s governing documents

before concluding that Dave True’s interest lacked control.      In

addition, Mr. Lax did not provide a theoretical basis for his

change in approach to calculating discounts (going from separate

to combined discounts) between the initial and final Lax reports.

This makes Mr. Lax’s conclusions seem arbitrary.
                              - 283 -

    Similarly, Mr. Kimball generally based his 20-percent

minority discount on data from studies of premiums offered during

tenders for control of publicly traded companies.   He also did

not consider the specific control attributes of White Stallion

stock to arrive at the minority discount.

    Unless the articles of incorporation provide otherwise,

Arizona corporate law requires the following, in relevant part:

(1) Each outstanding share of stock is entitled to one vote, see

Ariz. Rev. Stat. Ann. sec. 10-721(A) (West 1996);79 all corporate

powers are exercised by the board of directors, see Ariz. Rev.

Stat. Ann. sec. 10-801(B) (West 1996); (3) directors are elected

by a plurality of votes cast by shares entitled to vote, see

Ariz. Rev. Stat. Ann. sec. 10-728(A) (West 1996); (4) sales of

assets other than in the regular course of business must be

approved by a majority of all votes cast by shares entitled to

vote, see Ariz. Rev. Stat. Ann. sec. 10-1202(E) (West 1996); (5)

dissolution of the corporation must be approved by a majority of

all votes cast by shares entitled to vote, see Ariz. Rev. Stat.

Ann. sec. 10-1402(E) (West 1996).

    White Stallion’s articles of incorporation and bylaws were

not introduced in evidence.   Therefore, we assume that White

Stallion’s governing documents do not vary from Arizona corporate



     79
      Title 10, Corporations and Associations, was reorganized
by 1994 Ariz. Sess. Laws ch. 223 (effective Jan. 1, 1996). The
sections cited in our discussion were not substantively changed
but were renumbered by the new law.
                                   - 284 -

law.    At his death, Dave True’s 34.235-percent interest did not

represent a majority of the shares entitled to vote.        Thus it did

not give him the power to sell corporate assets or to dissolve

the corporation entirely.        However, it could have given him a

plurality in electing board members, which would have allowed him

to influence distribution policies.

       On this record, we find that a 15-percent minority discount

is appropriate for Dave True’s interest in White Stallion.

             2.   Marketability Discounts

                  a.   Kimball Report

       Mr. Kimball treated the subject interest in White Stallion

as not being readily marketable for the same reasons described in

the Belle Fourche section of this opinion.        See supra pp. 233-

234.    Accordingly, Mr. Kimball applied a 35-percent marketability

discount to arrive at nonmarketable minority value of $592,123 as

of June 4, 1994.

                  b.   Initial and Final Lax Reports

       As previously described, see supra pp. 280-281, the initial

Lax report showed a 45-percent marketability discount, whereas

the final Lax report indicated a combined minority and

marketability discount of 60 percent.        Thus, nonmarketable

minority values derived by the initial and final Lax reports as

of June 3, 1994, were $160,860 and $155,986, respectively.80


       80
            The final Lax report incorrectly computed the
                                                         (continued...)
                              - 285 -

            c.   Respondent’s Position

    Respondent argues that no marketability discount is

appropriate for Dave True’s 34.235-percent interest in White

Stallion because it represented a significant ownership block

that had swing vote potential.

            d.   Court’s Analysis

    We reject Mr. Kimball’s justifications for marketability

discounts that derive from the buy-sell agreement restrictions.

    We also reject respondent’s swing vote argument for the

reasons stated in our analysis of True Oil, see supra pp. 202-

203, and Mr. Lax’s combined discount approach for reasons stated

supra p. 282.

    We find that a minority interest in White Stallion, like a

minority interest in Belle Fourche, was less marketable than

actively traded interests because:   (1) The two branches of the

True family are committed to keeping White Stallion privately

owned; (2) the subject interest lacks control; and (3) Federal

tax rules limit the pool of potential investors in S corporation.

Moreover, certain facts suggest that a minority interest in White

Stallion would be less marketable than a minority interest in

Belle Fourche.   Although White Stallion was modestly profitable,

it was not a “cash cow” like Belle Fourche.   Also, White Stallion


     80
      (...continued)
nonmarketable minority value to be $160,860 due to a math error
that arose from Mr. Lax’s change in discount approaches between
the initial and final Lax reports.
                              - 286 -

made no distributions to shareholders during the analyzed period.

Instead, shareholders lent or contributed funds to the company.

    On the basis of the foregoing, we conclude that a minority

interest in White Stallion is less marketable than a minority

interest in Belle Fourche.   Therefore, we assign a 30-percent

marketability discount to Dave True’s 34.235-percent interest in

White Stallion, valued as of June 4, 1994.
                                                    - 287 -



            3.   Summary of Proposed Values and Court’s Determinations of Values of Interests
                 in White Stallion



Value as of               Book value      Statutory     Kimball     Final Lax    Respondent’s Court’s values
June 4, 1994              reported on   notice value    reports      report        position
                            return
Entity Value
  (Controlling Basis)         N/A           N/A        $1,138,698   $1,139,080   $1,139,080     $1,139,080
Less: Minority                                          (227,740)    (683,448)                   (170,862)
  Discount                    N/A           N/A            20%          60%1         N/A            15%
Marketable Minority
  Value                       N/A           N/A         910,958        N/A           N/A         968,218
Less: Marketability                                    (318,835)                                (290,465)
  Discount                    N/A           N/A           35%          N/A           N/A           30%
Nonmarketable Minority
  Value                       N/A           N/A         592,123      455,632         N/A         677,753
Value of 34.235%
  Interest Owned at
  Dave True’s Death         153,434       389,964       202,713      155,986       389,964       232,029

1
    Combined minority and marketability discount
                              - 288 -

Issue 3. Did Jean True Make Gift Loans When She Transferred
Interests in True Companies to Sons in Exchange for Interest-Free
Payments Received Approximately 90 Days After Effective Date of
Transfers?

    On June 30, 1994, and July 1, 1994 (hereinafter sometimes

referred to as the notice dates), Jean True gave notice to her

sons that she wanted to sell her interests in 22 True companies.

The buy-sell agreements governing transfers of interests in the

companies provided that, upon giving this notice, Jean True

became required to sell, and the sons became required to buy, her

interests.

    The buy-sell agreements also provided that the “effective

date[s]” of the resulting sales were the notice dates.   From and

after June 30, 1994, the True companies treated the income and

expenses associated with the interests sold as belonging to the

sons, not to Jean True.   Moreover, the sales prices for Jean

True’s interests were not adjusted for any income or loss of,

distributions made by, or changes in the value of the True

companies, after June 30, 1994.

    Notwithstanding the foregoing, the buy-sell agreements gave

the sons 6 months from the notice dates to “consummate” the

sales.   Jean True did not receive payment for her interests until

September 30, 1994, 3 months after the notice dates.   The total

amount she received, $13,298,978, did not include any interest to

compensate her for this 3-month delay.
                                - 289 -

    Respondent determined in the gift tax statutory notice to

Jean True that this deferred payment arrangement was a “below-

market gift loan” subject to section 7872, which gave rise to a

taxable gift from Jean True to her sons, in the amount of

$192,307.     Petitioners dispute this determination.

                            FINDINGS OF FACT

    In 1994, Jean True sold her interests in 22 True companies

to her sons.81     Five of the companies were partnerships, one was

a limited liability company (LLC), and 16 were corporations.         All

the corporations were S corporations, except for Midland

Financial Corp., which was a C corporation.

    Substantially identical buy-sell agreements governed

transfers of interests in these companies.     The buy-sell

agreements were contained in partnership agreements (partnership

buy-sell agreements) and in stockholders’ restrictive agreements

(corporate buy-sell agreements).

    The buy-sell agreements were triggered when Jean True gave

her sons notice of her intention to sell her interests.       Jean

True gave notice of her intention to sell her stock in the 16

corporations on June 30, 1994.     She gave notice of her intention

to sell her interests in the five partnerships and the LLC on

July 1, 1994.




     81
          See Appendix schedule 3 for a list of these companies.
                               - 290 -

    Once triggered by Jean True’s notice, the buy-sell

agreements required Jean True to sell, and her sons to purchase,

her interests.    Each of the buy-sell agreements provided that the

“effective date” of the resulting sale was the applicable notice

date.

    Although the buy-sell agreements defined the effective dates

of Jean True’s sales as the notice dates, other provisions of the

buy-sell agreements required only that the “sale and purchase” of

stock or partnership interests “be consummated” within 6 months

after those dates.   In fact, Jean True did not receive payment

for her stock and partnership interests until September 30, 1994

(payment date).

    The record does not establish exactly what happened on or

around the payment date, other than the receipt of payment by

Jean True.   It appears that the reissuance of stock certificates

to the sons was authorized by the corporations’ boards of

directors on September 29, 1994.   However, the minutes of the

board meetings authorizing this action refer to “the transfer of

the shares formerly owned” by Jean True, and state that

“appropriate action should be taken * * * to accept and

acknowledge the transfer of ownership that occurred effective

June 30, 1994".   The accompanying board resolutions similarly

discuss the “sale and transfer effective June 30, 1994" of “the

shares previously held” by Jean True.
                              - 291 -

    Each of the buy-sell agreements also contained a provision

entitled “Further Assurances”.   The further assurances provision

of the partnership buy-sell agreements stated:

    Before any retiring Partner, former Partner, or other
    person selling his interest shall be entitled to receive
    any money in payment of or on account of his partnership
    interest * * * he shall deliver or cause to be delivered
    to the remaining Partners such instruments as the
    remaining Partners may reasonably request in order to
    establish a record that the retiring Partner or a former
    Partner’s interest in the partnership has passed to and
    become vested in the remaining Partners.

The further assurances provision of the corporate buy-sell

agreements stated that each of the stockholders and the relevant

corporation agrees “to make, execute and deliver to the other

parties all assignments, transfers or other documents necessary

to carry out and accomplish the terms” of the corporate buy-sell

agreements.   However, the corporate buy-sell agreements did not

state that the seller was not entitled to receive payment until

she supplied whatever documents were required.

    The buy-sell agreements required Jean True’s sales to be

made at formula prices based on book value.   The price provision

of the partnership buy-sell agreements provided that “The price

of any partnership interest or portion thereof shall be the book

value of the Selling Partner’s capital account as of the close of

business of the day immediately preceding the sales event.”    Jean

True’s giving notice of her intention to sell was the sales

event.   The partnership buy-sell agreements therefore provided

that the price for Jean True’s sale of a partnership interest was
                              - 292 -

equal to the book value of her capital account in that

partnership as of the close of business on June 30, 1994, the day

before the day she gave notice of her intent to sell her

partnership interests.

    The corporate buy-sell agreements provided:

    The price of any shares sold hereunder shall be the book
    value of the stock at the end of the preceding fiscal
    year, less any and all dividends paid to the
    Shareholders prior to the effective date of sale, plus
    income computed in accordance with the Internal Revenue
    regulations generally requiring allocation on a per
    share, per day basis.

As applied to Jean True’s 1994 sales, the corporate buy-sell

agreements therefore provided that the sale price of stock was

equal to:   (1) The book value of that stock as of the end of the

corporation’s fiscal year preceding June 30, 1994, minus (2) the

dividends (if any) paid from the end of that fiscal year to

June 30, 1994, plus (3) a pro rata share of the corporation’s

income for the fiscal year including June 30, 1994.

    As shown by the foregoing citations to the buy-sell

agreements, the agreements did not provide for any adjustments to

be made to the formula prices on account of the income or loss

of, the dividends paid or distributions made by, or any change in

the value of a True company, after June 30, 1994.82

     82
      Although the buy-sell agreements did not provide for any
price adjustments to be made on account of the True companies’
financial performance after June 30, 1994, the price paid for
some of Jean True’s stock may have been affected by post-June 30,
1994, events. The corporate buy-sell agreements required the
preceding fiscal year’s ending book value to be increased by a
                                                   (continued...)
                               - 293 -

    The buy-sell agreements also did not provide for any

interest to be paid on the sales price on account of any passage

of time between the effective dates of the sales and the date

payment was ultimately made.

    From and after June 30, 1994, the 22 True companies

considered the income and expenses associated with the interests

sold by Jean True to belong to her sons, not to Jean True.

Moreover, the True companies filed their Federal income tax

returns consistently with this consideration.      For example, as

part of its Federal partnership return (Form 1065) for 1994, True

Oil filed three Forms 8308, “Report of a Sale or Exchange of

Certain Partnership Interests”; these forms reported that the

“Date of Sale or Exchange of Partnership Interest” with respect

to Jean True’s sale of her interest in True Oil was June 30,


     82
      (...continued)
pro rata share of the corporation’s income for the year of sale,
computed in accordance with the Internal Revenue laws.

     Sec. 1377(a)(1) provides that a stockholder’s pro rata share
of S corporation income for a taxable year is calculated by
allocating an equal portion of the corporation’s items to each
day in the year. Under this method, a selling shareholder’s pro
rata share of income for the year of sale will be affected by
corporate items realized after the sale date, because a portion
of such items will be allocated to her period of ownership. Sec.
1377(a)(2), however, provides that under certain circumstances
the shareholders may elect to compute the selling shareholder’s
pro rata share as if the taxable year terminated on the sale
date.

     It appears that the True family     made the election to compute
Jean True’s pro rata share of income     as if the corporation’s
taxable year ended on June 30, 1994,     with respect to some (but
not all) of the 15 S corporations in     which she sold her stock.
                              - 294 -

1994.   True Oil’s 1994 return also contained schedules showing

that after June 30, 1994, Jean True owned a zero percent share of

True Oil’s income, deductions, losses, credits, capital account,

and other items.   Similarly, Belle Fourche’s Federal tax return

(Form 1120S) for 1994 contains a schedule of changes in

ownership; that schedule showed that Jean True owned no Belle

Fourche stock after June 30, 1994.

    The amount of the payment Jean True received on the payment

date (September 30, 1994) in exchange for her interest in a True

company was equal to the formula price of that interest as

determined under the corresponding buy-sell agreement.    The

parties agree that the prices of Jean True’s interests as

determined under the buy-sell agreements, and the amounts

received by Jean True on the payment date in exchange for those

interests, were as shown in the following table:
                               - 295 -

                                         Formula price and amount
Entity                                   received on payment date
True Oil                                        $2,528,315
Eighty-Eight Oil                                 4,400,744
True Ranches                                     2,712,212
Rancho Verdad                                      226,759
True Mining Co.                                        176
True Environmental Remediating                     205,886
  LLC
Belle Fourche                                      183,593
Black Hills Trucking                               590,511
Midland Financial Corp.                          2,226,338
Toolpushers Supply Co.                             137,872
Black Hills Oil                                         60
Bonanza Publishing, Inc.                               395
Clareton Oil Co.                                        58
Equitable Oil Purchasing Co.                         2,304
Fire Creek Oil Co.                                   1,193
Pumpkin Buttes Oil Co.                                  51
Roughrider Pipeline Co.                             55,208
Sunlight Oil Co.                                        57
True Geothermal Drilling Co.                           111
True Wyoming Beef                                      638
Wind River Oil Co.                                      59
True Land and Royalty Co.                           26,438
  Total                                         13,298,978

    Respondent has conceded that the fair market value, as of

June 30, 1994, of the interests sold by Jean True did not exceed

the formula prices of those interests, except in the case of the
                               - 296 -

following companies:   True Oil, Eighty-Eight Oil, True Ranches,

Belle Fourche, and Black Hills Trucking.

    As a result of Dave True’s death on June 4, 1994, Jean True

acquired part of the stock and partnership interests she

ultimately sold to her sons.   Dave True’s death triggered the

buy-sell agreements and required Jean True and the sons to buy

the interests formerly held by Dave True.

    The sales of stock triggered by Dave True’s death apparently

were not formally closed until about September 20, 1994.

Although the record does not establish precisely what happened on

September 20, 1994, it appears that the reissuance of stock

certificates to reflect the transfer of ownership from Dave True

to Jean True and the sons was authorized on that date.     However,

the buy-sell agreements defined the effective date of these

transfers as the date of Dave True’s death.   Consistent with this

definition, the minutes of the board meetings concerning the

reissuance of Dave True’s stock treat Dave True’s death as the

date ownership of the stock was transferred to Jean True and the

sons.83

    On a schedule attached to Jean True’s amended Federal gift

tax return for 1994, Jean True reported the 1994 sales of her

interests to her sons as gifts with a “Value at date of gift” of


     83
      Respondent has not determined or otherwise asserted that
any gift loans resulted from the sales triggered by Dave True’s
death on June 4, 1994, even though some of those sales may not
have been formally closed until Sept. 20, 1994.
                              - 297 -

zero.   This schedule reported the “Date of gift” as June 30,

1994.

     In the statutory notice, respondent determined, without

citing any authority, that the value of the gift Jean True made

by lending her sons the sales price from June 30, 1994, to the

payment date was $192,307.   The notice explained that this amount

was equal to 91 days of interest on the $13,298,978 aggregate

sales price, calculated using the 5.9-percent interest rate the

True family used for other intrafamily loans.    Although the

notice stated that “Arguably, the 5.9% is below-market”, it also

stated that “no adjustment will be made for this due to the

extreme difficulty of computing it”.    The notice did not cite any

authority for these conclusions.

                              OPINION

I.   Summary of Arguments

     On June 30, 1994, and July 1, 1994 (notice dates), Jean True

gave her sons notice that she wanted to sell her interests in 22

True companies.   This notice triggered the provisions of the buy-

sell agreements that required Jean True to sell her interests to

her sons.

     The buy-sell agreements provided that the effective dates of

these sales were the notice dates.   However, the buy-sell

agreements also stated that the sales did not have to “be

consummated” until 6 months after those dates.    In fact, Jean

True did not receive payment for her interests until September
                              - 298 -

30, 1994, 3 months after the notice dates.    We hereinafter refer

to the deferred payment of the sales price for Jean True’s

interests, pursuant to the provisions of the buy-sell agreements

giving the parties up to 6 months to “consummate” the sales, as

the deferred payment arrangement.

    The amount Jean True received on the payment date,

$13,298,978, was equal to the sum of the formula prices for the

interests she sold, calculated as provided in the buy-sell

agreements.   This sum did not include any stated interest or any

other adjustments to take account of the 3-month period between

the notice dates and the payment date.

    Respondent asserts that the sales of Jean True’s interests

were completed for tax purposes on June 30, 1994, because the

benefits and burdens of ownership were transferred on that date.

Respondent further asserts that because the deferred payment

arrangement allowed 3 months to pass between the sale completion

date and the payment date, Jean True effectively lent her sons

(during that 3-month period) an amount equal to the $13,298,978

sales proceeds she was entitled to receive.   Finally, respondent

asserts that this loan was in the nature of a gift, and that Jean

True therefore made a taxable gift to her sons of the value of

the use of the sale proceeds from June 30, 1994, to September 30,

1994.

    Respondent has continued to assert, as determined by the

statutory notice, that the value of Jean True’s gift is $192,307.
                               - 299 -

However, respondent now argues that the reason for this is that

the deferred payment arrangement was a “below-market loan”

subject to section 7872.   Sec. 7872(c)(1)(A).   Notwithstanding

this new argument, respondent does not explain why the True

family’s 5.9-percent intrafamily interest rate used to calculate

the value of Jean True’s gift in the statutory notice should

apply, rather than the “applicable Federal rate” expressly

referenced by section 7872(e), (f)(1), and (f)(2).

    Petitioners make three arguments why the deferred payment

arrangement was not a gift loan.   First, petitioners argue that

the sales of Jean True’s interests were completed for tax

purposes on September 20, 1994, instead of on June 30, 1994, as

asserted by respondent.    According to petitioners, Jean True was

not entitled to receive the sales proceeds–-and therefore could

not have lent them to her sons–-until the sales were complete.84

    Second, petitioners argue that the deferred payment

arrangement cannot be a below-market loan subject to section 7872

because:   (1) If the deferred payment arrangement were a

“contract for the sale or exchange of any property” within the



     84
      Petitioners do not explain why Sept. 20, 1994, is the
relevant date. However, we note that Jean True’s acquisition
(from Dave True) of some of the stock she ultimately sold to her
sons appears to have been closed on that date.

     Petitioners also do not explain why, if Sept. 20, 1994, was
the sale completion date, Jean True could not have made a below-
market gift loan from that date to the payment date on Sept. 30,
1994.
                             - 300 -

meaning of section 483, no portion of the sales price would be

recharacterized as interest under that section; and (2) if the

deferred payment arrangement were a “debt instrument given in

consideration for the sale or exchange of property” within the

meaning of section 1274, no portion of the sales price would be

treated as original issue discount (OID) under that section.

    Third and finally, petitioners argue that even if the

deferred payment arrangement was a “below-market loan” to which

section 7872 could apply, it was not a “gift loan” actually

subject to that section, because allowing short delays in the

payment of sales proceeds, without charging interest, is a normal

commercial practice satisfying the ordinary business transaction

exception set forth in section 25.2512-8, Gift Tax Regs.

    We consider these arguments seriatim.   We conclude that: (1)

The sales of Jean True’s interests were completed for tax

purposes on June 30, 1994, and July 1, 1994 (i.e., on the notice

dates, which are also the effective dates defined by the buy-sell

agreements); (2) sections 483 and 1274 do not prevent the

application of section 7872 to the deferred payment arrangement;

and (3) the deferred payment arrangement is a below-market gift

loan subject to section 7872, rather than an ordinary business

transaction.

II. Jean True’s Sales Were Completed on Notice Dates

    The “Further Assurances” provisions of the partnership buy-

sell agreements stated:
                              - 301 -

    Before any retiring Partner * * * shall be entitled to
    receive any money in payment of or on account of his
    partnership interest * * * he shall deliver or cause to
    be delivered to the remaining Partners such instruments
    as the remaining Partners may reasonably request in
    order to establish a record that the retiring * * *
    Partner’s interest in the partnership has passed to and
    become vested in the remaining Partners.

    Petitioners claim these further assurances provisions were

not satisfied until September 20, 1994, when title to Jean True’s

stock and partnership interests “vested” in her sons.85

Petitioners assert that as a result, Jean True could not have

lent her sales proceeds to her sons on June 30, 1994, as

contended by respondent-–because under the terms of the buy-sell

agreements, Jean True was not entitled to receive those proceeds

until the “vesting” date.

     As a preliminary matter, we note that petitioners’ argument

on this point cites no authority and is hard to follow.    However,

the thrust of petitioners’ argument appears to be that the sales

of Jean True’s interests were not completed for tax purposes

until September 20, 1994.   For the reasons set forth below, we

disagree, and conclude that the sales were completed on June 30,

1994, and July 1, 1994 (the notice dates, also the effective

dates as defined by the buy-sell agreements).

    First, we note that the “Further Assurances” provisions of

the corporate buy-sell agreements are different from the



     85
      As noted supra p. 299, it is not clear why petitioners
believe Sept. 20, 1994, is the relevant date.
                              - 302 -

provisions of the partnership buy-sell agreements relied upon by

petitioners.   The further assurances provisions of the corporate

agreements state only that each of the stockholders and the

relevant corporation agrees “to make, execute and deliver to the

other parties all assignments, transfers or other documents

necessary to carry out and accomplish the terms” of the corporate

buy-sell agreements.   However, the corporate buy-sell agreements

do not state that delivery of these documents is a condition

precedent to the right to receive payment, or to any other right

or obligation arising under the agreements.

    Second, the buy-sell agreements, when read in their

entirety, show Jean True and her sons intended that a binding

contract of sale would be created on the notice dates, even

though payment was not required to be made on those dates.    For

example, the partnership buy-sell agreements define the term

“sales event” to include “the events outlined in Paragraph 18 the

occurrence of which, under the terms hereof, triggers the

mandatory purchase and sale agreement.”   Paragraph 18 in turn

provides that a voluntary sale is a “sales event”, and states:

    In the event any Partner desires at any time to sell all
    or a part of his or her partnership interest in the
    Company, he or she shall so notify the Purchasing
    Partners in writing. * * * Thereafter, the Selling
    Partner shall sell and the Purchasing Partners shall
    purchase such partnership interest in accordance with
    the terms of paragraphs 19 [restating the buy-sell
    agreement, and providing that purchases shall be made by
    Purchasing Partners in proportion to interests already
    owned], 20 [defining formula price] and 21 [defining
                              - 303 -

    effective date as the notice date] * * * . * * *
    [Emphasis added.]

    Nothing in these operative provisions suggests that the buy-

sell obligations arising on the notice dates were conditioned

upon the selling partner’s compliance with the “Further

Assurances” provision.   Indeed, they do not even refer to the

“Further Assurances” provision.86

    Third and most importantly, the terms of the buy-sell

agreements, the conduct of the parties to those agreements, and

the actions of the True companies all show that Jean True and her

sons intended the benefits and burdens of ownership of Jean

True’s interests to shift to her sons on the notice dates.

    Petitioners correctly note that Jean True did not receive

payment for her interests in the 22 True companies until

September 30, 1994.   In addition, it appears that the

corporations were authorized on or around that date to reissue

the shares Jean True sold in the names of Jean True’s sons.

    The record does not establish precisely what happened on or

around the payment date, other than the receipt of payment and

the reissuance of some stock certificates.   However, petitioners

have not shown (or even claimed) that the sons did not take

possession of Jean True’s stock certificates, or that the

partnership records did not reflect a change in ownership, well


     86
      The “sales event” and “sale” provisions of the corporate
buy-sell agreements are substantially the same as the cited
provisions of the partnership buy-sell agreements.
                              - 304 -

before the payment date.   To the contrary, the board minutes and

resolutions concerning the reissuance of stock treat June 30,

1994, as the date ownership of Jean True’s stock passed to the

sons.   Similarly, Jean True’s amended 1994 Federal gift tax

return reported that the 1994 sales of her interests occurred on

June 30, 1994.

    We also note that under relevant State (Wyoming) law, board

of directors’ approval and recording on the corporate books are

not conditions precedent to a valid transfer of stock ownership.

See Jones v. Central States Inv. Co., 654 P.2d 727 (Wyo. 1982).

Also, although neither party has argued that, until the payment

date, the buy-sell agreements created an incomplete gift, we note

that a stock gift may be complete before the donee receives

possession of or title to the stock.    See Estate of Davenport v.

Commissioner, 184 F.3d 1176 (10th Cir. 1999), affg. T.C. Memo.

1997-390.

    More generally, a sale is complete for Federal income tax

purposes when the benefits and burdens of ownership shift; this

may occur well before title passes or a formal closing of the

sale occurs.   See Derr v. Commissioner, 77 T.C. 708, 723-724

(1981) (for Federal income tax purposes, sale occurs upon

transfer of benefits and burdens of ownership rather than upon

satisfaction of technical requirements for passage of title under

State law; applicable test is facts and circumstances test with

no single factor controlling); Hoven v. Commissioner, 56 T.C. 50,
                               - 305 -

55 (1971) (in determining date of property transfer, date on

which benefits and burdens or incidents of ownership of property

pass must be considered); Merrill v. Commissioner, 40 T.C. 66, 74

(1963) (where delivery of deed is delayed to ensure payment,

intent of parties as to when benefits and burdens of ownership

are to be transferred, as evidenced by factors other than the

passage of bare legal title, controls for tax purposes), affd.

336 F.2d 771 (9th Cir. 1964); cf. Dyke v. Commissioner, 6 T.C.

1134 (1946) (stock sale not completed until all conditions of

escrow agreement (including payment) were satisfied and stock was

actually delivered, even though buyer was entitled to

corporation’s earnings for approximately 1 month before delivery

date).

    Taking into account all the facts and circumstances of the

case at hand, we conclude that Jean True and her sons intended

the benefits and burdens of ownership of Jean True’s stock and

partnership interests to pass to the sons on the notice dates;

i.e., on June 30, 1994, in the case of her stock and on July 1,

1994, in the case of her partnership (and LLC) interests.    We

further conclude that the benefits and burdens of ownership in

fact shifted on those dates.    These conclusions are based on the

following observations:

    1.    The buy-sell agreements expressly provided that the

notice dates were the effective dates of Jean True’s sales to her

sons.    The buy-sell agreements also expressly provided that on
                              - 306 -

those dates Jean True became obligated to sell, and her sons

became obligated to buy, her interests in the 22 True companies.

    2.    From and after June 30, 1994, the 22 True companies

considered the income and expenses associated with the interests

sold by Jean True to belong to the sons, not to Jean True.

Moreover, the True companies filed their Federal tax returns

consistently with this observation.

    3.    Although the reissuance of some stock certificates to

reflect the change in ownership of Jean True’s stock was

authorized on September 29, 1994, the minutes of the board

meetings concerning this action refer to “the transfer of the

shares formerly owned” by Jean True, and state that “appropriate

action should be taken * * * to accept and acknowledge the

transfer of ownership that occurred effective June 30, 1994".

(Emphasis added.)   Similarly, the accompanying board resolutions

discuss “the sale and transfer effective June 30, 1994" of “the

shares previously held” by Jean True.   (Emphasis added.)87

    4.    The partnership buy-sell agreements provided that the

price for a partnership interest owned by Jean True was equal to


     87
      As noted supra p. 299, petitioners argue that Jean True’s
sales were completed for tax purposes on Sept. 20, 1994. It is
not clear why petitioners chose this date. It appears that a
formal closing of Jean True’s purchase (from Dave True) of some
of the stock she ultimately sold to her sons was held on or
around that date. However, the minutes of the Sept. 20, 1994,
board meetings authorizing the reissuance of Dave True’s stock to
Jean True treat June 4, 1994 (the date of Dave True’s death), as
the effective date of the transfer of ownership of that stock to
Jean True.
                              - 307 -

the book value of that interest as of the close of business on

June 30, 1994.   This price was not adjusted for any income or

loss, distributions made by, or change in the value of the

partnership, for any period after June 30, 1994.     As a result,

once Jean True gave notice, all she could receive in exchange for

a partnership interest was its book value as of June 30, 1994.

Jean True’s sons became entitled to the economic benefits, and

would suffer the economic burdens, flowing from the partnerships

after June 30, 1994.

    5.    Similarly, the corporate buy-sell agreements provided

that the price for stock owned by Jean True was based on the book

value of the stock as of the last day of the fiscal year ending

before June 30, 1994.   This price was not adjusted for any income

or loss, distributions made by, or change in the value of the

related corporation, after June 30, 1994.88    As a result, once

Jean True gave notice, all she could receive for her stock was

its book value as of June 30, 1994.     Jean True’s sons became

entitled to all the economic benefits, and would suffer all the

economic burdens, flowing from the stock after June 30, 1994.




     88
      The purchase price of stock did include a pro rata share
of the corporation’s income for the year including June 30, 1994.
With respect to some of the corporations, this pro rata share may
have reflected income realized after June 30, 1994. See supra
pp. 292-293 note 82.
                                  - 308 -

       For all these reasons, we hold that for Federal income tax

purposes Jean True sold her stock on June 30, 1994, and her

partnership (and LLC) interests on July 1, 1994.89

III.        Sections 483 and 1274 Do Not Prevent Below-Market Loan
            Treatment Under Section 7872

       The deferred payment arrangement allowed 3 months to pass

between the dates Jean True’s sales were completed for tax

purposes and the payment date.       For this reason, respondent

asserts that the deferred payment arrangement should be

considered to be a loan (from Jean True to her sons) of the

$13,298,978 sales price for that 3-month period.       Because Jean

True did not charge or receive any interest on this amount,

respondent further asserts that the deferred payment arrangement

was a below-market gift loan to which section 7872 applies.

       Petitioners argue that even if Jean True’s sales were

completed on the notice dates (as we have decided), section 7872

cannot apply to the deferred payment arrangement.       The buy-sell

agreements required Jean True’s sales to be consummated within 6

months after the notice dates.       As a result, if the deferred

payment arrangement were a “contract for the sale or exchange of


       89
      Respondent maintains that Jean True sold all her interests
on June 30, 1994. We disagree. Jean True did not give notice of
her desire to sell her partnership (and LLC) interests until July
1, 1994. Until she gave notice, she was not required to sell,
and her sons were not required to buy, those interests. Also,
the buy-sell agreements defined the effective date of the sale of
her interests as the notice dates. For these reasons we conclude
that the sale of Jean True’s partnership (and LLC) interests
occurred on July 1, 1994, as stated in the text.
                               - 309 -

any property” to which section 483 ordinarily could apply, no

portion of the sales price would be recharacterized as interest

under that section.   See sec. 483(a), (c)(1) (although sec. 483

generally applies to payments made under any contract for the

sale or exchange of any property, it does not apply unless some

contract payments are due more than 1 year after the sale or

exchange).   Similarly, if the deferred payment arrangement were a

“debt instrument given in consideration for the sale or exchange

of property” to which section 1274 ordinarily could apply, no

portion of the sales price would be recharacterized as original

issue discount (OID) under that section.   See sec. 1274(c)(1)

(although sec. 1274 generally applies to any debt instrument

given in consideration for the sale or exchange of property, it

does not apply unless some payments under the debt instrument are

due more than 6 months after the date of the sale or exchange).

    Petitioners assert that because no portion of the

$13,298,978 aggregate sales price would be recharacterized as

interest or OID under section 483 or 1274, the deferred payment

arrangement cannot be treated as a below-market loan subject to

section 7872.   We disagree.   In Frazee v. Commissioner, 98 T.C.

554 (1992), we considered the relationship of sections 483, 1274,

and 7872 for gift tax purposes and rejected arguments quite

similar to those made by petitioners in the case at hand.
                              - 310 -

    The taxpayers in Frazee sold property to family members in

exchange for a note.   The interest rate on the note, although

less than a market rate, was sufficient to avoid the

recharacterization of any part of the stated principal of the

note as interest under section 483.     The Frazee taxpayers argued

that as a result, the note could not be a “below-market loan”

subject to section 7872.   We disagreed.   In our view, sections

483 and 1274 were enacted to ensure the proper characterization

of payments as principal or interest for income tax purposes.       By

contrast, the key issue for gift tax purposes is the valuation of

all payments (both principal and interest).    See Krabbenhoft v.

Commissioner, 94 T.C. 887, 890 (1990), affd. 939 F.2d 529 (8th

Cir. 1991).   We held in Frazee that sections 483 and 1274 simply

were not relevant for that gift tax purpose.

    The Commissioner’s primary position in Frazee was that the

value of the intrafamily note for gift tax purposes should be its

“present value” under section 7872 (i.e., a value determined by

reference to the applicable Federal rate), rather than its fair

market value under general tax principles (i.e., a value

determined by reference to market interest rates).    Although we

found this position to be “anomalous” because it was contrary to

the traditional fair market value approach, Frazee v.

Commissioner, supra at 590, we nevertheless accepted the

Commissioner’s treatment of the intrafamily note as a below-
                               - 311 -

market gift loan subject to section 7872.   See id.; cf. Blackburn

v. Commissioner, 20 T.C. 204 (1953).

    Petitioners correctly observe that section 7872(f)(8)

provides that section 7872 does not apply to any loan to which

section 483 or 1274 applies.   This prohibition is not applicable

to the case at hand.   Technically, neither section 483 nor

section 1274 applies to the deferred payment arrangement, because

the buy-sell agreements required payment to be made within 6

months after the notice dates.   See sec. 483(c)(1) (sec. 483 does

not apply where no payment is due more than 1 year after the sale

or exchange); sec. 1274(c)(1) (sec. 1274 only applies where at

least one payment is due more than 6 months after the sale or

exchange).

    Petitioners also observe that certain proposed section 7872

regulations state that section 7872 does not apply to any loan

given in consideration for the sale or exchange of property,

within the meaning of sections 483(c)(1) and 1274(c)(1), even if

the rules of those sections do not technically apply by reason of

safe harbors or other exceptions.   See sec. 1.7872-2, Proposed

Income Tax Regs., 50 Fed. Reg. 33553, 33557 (Aug. 20, 1985).    We

note, however, that although proposed regulations constitute a

body of informed judgment on which courts may draw for guidance,

see Frazee v. Commissioner, supra at 582, we accord them no more

weight than a litigating position, see KTA-Tator, Inc. v.
                                - 312 -

Commissioner, 108 T.C. 100, 102-103 (1997); F.W. Woolworth Co. v.

Commissioner, 54 T.C. 1233, 1265-1266 (1970).

    The Commissioner proposed section 1.7872-2, Proposed Income

Tax Regs., supra, in 1985, and has never adopted it in final

form.     The Commissioner has since asserted that section 7872 can

apply to loans given in consideration for the sale or exchange of

property, in both Frazee v. Commissioner, supra, and the case at

hand.     Moreover, our acceptance in Frazee of the Commissioner’s

position that section 7872 applied to the intrafamily note

necessarily rejected the position taken in the proposed

regulation.

    For all these reasons, consistent with our decision in

Frazee, we hold that the deferred payment arrangement may be a

below-market loan subject to section 7872, even though no part of

the sales price would be treated as interest or OID under

sections 483 and 1274.90


     90
      The Court of Appeals for the Seventh Circuit held, in
Ballard v. Commissioner, 854 F.2d 185 (7th Cir. 1988), revg. T.C.
Memo. 1987-128, that a note should have no gift tax consequences
where it stated interest at the “safe harbor” rate referred to by
sec. 483 and no portion of the note’s stated principal amount
would be recharacterized as interest for that reason. In
Krabbenhoft v. Commissioner, 94 T.C. 887 (1990), affd. 939 F.2d
529 (8th Cir. 1991), we reconsidered our position on the
relevance of sec. 483 for gift tax purposes in light of the
reversal of our Ballard decision, and decided not to follow that
reversal except where required by the Golsen rule (see Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971)). Moreover, the Court of Appeals for the Tenth Circuit, to
which an appeal of this case would lie, has agreed with our view,
                                                   (continued...)
                             - 313 -

IV. Deferred Payment Arrangements Are Below-Market Gift Loans
    Subject to Section 7872

    Section 7872(c)(1)(A) provides (subject to certain

exceptions not relevant to the case at hand) that section 7872

applies to “Any below-market loan which is a gift loan.”

Therefore, section 7872 applies to the deferred payment

arrangement if that arrangement is:    (1) A “loan”, (2) a “below-

market loan”, and (3) a “gift loan”.

    A.    Loan

    Section 7872 does not define the term “loan”.    However, the

legislative history indicates that “loan” should be interpreted

broadly to include any extension of credit.   See Frazee v.

Commissioner, 98 T.C. at 589 (citing conference report).   We

concluded in Frazee v. Commissioner, supra at 588-589, that

section 7872 does not apply solely to loans of money; it also

applies to seller-provided financing for the sale of property.

In our view, the fact that the deferred payment arrangement in

the case at hand was contained in the buy-sell agreements, rather

than in a separate note as in Frazee, does not require a

different result.




     90
      (...continued)
as affirmed by the Court of Appeals for the Eighth Circuit in
Krabbenhoft, that sec. 483 is not relevant for gift tax valuation
purposes. See Schusterman v. United States, 63 F.3d 986 (10th
Cir. 1995).
                              - 314 -

    For these reasons we conclude that the deferred payment

arrangement is a “loan” for purposes of section 7872.

    B.   Below-Market Loan

    Section 7872 sets forth two definitions of below-market

loans.   One definition applies to demand loans; the other applies

to term loans.   Sec. 7872 (e)(1)(A), (B).

    A “demand loan” is defined as “any loan which is payable in

full at any time on the demand of the lender.”    Sec. 7872(f)(5).

A “term loan” is defined as “any loan which is not a demand

loan.”   Sec. 7872(f)(6).

    The deferred payment arrangement required Jean True’s sales

to be consummated “within 6 months” after the notice dates.   It

did not give Jean True the right to payment on demand.   Because

the deferred payment arrangement was not a “demand loan” as

defined in section 7872(f)(5), it is a “term loan” under section

7872(f)(6).

    A term loan is a “below-market loan” if the “amount loaned”

exceeds the present value of all payments due under the loan,

discounted at the applicable Federal rate in effect as of the

date of the loan.   Sec. 7872(e)(1)(B), (f)(1).   Neither party has

argued that the “amount loaned” was other than the $13,298,978

aggregate sales price of Jean True’s interests under the buy-sell

agreements, and we assume that the “amount loaned” was equal to

that price.
                               - 315 -

    The amount Jean True ultimately received on the payment date

(September 30, 1994) was equal to the $13,298,978 “amount

loaned”.    Because the “present value” of $13,298,978 to be paid

up to 6 months in the future, without interest, is less than

$13,298,978, the deferred payment arrangement was a “below-market

loan”.   Sec. 7872(e)(1)(B).

    C.     Gift Loan

    Section 7872 applies to certain defined categories of below-

market loans.    See sec. 7872(c)(1).    One of these categories is

gift loans.    See Sec. 7872(c)(1)(A).

    A gift loan is defined as “any below-market loan where the

foregoing of interest is in the nature of a gift.”     Sec.

7872(f)(3).    As we said in Frazee v. Commissioner, supra at 589:

    The question of whether the forgoing of interest is in
    the nature of a gift is determined under the gift tax
    principles of chapter 12. See sec. 7872(d)(2). Under
    traditional gift tax principles, we look to whether the
    value of the property transferred exceeds the value of
    the consideration received, dispensing with the test of
    donative intent. Therefore, a below-market loan will be
    treated as a gift loan unless it is a transfer made in
    the ordinary course of business, that is, unless it is a
    transaction which is bona fide, at arm’s length, and
    free of donative intent. * * * [Emphasis added.]

See also sec. 25.2512-8, Gift Tax Regs.      We also note that

intrafamily transactions are subject to special scrutiny and are

presumed to be gifts.    See Harwood v. Commissioner, 82 T.C. 239,

259 (1984), affd. without published opinion 786 F.2d 1174 (9th

Cir. 1986).
                              - 316 -

    As discussed supra under Issue 2 of this opinion, we have

found that Jean True’s sales of her interests in True Oil,

Eighty-Eight Oil, True Ranches, Belle Fourche, and Black Hills

Trucking gave rise to taxable gifts, because the fair market

value of Jean True’s interests in those companies exceeded the

sales prices for those interests determined under the buy-sell

agreements.   This establishes that the sales of Jean True’s

interests in those companies, including the parts of the deferred

payment arrangement relating to those sales, were not

transactions in the ordinary course of business and were gifts.

See Frazee v. Commissioner, 98 T.C. at 589.

    With respect to the sales of Jean True’s interests in the

remainder of the 22 True companies, respondent has not asserted

that the formula sales prices were less than fair market value.

We have found, however, that Jean True transferred the benefits

and burdens of ownership of her interests in those companies to

her sons on the notice dates, even though the sons were not

required to pay for those interests until 6 months after those

dates.   We believe that parties dealing at arm’s length would not

have transferred ownership of such business interests on these

terms.   Independent parties would have required either the

payment of interest on the purchase price during the period from

the notice dates to the payment date, or an adjustment to the
                                - 317 -
formula prices to reflect the financial performance of the True

companies during that period.

     For all these reasons, we conclude that the deferred payment

arrangement was not a transaction in the ordinary course of

business and was therefore a gift loan.

V.   Amounts of the Gifts–-Application of Section 7872

     We have just concluded that for purposes of section 7872,

the deferred payment arrangement was a term loan and a gift loan.

Section 7872 treats the lender of a gift term loan as having

transferred to the borrower, on the date the loan is made, a cash

gift in an amount equal to the excess of:     (1) The “amount

loaned”, over (2) the present value of all payments required to

be made under the loan, discounted at the applicable Federal

rate.     See sec. 7872(b)(1), (d)(2), (f)(1).

     It is not entirely clear how this provision should be

applied to the case at hand.     The buy-sell agreements required

payment to be made within 6 months of the notice dates.

Therefore, as of the notice dates, the deferred payment

arrangement could have been considered to be a 6-month loan,

prepayable without penalty.91




     91
      We note that certain proposed sec. 7872 regulations state
that an option to prepay should be disregarded in determining the
term of a loan. See sec. 1.7872-10, Proposed Income Tax Regs.,
50 Fed. Reg. 33553, 33566 (Aug. 20, 1985).
                               - 318 -
    If the deferred payment arrangement were considered to be a

6-month term loan, then section 7872 would deem Jean True to have

made a gift, on the notice dates, of approximately 6 months’

worth of interest on the $13,298,978 aggregate purchase price.

Although Jean True actually received payment only 3 months after

the notice dates, section 7872 does not appear to provide

explicitly for any adjustment to be made to the amount of the

gift if a gift term loan is prepaid.

    Respondent’s determination appears to be a reaction to the

possible harshness of such a result.     In the statutory notice,

respondent asserted that the amount of Jean True’s gift arising

from the deferred payment arrangement was $192,307.     The notice

stated that this amount represented 91 days of interest on the

$13,298,978 sales price.   Although respondent now maintains that

the consequences of the deferred payment arrangement should be

determined under section 7872, respondent has not increased the

amount of the asserted gift.

    Respondent’s calculation of the amount of the gift is

consistent with the treatment that would obtain under section

7872, if the deferred payment arrangement were treated as a

demand gift loan rather than a term gift loan.92    Although


     92
      The provisions requiring payment “within six months” after
the notice dates, the fact that payment was in fact made only 3
months after those dates, and the possible harshness of imputing,
under these circumstances, a gift in an amount equal to the value
                                                   (continued...)
                              - 319 -
respondent apparently could have asserted that a larger gift was

made, we accept respondent’s concession that in the case at hand

the amount of the gift should be computed as though the deferred

payment arrangement were a demand gift loan.   However, consistent

with this opinion (and with respondent’s position that section

7872 applies), respondent’s determination should be modified in

two respects.   First, the portion of the aggregate sales price

attributable to Jean True’s partnership (and LLC) interests

should be considered to be a loan outstanding from July 1, 1994

rather than from June 30, 1994.   Second, the amount of the gift

should be computed using the applicable Federal rates prescribed

by section 7872, rather than the 5.9-percent True family rate

referred to in the statutory notice.93




     92
      (...continued)
of 6 months’ use of the amount lent, suggest that the deferred
payment arrangement might preferably be viewed as a demand loan
of indefinite maturity, rather than a term loan. Sec. 7872(f)(5)
gives the Secretary regulatory authority to treat indefinite
maturity loans as demand loans. However, because the Secretary
has not exercised that authority, a loan that is not a demand
loan ordinarily must be treated as a term loan for sec. 7872
purposes. See sec. 7872(f)(6); KTA-Tator, Inc. v. Commissioner,
108 T.C. 100, 104-105 (1997).
     93
      The short-term applicable Federal rate for June 1994,
based on semiannual compounding, was 5.48 percent; the
corresponding rate for July, 1994, was 5.55 percent. See Rev.
Rul. 94-44, 1994-2 C.B. 190; Rev. Rul. 94-36, 1994-1 C.B. 215.

     Respondent’s trial memorandum erroneously referred to the
5.9-percent interest rate used to value the gift in the statutory
notice as the “applicable Federal rate”.
                              - 320 -
Issue 4. Are Petitioners Liable for Valuation Understatement
Penalties Under Sections 6662(a), (g), and (h)?

                         FINDINGS OF FACT

    On an attachment to his 1993 gift tax return, Dave True

disclosed the sale to his wife and sons of 30-percent interests

in the True partnerships listed in Appendix schedule 1.     The

attachment listed the partnerships whose interests were sold and

indicated, in general terms, that the sales price was book value,

without providing actual numbers.   The 1993 gift tax return

reported zero as the value of gifts attributable to these

transactions.   Petitioners did not engage a professional

appraiser to value the transferred interests in the True

partnerships for gift tax reporting purposes.

    The estate tax return did not list individually the

interests in True companies that Dave True owned at death.

Instead, it showed on Schedule F, Other Miscellaneous Property

Not Reportable Under any Other Schedule, the value of Dave True’s

living trust, which owned his interests in the True companies at

death.   Another schedule attached to the estate tax return

provided a breakdown of the assets owned by the living trust as

of June 4, 1994, which included cash of $39,349,150, investments,

notes receivable from some of the True companies, and

miscellaneous assets.   Total book value of all the True companies

owned by Dave True at his death was $37,894,797, see Appendix

schedule 2.   The living trust document, which was attached to the
                               - 321 -
estate tax return, listed the interests in the True companies

that Dave True originally conveyed to the living trust at its

inception.    The estate tax return made no further disclosure of

the valuation of the True companies under the buy-sell

agreements.

    On brief, petitioners explained that the book value of Dave

True’s interests in the True companies was reported as a cash

asset of the living trust because, under the terms of the buy-

sell agreements, the sales were deemed to have been transacted as

of the day before Dave True’s death, or June 3, 1994.

    Petitioners hired Mr. Lax to value Dave True’s interests in

the True companies before filing the estate tax return.

Petitioners instructed Mr. Lax to disregard the buy-sell

agreements in so doing.    For the most part, Mr. Lax’s values for

the disputed companies approximated book value.   However, book

values for the subject interests in Belle Fourche and Black Hills

Trucking were only 18.20 and 29.92 percent, respectively, of Mr.

Lax’s values.   In any event, petitioners did not use any of Mr.

Lax’s values, but instead in effect reported the interests at

book value.

    On an attachment to her amended 1994 gift tax return,94 filed

on or around June 19, 1996, Jean True disclosed the sale to her


     94
      Jean True’s 1994 gift tax return as originally filed did
not disclose the sales of her remaining interests in the True
companies.
                               - 322 -
sons of her entire interest in the True companies listed in

Appendix schedule 3.    The attachment listed the interests in the

partnerships and corporations that were sold and indicated, in

general terms, that the sales price was book value, without

providing actual numbers.    The amended 1994 gift tax return

reported zero as the value of gifts attributable to these

transactions.    Jean True did not disclose the gift loan that

arose out of the deferred payment transaction on either her

original or her amended 1994 gift tax return.

    In the August 1988, “Policy for the Perpetuation of the

Family Business” (policy), the True family agreed that tax

planning played a crucial role in every business decision.      The

policy stated:    “In considering potentially controversial tax

issues, we will include the criteria [sic] whether we are willing

to take the issue to court.”

    In the statutory notices, respondent determined accuracy-

related penalties under section 6662(a), (g), and (h)

attributable to valuation misstatements allegedly reported in the

1993 and 1994 gift tax returns and the estate tax return.

Respondent continued to argue for imposition of these penalties

at trial and on brief.

                               OPINION

    Section 6662 imposes a 20-percent penalty on any portion of

an underpayment of tax that is attributable to, inter alia, any
                                 - 323 -
substantial estate or gift tax valuation understatement.        See

sec. 6662(a) and (b).95      An estate or gift tax valuation

understatement is substantial if the value of any property

claimed on an estate or gift tax return is 50 percent or less of

the amount determined to be the correct value.      See sec.

6662(g)(1).     No penalty is imposed unless the portion of the

underpayment attributable to substantial estate or gift tax

valuation understatements for the taxable period (or with respect

to the estate of the decedent) exceeds $5,000.      See sec.

6662(g)(2).     The penalty is increased from 20 percent to 40

percent and is a gross valuation misstatement, if the value of




     95
          SEC 6662.   IMPOSITION OF ACCURACY-RELATED PENALTY.

          (a) Imposition of Penalty.--If this section applies to
any portion of an underpayment of tax required to be shown on a
return, there shall be added to the tax an amount equal to 20
percent of the portion of the underpayment to which this section
applies.

          (b) Portion of Underpayment to Which Section
Applies.--This section shall apply to the portion of any
underpayment which is attributable to 1 or more of the following:

             (1) Negligence or disregard of rules or regulations.
             (2) Any substantial understatement of income tax.
             (3) Any substantial valuation misstatement under
                 chapter 1
             (4) Any substantial overstatement of pension
                 liabilities.
             (5) Any substantial estate or gift tax valuation
                 understatement.
                               - 324 -
any property claimed on the return is 25 percent or less of the

amount determined to be the correct value.   See sec. 6662(h).

    Section 6664 provides an exception to the imposition of

accuracy-related penalties if the taxpayer shows that there was

reasonable cause for the understatement and that the taxpayer

acted in good faith.    See sec. 6664(c); see also United States v.

Boyle, 469 U.S. 241, 242 (1985).   Whether a taxpayer acted with

reasonable cause and in good faith is a factual question.   See

sec. 1.6664-4(b), Income Tax Regs.   Generally, the most important

factor is the extent to which the taxpayer exercised ordinary

business care and prudence in attempting to assess his or her

proper tax liability.   See Estate of Simplot v. Commissioner, 112

T.C. 130, 183 (1999) (citing Mandelbaum v. Commissioner, T.C.

Memo. 1995-255), revd. on another issue 249 F.3d 1191 (9th Cir.

2001); sec. 1.6664-4(b), Income Tax Regs.
                                   - 325 -
    Under section 6662(g),96 respondent apparently takes the

position that the determination whether the percentage threshold

for a substantial or gross valuation understatement has been

reached is made on a property-by-property basis.     See Part XX

Penalties Handbook, Internal Revenue Manual (RIA), sec.

120.1.5.11.2.   In the absence of any argument to the contrary by

any of the parties in this case, we use this specifically

targeted approach.




     96
      SEC 6662(g).   SUBSTANTIAL ESTATE OR GIFT TAX VALUATION
UNDERSTATEMENT.

          (1) In General.--For purposes of this section, there is
a substantial estate or gift tax valuation understatement if the
value of any property claimed on any return of tax imposed by
subtitle B is 50 percent or less of the amount determined to be
the correct amount of such valuation.

                       *   *   *    *   *    *   *

               (h) INCREASE IN PENALTY IN CASE OF GROSS
VALUATION MISSTATEMENTS.

          (1) In General.--To the extent that a portion of the
underpayment to which this section applies is attributable to one
or more gross valuation misstatements, subsection (a) shall be
applied with respect to such portion by substituting “40 percent”
for “20 percent”.
          (2) Gross Valuation Misstatements.--The term “gross
valuation misstatements” means--

                       *   *   *    *   *    *   *

               (C) any substantial estate or gift tax valuation
understatement as determined under subsection (g) by substituting
“25 percent” for “50 percent”.
                             - 326 -
    The penalty applies to all property included in the gross

estate under section 2031 or transferred for less than adequate

and full consideration under sec. 2512(b).   See Estate of Owen v.

Commissioner, 104 T.C. 498, 505-506 (1995) (applying section

6660, which was the precursor of section 6662(g)).

    In the cases at hand, we determine whether the percentage

threshold for a substantial or gross valuation understatement has

been reached by individually comparing the book value of the

subject interests in the disputed companies claimed on the 1993

and 1994 gift tax returns and the estate tax return97 with our

determinations of the correct values of those interests.   The

table below shows reported value as a percentage of actual value




     97
      The way in which the transactions were reported (as sales
on the gift tax returns and as cash proceeds in the living trust
on the estate tax return) might raise a question about whether
there was an understatement of value of property “claimed on any
return of tax imposed by subtitle B”. However, petitioners
raised no such question. Indeed, they contend that they
disclosed the value of the transferred interests at book value,
according to the terms of the buy-sell agreements. Petitioners’
brief states:

     the Estate reported on the Estate Tax Return an amount
     equal to the book value price of the interests owned by
     Dave True as of the date of his death. In calculating
     their gift tax, Dave and Jean True valued the interests
     that they sold at book value so there was no gift to
     report. Therefore, the accuracy-related penalty
     mathematically should be calculated based on the
     difference between the correct value of the property
     and the book value used to calculate the tax as
     reported.
                                - 327 -
(as determined by the Court) for each of the subject interests in

the disputed companies.
                                           Actual value    Reported as a
Subject interest claimed on    Reported    determined by   percentage of
estate or gift tax return     book value       Court       actual value

True Oil
1993 gift tax return          $5,226,006    $6,204,908        84.22%
Estate tax return             5,538,423      8,288,746        66.82%
1994 gift tax return          2,528,315      3,712,376        68.11%


Belle Fourche
Estate tax return               747,723     10,234,704         7.31%
1994 gift tax return            183,593      2,115,123         8.68%


Eighty-Eight Oil
1993 gift tax return          2,556,378      5,628,052        45.42%
Estate tax return             9,546,285     10,757,119        88.74%
1994 gift tax return          4,400,744      4,817,914        91.34%


Black Hills Trucking
Estate tax return               951,467      5,087,246        18.70%
1994 gift tax return            590,511      2,952,048        20.00%


True Ranches
1993 gift tax return          3,265,647      6,060,161        53.89%
Estate tax return             5,777,943     10,368,441        55.73%
1994 gift tax return          2,712,212      4,643,833        58.40%



White Stallion
Estate tax return               153,434        232,029        66.13%
                               - 328 -
       As the table indicates, the subject interests in Belle

Fourche were valued on the estate tax return and the 1994 gift

tax return at less than 25 percent of the correct value, which

result in gross valuation misstatements under section 6662(h).

The subject interest in Eighty-Eight Oil was valued on the 1993

gift tax return at more than 25 percent, but less than 50 percent

of the correct value, which results in a substantial gift tax

valuation understatement under section 6662(g).    Finally, the

subject interests in Black Hills Trucking were valued on the

estate tax return and the 1994 gift tax return at less than 25

percent of the correct value, resulting in gross valuation

misstatements under section 6662(h).98

       Unless the reasonable cause exception to the accuracy-

related penalties applies, the 40-percent penalty will apply to

the portion of any underpayment of estate tax or 1994 gift tax

attributable to the gross valuation understatement of the subject

interests in Belle Fourche and Black Hills Trucking.    Moreover,

the 20-percent penalty will apply to the portion of any

underpayment of 1993 gift tax attributable to the substantial

valuation understatement of the subject interest in Eighty-Eight

Oil.



       98
      The gift loan derived from the deferred payment
transaction was not property “claimed on any return of tax
imposed by subtitle B” and is therefore not subject to the
valuation understatement penalties.
                              - 329 -
    There is no statutory, regulatory, or case law guidance for

the calculation of the portion of the underpayment attributable

to a substantial or gross valuation understatement for estate or

gift tax purposes.   However, section 1.6664-3, Income Tax Regs.,

provides rules for determining the order in which adjustments to

a return are taken into account to compute penalties imposed

under the first three components of the accuracy-related penalty

(i.e., penalties for negligence or disregard of rules or

regulations, substantial understatement of income tax, and

substantial (or gross) valuation misstatements under chapter 1).

See secs. 1.6662-1 and 1.6664-3, Income Tax Regs.   Therefore, we

draw from those regulations to determine the portions of the

underpayments attributable to substantial or gross valuation

understatements in the cases at hand.

    According to the regulations, in computing the portions of

an underpayment subject to penalties imposed under sections 6662

and 6663, adjustments to a return are considered made in the

following order:

    (1) Those with respect to which no penalties have been
    imposed.

    (2) Those with respect to which a penalty has been
    imposed at a 20 percent rate (i.e., a penalty for
    negligence or disregard of rules or regulations,
    substantial understatement of income tax, or substantial
    valuation misstatement, under sections 6662(b)(1)
    through 6662(b)(3), respectively).
                              - 330 -
    (3) Those with respect to which a penalty has been
    imposed at a 40 percent rate (i.e., a penalty for a
    gross valuation misstatement under sections 6662(b)(3)
    and (h)).

    (4) Those with respect to which a penalty has been
    imposed at a 75 percent rate (i.e., a penalty for fraud
    under section 6663). [Sec. 1.6664-3(b), Income Tax
    Regs.]


    Examples under the regulations, and our opinion in Lemishow

v. Commissioner, 110 T.C. 346 (1998), illustrate how the

regulations would apply to the cases at hand.   Step 1 is to

determine the portion, if any, of the underpayment on which no

accuracy-related penalty or fraud penalty is imposed by

increasing reported taxable income for understated income that is

not subject to penalty (adjustment 1), recomputing the tax, and

comparing it to the tax shown on the return.    Step 2 determines

the portion, if any, of the underpayment on which a penalty of 20

percent is imposed by increasing taxable income derived in step 1

for understated income subject to the 20-percent penalty

(adjustment 2), recomputing the tax, and comparing it to the tax

computed in step 2.   Finally, step 3 determines the portion, if

any, of the underpayment on which a penalty of 40 percent is

imposed by computing the total underpayment attributable to all

understated income and subtracting the portions of such

underpayment calculated in steps 1 and 2.   See Lemishow v.

Commissioner, 110 T.C. 346 (1998); see also Todd v. Commissioner,
                                - 331 -
89 T.C. 912 (1987), affd. 862 F.2d 540 (5th Cir. 1988; sec.

1.6664-3(d), Income Tax Regs.

    In the cases at hand, the same methodology should apply to

compute the portions of the underpayments attributable to the

substantial and gross valuation understatements, identified

above, that were reported on the 1993 and 1994 gift tax returns

and on the estate tax return.

    Finally, we hold that the reasonable cause exception to the

accuracy-related penalties does not apply to the cases at hand.

The facts of record indicate that petitioners did not exercise

ordinary business care and prudence in attempting to assess the

proper estate and gift tax liabilities for the years in question.

    In having the 1993 gift tax return prepared, Dave True did

not engage a professional appraiser to value the transferred

interests in the True partnerships.       Instead, he wanted to test,

through litigation, the ability of the buy-sell agreements to fix

Federal gift tax value.   Petitioners claimed to rely on the

decisions in the 1971 and 1973 gift tax cases, which held that

book value equaled fair market value, when they valued the

subject interests in the cases at hand at book value.      We find

that such reliance was not reasonable; petitioners did not engage

counsel to advise them of the legal effects of those cases on

future transfers pursuant to the buy-sell agreements.      Moreover,

the opinions of the District Court in the 1971 and 1973 gift tax

cases did not address whether the buy-sell agreements were
                                - 332 -
testamentary devices; therefore, those opinions and the resulting

decisions did not provide adequate support for petitioners’

reporting positions on the gift and estate tax returns.

    In having the estate tax return prepared, petitioners

engaged Mr. Lax to value Dave True’s interests in the True

companies as of June 3, 1994.    However, petitioners obviously did

not rely on Mr. Lax’s conclusions.    If they had done so, they

would not have grossly understated the date-of-death value of

Dave True’s interest in Belle Fourche and substantially

understated the date-of-death value of his interest in Black

Hills Trucking.

    Unlike the taxpayers in Mandelbaum v. Commissioner, T.C.

Memo. 1995-255, Dave True and the True family had substantial

sophistication in legal, valuation, and tax matters; they were

accustomed to working with and using lawyers on both tax99 and

non-tax100 matters.   In fact, the family’s business policy


     99
      See, e.g., True v. United States, 190 F.3d 1165 (10th Cir.
1999); True Oil Co. v. Commissioner, 170 F.3d 1294 (10th Cir.
1999), affg. Nielson-True Partnership v. Commissioner, 109 T.C.
112 (1997); True v. United States, 35 F.3d 574 (10th Cir.
1994)(unpublished opinion); True v. United States, 894 F.2d 1197
(10th Cir. 1990); True v. United States, 80 AFTR 2d 97-7918, 97-2
USTC par. 50,946 (D. Wyo. 1997); True v. United States, 72 AFTR
2d 93-5660, 93-2 USTC par. 50,461 (D. Wyo. 1993); True v. United
States, 629 F. Supp. 881 (D. Wyo. 1986); True v. United States,
547 F. Supp. 201 (D. Wyo. 1982); True v. United States, Docket
No. C79-131K (D. Wyo., Oct. 1, 1980)
     100
       See, e.g., Walker v. Toolpushers Supply Co., 955 F. Supp.
1377 (D. Wyo. 1997); True Oil Co. v. Sinclair Oil Corp., 771 P.2d
781, 794 (Wyo. 1989); True v. High Plains Elevator Mach. Co., 577
                                                   (continued...)
                                - 333 -
explicitly stated that for every business deal they would

consider its tax consequences, and they would evaluate whether to

litigate potentially controversial tax issues.    In the cases at

hand, the True family was well aware of the issues in controversy

and the dollars at stake.    They took aggressive positions on the

estate and gift tax returns to test the effectiveness of the buy-

sell agreements to fix transfer tax values.    They did not rely,

in good faith, on professional appraisals or obtain professional

advice on the effects of the decisions in the prior gift tax

cases.     Accordingly, we hold that the reasonable cause exception

to the accuracy-related penalties does not apply to the cases at

hand.

    To reflect the foregoing,



                                           Decisions will be entered

                                      under Rule 155.




     100
       (...continued)
P.2d 991 (Wyo. 1978); True Oil Co. v. Gibson, 392 P.2d 795 (Wyo.
1964).
                                                          - 334 -
                                                          Appendix

                                                                                                            Schedule 1
1993 Transfers by Dave True
                                                                              Fair market value
                                                         Fair market             of True sons’            Total purchase
                                    Interest            value of 100%          24.84% aggregate           price paid by
                                   transferred        interest per 1993       interests per 1993           True sons
                                  to True sons(1)     gift tax notice(2)        gift tax notice            (book value)
Disputed Companies

True Oil                             24.84%               $56,120,008               $13,940,210           $5,226,006
Eighty-Eight Oil                     24.84%                53,333,341                13,248,002            2,556,378
True Ranches                         24.84%                49,090,137                12,193,990            3,265,647

  Subtotal                                                158,543,486               39,382,202            11,048,031

Undisputed Companies

Rancho Verdad                        24.84%                 2,175,048                   540,282(3)            327,012
True Drilling                        24.84%                 4,605,773                 1,144,074(3)            848,208
True Geothermal Energy               24.84%                 1,226,039                   304,548               304,548
True Mining                          24.84%                     1,027                       255                   255
True Envir. Rem. LLC                 24.84%                 1,111,256                   276,036               276,036

  Subtotal                                                  9,119,143                2,265,195              1,756,059

       Grand total                                        167,662,629                41,647,397           12,804,090
 (1)
       Aggregate interests in each company transferred by Dave True to Hank, Diemer, and David L. True.
       Interests sold to Jean True were not included in the 1993 gift tax notice.

 (2)
       The 1993 gift tax notice did not separately state the values of the transferred interests.    The values shown above
       are based on the Revenue Agent’s Reports and the 1994 estate tax notice.

 (3)
       Respondent no longer asserts a gift tax deficiency related to this entity.
                                                      - 335 -
                                                                                                          Schedule 2
1994 Transfers by Estate
                                                                          Fair market value
                                                   Fair market             of Dave True’s           Total purchase
                             Interest owned       value of 100%            interest owned            price paid by
                             by Dave True       interest per 1994         at death per 1994        Jean True & True
                               at death(1)      estate tax notice(2)      estate tax notice       sons (book value)
Disputed Companies
True Oil                        38.47%             $52,097,003                $20,041,717             $5,538,423
Eighty-Eight Oil                38.47%              68,900,000                 26,505,830              9,546,285
True Ranches                    38.47%              52,725,363                 20,283,447              5,777,943
Belle Fourche                   68.74%              28,919,991                 19,801,518                747,723
Black Hills Trucking            58.16%              10,933,726                  6,359,055                951,467
White Stallion                  34.235%              1,139,080                    389,964                153,434
  Subtotal                                         214,715,163                 93,381,531             22,715,275

Undisputed Companies
Rancho Verdad                   38.47%               2,175,053                    836,743(3)             506,308
True Drilling                   38.47%               4,605,776                  1,771,842(3)             938,940
Tool Pushers                    70.683%              6,500,000                  4,594,395(3)           2,173,211
Midland Financial               68.47%              20,000,001                 13,694,001(3)           8,761,108
Roughrider Pipeline             68.47%                 325,001                    222,528(3)             217,396
Smokey Oil                      72.394%              2,399,983                  1,737,444(3)           1,733,359
True Geothermal Energy          38.47%                 662,516(2)                 254,870                254,870
True Mining                     38.47%                   1,024                        394                    394
True Envir. Rem. LLC            38.47%               1,234,656                    474,972                474,972
Black Hills Oil Marketers       68.47%                     349                        239                    239
Bonanza Publishing              68.47%                   2,294                      1,571                  1,571
Clareton Oil                    68.47%                     334                        229                    229
Donkey Creek Oil                68.47%                     334                        229                    229
Equitable Oil Purchasers        56.51%                   5,764                      3,257                  3,257
Fire Creek Oil                  68.47%                   6,282                      4,301                  4,301
Pumpkin Buttes Oil              68.47%                     296                        203                    203
Sunlight Oil                    68.47%                     332                        227                    227
True Geothermal Drilling        68.47%                     894                        612                    612
True Wyoming Beef               68.47%                   4,092                      2,802                  2,802
Wind River Oil                  68.47%                     340                        233                    233
True Land & Royalty             68.47%                 153,441                    105,061                105,061
  Subtotal                                          38,078,762                 23,706,153             15,179,522
    Grand total                                    252,793,925                117,087,684             37,894,797
(1)
     Dave True’s total interest in each company as of his death. Respondent has agreed that any adjustment to the
      value of the interest transferred to Jean True qualifies for the marital deduction.
 (2)
      Fair market value of 100% interest amounts for True Geothermal Energy and following were extrapolated from 1994
      estate tax notice
 (3)
      Respondent no longer asserts an estate tax deficiency related to this entity.
                                                        - 336 -
                                                                                                         Schedule 3

1994 Transfers by Jean True
                                                                          Fair market value
                                                     Fair market            of aggregate          Total purchase
                                  Interest          value of 100%        interests transferred    price paid by
                                 transferred      interest per 1994        by Jean True per          True sons
                                by Jean True       gift tax notice       1994 gift tax notice       (book value)
Disputed Companies

True Oil                          17.23%             $52,097,000               $8,976,312           $2,528,315
Eighty-Eight Oil                  17.23%              68,900,000               11,871,469            4,400,744
True Ranches                      17.23%              52,725,360                9,084,581            2,712,212
Belle Fourche                     17.23%              28,920,000                4,982,916              183,593
Black Hills Trucking              37.93%(1)           10,933,730                4,147,164              590,511

 Subtotal                                            213,576,090               39,062,442           10,415,375

Undisputed Companies

Rancho Verdad                     17.23%               2,175,051                     374,761(2)        226,759
Tool Pushers                       4.54%               6,500,000                     295,100(2)        137,872
Midland Financial                 17.23%              20,000,000                   3,446,000(2)      2,226,338
Roughrider Pipeline               17.23%                 320,417                      55,208(2)         55,208
True Mining                       17.23%                   1,023                         176               176
True Envir. Rem. LLC              17.23%               1,194,929                     205,886           205,886
Black Hills Oil Marketers         17.23%                     347                          60                60
Bonanza Publishing                17.23%                   2,292                         395               395
Clareton Oil                      17.23%                     334                          58                58
Equitable Oil Purchasers          40.00%                   5,761                       2,304             2,304
Fire Creek Oil                    17.23%                   6,924                       1,193             1,193
Pumpkin Buttes Oil                17.23%                     295                          51                51
Sunlight Oil                      17.23%                     330                          57                57
True Geothermal Drilling          17.23%                     642                         111               111
True Wyoming Beef                 17.23%                   3,700                         638               638
Wind River Oil                    17.23%                     340                          59                59
True Land & Royalty               17.23%                 153,441                      26,438            26,438

 Subtotal                                             30,365,826                   4,408,495         2,883,603

      Grand total                                    243,941,916               43,470,937           13,298,978


(1)
      Jean True’s percentage interest should be 37.63%.
(2)
      Respondent no longer asserts a gift tax deficiency related to this entity.
