`




                           115 T.C. No. 30



                     UNITED STATES TAX COURT



                  J. C. SHEPHERD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2574-97.                     Filed October 26, 2000.


          P transferred to a newly formed family partner-
     ship, of which P is 50-percent owner and his two sons
     are each 25-percent owners, (1) P’s fee interest in
     timberland subject to a long-term timber lease and
     (2) stocks in three banks.

          Held: P’s transfers represent separate indirect
     gifts to his sons of 25 percent undivided interests in
     the leased timberland and stocks. Held, further, the
     fair market value of petitioner’s gifts determined.



     David D. Aughtry, James M. Kane, and Howard W. Neiswender,

for petitioner.

     Robert W. West, for respondent.
                                  - 2 -

        THORNTON, Judge:   Respondent determined a $168,577

deficiency in petitioner’s Federal gift tax for calendar year

1991.    The issues for decision are:     (1) The characterization,

for gift tax purposes, of petitioner’s transfers of certain real

estate and stock into a family partnership of which petitioner is

50-percent owner and his two sons are each 25-percent owners;

(2) the fair market value of the transferred real estate

interests; and (3) the amount, if any, of discounts for

fractional or minority interests and lack of marketability that

should be recognized in valuing the transferred interests in the

real estate and stock.

     Section references are to the Internal Revenue Code as in

effect on the date of the gifts.     Rule references are to the Tax

Court Rules of Practice and Procedure.

                            FINDINGS OF FACT

     The parties have stipulated some of the facts, which are so

found.

     Petitioner is married to Mary Ruth Shepherd and has two

adult sons, John Phillip Shepherd (John) and William David

Shepherd (William).    When he filed his petition, petitioner

resided in Berry, Alabama.

Petitioner’s Acquisition of Interests in Land and Bank Stock

     Beginning in 1911, petitioner’s grandfather–-at first singly

and later with petitioner’s father--acquired a great deal of land
                                - 3 -

in and around Fayette County, Alabama.    In April 1949,

petitioner’s grandfather died and left petitioner, his only

grandchild, a 25-percent interest in all that he owned.    Among

the grandfather’s possessions was an interest in more than 9,000

acres spread over numerous parcels in and around Fayette County,

Alabama (the land), and stock (the bank stock) in three

rural Alabama banks-–the Bank of Parish, the Bank of Berry, and

the Bank of Carbon Hill (the banks).

     Prior to 1957, petitioner’s father gave petitioner an

additional 25-percent interest in the land, thereby increasing

petitioner’s ownership interest to 50 percent.    As described in

more detail below, on January 3, 1957, petitioner and his father

leased the land to Hiwassee Land Co. (Hiwassee) under a 66-year

timber lease.    On June 2, 1965, petitioner’s father died, leaving

all his property–-including his 50-percent interest in the land

and an undisclosed amount of stock in the banks--to petitioner’s

mother.    Petitioner’s mother died shortly thereafter, devising to

petitioner her 50-percent interest in the land and the bank

stock.    Petitioner then owned the entire interest in the land,

subject to Hiwassee’s leasehold interest.    Petitioner also owned

more than 50 percent of the common stock of the banks, of which

he was then president.1



     1
       The record does not specify when petitioner first became
president of the banks.
                              - 4 -

Long-Term Timber Lease of Family Land

     As described above, by 1957 petitioner and his father each

owned a 50-percent interest in the family land.    On January 3,

1957, petitioner and his father entered into a long-term timber

lease with Hiwassee, granting Hiwassee the right to cut and

remove timber on 9,091 acres (the leased land).2   The term of the

lease is for 66 years, expiring on January 1, 2023.

     Hiwassee agreed to pay annual rent of $1.75 per acre,

payable for each calendar year by February 1 of that year.    The

annual rent is to be adjusted each year by the same percentage as

the annual average of the Wholesale Price Index for all

commodities (now the Producer Price Index) (PPI) increases or

decreases relative to the Wholesale Price Index for 1955.    The

annual rents are adjusted “only for increments of increase or

decrease equaling or exceeding five percent (5%) from the 1955




     2
       Bowater, Inc., is the successor in interest to the rights
of Hiwassee Land Co. (Hiwassee) under the lease on the subject
property. References to Hiwassee hereinafter also include
references to Bowater, Inc., as successor in interest.
                                - 5 -

average or from the average resulting in the previous

adjustment.”3

     Under the lease, the lessors retain all mineral rights on

the land but must obtain the lessee’s consent (“which shall not

be unreasonably withheld”) to develop the minerals.4

     The lease allows the lessors to sell the leased land,

subject to Hiwassee’s right of first refusal; if Hiwassee elects

not to purchase, then the sale is to be made subject to the terms

of the lease.




     3
         Hiwassee paid rents under the lease as follows:

     Year          Amount               Year     Amount

     1957        $16,199.25             1977   $31,475.61
     1958         15,902.25             1978    34,907.40
     1959         17,901.39             1979    37,613.40
     1960         16,886.94             1980    42,188.43
     1961         16,877.64             1981    48,125.39
     1962         16,877.64             1982    52,299.54
     1963         16,877.64             1983    52,299.54
     1964         16,877.64             1984    52,299.54
     1965         16,877.64             1985    55,344.37
     1966         16,874.44             1986    55,344.37
     1967         17,947.41             1987    55,344.37
     1968         17,947.41             1988    55,344.37
     1969         17,947.41             1989    55,344.37
     1970         19,119.86             1990    59,911.63
     1971         19,119.86             1991    59,911.63
     1972         20,472.68             1992    59,911.63
     1973         20,472.68             1993    59,911.63
     1974         24,350.76             1994    63,493.79
     1975         28,769.97             1995    62,858.88
     1976         31,475.61
     4
       The lease states that “It is understood” that
approximately three-quarters of the mineral rights are held by
parties other than the lessors.
                                  - 6 -

     The lease contains no requirement that Hiwassee reseed or

reforest the leased land at the expiration of the lease.

The Shepherd Clifford Trust

     On or about December 22, 1980, petitioner and his wife

established the J. C. Shepherd “Clifford” Trust Agreement (the

trust), an inter vivos trust with a term of 10 years.     Upon

creation of the trust, petitioner and his wife conveyed an

undivided 25-percent interest in the leased land to the trust.

On January 5, 1981, they conveyed a second 25-percent undivided

interest in the leased land to the trust.5

     John and William were equal income beneficiaries of the

trust.      During the term of the trust, they each received one-half

of the income from one-half of the Hiwassee lease (i.e., each

received 25-percent of the Hiwassee lease income).

     On or about April 1, 1991, the trust terminated.     The

trustee reconveyed the two previously transferred 25-percent

undivided interests in the leased land to petitioner and his

wife.




        5
       The deeds conveying the two 25-percent interests in the
land show that the land was conveyed by petitioner and his wife.
Petitioner’s wife, however, owned no record title or interest in
the property. Her only interests were spousal rights and
benefits created under Alabama State law. The parties have
stipulated that in Alabama real estate transactions, it is
customary for the owner’s spouse to sign all documents to
eliminate questions regarding retention of dower or other spousal
benefits or rights.
                               - 7 -

The Shepherd Family Partnership

     On August 1, 1991, petitioner executed the Shepherd Family

Partnership Agreement (the partnership agreement).     On August 2,

1991, John and William executed it.     The Shepherd Family

Partnership (the partnership) is a general partnership

established pursuant to Alabama State law.     The partnership

agreement designates petitioner as the managing partner, with

power to “implement or cause to be implemented all decisions

approved by the Partners, and shall conduct or cause to be

conducted the ordinary and usual business and affairs of the

Partnership”.   The partners’ interests in the partnership’s net

income and loss, capital, and partnership property are as

follows:   Petitioner--50 percent; John–-25 percent; and William–-

25 percent.   The partnership agreement provides that these

partnership interests will continue throughout the existence of

the partnership unless the partners mutually agree to change

their respective interests.

      The partnership agreement provides that each partner shall

have three capital accounts–-a permanent capital account, an

operating capital account, and a drawing capital account.       The

partnership agreement states that the initial permanent capital

account for each partner, as of August 1, 1991, is $10 for

petitioner and $5 each for William and John.     In this same

section, captioned “INITIAL CAPITAL CONTRIBUTIONS”, the

partnership agreement also states:     “Each Partner shall be
                               - 8 -

entitled to make voluntary additional permanent capital

contributions.   Each such contribution shall be allocated in the

Partnership Interests to the Partners’ permanent capital

accounts.”

     In a section captioned “DEBITS/CREDITS”, the partnership

agreement provides that the permanent capital account of each

partner shall consist of each partner’s initial capital

contribution as described above increased by the “Partner’s

Partnership Interest in the adjusted basis for federal income tax

purposes of any additional permanent capital contribution of

property by a Partner (less any liabilities to which such

property is subject)”.

     The partnership agreement provides that “Any Partner shall

have the right to receive a distribution of any part of his

Partnership permanent capital account in reduction thereof with

the prior consent of all the other Partners.”

     The partnership agreement also provides that all property

acquired by the partnership shall be owned by the partners as

tenants in partnership in accordance with their partnership

interests, with no partner individually having any ownership

interest in the partnership property.   Additionally, each partner

waives any right to require partition of any partnership

property.

     Under the partnership agreement, any partner may withdraw

from the partnership at any time, upon written notice to the
                               - 9 -

other partners.   The partnership agreement states that the effect

of the withdrawal is to terminate the relationship of the

withdrawing partner as a partner and thereby eliminate the

withdrawing partner’s right to liquidate the partnership.    The

withdrawing partner may transfer all or any part of his

partnership interest with or without consideration, but only

after providing the other partners the first option to purchase

his interest at fair market value, generally as determined by an

independent appraiser.

     Upon dissolution of the partnership, proceeds from the

liquidation of partnership property, after satisfaction of

partnership debts, are to be applied to payment of credit

balances of the partners’ capital accounts.

Transfer of the Leased Land to the Partnership

     On August 1, 1991–-one day before John and William had

executed the partnership agreement--petitioner and his wife

executed two deeds purporting to transfer the leased land to the

partnership.6   Each deed purported to transfer to the partnership

an undivided 50-percent interest in the leased land (for an

aggregate transfer of the entire interest in the leased land).

On August 30, 1991, the deeds conveying the leased land to the

partnership were recorded.



     6
       Again, as far as is revealed in the record, petitioner’s
wife owned no record title or interest in the leased land but
signed the deeds as a formality to eliminate any question as to
spousal benefits under Alabama law.
                              - 10 -

Transfer of the Bank Stock to the Partnership

     On September 9, 1991, petitioner transferred to the

partnership some of his stock in each of the three banks.7     The

parties have stipulated that the bank stock had a fair market

value at the time of transfer (prior to any consideration of any

partnership adjustment) as follows:

         Stock              No. of Shares       Fair Market Value

Bank of Berry, AL            313 shares             $186,633
Bank of Carbon Hill, AL      136 shares              279,140
Bank of Parrish, AL          262 shares              466,446
      Total                                          932,219

Petitioner’s Gift Tax Return and Respondent’s Determination

     Petitioner filed Form 709, United States Gift (and

Generation-Skipping Transfer) Tax Return, for calendar year 1991,

reporting gifts to John and William of interests in the leased

land and the bank stock.   On the Form 709, petitioner valued the

leased land at $400,000.   Petitioner listed the total appraised

value of the transferred bank stock as $932,219, less a 15-

percent minority discount, for a gift value of $792,386.

Petitioner reported a gift to John and William of $298,097 each

(25 percent of the total reported $400,000 value of the leased

land and $792,386 value of the transferred bank stock).

Petitioner reported no gift tax due on these transfers, the gift




     7
       Petitioner testified that he did not know what percentage
of his stock in the three banks he transferred to the partnership
in 1991 but that after the transfers he still owned a greater
than 50-percent interest in each bank.
                                - 11 -

tax computed ($187,966) being more than offset by his claimed

maximum unified credit ($192,800).

      In the notice of deficiency, respondent determined that the

fair market value of the 50-percent interest in the leased land

that petitioner gifted to his sons was $639,300 (implying a value

of $1,278,600 for petitioner’s entire interest in the leased

land).   Respondent made no adjustment to the gift value of the

bank stock reported on the return.       Respondent determined that

petitioner had a gift tax deficiency of $168,577.

                                OPINION

A.   General Legal Principles

      Section 2501 generally imposes an excise tax on the transfer

of property by gift during the taxable year.       The gift tax is

imposed only upon a completed and irrevocable gift.       See Burnet

v. Guggenheim, 288 U.S. 280 (1933).       A gift is complete as to any

property when “the donor has so parted with dominion and control

as to leave in him no power to change its disposition, whether

for his own benefit or for the benefit of another”.      Sec.

25.2511-2(b), Gift Tax Regs.

      A gift of property is valued as of the date of the transfer.

See sec. 2512(a).   If property is transferred for less than

adequate and full consideration, then the excess of the value of

the property transferred over the consideration received is

generally deemed a gift.   See sec. 2512(b).      The gift is measured

by the value of the property passing from the donor, rather than
                                - 12 -

by the property received by the donee or upon the measure of

enrichment to the donee.   See sec. 25.2511-2(a), Gift Tax Regs.

      For gift tax purposes, the value of the transferred property

is generally 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.”    United States v. Cartwright, 411

U.S. 546, 551 (1973); see sec. 25.2512-1, Gift Tax Regs.

      The determination of property value for gift tax purposes is

an issue of fact, and all relevant factors must be considered.

See Anderson v. Commissioner, 250 F.2d 242, 249 (5th Cir. 1957),

affg. in part and remanding T.C. Memo. 1956-178; LeFrak v.

Commissioner, T.C. Memo. 1993-526.

B.   The Parties’ Contentions

      The parties disagree about the characterization, for gift

tax purposes, of petitioner’s transfers of the leased land and

bank stock.   The parties also disagree about the fair market

value of the leased land at the time petitioner transferred it.

In addition, the parties disagree as to what valuation discounts

should apply to petitioner’s transfer of the leased land and bank

stock.   The nub of the parties’ disagreement in this last regard

is whether petitioner’s transfers to the partnership should

reflect minority and marketability discounts attributable to the

sons’ minority-interest status in the partnership.
                                - 13 -

         In his petition, petitioner not only assigns error to

respondent’s determination in the statutory notice but also seeks

a partial restoration of his unified credit.     Petitioner contends

that the gifts to his sons of interests in the leased land

represent two separate gifts of partnership interests and that

the gifts of bank stock represent two separate indirect gifts

bestowed through enhancements of the previously gifted

partnership interests.     Viewed thus, petitioner contends, these

gifts should be valued giving effect to a 33.5-percent minority

and marketability discount applicable to each son’s 25-percent

partnership interest.     The bottom line, petitioner argues, is

that the gifts of both the leased land and the bank stock, as

reported on his 1991 gift tax return, were overvalued.

     Respondent does not dispute that the partnership exists or

that it is a legitimate partnership.8    Respondent also agrees

that if the gifts of land were to be valued giving effect to

minority and marketability discounts in recognition of the 25-

percent partnership shares, then the appropriate discount would

be 33.5 percent.     Respondent contends, however, that this

discount rate is inapplicable, because the gifts should not be

measured by reference to the sons’ partnership interests.      In



     8
       Moreover, respondent has not argued and we do not consider
the applicability of chapter 14 (secs. 2701-2704), relating to
special valuation rules that apply to, among other things,
transfers of certain interests in partnerships and certain
lapsing rights and restrictions.
                                - 14 -

support of his position, respondent contends that petitioner did

not give his sons partnership interests but rather gave them

either:   (1) Indirect gifts of real estate, accomplished by means

of a transfer to the partnership, or alternatively (2) direct

gifts of real estate, accomplished before the partnership ever

came into existence.

C.   Characterization of the Transfers

      The parties agree that the partnership came into existence

on August 2, 1991, when John and William executed the partnership

agreement, rather than on the previous day, when only petitioner

had executed it.   The parties disagree, however, about the effect

of petitioner’s executing deeds on August 1, 1991, purporting to

transfer the leased land to the then-nonexistent partnership.

Respondent argues that on August 1, 1991, petitioner effectively

gave an undivided 50-percent interest in the leased land to his

sons, either directly or indirectly.     Petitioner argues that the

gift was not completed until August 2, 1991.    We look to

applicable State law, in this case Alabama law, to determine what

property rights are conveyed.    See United States v. National Bank

of Commerce, 472 U.S. 719, 722 (1985) (“‘in the application of a

federal revenue act, state law controls in determining the nature

of the legal interest which the taxpayer had in the property’”

(quoting Aquilino v. United States, 363 U.S. 509, 513 (1960));

LeFrak v. Commissioner, supra.
                             - 15 -

     We agree with petitioner that any gift to his sons was not

completed before August 2, 1991.9   On August 1, 1991, there was

no completed gift, because there was no donee, and petitioner had

not parted with dominion and control over the property.

Petitioner could not make a gift to himself.   See Kincaid v.

United States, 682 F.2d 1220, 1224 (5th Cir. 1982).

     We disagree with petitioner’s contention, however, that his

gifts to his sons of interests in the leased land represented

gifts of minority partnership interests because, as just

discussed, the creation of the partnership (and therefore the

creation of the sons’ partnership interests) preceded the

completion of petitioner’s gift to the partnership.   To adopt

petitioner’s contention would require us to recognize the

existence, however fleeting, of a one-person partnership,

contrary to Alabama law, which defines a partnership as “An

association of two or more persons to carry on as co-owners a




     9
       The Alabama Recording Act, Ala. Code sec. 35-4-90(a)
(1991), generally provides that the conveyance of land is void as
to the grantee unless the deed transferring the land is recorded.
Here, the deeds conveying the land to the partnership were not
recorded until Aug. 30, 1991. Neither party has raised, and we
do not reach, the issue of whether petitioner’s gifts were not
completed until the date of recordation. Cf. Estate of Whitt v.
Commissioner, 751 F.2d 1548, 1561 (11th Cir. 1985) (facts
indicated that gifts were not intended to be completed until the
recordation of the deeds of conveyance), affg. T.C. Memo. 1983-
262. It is of little consequence to our analysis, however,
whether petitioner’s gifts of interests in the leased land were
completed on Aug. 2 or Aug. 30, 1991.
                              - 16 -

business for profit.”   Ala. Code sec. 10-8-2 (1994); see LeFrak

v. Commissioner, supra.

     Nor do we agree with petitioner’s contention that his

transfers should be characterized as enhancements of his sons’

existent partnership interests.   The gift tax is imposed on the

transfer of property.   See sec. 2501.   Here the property that

petitioner possessed and transferred was his interests in the

leased land and bank stock.   How petitioner’s transfers of the

leased land and bank stock may have enhanced the sons’

partnership interests is immaterial, for the gift tax is imposed

on the value of what the donor transfers, not what the donee

receives.   See Robinette v. Helvering, 318 U.S. 184, 186 (1943)

(the gift tax is “measured by the value of the property passing

from the donor”); Stinson Estate v. United States, 214 F.3d 846,

849 (7th Cir. 2000); Citizens Bank & Trust Co. v. Commissioner,

839 F.2d 1249 (7th Cir. 1988) (for gift and estate tax purposes,

value of stock transferred to trusts was determined without

regard to terms or existence of trust); Goodman v. Commissioner,

156 F.2d 218, 219 (2d Cir. 1946), affg. 4 T.C. 191 (1944); Ward

v. Commissioner, 87 T.C. 78, 100-101 (1986); LeFrak v.

Commissioner, supra; sec. 25.2511-2(a), Gift Tax Regs.; cf.

Estate of Bright v. United States, 658 F.2d 999, 1001 (5th Cir.

1981) (for estate tax purposes, “the property to be valued is the

property which is actually transferred, as contrasted with the
                                - 17 -

interest held by the decedent before death or the interest held

by the legatee after death”).

     1.   Petitioner’s Constitutional Challenge

     Petitioner argues that the gift tax must be measured not by

reference to the value of the property in the hands of the donor

but “by the value of the property in gratuitous transit.”

Otherwise, petitioner argues, the gift tax would be a direct tax

on the transferred property, in contravention of the

constitutional restraint on the imposition of direct taxes (the

Direct Tax Clause).    See U.S. Const. art. I, sec. 9, cl. 4 (“No

capitation, or other direct, Tax shall be laid, unless in

Proportion to the Census or Enumeration herein before directed to

be taken.”).

     Petitioner’s argument is without merit.     In upholding the

Federal gift tax against a challenge based on the Direct Tax

Clause, the Supreme Court stated in Bromley v. McCaughn, 280 U.S.

124, 136-138 (1929):

     While taxes levied upon or collected from persons
     because of their general ownership of property may be
     taken to be direct, * * * this Court has consistently
     held, almost from the foundation of the government,
     that a tax imposed upon a particular use of property or
     the exercise of a single power over property incidental
     to ownership, is an excise which need not be
     apportioned, and it is enough for present purposes that
     this tax is of the latter class * * *

             *     *     *      *        *   *     *

          It is said that since property is the sum of all
     the rights and powers incident to ownership, if an
     unapportioned tax on the exercise of any of them is
                              - 18 -

     upheld, the distinction between direct and other
     classes of taxes may be wiped out, since the property
     itself may likewise be taxed by resort to the expedient
     of levying numerous taxes upon its uses; that one of
     the uses of property is to keep it, and that a tax upon
     the possession or keeping of property is no different
     from a tax on the property itself. Even if we assume
     that a tax levied upon all the uses to which property
     may be put * * * would be in effect a tax upon
     property, * * * and hence a direct tax requiring
     apportionment, that is not the case before us.

              *    *     *     *       *   *    *

     * * * [The gift tax] falls so far short of taxing
     generally the uses of property that it cannot be
     likened to the taxes on property itself which have been
     recognized as direct. It falls, rather, into that
     category of imposts or excises which, since they apply
     only to a limited exercise of property rights, have
     been deemed to be indirect and so valid although not
     apportioned.

     In short, the gift tax is not a direct tax because it is not

levied on the “general ownership” of property but rather applies

only to “a limited exercise of property rights”; i.e., the

exercise of the “power to give the property owned to another.”

Id. at 136.   Here, petitioner’s dispute is not with the fact that

he made a donative transfer that is properly the subject of the

Federal gift tax, but rather with the characterization of the

property for purposes of measuring its value–-a consideration

that is irrelevant for purposes of determining the

constitutionality of the tax.10


     10
       Indeed, in a closely analogous context, the Supreme Court
has held that the constitutionality of the Federal estate tax
does not depend upon there even being a transfer of the property
at death. See Fernandez v. Wiener, 326 U.S. 340, 355 (1945);
                                                   (continued...)
                                - 19 -

     2.   Did Petitioner Make Direct Gifts to His Sons?

     Petitioner deeded the leased land and bank stock to the

partnership.   Whatever interests his sons acquired in this

property they obtained by virtue of their status as partners in

the partnership.   Clearly, then, contrary to one of respondent’s

alternative arguments, petitioner did not make direct gifts of

these properties to his sons.    Cf. LeFrak v. Commissioner, supra

(transfer by donor-father of buildings to himself and his

children as tenants in common, “d.b.a.” (doing business as) one

of various partnerships formed later the same day to hold the

particular building conveyed, represented direct gifts to the

children of the father’s interest in the buildings).

     3.   Did Petitioner Make Indirect Gifts to His Sons?

     A gift may be direct or indirect.   See sec. 25.2511-1(a),

Gift Tax Regs.   The regulations provide the following example of

a transfer that results in an indirect taxable gift, assuming

that the transfer is not made for adequate and full

consideration:   “A transfer of property by B to a corporation

generally represents gifts by B to the other individual

shareholders of the corporation to the extent of their



     10
      (...continued)
Bittker & Lokken, Federal Taxation of Income, Estates and Gifts,
par. 120.1.3, at 120-6 (2d ed. 1993) (the transfer of property at
death is “a sufficient condition–-but not a necessary one–-for a
constitutional tax. By holding that a tax on a transfer at death
is not a direct tax, the Court did not imply that a tax on
something other than a transfer at death is a direct tax”).
                               - 20 -

proportionate interests in the corporation.”    Sec. 25.2511-

1(h)(1), Gift Tax Regs.

       Application of this general rule is well established in case

law.    For instance, in Kincaid v. United States, 682 F.2d at

1225, the taxpayer transferred her ranch to a newly formed

corporation in which she and her two sons owned all the voting

stock.    In exchange for the ranch, the taxpayer received

additional shares of the corporation’s stock.    The stock was

determined to be less valuable than the ranch.    The court

concluded that the difference between what she gave and what she

got represented a gift to the shareholders.    Noting that the

taxpayer could not make a gift to herself, the court held that

she made a gift to each of her sons of one-third of the total

gift amount.    See also Heringer v. Commissioner, 235 F.2d 149,

151 (9th Cir. 1956) (transfers of farm lands to a family

corporation of which donors were 40-percent owners represented

gifts to other shareholders of 60 percent of the fair market

value of the farm lands), modifying and remanding 21 T.C. 607

(1954); CTUW Georgia Ketteman Hollingsworth v. Commissioner, 86

T.C. 91 (1986) (mother’s transfer to closely held corporation of

property in exchange for note of lesser value    represented gifts

to the other five shareholders of five-sixths the difference in

values of the property transferred and the note the mother

received); Estate of Hitchon v. Commissioner, 45 T.C. 96 (1965)

(father’s transfer of stock to a family corporation for no
                              - 21 -

consideration constituted gift by father of one-quarter interest

to each of three shareholder-sons); Estate of Bosca v.

Commissioner, T.C. Memo. 1998-251 (father’s transfer to a family

corporation of voting common stock in exchange for nonvoting

common stock represented gifts to each of his two shareholder-

sons of 50 percent of the difference in the values of the stock

the father transferred and of the stock he received); cf. Chanin

v. United States, 183 Ct. Cl. 745, 393 F.2d 972 (1968) (two

brothers’ transfers of stock in their wholly owned corporation to

the subsidiary of another family corporation constituted gifts to

the other shareholders of the family corporation, reduced by the

portion attributable to the brothers’ own ownership interests in

the family corporation).

     Likewise, a transfer to a partnership for less than full and

adequate consideration may represent an indirect gift to the

other partners.   See Gross v. Commissioner, 7 T.C. 837 (1946)

(taxpayer’s and spouse’s transfer of business assets into a newly

formed partnership among themselves, their daughter, and son-in-

law resulted in taxable gifts to the daughter and son-in-law).

Obviously, not every capital contribution to a partnership

results in a gift to the other partners, particularly where the

contributing partner’s capital account is increased by the amount

of his contribution, thus entitling him to recoup the same amount

upon liquidation of the partnership.   In the instant case,

however, petitioner’s contributions of the leased land and bank
                              - 22 -

stock were allocated to his and his sons’ capital accounts

according to their respective partnership shares.   Under the

partnership agreement, each son was entitled to receive

distribution of any part of his capital account with prior

consent of the other partners (i.e., his father and brother), and

was entitled to sell his partnership interest after granting his

father and brother the first option to purchase his interest at

fair market value.   Upon dissolution of the partnership, each son

was entitled to receive payment of the balance in his capital

account.

     In these circumstances, we conclude and hold that

petitioner’s transfers to the partnership represent indirect

gifts to each of his sons, John and William, of undivided 25-

percent interests in the leased land and in the bank stock.11   In

reaching this conclusion, we have effectively aggregated

petitioner’s two separate, same-day transfers to the partnership

of undivided 50-percent interests in the leased land to reflect


     11
       We do not suggest, and respondent has not argued, that
such an analysis necessarily entails disregarding the
partnership. Similarly, in Kincaid v. United States, 682 F.2d
1220 (5th Cir. 1982), and in the other cases cited supra treating
gifts to corporations as indirect gifts to the other
shareholders, the courts did not necessarily disregard the donee
corporations. In either case, characterizing the subject gift as
comprising proportional indirect gifts to the other partners or
shareholders, as the case may be, rather than as a single gift to
the entity of which the donor is part owner, reflects the
exigency that the donor cannot make a gift to himself or herself.
See id. at 1224 (“Mrs. Kincaid cannot, of course, make a gift to
herself”).
                              - 23 -

the economic substance of petitioner’s conveyance to the

partnership of his entire interest in the leased land.   We have

not, however, aggregated the separate, indirect gifts to his

sons, John and William.   See Estate of Bosca v. Commissioner,

T.C. Memo. 1998-251 (for purposes of the gift tax, each separate

gift must be valued separately), and cases cited therein; cf.

Estate of Bright v. United States, 658 F.2d 999 (5th Cir. 1981)

(rejecting family attribution in valuing stock for estate tax

purposes).

D.   Valuation of the Leased Land

     The parties rely on expert testimony to value petitioner’s

interest in the leased land at the time he transferred it to the

partnership.   We evaluate expert opinions in light of all the

evidence in the record and may accept or reject the expert

testimony, in whole or in part, according to our own judgment.

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

Estate of Mellinger v. Commissioner, 112 T.C. 26, 39 (1999).

“The persuasiveness of an expert’s opinion depends largely upon

the disclosed facts on which it is based.”    Estate of Davis v.

Commissioner, 110 T.C. 530, 538 (1998).   We may be selective in

our use of any part of an expert’s opinion.   See id.

     Petitioner presented testimony of three expert witnesses:

Mr. Norman W. Lipscomb (Lipscomb), Mr. Gene Dilmore (Dilmore),

and Mr. Harry L. Haney, Jr. (Haney).
                               - 24 -

     Lipscomb valued petitioner’s 100-percent interest in the

leased land under both a sales comparison approach12 and an

income capitalization approach,13 and then reconciled the two

results.   Under his sales comparison approach, Lipscomb valued

the leased land at $958,473.   In arriving at this value, Lipscomb

determined an indicated value of the leased land on the basis of

each of four comparable sales, then discounted each indicated

value by 45 percent on the theory that buyers would demand a

significant discount for property encumbered by a lease for 32

years.    Under his income capitalization approach, Lipscomb valued

the leased land at $795,364.   Treating the values determined

under the sales comparison approach and the income capitalization

approach as establishing upper and lower boundaries,

respectively, of a range of possible values, and weighing the

income capitalization approach most heavily, Lipscomb determined

that the value of a 100-percent interest in the leased land, as

of the date of the gifts, was $850,000.   Lipscomb then determined

that a 50-percent undivided interest should be subject to a 27-

percent discount for a fractional ownership interest, as

determined by a range of adjustments suggested by his analysis of



     12
       Under a sales comparison approach, property is valued by
identifying sales of comparable properties and making appropriate
adjustments to the sales prices.
     13
       Under an income capitalization approach, income-producing
property is valued by estimating the present value of anticipated
future economic benefits; i.e., cash flows and reversions.
                               - 25 -

what he deemed to be three comparable sales of fractional real

estate interests.    The net result was that Lipscomb valued a 50-

percent undivided interest in the leased land as of March 31,

1991, at $310,250.

     Dilmore used an income capitalization approach to arrive at

a $210,000 value for an undivided one-half fee interest in the

leased land as of March 31, 1991, after applying a 15-percent

discount for an undivided interest in the property.

     Haney’s report is limited to identifying various factors

that could negatively affect the value of the reversionary

interest in the leased land at the expiration of the long-term

timber lease on January 1, 2023 (the reversion); he provided no

specific dollar estimate of the reversion’s value.

     Respondent’s expert, Mr. Richard A. Maloy (Maloy), also used

an income capitalization approach, valuing petitioner’s entire

fee interest in the leased land, as of March 31, 1991, at

$1,547,000, calculated as the present value of the income stream

(contract rents) plus the present value of the reversion.

Maloy’s determination of present value reflects no discounts for

fractional interests or limited marketability.

     On brief, petitioner argues that the proper and most

realistic way to value land subject to a long-term timber lease

is to use an income capitalization methodology such as was

employed in Saunders v. United States, 48 AFTR 2d 81-6279, 81-2

USTC par. 13,419 (M.D. Ga. 1981).   Accordingly, the parties are
                               - 26 -

in substantial agreement that the leased land should be valued as

of the time the subject gift was made as the sum of:     (a) The

present value of the projected annual rental income from the

lease, plus (b) the present value of the reversion.      The parties

disagree, however, about numerous assumptions made by the experts

at each step of the valuation methodology.   We address these

disagreements below.

     1.   Present Value of Projected Lease Rents

     The value of the lease income stream may be estimated by

determining the rental payments petitioner was receiving at the

time of the gifts, then projecting those rents into the future

based upon an anticipated growth rate, and finally discounting

the future rents payments to a 1991 present value using an

appropriate discount rate.   See Saunders v. United States, supra;

see also Estate of Barge v. Commissioner, T.C. Memo. 1997-188

(using an income capitalization approach to value gift of 25-

percent undivided interest in timberland); cf. Estate of Proctor

v. Commissioner, T.C. Memo. 1994-208.    We estimate the present

value of the projected income stream from the lease based upon

events, expectations, and market conditions as they existed at

the time of the gifts in August 1991.

           a.   Projected Annual Income From the Lease

     It is undisputed that when petitioner made the gifts, the

remaining term of the lease was approximately 32 years.     The

parties have also stipulated the actual rental amounts received
                              - 27 -

by petitioner from 1957 through 1995.   The parties disagree,

however, about the anticipated growth rate of the annual rent

payments over the remaining life of the lease.

     Under the lease, rents are adjusted to reflect changes

relative to the average 1955 Wholesale Price Index but only after

there has been a cumulative adjustment of at least 5 percent from

the last change.   In projecting future rents, Maloy, Lipscomb,

and Dilmore each rely on historical changes in the PPI.     Maloy

and Lipscomb agree that historical changes in the PPI averaged

1.87 percent for the 10 years before 1991.14   Maloy ends his

analysis there, projecting rental increases of 5.6 percent (1.87

times 3) every 3 years for the duration of the lease.

     Lipscomb and Dilmore also take into account historical data

showing that the rate of actual rent increases has lagged behind

the rate of changes in the PPI, ostensibly as a result of

inconstant annual rates of increase in the PPI in combination

with the requirement that rents adjust only after there has been

a 5-percent cumulative change in the average price index.    On the

basis of this analysis, Lipscomb projects lease rent increases

of 5.2 percent every 3 years, and Dilmore estimates an average

long-term growth rate of approximately 1.5 percent per year.




     14
       Mr. Gene Dilmore (Dilmore) determined that increases in
the Producer Price Index (PPI) averaged 1.41 percent over the 10
years prior to petitioner’s gifts.
                               - 28 -

     Because rent increases under the lease historically have

lagged behind increases in the PPI, and in light of the

uncertainty about the magnitude and direction of changes in PPI

annual averages over a period as long as the 32 years remaining

on the lease term at the time of petitioner’s gifts, we conclude

that it is appropriate to take into account historical patterns

of actual rents under the lease.   On the basis of our review of

all the expert reports and testimony, we conclude that Lipscomb’s

projection of a 5.2-percent rent increase every 3 years for the

duration of the lease is fair and reasonable.

          b.    Present Value of Projected Rental Payments

     In determining the 1991 present value of the projected

rental payments, a critical factor is the discount rate applied

to the projected lease income stream.

     Lipscomb selected a discount rate of 8 percent, as

representing “what a typical investor would have expected for

investments of this type of land.”      His report indicates that

although the investment was “low-risk”, a higher discount rate

was warranted owing to the limited marketability of the

investment.    Lipscomb applied the 8-percent discount rate to the

after-tax lease income stream (assuming a 35-percent tax rate).

     Dilmore selected a discount rate of 13.5 percent, consisting

of a 12.5-percent “basic discount rate” and an additional 1

percent to reflect the lack of a reforestation clause in the

lease.   Dilmore’s report states that he selected the 12.5-percent
                                - 29 -

basic rate as being 3.5 percent over the prime lending rate of 9

percent and approximately 1.5 times the 30-year bond rate.      His

report indicates that this basic discount rate is consistent with

the somewhat lower yields on a land lease at a Birmingham

shopping center and with a national survey of 1991 real estate

yields for all real estate types.    His report states that a

higher discount is appropriate for the leased land than for these

other real estate comparables because the lease income “is

dependent upon the stability or lack thereof in the timber

business.”   His report indicates that an additional 1-percent

discount should be added to his 12.5-percent basic rate to

reflect the absence of any lease term requiring the lessee to

reseed or reforest the land upon termination of the lease.

Dilmore applied the 13.5-percent discount rate to the pretax

lease income stream.

     Maloy selected a discount rate of 8 percent on the basis of

interviews with Federal Land Bank appraisers and forestry

economics professors.    Unlike Lipscomb, but like Dilmore, Maloy

applied his selected discount rate to the pretax lease income

stream.

                  i.    Pretax Versus After-Tax Present Value
                        Analysis

     Respondent argues that Lipscomb’s use of an after-tax

analysis is inappropriate for determining fair market value.

Respondent argues that an after-tax analysis is “used only to
                              - 30 -

determine the internal rate of return of a particular investor.”

Respondent cites Estate of Proctor v. Commissioner, T.C. Memo.

1994-208, for the proposition that “investment” analysis does not

equate to fair market value analysis.

     In Estate of Proctor, we held that in determining the fair

market value of a ranch subject to a lifetime lease option, a

“conventional lease analysis method” was preferable to an

“investment differential method”,15 because the latter method

“attempts to measure ‘investment value’ rather than market value.

Investment value is more subjective because it is predicated on

the investment preferences of the individual investor.”     Id.   We

did not hold, however, as a matter of law that income

capitalization under the conventional lease analysis method must

be done on a pretax basis, or that particular factors that are

relevant for investment purposes are irrelevant in determining

fair market value.   Rather, we determined the applicable discount

rate based on our conclusion that it was “a better reflection of

risks associated with investing in ranch property, and is a more

accurate estimate of the rate of return investors expect to earn

when investing in ranch property.”     Id.




     15
       We defined the “investment differential method” as a
“method of valuation frequently used by appraisers to compare one
potential investment to the whole spectrum of other investment
opportunities available to a client.” Estate of Proctor v.
Commissioner, T.C. Memo. 1994-208.
                             - 31 -

     There is no fixed formula for applying the factors that are

considered in determining fair market value of an asset.   See

Estate of Davis v. Commissioner, 110 T.C. at 536 (in determining

the fair market value of minority blocks of stock in a

corporation, it was appropriate to take into consideration built-

in capital gains tax on the stock).   The weight given to each

factor depends upon the facts of each case.   See id. at 536-537.

Here, the relevant inquiry is whether a hypothetical willing

seller and a hypothetical willing buyer, as of the date of

petitioner’s gifts, would have agreed to a price for the lease

income stream that took no account of tax consequences.    See id.

at 550-554; see also Eisenberg v. Commissioner, 155 F.3d 50

(2d Cir. 1998); Estate of Borgatello v. Commissioner, T.C. Memo.

2000-264; Estate of Jameson v. Commissioner, T.C. Memo. 1999-43.

     A treatise relied upon by both parties states:

     Present value can be calculated with or without
     considering the impact of * * * income taxes as long as
     the specific rights being appraised are clearly
     identified. The techniques and procedures selected are
     determined by the purpose of the analysis, the
     availability of data, and the market practices.
     [Appraisal Institute, The Appraisal of Real Estate 462
     (11th ed. 1996).16]




     16
       In his rebuttal report, Maloy cites the above-cited
treatise for the different proposition that present value
analysis is properly applied using before-tax income streams.
Maloy has provided no page reference for his interpretation of
the treatise, and we conclude that his reliance on the treatise
is in error.
                               - 32 -

     Lipscomb testified convincingly that in his experience it

was customary practice in the timber industry to apply an after-

tax analysis.17   In his rebuttal report, Maloy includes as an

appendix portions of a treatise (Bullard, Basic Concepts in

Forest Valuation and Investment Analysis, sec. 6.2 (1998)) that

describe the use of an after-tax analysis for forestry

investments, whereby one converts all costs and revenues to an

after-tax basis and calculates all present values using an after-

tax discount rate.   Accordingly, authorities relied upon by

respondent’s own expert appear to acknowledge that an after-tax

analysis, consistently utilizing after-tax income and after-tax

discount rates, may be appropriate.18

     It is true, as Maloy indicates in his rebuttal report, that

an after-tax analysis requires an assumption as to whether the

hypothetical buyer is taxable and at what rate.   It appears,

however, that in selecting his discount rate, Maloy himself has




     17
       Dilmore testified that in this case he had used a before-
tax analysis to determine the present value of the lease income
stream, but “you could do it either way.”
     18
       In his rebuttal report filed before trial, Maloy contends
that Lipscomb inconsistently used an 8-percent pretax discount
rate against after-tax income. Although Lipscomb’s expert report
is not explicit in this regard, it is clear from Lipscomb’s
testimony that his income capitalization method was an after-tax
method, entailing use of an after-tax discount rate.
                             - 33 -

assumed that the hypothetical buyer is taxable at rates

consistent with those used in Lipscomb’s after-tax analysis.19

     Accordingly, we reject respondent’s suggestion that in

determining the present value of a projected income stream for

gift tax purposes, the determination must as a matter of law be

made on a pretax basis.

     Given Lipscomb’s assumed 35-percent tax rate, his 8-percent

after-tax discount rate may be converted to a pretax discount

rate of approximately 12.3 percent (8 divided by (1.0-.35)),

which is very close to the 12.5-percent pretax “basic rate”

selected by Dilmore for use in his pretax analysis.   In the

instant circumstances, the critical question, we believe, is not

whether to use a pretax or after-tax analysis, but whether it is

more appropriate to apply the pretax discount rate selected by

Maloy (8 percent), or by Dilmore (13.5 percent), or the

equivalent pretax discount rate selected by Lipscomb (12.3

percent).




     19
       Maloy’s report indicates that, on the basis of his
research, yield rates associated with investments like the
subject lease range from 6 to 8 percent, with the lower yields
more likely associated with investors who are tax-exempt. Maloy
selects an 8-percent rate associated with taxable investors.
Moreover, an 8-percent rate is approximately 33 percent higher
than the 6-percent rate that he associates with tax-exempt
investors, implying a 33-percent tax rate, which coincides
roughly with the 35-percent tax rate that Lipscomb assumes in his
analysis.
                               - 34 -

                  ii.   Nominal Versus Real Discount Rates

     The lease terms adjust the annual rent payments for

inflation.   The parties disagree over whether, in light of this

inflation-adjustment feature, it is appropriate to use a “real”

discount rate (i.e., a discount rate that eliminates the effects

of inflation) or a higher “nominal” discount rate (i.e., the real

rate plus the inflation rate).    Maloy’s expert report states that

the appropriate discount rate to apply here is a real rate.    On

brief, respondent argues that the discount rates used by

petitioner’s experts are too high because they are nominal rates.

Petitioner and his experts counter that in the instant

circumstances only nominal discount rates and not real rates are

appropriate.

     The differences between the parties appear rooted at least

partly in semantics.    Acknowledging that these matters are not

self-evident to those unbaptized in the murky waters of actuarial

science, we agree with petitioner and his experts, whose views

align with the aforementioned learned treatise, Appraisal

Institute, supra at 460-461, relied upon for different purposes

by both parties, which states as follows:

          Because lease terms often allow for inflation with
     * * * adjustments based on the Consumer Price Index
     (CPI), it is convenient and customary to project income
     and expenses in dollars as they are expected to occur,
     and not to convert the amounts into constant dollars.
     Unadjusted discount rates, rather than real rates of
     return, are used so that these rates can be compared
     with other rates quoted in the open market–-e.g.,
     mortgage interest rates and bond yield rates. * * *
                                - 35 -


                  *      *      *       *     *     *     *

          Projecting the income from real estate in nominal
     terms allows an analyst to consider whether or not the
     income potential of the property and the resale price
     will increase with inflation. The appraiser must be
     consistent and not discount inflated dollars at real,
     uninflated rates. When inflated nominal dollars are
     projected, the discount rate must also be a nominal
     discount rate that reflects the anticipated inflation.
     [Emphasis added.]

     We conclude that Maloy’s 8-percent discount rate is

understated as a result of his inappropriate use of a real

discount rate rather than a higher nominal discount rate.

                  iii.   Adjustment of Discount Rate for Lack of
                         Marketability

     It also appears that the differences between respondent’s

and petitioner’s experts are partly attributable to the fact that

they are valuing different things.       Maloy’s report states that he

has determined the market value of petitioner’s leased fee

interest.   Dilmore and Lipscomb, on the other hand, have each

valued an undivided one-half interest in the leased fee interest.

Lipscomb, like Maloy but unlike Dilmore, acknowledges that the

leased land is a “low-risk” investment, which would suggest a

relatively low discount rate.       Lipscomb’s recommended discount

rate reflects an upward adjustment to reflect the limited

marketability of an undivided one-half interest.

     As previously discussed, we have determined that

petitioner’s transfer of the leased land to the partnership

should be characterized as two separate undivided 25-percent
                                - 36 -

interests in the leased land.    We agree with Lipscomb that an

undivided fractional interest in the leased land will make it a

less favorable investment than the entire interest, by making it

less marketable and more illiquid, and that these factors may be

appropriately considered in selecting the discount rate.20   See

Saunders v. United States, 48 AFTR 2d 81-6279, 81-2 USTC par.

13,419 (M.D. Ga. 1981).   Accordingly, we conclude that Lipscomb’s

selected discount rate is fair and reasonable.    Our conclusion is

bolstered by the fact that, when converted to a pretax rate,

Lipscomb’s discount rate nearly coincides with the “basic rate”

determined by Dilmore using a different methodology based on

comparisons with various other types of investments.21




     20
       Alternatively, where the value of the transferred
property is to be determined with adjustments for lack of
marketability, it could be appropriate in some circumstances to
value the donor’s entire interest in the transferred property
employing a discount rate that reflects no adjustment for lack of
marketability, and then to adjust the value so determined for
lack of marketability with appropriate valuation discounts. As
discussed infra, however, it is inappropriate to make redundant
adjustments to both the discount rate and the valuation discount.
See Bittker & Lokken, Federal Taxation of Income, Estates, and
Gifts, par. 135.3.2, at 135-30 (2d ed. 1993) (“When property is
valued by capitalizing its anticipated net earnings, no
marketability discount is needed if the capitalization factor
reflects not only the earnings in isolation, but also the fact
that the investor may find it difficult to liquidate the
investment.”).
     21
       We reject Dilmore’s additional 1-percent discount for the
lack of a reforestation clause at the end of the lease. As
discussed infra, respondent has allowed, and we have accepted, an
allowance for reforestation in determining the value of the
reversion, thus making Dilmore’s additional 1-percent discount
for this purpose unnecessary.
                                - 37 -

     We hold and conclude, therefore, that Lipscomb has fairly

and reasonably determined the net present value of the lease

income stream to be $566,773.

     2.   Present Value of the Reversion

     Lipscomb’s income capitalization approach assumes that the

leased land will have a January 1, 2023, pretax reversion value

of $4,127,687.   Lipscomb then purports to arrive at a January 1,

2023, after-tax value of the reversion by assuming a 35-percent

tax on $4,127,687, and then discounting this after-tax amount to

1991 present value using an 8-percent discount rate.   Nothing in

the record explains Lipscomb’s derivation of his estimated

January 1, 2023, pretax conversion value.22   Furthermore, we


     22
       On brief, petitioner alleges that to arrive at the
$4,127,687 value for the reversion of the leased land, Lipscomb
applied a growth rate of 4 percent to comparable 1991 values.
The parts of the record that petitioner’s brief cites in support
of this proposition, however, do not yield this information, nor
have we discovered it elsewhere in the record. Statements in
briefs do not constitute evidence. See Rule 143(b). Even if we
were to assume arguendo that petitioner’s representation about
Lipscomb’s derivation of the reversion value were accurate, the
record is inadequate to allow us to identify with certainty the
comparables Lipscomb used for this purpose or to meaningfully
evaluate the appropriateness of either the comparables or the
assumed growth rate that petitioner alleges Lipscomb employed in
his analysis.

     If we were to assume arguendo that the comparables in
question were the same comparables Lipscomb used in his sales
comparison approach, the facts disclosed in his report and
testimony are inadequate to persuade us that those comparables
were determined appropriately. As previously discussed, using
the sales comparison approach, Lipscomb determined that
petitioner’s interest in the leased land had a 1991 fair market
value of $958,473. Lipscomb derived this number by applying a
45-percent marketability discount to what he deemed to be
comparable sales. Lipscomb testified that he determined the 45-
                                                   (continued...)
                              - 38 -

disagree with Lipscomb’s implicit premise, otherwise unsupported

by the record or common sense, that in determining the fair

market value of the reversion–-either in 2023 or in 1991–-a

hypothetical willing buyer and seller would have adjusted the

price downward to account for the seller’s income tax liability

on the sale.   Cf. Estate of Davis v. Commissioner, 110 T.C. 530

(1998).

     Dilmore calculates the January 1, 2023, value of the

reversion by projecting lease rental income to be $95,052 in

2023, and then capitalizing it at a rate of 12.6 percent, to

yield an estimated January 1, 2023, value of $754,381.   He then

discounts the January 1, 2023, value to 1991 present value.

Dilmore’s method improperly seeks to determine the January 1,

2023, value of the reversion on the basis of the final year’s

lease payments.   We are unconvinced that the fair market value of

the land in 2023, when the lease expires, is properly computed

on the basis of the last year’s rent payments under the lease.

Accordingly, we reject Dilmore’s conclusions in this regard.

     Respondent’s expert Maloy calculates the value of the

reversion by first establishing a $238 per acre “baseline”



     22
      (...continued)
percent discount based on analysis of sales of other leased
properties, which showed a range of discounts from 30 percent to
“almost 100 percent”. The record does not reveal how Lipscomb
chose the 45-percent discount from this wide range. Moreover,
the data underlying his analysis of these other sales are not
part of the record. Accordingly, we are unable to assess or
accept the appropriateness of the 45-percent discount that
Lipscomb applied.
                               - 39 -

estimate of the value of a 100-percent fee simple interest in the

leased land in 1991.    Maloy determines this baseline estimate on

the basis of comparisons with numerous property sales in the same

counties as the leased land.   Maloy then applies a growth rate of

5 percent to project a future value for the reversion in 2023 of

$10,245,020.23   From this amount, Maloy subtracts $2,454,315 for

estimated replanting costs in 2023, to yield net future value in

2023 of $7,790,706.24   Maloy then applies a discount rate of 8

percent to yield a present value of the reversion of $663,768.

     As previously discussed, we disagree with Maloy’s selected

discount rate as being understated.     We conclude, however, that

Maloy’s valuation of the reversion is in all other respects

reasonable and is based on sound assumptions and methodology,

taking into consideration, among other things, reasonable costs

of reforesting the land at the end of the lease.25    Accordingly,


     23
       Maloy’s assumption of a 5-percent growth rate is based on
his determination that timberland in general would benefit from
increased timber prices, Federal programs, and the leasing of
hunting rights.
     24
       Maloy estimates replanting costs in 2023 by determining
an estimated $150 per acre replanting cost in 1990 and then
adjusting this number upward to reflect an estimated annual
inflation rate of 1.87 percent.
     25
       Petitioner’s own witness, Charles Irwin, testified that
in 1991 it probably would have cost $75-$80 per acre to prepare
the land for planting if it lay fallow for under 1 year, and $50-
$55 per acre to plant the land, resulting in a total cost of
$125-$135 per acre. Thus, Maloy’s replanting estimate is
actually greater than Irwin’s. Irwin does claim that the costs
to prepare the land could “probably double” if the fallow period
was 4 or 5 years. It seems unlikely, however, that the lessee
                                                   (continued...)
                              - 40 -

employing Maloy’s methodology but substituting the pretax

equivalent of Lipscomb’s selected discount rate (12.3 percent),

we hold that at the time of petitioner’s gifts, the present value

of the reversion in the leased land was $190,291.26

E.   Discounts for Fractional Interests

      The parties have stipulated that if we were to measure

petitioner’s gifts by reference to the sons’ interests in the

partnership, the correct minority and marketability discount

would be 33.5 percent.   We have determined, however, that

petitioner’s transfers represented separate, indirect gifts to

his sons of interests in the leased land and bank stock, rather

than gifts of partnership interests or enhancements thereto.    As

previously discussed, the gift tax is imposed on the value of

what the donor transfers, not what the donee receives.   See

Robinette v. Helvering, 318 U.S. at 186 (the gift tax is

“measured by the value of the property passing from the donor”);



      25
      (...continued)
under a long-term timber lease would allow the land to lie fallow
for a number of years before the end of the lease, rather than
managing timber harvesting to maximize the timber’s growth
potential for the full duration of the lease.
      26
       On brief, petitioner–-agreeing wholly with none of his
several experts, but instead relying selectively on discrete
aspects of their several reports--urges that the 1991 value of
the reversion was only $30,024. In defense of this small number,
petitioner argues that “no one in their right mind is going to
pay anything in 1991 for a residual interest in the year 2023”.
Petitioner argues, among other things, that there may be a
reduced market for timber, because we may have a paperless
society by 2023. Maybe sooner, judging by the size of the record
in this case. Nevertheless, we are unpersuaded that a future fee
interest in more than 9,000 acres of Alabama timberland has
little or no value.
                               - 41 -

Stinson Estate v. United States, 214 F.3d at 849; Citizens Bank &

Trust Co. v. Commissioner, 839 F.2d 1249 (7th Cir. 1988) (for

gift and estate tax purposes, value of stock transferred to

trusts was determined without regard to terms or existence of

trust); Goodman v. Commissioner, 156 F.2d at 219; Ward v.

Commissioner, 87 T.C. at 100-101; LeFrak v. Commissioner, T.C.

Memo. 1993-526; sec. 25.2511-2(a), Gift Tax Regs.    Accordingly,

the subject gifts are not measured by reference to the sons’

partnership interests.   Because the conditions of the stipulation

are not met, we must consider what valuation discounts, if any,

are applicable.

     1.   The Leased Land

     Lipscomb opined that a 27-percent discount was appropriate

in recognition of the fractionalized ownership of the leased

land because of the resulting reduction in marketability and

control.27   As previously discussed, however, in performing his

analysis of the 1991 present value of the lease income, Lipscomb

had previously taken lack of marketability into account in

adjusting his discount rate upward.     Consequently, his 27-percent

valuation discount is redundant insofar as it reflects lack of

marketability and to that extent is excessive.    Lipscomb’s

analysis is insufficiently detailed to permit us to isolate the




     27
       Lipscomb determined the 27-percent discount rate by
analyzing sales of what he deemed to be similar properties, which
indicated a range of adjustments from 25 percent to 100 percent.
                              - 42 -

redundant elements.   Accordingly, we reject his recommended 27-

percent valuation discount.

     Dilmore testified that an undivided interest in the leased

land should be subject to a discount of 15 percent, comprising

these three elements:

     (1) Operation–-a 3-percent discount for lack of complete

control of the management of the property and of decisions made

about it;

     (2) Disposition of the property–-a 10-percent discount to

reflect the possibility of disagreement between the co-owners and

the necessity of getting them to agree on the sale; and

     (3) Partitioning–-a 2-percent discount in recognition of the

eventuality that partitioning of the physical property might

become necessary.   Dilmore indicated that “This would appear to

be a fairly minor factor” for the leased land.

     On brief, respondent argues that no valuation discount for

fractional interests is warranted with respect to the leased

land, but, if it were, it should be measured solely by the cost

of partitioning the land, which Maloy opined would probably be

about $25,000.   We reject respondent’s argument as failing to

give adequate weight to other reasons for discounting a

fractional interest in the leased land, such as lack of control

in managing and disposing of the property.   See Estate of Stevens

v. Commissioner, T.C. Memo. 2000-53; Estate of Williams v.

Commissioner, T.C. Memo. 1998-59.
                                - 43 -

      Accordingly, on the basis of our review of all the expert

testimony and reports, we conclude and hold that Dilmore’s 15-

percent valuation discount for an undivided fractional interest

in the leased land is fair and reasonable.28

      2.   The Bank Stock

      With regard to the bank stock, respondent has not contested

the 15-percent minority interest discount as claimed on

petitioner’s gift tax return.    Accordingly, we hold that the

stipulated value of the bank stock on the date of petitioner’s

gifts ($932,219) is subject to a 15-percent minority interest

discount for the gifts to his sons of undivided interests.

F.   Summary and Conclusion

      On the basis of all the evidence in the record, we conclude

and hold that petitioner made separate gifts to each of his two

sons of 25-percent undivided interests in the leased land and the

bank stock.    The value of the total separate gifts to each son is




      28
       On brief, petitioner argues that because Lipscomb (and by
extension Dilmore) selected valuation discounts based upon a 50-
percent undivided interest in the leased land, as opposed to a
25-percent undivided interest, their recommended valuation
discounts are understated. Petitioner also argues that various
other cases have allowed fractional-interest discounts greater
than those recommended by petitioner’s own experts. We must
determine the applicable valuation discount on the basis of the
facts in the record before us. Here, petitioner has presented no
concrete, convincing evidence as to what additional amount of
discount, if any, should be attributable to a 25-percent
undivided interest as opposed to a 50-percent undivided interest.
                              - 44 -

$358,973, and the value of petitioner’s aggregate gifts is

$717,946, calculated as follows:

Leased Land
      1991 present value of lease income              $566,773
      1991 present value of 2023 reversion             190,291
            Combined present value                     757,064

     Pro rata interest                                     25%
     Undiscounted pro rata value                       189,266
     Valuation discount adjustment (1-.15)                 .85
          Value of separate indirect gifts             160,876

Bank Stock
     Stipulated value                                   932,219
     Pro rata interest                                      25%
     Undiscounted pro rata interest                     233,055
     Valuation discount adjustment (1-.15)                  .85
           Value of separate indirect gifts             198,097

Combined Value of Separate Indirect Gifts
     Leased land                                        160,876
     Bank stock                                         198,097
          Total                                         358,973
Total Indirect Gifts
     John                                               358,973
     William                                            358,973
                                                        717,946

     We have considered all other arguments the parties have

advanced for different results.    Arguments not expressly

addressed herein we conclude are irrelevant, moot, or without

merit.



     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.

     Reviewed by the Court.

     WELLS, CHABOT, COHEN, PARR, WHALEN, COLVIN, HALPERN,
CHIECHI, LARO, and GALE, JJ., agree with this majority opinion.
                               - 45 -

     WHALEN, J., concurring:   I agree with both the reasoning and

result of the majority opinion, but I write separately to make

the point that this case does not present the same issues

concerning the valuation of the indirect gifts as were presented

in Estate of Bosca v. Commissioner, T.C. Memo. 1998-251, and to

comment on the position of Judges Beghe and Ruwe, who make

interesting and worthwhile points, especially in light of the

increasing use of family partnerships.

     In this case, the majority opinion decides two principal

issues.   First, it rejects petitioner’s contention that the

transfers of leased land and bank stock made by petitioner should

be characterized as gifts to petitioner’s two sons of minority

interests in   a family partnership, or as enhancements of his

sons’ existing partnership interests.    Petitioner sought

that characterization of the transfers to justify the application

of substantial discounts in valuing the property.    Contrary to

petitioner’s position, the majority characterizes the transfers

as indirect gifts to the sons of the leased land and bank stock.

The majority relies   on section 25.2511-1(h)(1), Gift Tax Regs.,

which provides:

     A transfer of property by B to a corporation generally
     represents gifts by B to the other individual
     shareholders of the corporation to the extent of their
     proportionate interests in the corporation.


Based thereon, the majority holds that the transfers represent an

indirect gift to each of petitioner’s two sons of an undivided

25-percent interest in the leased land and bank stock.    To my
                                - 46 -

knowledge, there is no disagreement as to this aspect of the

majority opinion.

     Second, the majority opinion values the two gifts made by

petitioner.   In the case of the bank stock, the parties

stipulated that before the transfer to the partnership the

aggregate value of the stock of the three banks that was included

in the transfer was $932,219.    In view of the fact that the stock

of each of the three banks represented a minority interest in the

bank, the majority reduced or discounted the value of the stock

by 15 percent.   This discount was claimed on petitioner’s gift

tax return, and respondent did not contest it in these

proceedings. There is nothing to suggest that the amount of this

discount would vary depending on whether the gifts were valued in

the aggregate or separately.    The majority then, in effect,

treats 50 percent of the remaining value as having been retained

by petitioner through his interest in the family partnership and

treats 25 percent of the remaining value, $198,097, as a gift to

each son in accordance with section 25.2511-1(h)(1).

     In the case of the leased land, after resolving   various

factual disputes between and among the parties’ expert witnesses,

the majority opinion concludes that the present value of the

leased land, before the transfer to the partnership, was

$757,064.   In view of the fact that the gifts made by petitioner

were gifts of undivided interests in the leased land, the

majority agrees that the value of the leased land should be

reduced or discounted by 15 percent due to the fact that the
                              - 47 -

donees did not have complete control over the property.     In

footnote 28 of the opinion, the majority notes that the 15-

percent discount is based upon “a 50-percent undivided interest

in the leased land, as opposed to a 25-percent undivided

interest” due   to petitioner’s failure to provide evidence as to

“what additional amount of discount, if any, should be

attributable to a 25-percent undivided interest as opposed to a

50-percent undivided interest.”   Thus, based upon the record at

trial, the same discount is applicable regardless of whether the

gifts of the leased land are valued on an aggregate basis or

separately.   The majority opinion then, in effect, treats 50

percent of the remaining value as having been retained by

petitioner through his interest in the partnership and treats 25

percent of the remaining value, $160,876, as a gift to each son

in accordance with section 25.2511-1(h)(1).

     The majority opinion, at page 23, states as follows:


     We have not, however, aggregated the separate, indirect
     gifts to his sons, John and William. See Estate of
     Bosca v. Commissioner, T.C. Memo. 1998-251 (for
     purposes of the gift tax, each separate gift must be
     valued separately), and cases cited therein; cf. Estate
     of Bright v. United States, 658 F.2d 999 (5th Cir.
     1981) (rejecting family attribution in valuing stock
     for estate tax purposes).


As the author of the Estate of Bosca v. Commissioner, I

appreciate the approval of that opinion by the majority.

However, the approach of the majority in the instant case, as

discussed above, is different from the approach used in Estate of
                              - 48 -

Bosca because, in this case, there is no difference between the

valuation of petitioner’s gifts to his sons depending on whether

the gifts are valued on an aggregate basis or separately.   The

value of 50 percent of the gifted property, or $378,532 (50

percent of $757,064), less a 15-percent discount is the same as

two 25-percent undivided interests in the leased land, $378,532,

less a 15-percent discount.

     In valuing the gifts in Estate of Bosca, it was necessary

for the Court to decide whether the gifts should be valued on an

aggregate basis; i.e., as part of a 50-percent block of stock, or

whether they should be valued separately; i.e., as two 25-percent

blocks of stock.   In deciding to take the latter approach, we

followed the long-standing position of this Court that separate

gifts must be valued separately.   See, e.g., Calder v.

Commissioner, 85 T.C. 713 (1985); Rushton v. Commissioner, 60

T.C. 272, 278 (1973), affd. 498 F.2d 88 (5th Cir. 1974); Standish

v. Commissioner, 8 T.C. 1204 (1947); Phipps v. Commissioner, 43

B.T.A. 1010-1022 (1941), affd. 127 F.2d 214 (10th Cir. 1942);

Hipp v. Commissioner, T.C. Memo. 1983-746.

     As I understand their position, Judges Ruwe and Beghe agree

that, under the facts of this case, petitioner made   a gift to

each of his two sons, but they do not agree with the approach

used by the majority in valuing the gifts.   They appear to take

the position that in computing the difference between the value

of the property transferred by the donor and the value of the

consideration received by the donor, as required by section
                               - 49 -

2512(b), the property is to be valued in the donor’s hands prior

to the transaction with no discounts or reductions permitted.

     For example, in the case of the leased land, the only asset

as to which respondent has raised an issue in this case, it

appears that Judges Ruwe and Beghe take the position that the

value of the property in the donor’s hands before the transfer,

$757,064, must also be the value    of the property transferred by

the donor.    Presumably, they would take the position that the

value of the consideration received by the donor is 50 percent of

the value of the property transferred or $378,532, based upon the

fact that petitioner retained a 50-percent interest in the

partnership.   Under this approach the aggregate value of the

gifts would be $378,532 and that amount must be included in

computing the amount of gifts made by petitioner during the

calendar year.   Thus, they disagree that a discount of 15 percent

is proper to reflect the reduced value of undivided interests in

the leased land.

     Their view appears to be at odds with the fact that

discounts and reductions are permitted in the case of direct

gifts.   If a donor makes a direct gift to one or more donees, the

sum of the gifts may be less than the value of the property in

the donor’s hands before the transfer.    For example, we have held

that the sum of all the fractional interests in real property

gifted by a    donor was less than the value of the whole property

in the donor’s hands.   In Mooneyham v. Commissioner, T.C. Memo.

1991-178, the donor owned 100 percent of a certain parcel of real
                              - 50 -

property worth $1,302,000 before transferring a 50-percent

undivided interest in the property to her brother.    We held that

the value of the gift, the 50-percent fractional interest, was

“50 percent of the total less a 15-percent discount or $553,350.”

Thus, the property transferred by the donor was worth $97,650

less than it   was in the donor’s hands.   Similarly, in Estate of

Williams v. Commissioner, T.C. Memo. 1998-59, the owner of two

parcels of property transferred 50-percent undivided interests in

each of the parcels.   We held that each of the two gifts in that

case should be valued as 50 percent of the fair market value of

the property less aggregate discounts of 44 percent.    See also

Heppenstall v. Commissioner, a Memorandum Opinion of this Court

dated   Jan. 31, 1949 (minority discount).   These cases show

that, in appropriate cases, the minority discount and

fractionalized interest discount can be taken into account for

purposes of valuing direct gifts under section 2512(a).    This

suggests that such discounts can also be taken into account in

valuing indirect gifts under section 2512(b).    Otherwise, there

would be a difference in the application of the willing buyer,

willing seller standard depending on whether the valuation is of

a direct gift or an indirect gift.

     As described above, in valuing the gifts of bank stock, the

majority opinion applied a minority interest discount to reflect

the fact that a willing buyer would pay less for the minority

interests in the three banks that petitioner transferred.    In

valuing the leased land, the majority opinion applied a
                               - 51 -

fractional interest discount to reflect the fact that a willing

buyer would pay less for the undivided interest in the leased

land that petitioner transferred.   These discounts are

attributable to the nature of the property transferred by the

donor.   They   are not attributable to restrictions imposed by the

terms of the conveyance.   See Citizens Bank & Trust Co.

v. Commissioner, 839 F.2d 1249 (7th Cir. 1988).   In my view,

neither of these discounts is inconsistent with section 25.2511-

2(a), Gift Tax Regs., and the corresponding case law which

require that the gift be measured by the value of the property

passing from the donor, and not by what the   donee receives.

See, e.g., Ahmanson Found. v. United States, 674 F.2d 761, 767-

769 (9th Cir. 1981).

     CHABOT, COLVIN, HALPERN, and THORNTON, JJ., agree with this
concurring opinion.
                               - 52 -

       HALPERN, J., concurring:   I write to state my agreement

with the majority opinion and to respond to the suggestion that

in allowing a fractional interest discount with respect to the

leased land, the majority opinion has deviated from the valuation

rule of section 2512(b).    The threshold question under section

2512(b) is what “property is transferred”.    As germane to the

facts of the case under review, the question is whether

petitioner’s transfer of land to the partnership should be deemed

to represent a single transfer of petitioner’s 100-percent

interest in the land, or whether it should be viewed as separate,

indirect transfers of fractional interests to his two sons.

       The instant case, like Kincaid v. United States, 682 F.2d

1220 (5th Cir. 1982), is based on application of an indirect gift

rule as provided in the regulations:    “A transfer of property by

B to a corporation [for less than full and adequate

consideration] generally represents gifts by B to the other

shareholders of the corporation to the extent of their

proportionate interests in the corporation.”    Gift Tax Regs.

sec. 25.2511-1(h)(1) (emphasis added).    Applying this regulation,

the court in Kincaid concluded that the taxpayer’s single

transfer of a ranch to the family-owned corporation represented

“a gift to each of her sons” to the extent of their proportionate

interests.   Id. at 1224.   Given the unambiguous premise of the

cited regulation, as applied in Kincaid, that the transfer gives

rise to separate “gifts”, it follows that for purposes of valuing

those separate gifts, the “property transferred” should be viewed
                                - 53 -

as the property transferred by virtue of each of the deemed

separate gifts.   Otherwise, we must construe section 2512(b) to

apply not on a gift-by-gift basis, but on the basis of aggregate

gifts made by the donor to different donees–-a result without

basis in law or common sense.

       It would seem beyond cavil that if the petitioner had made

direct gifts to his sons of 25-percent undivided interests in the

land, we would permit appropriate fractional interest discounts

in valuing the gifts.   It would be anomalous if by making the

same gifts indirectly, through a partnership, instead of

directly, such fractional interest discounts were precluded.

Having applied the indirect gift rule to deny the donor entity-

level discounts on the basis that the transfer to the entity was

in essence multiple transfers to the individual objects of the

donor’s bounty, it would be unfair then to ignore the operation

of that rule in concluding that in considering the availability

of a fractional interest discount, the transfer should be treated

as a unitary transfer to the entity.

       Finally, it is true, as Judge Ruwe notes, that neither

Kincaid nor several of its progeny allowed any fractional

interest discount with respect to the transferred property.

There is no indication in any of these cases, however, that the

taxpayer raised or that the court considered such an issue.     The

only case in the Kincaid line of cases to expressly consider the

issue was Estate of Bosca v. Commissioner, T.C. Memo. 1998-251,

which concluded, consistent with the majority opinion, that
                             - 54 -

fractional interest discounts were permissible.   I see no reason

why we should now abandon this precedent, which is soundly

reasoned.

     CHABOT, COHEN, WHALEN, COLVIN, LARO, GALE, and THORNTON,
JJ., agree with this concurring opinion.
                               - 55 -

     RUWE, J., concurring in part and dissenting in part:     I

agree with the majority opinion except for its allowance of a 15-

percent valuation discount with respect to what the majority

describes as “indirect gifts [by petitioner] to each of his sons,

John and William, of undivided 25-percent interests in the leased

land”.   Majority op. p. 22.   In my opinion, no such discount is

appropriate because undivided interests in the leased land were

never transferred to petitioner’s sons.   The transfer in question

was a transfer of petitioner’s entire interest in the leased land

to the partnership.   This transfer was to a partnership in which

petitioner held a 50-percent interest.    Except for enhancing the

value of petitioner’s 50-percent partnership interest, he

received no other consideration for the transfer.

     Section 2512(b) provides:

     SEC. 2512.   Valuation of Gifts.

          (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 Supreme Court has described previous versions of the

gift tax statutes (section 501 imposing the tax on gifts and

section 503 which is virtually identical to present section

2512(b)) in the following terms:
                              - 56 -

          Sections 501 and 503 are not disparate provisions.
     Congress directed them to the same purpose, and they
     should not be separated in application. Had Congress
     taxed “gifts” simpliciter, it would be appropriate to
     assume that the term was used in its colloquial sense,
     and a search for “donative intent” would be indicated.
     But Congress intended to use the term “gifts” in its
     broadest and most comprehensive sense. H. Rep. No.
     708, 72d Cong., 1st Sess., p.27; S. Rep. No. 665, 72d
     Cong., 1st Sess., p.39; cf. Smith v. Shaughnessy, 318
     U.S. 176; Robinette v. Helvering, 318 U.S. 184.
     Congress chose not to require an ascertainment of what
     too often is an elusive state of mind. For purposes of
     the gift tax it not only dispensed with the test of
     “donative intent.” It formulated a much more workable
     external test, that where “property is transferred for
     less than an adequate and full consideration in money
     or money’s worth,” the excess in such money value
     “shall, for the purpose of the tax imposed by this
     title, be deemed a gift...” And Treasury Regulations
     have emphasized that common law considerations were not
     embodied in the gift tax. [Commissioner v. Wemyss, 324
     U.S. 303, 306 (1945); fn. ref. omitted.]

     The Supreme Court described the objective of these statutory

provisions as follows:

     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. * * * [Id. at 307.]

     Under the applicable statutory provisions, it is unnecessary

to consider the value of what petitioner’s sons received in order

to determine the value of the property that was transferred.

Indeed, the regulations provide that it is not even necessary to

identify the donee.1   The regulations provide that the gift tax


     1
      Sec. 25.2511-2(a), Gift Tax Regs.:

          SEC. 25.2511-2. Cessation of donor’s dominion and
     control. (a) The gift tax is not imposed upon the
     receipt of the property by the donee, nor is it
     necessarily determined by the measure of enrichment
                                                   (continued...)
                              - 57 -

is the primary and personal liability of the donor, that the gift

is to be measured by the value of the property passing from the

donor, and that the tax applies regardless of the fact that the

identity of the donee may not be presently known or

ascertainable.   See sec. 25.2511-2(a), Gift Tax Regs.2

     The majority correctly states the formula for valuing

transfers of property:

     If property is transferred for less than adequate and
     full consideration, then the excess of the value of the
     property transferred over the consideration received is
     generally deemed a gift. See sec. 2512(b). The gift
     is measured by the value of the property passing from
     the donor, rather than by the property received by the
     donee or upon the measure of enrichment to the donee.
     See sec. 25.2511-2(a), Gift Tax Regs. [Majority op.
     pp. 11-12.]

This is exactly the formula used in the cases on which the

majority relies for the proposition that a gift was made.    See

Kincaid v. United States, 682 F.2d 1220 (5th Cir. 1982); Heringer



     1
      (...continued)
     resulting to the donee from the transfer, nor is it
     conditioned upon ability to identify the donee at the
     time of the transfer. On the contrary, the tax is a
     primary and personal liability of the donor, is an
     excise upon his act of making the transfer, is measured
     by the value of the property passing from the donor,
     and attaches regardless of the fact that the identity
     of the donee may not then be known or ascertainable.
     2
      See also Robinette v. Helvering, 318 U.S. 184 (1943), in
which the taxpayer argued that there could be no gift of a
remainder interest where the putative remaindermen (prospective
unborn children of the grantor) did not exist at the time of the
transfer. The Supreme Court rejected this argument stating that
the gift tax is a primary and personal liability of the donor
measured by the value of the property passing from the donor and
attaches regardless of the fact that the identity of the donee
may not be presently known or ascertainable.
                              - 58 -

v. Commissioner, 235 F.2d 149 (9th Cir. 1956); Ketteman Trust v.

Commissioner, 86 T.C. 91 (1986).   In each of these cases,

property was transferred to a corporation for less than full

consideration.   All or part of the stock of the transferee

corporations was owned by persons other than the transferor.      In

each case, the value of the gift was found to be the fair market

value of the property transferred to the corporation, minus any

consideration received by the transferor.    None of these cases

allowed a discount based upon a hypothetical assumption that

fractionalized interests in the transferred property were given

to the individual shareholders of the transferee corporations.

Unfortunately, the majority does not follow its own formula, as

quoted above, or the above-cited cases.

     The only case cited by the majority where a discount was

given based on a hypothetical assumption that fractionalized

interests in the transferred property were given to the indirect

beneficiaries (shareholders or partners) is Estate of Bosca v.

Commissioner, T.C. Memo. 1998-251.     I believe that Estate of

Bosca was incorrectly decided on this point.    That opinion

improperly relied upon cases that dealt with determining the

number of annual gift tax exclusions and blockage discounts.

     Opinions dealing with the number of annual gift tax

exclusions under section 2503(b)3 have no application in


     3
      Sec. 2503(b) provides in part:

          SEC. 2503(b). Exclusions From Gifts.--In the case
                                                   (continued...)
                              - 59 -

determining the value of gifts under section 2512(b).    Under the

annual gift tax exclusion, the first $10,000 of gifts made to any

person is excluded from total taxable gifts.   Unlike section

2512(b), section 2503(b) focuses on the identity of the donee.

Section 2503(b) specifically addresses “gifts * * * made to any

person” and excludes “the first $10,000 of such gifts to such

person”.   In explaining the meaning of “gift” in the statute

providing for the annual exclusion, the Supreme Court explained:

          But for present purposes it is of more importance
     that in common understanding and in the common use of
     language a gift is made to him upon whom the donor
     bestows the benefit of his donation. One does not
     speak of making a gift to a trust rather than to his
     children who are its beneficiaries. The reports of the
     committees of Congress used words in their natural
     sense and in the sense in which we must take it they
     were intended to be used in § 504(b) when, in
     discussing § 501, they spoke of the beneficiary of a
     gift upon trust as the person to whom the gift is
     made.* * * Helvering v. Hutchings, 312 U.S. 393, 396
     (1941).


     The Supreme Court’s interpretation of the term “gift” for

purposes of the annual exclusion was based upon the common

meaning and understanding of the term gift.    The Supreme Court’s

interpretation of the term gift in section 2503(b) must be

contrasted with the Supreme Court’s broad interpretation of


     3
      (...continued)
     of gifts (other than gifts of future interests in
     property) made to any person by the donor during the
     calendar year, the first $10,000 of such gifts to such
     person shall not, for purposes of subsection (a), be
     included in the total amount of gifts made during such
     year. * * *
                              - 60 -

section 2512(b).   Section 2512(b) specifies a formula for

determining when a transfer will be deemed a gift and for

determining the amount of the gift for gift tax purposes.     In

explaining the broad reach of the predecessor of section 2512(b),

the Supreme Court in Commissioner v. Wemyss, 324 U.S. 303 (1945),

explained that Congress was applying the gift tax to transfers

that were beyond the common meaning of the term gift.

     Had Congress taxed “gifts” simpliciter, it would be
     appropriate to assume that the term was used in its
     colloquial sense, and a search for “donative intent”
     would be indicated. But Congress intended to use the
     term “gifts” in its broadest and most comprehensive
     sense. * * * [Id. at 306.]

Thus, for purposes of the gift tax, a transfer that is deemed to

be a “gift” is statutorily defined in section 2512(b) in broad

and comprehensive terms and is not limited to the common meaning

of that term.

     Reliance on cases based on blockage discounts is also

misplaced in the context of section 2512(b).   The gift tax

regulations permit an exception to the traditional definition of

fair market value for gifts of large blocks of publicly traded

stock.   Under the regulations, a blockage discount can be allowed

“If the donor can show that the block of stock to be valued, with

reference to each separate gift, is so large in relation to the

actual sales on the existing market that it could not be

liquidated in a reasonable time without depressing the market.”

Sec. 25.2512-2(e), Gift Tax Regs.   (Emphasis added.)   The cases

dealing with blockage discounts are distinguishable because they
                              - 61 -

were decided on the basis of a specific regulation dealing with

blockage discounts and involved either separate transfers of

properties to various persons or transfers in trust where the

transferor allocated specific properties to the trust accounts of

individual donees.   See Rushton v. Commissioner, 498 F.2d 88 (5th

Cir. 1974), affg. 60 T.C. 272 (1973); Calder v. Commissioner, 85

T.C. 713 (1985).   In the instant case, there was a single

transfer of petitioner’s property for less than full and adequate

consideration.   Pursuant to section 2512(b), such a transfer is

deemed to be a gift to the extent the fair market value of the

transferred property exceeded the value of any consideration

received by the transferor.

   The value of the property to which the gift tax applies in the

instant case is the fair market value of the leased property that

petitioner transferred to the partnership, minus the portion of

that value that served to enhance petitioner’s 50-percent

partnership interest.   See Kincaid v. United States, supra at

1224; Heringer v. Commissioner, 235 F.2d at 152-153;4 Ketteman

Trust v. Commissioner, 86 T.C. at 104.   There is nothing in that

formula that would justify a discount for two 25-percent


     4
      In Heringer v. Commissioner, 235 F.2d 149 (9th Cir. 1956),
the taxpayers held a 40-percent interest in the corporation to
which they transferred property. The taxpayers argued that any
gift should not exceed 60-percent of the value of the transferred
property because the taxpayers’ 40-percent stock interest was
increased proportionately by the transfer and that such increase
was analogous to receipt of consideration. The Court of Appeals
agreed citing sec. 1002, 1939 I.R.C., which contains the same
language as the current version of sec. 2512(b). See id. at 152-
153.
                              - 62 -

undivided interests in the leased property.   Petitioner never

transferred 25-percent fractional interests in the leased

property.   His sons never received or owned 25-percent undivided

interests in the leased property.   Indeed, no such fractionalized

interests ever existed.   After the transfer, the partnership held

the same property interest that petitioner held before the

transfer; there was no fractionalization of ownership; and the

partnership could have sold the leased property for the same fair

market value that petitioner could have realized.   Nevertheless,

the majority values the leased property by giving a discount for

hypothetical fractional interests that never existed.   On this

point, the majority is in error.

     VASQUEZ and MARVEL, JJ., agree with this concurring in part
and dissenting in part opinion.
                             - 63 -

     BEGHE, J., concurring in part and dissenting in part: I

concur in the majority’s conclusion that, in computing the value

of the gifts, the donor is not entitled to entity level

discounts; I dissent from the majority’s conclusion that

petitioner’s transfer of the leased land should be valued as

separate indirect transfers to his sons of individual 25-percent

interests, rather than as a unitary transfer to the partnership.1

     With all the woofing these days about using family

partnerships to generate big discounts, the majority opinion

provides salutary reminders that the “gift is measured by the

value of the property passing from the donor, rather than by the

property received by the donee or upon the measure of enrichment

of the donee”, majority op. pp. 11-12, and that “How petitioner’s

transfers of the leased land and bank stock may have enhanced the

sons’ partnership interests is immaterial, for the gift tax is

imposed on the value of what the donor transfers, not what the

donee receives”, majority op. p. 16 (citing section 25.2511-2(a),




     1
       Although the majority describe the gifts as “undivided 25-
percent interests in the leased land”, majority op. p. 22, the
15-percent discounts allowed by the majority in valuing those
interests amount to no more than the discount petitioner’s
experts attributed to the transfer of a 50-percent interest.
This is because petitioner’s experts “presented no concrete,
convincing evidence as to what additional amount of discount, if
any, should be attributable to a 25-percent undivided interest as
opposed to a 50-percent undivided interest”. Majority op. note
28. For an example of an agreement by the parties as to the
difference in value between a transfer of a 50-percent block and
two 25-percent blocks of the stock of a closely held corporation,
see Estate of Bosca v. Commissioner, T.C. Memo. 1998-251.
                             - 64 -

Gift Tax Regs., Robinette v. Helvering, 318 U.S. 184, 186 (1943),

and other cases therein); see also sec. 25.2512-8, Gift Tax Regs.

     This is the “estate depletion” theory of the gift tax2,

given its most cogent expression by the Supreme Court in

Commissioner v. Wemyss, 324 U.S. 303, 307-308 (1945):

     The section taxing as gifts transfers that are not made
     for “adequate and full [money] consideration” aims to
     reach those transfers that are withdrawn from the
     donor’s estate. To allow detriment to the donee to
     satisfy the requirement of “adequate and full
     consideration” would violate the purpose of the statute
     and open wide the door for evasion of the gift tax.
     See 2 Paul, supra [Federal Estate and Gift Taxation
     (1942)] at 1114.3


     The logic and the sense of the estate depletion theory

require that a donor’s simultaneous or contemporaneous gifts to

or for the objects of his bounty be unitized for the purpose of



     2
       See, e.g., Lowndes et al., Federal Estate and Gift Taxes
356 (1974); Solomon et al., Federal Taxation of Estates, Trusts
and Gifts 191 (1989).
     3
       The Paul treatise, cited twice with approval in
Commissioner v. Wemyss, 324 U.S. 307, 308 (1948), put it this
way:

          It is Congress’s intention to reach donative
     transfers which diminish the taxpayer’s estate. The
     existence of “an adequate and full consideration in
     money or money’s worth” which is not received by the
     taxpayer has that very same effect. Since the section
     is aimed essentially at “colorable family contracts and
     similar undertakings made as a cloak to cover gifts,”
     it is fair to assume that Congress intended to exempt
     transfers only to the extent that the taxpayer’s estate
     is simultaneously replenished. The consideration may
     thus augment his estate, give him a new right or
     privilege, or discharge him from liability. [2 Paul,
     Federal Estate and Gift Taxation, 1114-1115 (1942);
     citations omitted.]
                               - 65 -

valuing the transfers under section 2511(a).   After all, the gift

tax was enacted to protect the estate tax, and the two taxes are

to be construed in pari materia.   See Merrill v. Fahs, 324 U.S.

308, 313 (1945).    The estate and gift taxes are different from an

inheritance tax, which focuses on what the individual donee-

beneficiaries receive; the estate and gift taxes are taxes whose

base is measured by the value of what passes from the transferor.

     I would hold, contrary to the majority and the approach of

Estate of Bosca v. Commissioner, T.C. Memo. 1998-251,4 that the

gross value of what petitioner transferred in the case at hand is

to be measured by including the value of his entire interest in

the leased land.5   I would then value the net gifts by


     4
       Contrary also to the Commissioner’s concession, in Rev.
Rul. 93-12, 1993-1 C.B. 202, that a donor’s simultaneous equal
gifts aggregating 100 percent of the stock of his wholly owned
corporation to his five children are to be valued for gift tax
purposes without regard to the donor’s control and the family
relationship of the donees. The ruling is wrong because it
focuses on what was received by the individual donees; what is
important is that the donor has divested himself of control. The
cases relied upon by the ruling–-Estate of Bright v. United
States, 658 F.2d 999 (5th Cir. 1981); Propstra v. United States,
680 F.2d 1248 (9th Cir. 1982); Estate of Andrews v. Commissioner,
79 T.C. 938 (1982); Estate of Lee v. Commissioner, 69 T.C. 860
(1978)--address an arguably different question: whether for
estate tax purposes a decedent’s transfer at death of interests
in real property or shares of a family corporation should be
valued by aggregating them with interests in the same property or
shares already held by the decedent’s spouse or siblings.
     5
       I acknowledge that my sense of the logic of the estate
depletion theory would require unitization of a donor’s same day
gifts of the stock of the same corporation in determining the
significance of parting with but not conveying control, contrary
to Estate of Heppenstall v. Commissioner, a Memorandum Opinion of
this Court dated Jan. 31, 1949, and arguably contrary to cases
that segregate same day gifts for blockage discount purposes,
                                                   (continued...)
                             - 66 -

subtracting from the gross value so arrived at the value, at the

end of the figurative day, of the partnership interest that

petitioner received back and retained, sec. 2512(b),6 not 50

percent of the value of the leased land that he transferred to

the partnership.




     5
      (...continued)
see, e.g., Rushton v. Commissioner, 498 F.2d 88 (5th Cir. 1974),
affg. 60 T.C. 272 (1973); Calder v. Commissioner, 85 T.C. 713
(1985), which may be attributed to the presence of a specifically
targeted regulation. In any event, my sense of what the estate
depletion theory implies for gift tax purposes is consistent with
and supported by the rule that unitizes a block of shares held at
death to determine the value at which they are included in the
gross estate, notwithstanding that they may be bequeathed to more
than one beneficiary. See, e.g., Ahmanson Found. v. United
States, 674 F.2d 761, 768 (9th Cir. 1981); Estate of Chenoweth v.
Commissioner, 88 T.C. 1577, 1582 (1987).
     6
       I see no problem in harmonizing the above-suggested
approach with the considerations that apply in determining
whether a gift qualifies as a present interest rather than future
interest for the purpose of the annual exclusion under sec.
2503(b). The annual exclusion inquiry necessarily focuses on the
quality and quantity of the donee’s interest. See Stinson Estate
v. United States, 214 F.3d 846 (7th Cir. 2000); sec. 25.2503-3,
Gift Tax Regs.; see also Helvering v. Hutchings, 312 U.S. 393
(1941); Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991).
Analogous considerations apply in computing the value of bequests
entitled to the estate tax charitable or marital deduction. See,
e.g., Ahmanson Found. v. United States, supra; Estate of
Chenoweth v. Commissioner, supra.
                              - 67 -

     FOLEY, J., dissenting:   The majority relies on Kincaid v.

United States, 682 F.2d 1220, 1226 (5th Cir. 1982), where the

court held that Mrs. Kincaid made a gift through an

“unequal exchange [that] served to enhance the value of her sons’

voting stock”.   The opinion, however, states:   “Nor do we agree

with petitioner’s contention that his transfers should be

characterized as enhancements of his sons’ existent partnership

interests.”   Majority op. p. 16.   The holding in this case is

premised on Kincaid.   The majority opinion, however, rejects

petitioner’s contention, which is the essence of the Kincaid

holding, and fails to explain why the result in this case should

be different from that in Kincaid.     Accordingly, I respectfully

dissent.
