                        T.C. Memo. 2006-63



                      UNITED STATES TAX COURT



       IAN G. KOBLICK AND TONYA A. KOBLICK, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13808-04.               Filed April 3, 2006.



     V. Jean Owens, for petitioners.

     Timothy Maher, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Petitioners Ian G. and Tonya A. Koblick

(individually referred to as Mr. Koblick and Mrs. Koblick,

respectively) challenge respondent’s income tax deficiency

determination for 1998 and 1999 which is based upon the

disallowance of charitable deductions that were carried forward

from a 1994 contribution of 45 percent of the outstanding stock
                               - 2 -

in Sealodge International, Inc. (Sealodge) to Maine Resources

Development Foundation (MRDF), a section 501(c)(3)1 charity.     The

issue before us is the value of the 45-percent stock ownership

interest in Sealodge.   As explained in more detail herein, we

find that the interest was worth significantly less than reported

by petitioners.

                          FINDINGS OF FACT

     Petitioners are husband and wife who resided in Key Largo,

Florida, as of the date of the filing of the petition.

     On December 19, 1994, Mr. Koblick transferred 11,247 shares

of common stock of Sealodge to MRDF.   The 11,247 shares of

Sealodge stock transferred by Mr. Koblick to MRDF represented 45

percent of the outstanding stock of Sealodge.   There were two

other shareholders of Sealodge, Dr. Neil Monney (Dr. Monney), who

owned 45 percent, and Debra Alexander, who owned 10 percent.

They also transferred their shares to MRDF simultaneously with

Mr. Koblick’s transfer.

     Petitioners received $90,000 from MRDF in exchange for the

45-percent interest in Sealodge transferred to MRDF by Mr.

Koblick.   On their 1994 Form 1040, U.S. Individual Income Tax

Return (Form 1040), petitioners claimed that the fair market

value of the stock in Sealodge donated to MRDF was $810,000, and


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                               - 3 -

that the resulting gift to MRDF was $720,000 ($810,000 gross

value of stock less $90,000 received from MRDF).

     Petitioners attached to their 1994 income tax return a

letter dated January 4, 1995, from the treasurer of MRDF to Mr.

Koblick and the two other shareholders of Sealodge.   The MRDF

letter confirmed the transfer of the MRDF shares and valued those

shares based on a report of Edward M. Geiger, a consulting

engineer.   Mr. Geiger’s report and another report prepared by

Thomas Ferguson were also attached to the 1994 return.

     Petitioners claimed charitable contribution deductions on

their Federal income tax returns for their donation of Sealodge

stock to MRDF as follows:

                Year                     Amount

                1994                     $55,411

                1995                      71,138

                1996                      65,889

                1997                     103,568

                1998                     357,601

                1999                      66,221

     Petitioners timely filed their Forms 1040 for the calendar

years 1998 and 1999 with the Internal Revenue Service in Atlanta,

Georgia, on August 13, 1999, and August 19, 2000, respectively.

     Respondent determined in the notice of deficiency for 1998

and 1999 that petitioners owed deficiencies of $84,956 and
                                - 4 -

$18,204, respectively.    The adjustments to income for both years

resulted from the reduction of the claimed deduction for the 1994

contribution of Sealodge stock from $720,000 to $360,000.

Sealodge

     Sealodge was incorporated in Florida in July 1987.

Sealodge’s stock was never publicly traded or listed on a public

exchange.    Debra Alexander received her 10-percent interest in

Sealodge from William Alexander in December 1990.    This was the

sole transfer of Sealodge’s stock prior to the transfers of

Sealodge stock to MRDF on December 19, 1994.

     The bylaws of Sealodge restricted the transfer of the

corporation’s stock as follows:

            a.   Sealodge’s stock was nontransferable through

     sale or otherwise without the prior approval of the

     corporation;

            b.   Sealodge reserved the right to deny a

     transfer of the corporation’s stock; and

            c.   Sealodge reserved the right to purchase or

     refuse to purchase the stock of any shareholder who

     desired to transfer his or her stock.

     At all relevant times, Mr. Koblick and Dr. Monney were the

sole directors and officers of Sealodge.   Mr. Koblick was the

president and treasurer of Sealodge; Dr. Monney was the

secretary.
                                - 5 -

     During the period January 1, 1990, through December 31,

1994, Sealodge did not have any cashflow available to increase

equity, and Sealodge never paid a dividend.    As of December 19,

1994, Sealodge did not have any liabilities.

     On or about August 7, 1987, Sealodge registered a trademark

with the U.S. Patent and Trademark Office for the name “Jules

Undersea Lodge”.    This trademark expired on September 26, 1994,

and was not renewed.

     As of December 19, 1994, Sealodge’s assets consisted of:

(1) A submersible barge known as “Jules Undersea Lodge”; (2) a

command center; (3) two diving bells; and (4) other miscellaneous

equipment whose value was not of significance.   A plan of

liquidation was in place on the valuation date so Sealodge’s

assets could be distributed to MRDF.    Sealodge was liquidated as

of December 31, 1994.

Jules Undersea Lodge

     Jules Undersea Lodge was built in 1972 by Perry Submarine

Builders (Perry).   It was originally named “La Chalupa” and was

constructed with private funds advanced by John Perry, the owner

of Perry.   Operational funds for La Chalupa were provided by the

Government of Puerto Rico under the Puerto Rico International

Undersea Laboratory program (PRINUL).   The vessel was designed to

house researchers for a week or more at a time at depths of up to

and not exceeding approximately 160 feet.   During the early
                               - 6 -

1970s, the vessel was submerged off the coast of Puerto Rico.

Mr. Koblick was involved as director of the PRINUL program during

the early-to-mid portion of the 1970s.   Eventually, by the mid-

1970s, funding for the PRINUL program ceased, and John Perry

reclaimed the vessel.   La Chalupa ended up in dry dock storage in

south Florida.   During 1982, an individual, Russ Hobson,

undertook extensive renovations of the vessel at a cost of

approximately $300,000.   Mr. Hobson intended to use the vessel

for a salvage operation in South America.   Mr. Hobson later

became financially imperiled and abandoned the project.     In 1984,

Mr. Koblick and Dr. Monney acquired the vessel from the Derecktor

Gunnell shipyard by paying $20,000 towards an outstanding yard

bill.   The vessel was then transferred to a corporate entity,

Jules Habitat, Inc.   Mr. Koblick and Dr. Monney were the

shareholders of Jules Habitat, Inc.    Mr. Koblick and Dr. Monney

together invested an additional $80,000 in 1986 into the project.

     By the end of 1986, a total of $400,000 had been invested

into the renovation project (comprising $300,000 invested by Mr.

Hobson, $20,000 to acquire the vessel from Derecktor Gunnell, and

$80,000 to convert the vessel into a habitat and acquire

operational systems).   The collective renovations undertaken by

Mr. Hobson, Mr. Koblick, and Dr. Monney converted the vessel into

an undersea habitat or “lodge” with two suites and a common room.
                               - 7 -

There were a total of five beds in the habitat.   The vessel was

rechristened “Jules Undersea Lodge” (JUL).

     By the end of 1986, JUL was submerged in a lagoon located in

Key Largo, Florida.   JUL had its first overnight guest by 1986.

By 1989, the vessel and its related equipment were transferred to

Sealodge.

     The cost to build a vessel in accordance with the standards

of the American Board of Shipping (ABS) and to have the vessel

certified by the ABS would be from 25 to 50 percent more than the

cost to build the same vessel without ABS certification.

JUL has never been certified by ABS.

     JUL has been subject to a regular maintenance program, but

there have been no major renovations to it since 1986.

     During the years prior to and following the contribution in

dispute, approximately 90 percent of JUL’s usage was as an

undersea hotel.   The remaining use has been as a research

facility.   The operation of JUL as an undersea hotel had net

operating losses for the 4 years prior to the charitable

contribution ranging from $5,434 to $21,067.

                              OPINION

     In this valuation dispute, the parties adopt very similar

methodologies but use widely different estimates of the elements

of the methodologies they apply.   Petitioners’ position presents

an internal inconsistency between the estimate of replacement
                               - 8 -

cost used by petitioners’ principal witness at trial and the

determination of replacement cost used to estimate the donation

by MRDF which was attached to petitioners’ return for 1994 with a

letter from MRDF to the donees.   Our discussion will start with

the role of replacement cost in the parties’ methodologies.

     Petitioners’ expert at trial was Thomas Ferguson, a self-

described marine surveyor.   He valued JUL by starting with an

estimate of replacement cost of $4.25 million.   He then

determined that JUL had a useful life of 18 years from its

“reoutfitted [sic] date in 1982 and salvage value of $620,000”,

thus resulting in depreciation of $2,450,000 from the replacement

cost of $4,250,000 and a fair market value of $1.8 million as of

December 19, 1994.   Mr. Ferguson’s original report was attached

to petitioners’ 1994 income tax return and reached the same

conclusions as the report submitted at trial.

     As stated previously, a letter to the donees of Sealodge

from MRDF, dated January 4, 1995, was also attached to the 1994

return.   Referenced in this letter and also attached to the 1994

return was a report prepared by Edward Geiger, a consulting

engineer.   Mr. Geiger’s report determined the value of JUL and

related equipment as $1.97 million based upon “the estimate cost

to replace this vessel.”2


     2
      Inexplicably, petitioners argue on brief that this
information should be ignored because Mr. Geiger’s report was not
                                                   (continued...)
                                 - 9 -

     There is an obvious conflict between the use of $4.25

million as a replacement cost by Mr. Ferguson and Mr. Geiger’s

estimate of replacement cost.    However, Mr. Ferguson testified at

trial he was not made aware of Mr. Geiger’s estimate when he

prepared his original report.    There is an additional problem

with the $4.25 million figure.    It was based on a letter from

Perry Oceanographic Foundation, a firm related to Perry, to Mr.

Ferguson dated December 7, 1994.    Perry’s estimate was for an

ABS-certified vessel, which JUL was not.    Mr. Geiger had worked

for Perry and was familiar with JUL’s original construction.      He

knew JUL was not ABS certified, and his estimate of $1.97 million

is more accurate than the $4.25 million figure.

     Respondent’s valuation expert, Mr. Geary, also determined

replacement cost and depreciated that cost to arrive at a value

for JUL.   His replacement cost estimate was $1.1 million, which

he reduced by 27 percent for inflation and further reduced for

depreciation to arrive at a value of $464,102.    He also used an

alternative method based upon JUL’s estimated value in 1977 and

recommended a value of $367,758.

     While expert opinions may assist in evaluating a claim, we

are not bound by those opinions and may reach a decision based on


     2
      (...continued)
admitted at trial. Petitioners are in error. The report was
stipulated as part of a joint exhibit (Ex. 3J), the 1994 income
tax return, and ironically was admitted at petitioners’ urging
over respondent’s objections.
                              - 10 -

our own analysis of all the evidence in the record.   Helvering v.

Natl. Grocery Co., 304 U.S. 282, 295 (1938); Estate of Newhouse

v. Commissioner, 94 T.C. 193, 217 (1990).   Where experts offer

conflicting estimates of fair market value, we must weigh each

estimate by analyzing the factors they used to arrive at their

conclusions.   Casey v. Commissioner, 38 T.C. 357, 381 (1962).

This Court may accept or reject the opinion of an expert in its

entirety, or we may be selective in the use of any portion.

Estate of Davis v. Commissioner, 110 T.C. 530, 538 (1998); Parker

v. Commissioner, 86 T.C. 547, 562 (1986); Buffalo Tool & Die

Manufacturing Co. v. Commissioner, 74 T.C. 441, 452 (1980).

     We are not persuaded that Mr. Geary’s alternative method is

superior to the replacement method, and we do not find the

replacement values used by either Mr. Ferguson or Mr. Geary to be

the best estimate in the record.   Rather, we find Mr. Geiger’s

replacement cost to be the best starting point.   His involvement

with the construction of JUL and his background make his estimate

the best choice to start the analysis.   We then depreciate his

value as Mr. Ferguson testified he would do, had he been aware of

Mr. Geiger’s report and selected his replacement cost value.

This computation yields a fair market value for JUL of

$1,060,000.
                                - 11 -

     This does not end our analysis because JUL was owned by

Sealodge, and we must determine the value of petitioners’ 45-

percent interest.

Minority and Lack of Marketability Discounts

     Minority discounts and discounts for lack of marketability

are often discussed together, but they are distinguishable.

Estate of Murphy v. Commissioner, T.C. Memo. 1990-472.    Shares of

corporate stock which represent a minority interest may be worth

less than a proportionate share of the value of the assets of the

corporation.   Id. (citing Harwood v. Commissioner, 82 T.C. 239,

267-268 (1984), affd. without published opinion 786 F.2d 1174

(9th Cir. 1986)); Estate of Andrews v. Commissioner, 79 T.C. 938,

957 (1982); Estate of Zaiger v. Commissioner, 64 T.C. 927,

945-946 (1975).     In Estate of Andrews v. Commissioner, supra at

953, we noted the distinction between a minority discount and

lack of marketability discount:

          The minority shareholder discount is designed to
     reflect the decreased value of shares that do not
     convey control of a closely held corporation. The lack
     of marketability discount, on the other hand, is
     designed to reflect the fact that there is no ready
     market for shares in a closely held corporation.
     Although there may be some overlap between these two
     discounts in that lack of control may reduce
     marketability, it should be borne in mind that even
     controlling shares in a nonpublic corporation suffer
     from lack of marketability because of the absence of a
     ready private placement market and the fact that
     flotation costs would have to be incurred if the
     corporation were to publicly offer its stock. * * *
                               - 12 -

     We shall first address the minority discount.    A minority

discount is appropriate if the block of stock does not enjoy the

variety of rights associated with control.    Estate of Andrews v.

Commissioner, supra at 953; Estate of Murphy v. Commissioner,

supra (citing Estate of Chenoweth v. Commissioner, 88 T.C. 1577,

1582 (1987)).    Control means that, because of the interest owned,

the shareholder can unilaterally direct corporate action, select

management, decide the amount of distribution, rearrange the

corporation’s capital structure, and decide whether to liquidate,

merge, or sell assets.    Estate of Newhouse v. Commissioner, 94

T.C. 193, 251 (1990).    Respondent’s experts testified about the

difficulties a 45-percent shareholder would face in changing

Sealodge’s corporate policies in view of its bylaws.     However,

respondent’s experts also pointed out the fact that petitioners’

interest in Sealodge had “swing vote” attributes and could be

joined with any of the two remaining blocks of stock to exercise

control in the corporation.    We shall take these factors into

consideration.

     Petitioners argue that since MRDF ultimately received

control of the stock in Sealodge, no discount is warranted.

Section 25.2511-1(a), Gift Tax Regs., explains that the gift tax

is an excise tax on the transfer and is not a tax on the subject

of the gift.    Sec. 25.2511-2(a), Gift Tax Regs.   Section

25.2511-2(a), Gift Tax Regs., provides:
                               - 13 -

       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 resulting to the donee
       from the transfer, nor is it conditioned upon ability
       to identify the donee at the time of the transfer.* * *

Therefore, in valuing the stock petitioners transferred, we do

not focus on what Sealodge actually received.

       However, there is authority for us to take into

consideration that petitioners transferred their 45-percent

interest in Sealodge as part of a prearranged plan to transfer a

100-percent controlling interest in the company.    In N. Trust Co.

v. Commissioner, 87 T.C. 349 (1986), four shareholders agreed to

transfer each of their 25-percent noncontrolling interests in

their closely held corporation to certain long-term trusts.      The

taxpayers contended that the minority discount should be 90

percent.    However, the Court allowed only a 25-percent discount.

The Court determined that the taxpayers, by following a

prearranged agreement to transfer the shares simultaneously,

“marched in lockstep” and that “So marching, their position was

no different than that of a single majority shareholder.”     Id. at

388.

       Here, we have a similar situation where petitioners and the

two other shareholders of Sealodge had a prearranged plan to

transfer their minority shares simultaneously.    Therefore, we

find that N. Trust Co. is instructive.    Given this determination,

we believe respondent’s proposed figure of 22 percent is too
                                - 14 -

high.     In N. Trust Co., we allowed a 25-percent minority discount

for a 25-percent voting interest in a corporation.     In this case,

we hold that a 10-percent discount is applicable, but a holding

of a 6-percent discount is sufficient to sustain the adjustment

in the notice of deficiency. Therefore, we sustain respondent’s

adjustment without reaching the other arguments for discount

raised by respondent.

Conclusion

        After applying a minority-position discount of 10 percent,

we would find that the 45-percent interest in Sealodge

transferred by Mr. Koblick had a value of $429,300 at the time of

his gift of stock to MRDF.     Therefore, the deduction value would

be $429,300 less $90,000 or $339,300.     Because the notice of

deficiency determines a higher value, we sustain that

determination and find that



                                      Decision will be entered

                                 for respondent.
