Estate of Rodgers v. Commissioner

T.C. Memo. 1999-129

UNITED STATES TAX COURT

ESTATE OF LYNN M. RODGERS, DECEASED, FIRST NATIONAL BANK OF
COMMERCE, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL
REVENUE, Respondent

Docket No. 761-92. Filed April 20, 1999.

Edward D. Wegmann and David F. Edwards, for petitioner.

Linda K. West, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined a deficiency of

$3,754,683.92 in petitioner's Federal estate tax (estate tax).

The sole issue remaining for decision is the fair market value of

the interest that Lynn M. Rodgers (decedent) owned on the date of

his death in Marrero Land and Improvement Association, Limited
 - 2 -

(Marrero Land or the Company). We find that the fair market

value of that interest on that date is $4,316,920.

FINDINGS OF FACT

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

On February 7, 1988 (the valuation date), decedent died

testate at the age of 90. First National Bank of Commerce, the

executor of decedent's estate (executor), had its principal place

of business in New Orleans, Louisiana, at the time the petition

was filed.

At the time of his death, decedent owned, inter alia, an

interest in 166-2/3 shares of stock of Marrero Land. That

interest was represented by voting trust certificate No. one

(voting trust certificate) which was issued and governed by the

Rodgers-Barkley voting trust and which represented as of the

valuation date one-third of the outstanding stock of the Company.

(We shall refer to decedent's voting trust certificate for 166-

2/3 shares of the stock of Marrero Land as decedent's interest in

Marrero Land.)

Marrero Land, which was incorporated under the laws of

Louisiana on December 6, 1904, has been a closely held corpora-

tion engaged principally in the business of acquiring, develop-

ing, managing, improving, maintaining, leasing, and selling real

estate located principally within the greater New Orleans metro-

politan area. Since its incorporation, Marrero Land has been
 - 3 -

owned and actively operated as a family enterprise, with the only

stockholders being descendants by blood or marriage of its

original stockholders who were Louis Herman Marrero, Sr., and his

three sons, Louis Herman Marrero, Jr., William Felix Marrero, and

Leo A. Marrero. (We shall refer to the descendants by blood or

marriage of the original stockholders of Marrero Land as Marrero

family members.)

At the time Marrero Land was incorporated, article VI of its

articles of incorporation (article VI) provided:

No stockholder shall have the right to sell or
transfer any share or shares of the capital stock of
the said corporation owned by him until the expiration
of fifteen days, after given [sic] written notice to
the other stock holders who will have the privilege of
purchasing the same during said fifteen days at the
actual cash value thereof, as established by the books
of the corporation.

Around 1980, N. Buckner Barkley, Jr. (Mr. Barkley) and Keith

M. Hammett (Mr. Hammett), who were not members of decedent's

immediate family and who were at the time members of the board of

directors and the executive vice president and the treasurer,

respectively, of Marrero Land, had concerns regarding Louis

Marrero, IV (Mr. Marrero), who was then president of Marrero

Land. That was because, inter alia, Mr. Marrero had pledged the

Marrero Land stock which he owned in order to secure certain of

his personal obligations, and Mr. Barkley and Mr. Hammett be-

lieved that that stock might be sold to satisfy Mr. Marrero's
 - 4 -

personal debts, in which event persons who were not Marrero

family members would become stockholders of Marrero Land.

Principally because of the foregoing concerns, Mr. Barkley

initiated steps to amend article VI, which did not specifically

address the situation in which the stock of one of the Company's

stockholders was to be sold in order to repay the debt of that

stockholder. Mr. Barkley asked Graham Stafford (Mr. Stafford),

Marrero Land's attorney, to review article VI, advise the Company

what it should do in order to address the concerns that persons

who were not Marrero family members might become stockholders,

and provide suggestions to the Company with respect to updating

and modernizing the language of article VI.

Mr. Stafford, working with Mr. Barkley, recommended that the

Company's stockholders amend article VI to provide as follows:

a - All sales, assignments, exchanges, transfers,
donations, or other dispositions of the shares of the
capital stock of this corporation shall be made on the
books of the corporation and in accordance with this
Article VI. Each share of the capital stock of this
corporation is issued on the condition that any trans-
fer in violation of this Article VI shall be void and
the corporation shall be under no obligation to trans-
fer such shares on its books, pay dividends to, or
otherwise regard the holder thereof as a shareholder of
this corporation. Each certificate of stock represent-
ing shares of this corporation shall bear a legend
making reference to this Article VI.

b - If any shareholder of the corporation desires
to sell, assign, exchange, transfer, donate, or oth-
erwise dispose of shares of the capital stock of the
corporation, he shall first offer such shares to the
corporation by giving written notice to the corpora-
 - 5 -

tion. Upon receipt of such notice, the corporation
shall send a copy of such notice to all shareholders.
For a period of forty-five (45) days after the cor-
poration receives notice from the selling shareholder,
the corporation shall have an option to purchase all
the shares offered at the book value of the shares.
The forty-five (45) day period during which the cor-
poration shall have the right to purchase the shares
shall be referred to as the "first option period".

c - If the corporation fails or refuses to pur-
chase the shares offered within the first option pe-
riod, the selling shareholder shall next offer such
shares to the other shareholders of the corporation,
and they, or any of them, shall have a second option to
purchase all such shares at their book value. If more
than one shareholder desires to purchase the shares,
such shareholders shall have the option to purchase the
shares offered in the proportion that the number of
shares registered in their respective names bears to
the total number of shares registered in the names of
all shareholders who desire to purchase such shares.
Each shareholder shall have thirty (30) days after the
date of the first option period expires within which to
notify the corporation in writing of the number of
shares he desires to purchase and shall attach a cer-
tified check, made payable to the corporation, in an
amount equal to the book value of the number of shares
he desires to purchase. The checks of all shareholders
shall be held in escrow by the corporation pending the
closing. Within forty (40) days of the termination of
the first option period, the corporation shall notify
the selling shareholder whether the second option has
been exercised by the shareholders and shall otherwise
comply with the provisions of subparagraph e of this
Article VI.

d - For purposes of this Article VI, the "book
value" shall mean the value of the shares as shown on
the books of the corporation as of the date shown on
the corporation's most recent annual audit. Such
determination of book value shall be made by the firm
of certified public accountants who performed the
corporation's most recent annual audit and shall be
made in accordance with generally accepted accounting
principles, with no value attributable to good will.
 - 6 -

e - Acceptance of any offer to sell shall be made
by the corporation giving written notice to the selling
shareholder, accompanied by a certified check for the
full amount of the purchase price, and such acceptance,
when accompanied by tender of the certified check shall
constitute a sale of the shares and shall entitle the
purchasers(s) to have the stock certificate for the
shares delivered, properly endorsed with signatures
guaranteed for all of the shares sold. The closing of
the sale and the transfer of the shares shall take
place at the registered office of the corporation
within fifteen (15) days of the acceptance. The date
and time of the closing shall be set forth in the
written notice of acceptance.

f - If a shareholder offers shares of this corporation
first to the corporation and then to the shareholders in
accordance with this Article VI, and neither the corporation
nor the shareholders shall accept such offer, then, for a
period of twelve months following the expiration of the
shareholders' second option period, such shareholder shall
be free to sell, assign, exchange, transfer, donate or
otherwise dispose of the shares in any manner and upon such
terms and conditions as he may deem appropriate, and such
transfer shall be recognized on the books of the corpora-
tion.

g - The donation inter vivos of shares of the
capital stock of the corporation or any transfer of
such shares following the death of a shareholder shall
be subject to the provisions of this Article VI unless
such shares shall be transferred to the spouse, chil-
dren, or other lawful descendants, or the spouse of any
child or lawful descendant, or the father or mother, or
other lawful ascendant, or the collateral relations of
the shareholder, whether outright, in trust, or to any
other legal entity established for the exclusive ben-
efit of any of the foregoing persons; provided, how-
ever, that the corporation shall not be required to
record and honor such transfer, except upon receipt of
written notice of such transfer.

h - Notwithstanding any other provision of this
Article VI, a shareholder shall have the right to sell
all or part of his shares to, or exchange such shares
with, his spouse, children, or other lawful descen-
dants, or the spouse of any child or lawful descendant,
 - 7 -

or the father, mother, or lawful ascendant, or the
collateral relations of the selling shareholder,
whether outright, in trust, or to any other legal
entity established for the exclusive benefit of any of
the foregoing persons; provided that such sale or
exchange is made for a price or consideration of no
more than the book value of the shares, and provided,
further, that the corporation shall not be required to
record and honor such transfer except upon receipt of
written notice of such transfer.

i - In the event any shareholder pledges or hy-
pothecates the shares of the capital stock of this
corporation to secure an obligation, and subsequently
defaults on such obligation, the creditor, before
enforcing any of its rights with respect to such
shares, shall immediately notify the corporation and
the defaulting shareholder, and for a period of forty-
five (45) days after the receipt of such notice, the
corporation shall have the option to purchase all of
the shares so pledged or hypothecated for the book
value of the shares. If the corporation fails or
refuses to purchase all the shares during the first
option period provided, the shareholders shall have a
second option to purchase the shares in accordance with
subparagraph c of this Article VI; provided, however,
if the shareholder who pledged or hypothecated his
shares shall cure the default on his obligation with
the creditor prior to the time the corporation or the
shareholders exercise their option to purchase the
shares, the option to purchase such shares shall ter-
minate. If either the corporation or the shareholders
purchases such shares, the purchase price shall be paid
jointly to the defaulting shareholder and the creditor.
If neither the corporation nor the shareholders pur-
chases all the shares so offered, then for a period of
twelve (12) months following the expiration of the
shareholder's second option period, the creditor shall
be free to exercise its security rights and sell,
assign, exchange, transfer, or otherwise dispose of
such shares in any manner and upon such terms and
conditions as he may deem appropriate, and such trans-
fer shall be recognized on the books of the corpora-
tion. In the event of a sale or transfer of any shares
of the capital stock of this corporation made by or at
the instance of any mortgagee, pledgee, creditor,
bankruptcy trustee or receiver of any shareholder,
 - 8 -

without first complying with the provisions of this
Article VI, whether such sale or transfer be public or
private, judicial or otherwise, the party acquiring
such shares shall offer the shares so purchased to the
corporation and to the shareholders thereof at book
value pursuant to the terms and conditions of this
Article VI, and if the corporation fails or refuses
within the first option period provided and the share-
holders fail or refuse within the second option period
provided to purchase all the shares so offered, the
shares may be transferred to the party acquiring the
shares, and such transfer shall be recognized on the
books of the corporation.

j - The failure or refusal of the corporation or
the shareholders to strictly enforce the provisions of
and exercise their rights under this Article VI shall
not be construed nor operate as a waiver of, and shall
be entirely without prejudice to their right to enforce
such provisions and exercise their rights under this
Article VI. Notwithstanding any other provision of
this Article VI, shareholders owning at least 80% of
the capital stock of the corporation may waive the
provisions of this Article VI by executing a written
consent.

In recommending that the stockholders of Marrero Land adopt

the foregoing amendment to article VI, Mr. Barkley did not intend

to change the price at which that Company's stock was to be

purchased under such amended article from the price at which such

stock was to have been purchased under article VI. On January

23, 1980, the stockholders of Marrero Land, who did not include

decedent's spouse or children, adopted a resolution authorizing

the foregoing amendment to article VI (amended article VI). On

February 6, 1980, that resolution became effective. In accor-

dance with La. Rev. Stat. Ann. sec. 12:57 (West 1994), a legend

appears on each of the outstanding stock certificates of Marrero
 - 9 -

Land, which restates the substance of the restrictions on the

transfer of the Company's stock that are contained in amended

article VI.

No appraisal of the Marrero Land stock was obtained prior to

the adoption in 1980 of amended article VI. That was because Mr.

Barkley and Mr. Hammett saw no reason to obtain such an appraisal

since the use of book value under amended article VI, which was

readily determinable by the Company's certified public accoun-

tants who audited its books each year, provided for a precise

determination of the price at which stock was to be purchased

under that article. The use of book value in amended article VI

also eliminated, as far as the Company and its stockholders were

concerned, the costs and uncertainties associated with establish-

ing a price for the stock of Marrero Land through an appraisal or

another method every time that there was a transfer of such

stock.

Even after the adoption of amended article VI, there was

dissension among the Company's stockholders about Mr. Marrero's

role in its management. Mr. Barkley and certain other stock-

holders wanted to remove Mr. Marrero as president. In an effort

to unite the voting power in Marrero Land of Mr. Barkley and

decedent, Mr. Barkley met with decedent and suggested that a

voting trust be formed, which would allow Mr. Barkley to vote the

stock of the Company that decedent owned. Decedent agreed. On
 - 10 -

January 19, 1981, Mr. Barkley and decedent entered into the

Rodgers-Barkley voting trust (voting trust) to which (1) decedent

transferred the 166-2/3 shares of Marrero Land stock that he

owned and (2) Mr. Barkley transferred one share of the Company's

stock that he owned. At all relevant times, Mr. Barkley has been

the sole trustee of the voting trust. As such, Mr. Barkley has

had the sole right to vote the stock of Marrero Land held in the

voting trust. Pursuant to the terms of the voting trust agree-

ment, the voting trust was to remain in force until January 19,

1996, at which time the duration of the voting trust could be

extended for an additional period of up to ten years upon the

approval of "registered owners of Voting Trust Certificates

representing not less than a majority of the total number of

Shares deposited".

After the voting trust was created and decedent transferred

to it all of the stock of Marrero Land that he owned, Mr. Barkley

succeeded in effecting management changes in the Company. Mr.

Marrero was asked to, and did, resign as president of Marrero

Land, and, on April 8, 1981, Mr. Barkley was elected the Com-

pany's president.

Since the adoption in 1980 of amended article VI until the

time of trial in this case, there have been two occasions on

which the provisions of that article became operative. The first

instance occurred in 1987 when Catherine Cleary Richard (Ms.
 - 11 -

Richard), who owned 5/9ths of one share of the Company's stock,

sought to sell that fractional share interest. Pursuant to

amended article VI, Ms. Richard offered to sell it to Marrero

Land. The Company exercised its right under that article and, on

March 24, 1987, purchased Ms. Richard's fractional share interest

in Marrero Land at book value.

The second occasion on which the provisions of amended

article VI became operative occurred in 1988, when James Cleary,

Jr. (Mr. Cleary), who owned 5/9ths of one share of the Company's

stock, sought to sell that fractional share interest. Pursuant

to the provisions of amended article VI, he offered to sell it to

Marrero Land. The Company exercised its right under that article

and, on October 31, 1988, purchased Mr. Cleary's fractional share

interest in Marrero Land at book value.

According to the audited financial statements of Marrero

Land, the book value of Marrero Land's equity as of the valuation

date was $12,936,054, and the book value of decedent's interest

in that equity was $4,316,920.1 Except for the real properties

identified in the following table and referred to herein as

remaining unimproved real properties, the following table shows

the fair market values of Marrero Land's assets as of the val-

uation date:

1
This figure was rounded.
 - 12 -

Assets other than real properties $11,024,000
Improved and leased real properties 26,398,433
Unimproved real properties:
Plantation Estates 2,450,000
Destrahan Division Wetlands 4,100,000
Fairfield Plantation 3,242,568
Barkley Estates - residential portion,
not including commercial portion 2,395,286
Whitehouse Plantation 1,032,831
Remaining unimproved real properties 20,366,470
Total 71,009,588

The fair market value of each of the unimproved real prop-

erties other than the remaining unimproved real properties that

are identified in the foregoing table was calculated by using a

discounted cash-flow analysis which included a discount for

market absorption (absorption discount) and marketing. The

dollar figure that is shown in the foregoing table for the

remaining unimproved real properties is the aggregate value as of

the valuation date of those properties to which the parties

stipulated and which was determined by ascertaining the value of

each such property without taking into account an absorption

discount.

As of the valuation date, neither decedent's spouse nor any

of his children was a stockholder of Marrero Land, and there was

no plan to sell or liquidate Marrero Land. It was anticipated as

of that date that the highest and best use of at a minimum

approximately 75 percent of the remaining unimproved real prop-

erties was to sell them.
 - 13 -

On November 7, 1988, the executor timely filed Form 706,

United States Estate (and Generation-Skipping Transfer) Tax

Return (estate tax return), on behalf of decedent's estate

(estate). The executor reported in the return that the fair

market value of decedent's interest in Marrero Land on the

valuation date was $4,312,018.

Respondent issued a notice of deficiency (notice) to the

estate and the executor. Respondent determined in the notice

that the fair market value of decedent's interest in Marrero Land

on the valuation date was $13,100,000.

The executor timely filed Form 843, Claim for Refund and

Request for Abatement (refund claim), on behalf of the estate.

The executor reported in the refund claim that the fair market

value of decedent's interest in Marrero Land on the valuation

date was $2,400,000, and not the value reported in the estate tax

return, and that consequently the estate was entitled to a refund

of Federal estate tax.

OPINION

The estate modified the position that it took in the refund

claim as to the fair market value of decedent's interest in

Marrero Land on the valuation date. The estate now claims that

the fair market value of that interest on that date is between

$3,486,167 and $3,933,412. In the alternative, the estate

contends that the maximum fair market value of decedent's in-
 - 14 -

terest in Marrero Land on the valuation date is its book value,

or $4,316,920, because amended article VI controls the value of

that interest for estate tax purposes.

Respondent modified the determination in the notice as to

the value of decedent's interest in Marrero Land on the valuation

date. Respondent now contends that the fair market value of that

interest on that date is $7,700,000.

The value of decedent's gross estate is to be determined by

including the value at his death of all of his property, real or

personal, tangible or intangible, wherever situated. See sec.

2031(a).2 The value of every item of property includible in

decedent's gross estate is its fair market value on the valuation

date. See sec. 20.2031-1(b), Estate Tax Regs. Section 20.2031-

1(b), Estate Tax Regs., defines the term "fair market value" as

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. * * *
All relevant facts and elements of value as of the
applicable valuation date shall be considered in every
case. * * *

The willing buyer and the willing seller to which section

20.2031-1(b), Estate Tax Regs., refers are hypothetical persons,

rather than specific individuals or entities, and the individual

2
All section references are to the Internal Revenue Code in
effect on the valuation date. All Rule references are to the Tax
Court Rules of Practice and Procedure.
 - 15 -

characteristics of those hypothetical persons are not necessarily

the same as the individual characteristics of the actual seller

and the actual buyer. See Estate of Curry v. United States, 706

F.2d 1424, 1428, 1431 (7th Cir. 1983); Estate of Bright v. United

States, 658 F.2d 999, 1005-1006 (5th Cir. 1981); Estate of Davis

v. Commissioner, 110 T.C. 530, 535 (1998). The hypothetical

willing buyer and the hypothetical willing seller are presumed to

be dedicated to achieving the maximum economic advantage. See

Estate of Curry v. United States, supra at 1428; Estate of Davis

v. Commissioner, supra; Estate of Newhouse v. Commissioner, 94

T.C. 193, 218 (1990).

In the case of unlisted stock, like the stock of Marrero

Land, the price at which sales of stock are made in arm's-length

transactions in an open market is the best evidence of its value.

See Champion v. Commissioner, 303 F.2d 887, 893 (5th Cir. 1962),

revg. and remanding T.C. Memo. 1960-51; Estate of Davis v. Com-

missioner, supra. In the instant case, the record does not

disclose any such sales of Marrero Land stock.

Where the value of unlisted stock cannot be determined from

actual sale prices, its value generally is to be determined by

taking into consideration the company's net worth, prospective

earning power, and dividend-paying capacity, as well as other

relevant factors, including the company's good will, its position

in the industry, its management, the degree of control of the
 - 16 -

business represented by the block of stock to be valued, and the

values of securities of corporations engaged in the same or

similar lines of business that are listed on a stock exchange.

See sec. 20.2031-2(f)(2), Estate Tax Regs. Section 4 of Rev.

Rul. 59-60, 1959-1 C.B. 237, 238-242, sets forth criteria that

are virtually identical to those listed in section 20.2031-

2(f)(2), Estate Tax Regs., and "has been widely accepted as

setting forth the appropriate criteria to consider in determining

fair market value". Estate of Newhouse v. Commissioner, supra at

217. Section 5 of Rev. Rul. 59-60, 1959-1 C.B. 242-243, which

addresses the weight to be given the relevant factors depending

on the nature of the company's business, provides in pertinent

part:

(a) Earnings may be the most important criterion
of value in some cases whereas asset value will receive
primary consideration in others. In general, the
appraiser will accord primary consideration to earnings
when valuing stocks of companies which sell products or
services to the public; conversely, in the investment
or holding type of company, the appraiser may accord
the greatest weight to the assets underlying the se-
curity to be valued.

Regardless whether the corporation whose stock is being

valued is seen primarily as an operating company or primarily as

an investment company, the Courts should not restrict consider-

ation to only one approach to valuation, such as capitalization

of earnings or net asset value. See Hamm v. Commissioner, 325

F.2d 934, 941 (8th Cir. 1963), affg. T.C. Memo. 1961-347; Estate

of Andrews v. Commissioner, 79 T.C. 938, 945 (1982). The degree
 - 17 -

to which a corporation is actively engaged in producing income

rather than merely holding property for investment should influ-

ence the weight to be given to the values arrived at under

different valuation approaches. However, it should not dictate

the use of one approach to the exclusion of all others. See

Estate of Andrews v. Commissioner, supra.

There is no fixed formula for applying the factors that are

to be considered in determining the fair market value of unlisted

stock. See Hamm v. Commissioner, supra at 938; Estate of Davis

v. Commissioner, supra at 536. The weight to be given to the

various factors in arriving at fair market value depends upon the

facts of each case. See sec. 20.2031-2(f), Estate Tax Regs. As

the trier of fact, we have broad discretion in assigning the

weight to accord to the various factors and in selecting the

method of valuation. See Estate of O'Connell v. Commissioner,

640 F.2d 249, 251-252 (9th Cir. 1981), affg. on this issue and

revg. in part T.C. Memo. 1978-191; Estate of Davis v. Commis-

sioner, supra at 537; see also sec. 20.2031-2(f), Estate Tax

Regs.

The determination of the value of closely held stock, like

the stock of Marrero Land in which decedent held an interest on

the valuation date, is a matter of judgment, rather than of

mathematics. See Hamm v. Commissioner, supra at 940; Estate of

Davis v. Commissioner, supra. Moreover, since valuation is

necessarily an approximation, it is not required that the value
 - 18 -

that we determine be one as to which there is specific testimony,

provided that it is within the range of figures that properly may

be deduced from the evidence. See Anderson v. Commissioner, 250

F.2d 242, 249 (5th Cir. 1957), affg. in part and remanding in

part T.C. Memo. 1956-178; Estate of Davis v. Commissioner, supra.

We turn first to the parties' dispute over the fair market

value of decedent's interest in Marrero Land on the valuation

date without regard to the estate's alternative position re-

garding amended article VI. As is customary in valuation cases,

the parties rely extensively on the opinions of their respective

experts to support their differing views about the fair market

value on the valuation date of decedent's interest in Marrero

Land. The estate relies on (1) Patrick J. Egan (Mr. Egan), a

general real estate appraiser certified by the State of Lou-

isiana, who is executive vice president and a partner of Latter &

Blum, Inc./Realtors (Latter & Blum), located in New Orleans,

Louisiana, and director of the Robert W. Merrick appraisal

division of Latter & Blum, and whom the Court qualified as a real

estate valuation expert; (2) Charles H. Stryker (Mr. Stryker),

who is the managing director of the valuation advisory services

of the metropolitan New York office of KPMG Peat Marwick, and

whom the Court qualified as a stock valuation expert; and

(3) David Chaffe III (Mr. Chaffe), who is the founder and the

president of the investment banking firm of Chaffe & Associates,
 - 19 -

Inc., located in New Orleans, Louisiana, and whom the Court

qualified as a stock valuation expert. Respondent relies on

(1) Frederick M. Guice, Sr. (Mr. Guice), a general real estate

appraiser certified by the State of Louisiana, who is employed by

Stephen L. Guice & Co., Inc., a real estate broker and appraisal

company located in New Orleans, Louisiana, and whom the Court

qualified as a real estate valuation expert; and (2) Philip W.

Moore (Mr. Moore), who is chairman of Moore Associates Valua-

tions, located in Jacksonville, Florida, and whom the Court

qualified as a stock valuation expert. Each of the experts

prepared an initial expert report (expert report) and a rebuttal

expert report (rebuttal report).3

We evaluate the opinions of experts in light of the dem-

onstrated qualifications of each expert and all other evidence in

the record. See Anderson v. Commissioner, supra at 249; Estate

of Davis v. Commissioner, 110 T.C. at 538. We have broad dis-

cretion to evaluate "'the overall cogency of each expert's

analysis.'" Sammons v. Commissioner, 838 F.2d 330, 333 (9th Cir.

3
Mr. Egan, the estate's real estate valuation expert, pre-
pared a rebuttal report with respect to the expert report of Mr.
Guice, respondent's real estate valuation expert, and Mr. Guice
prepared a rebuttal report with respect to the expert report of
Mr. Egan. In addition, each of the estate's stock valuation
experts, Mr. Stryker and Mr. Chaffe, prepared a rebuttal report
with respect to the expert report of respondent's stock valuation
expert Mr. Moore, and Mr. Moore prepared one rebuttal report with
respect to the expert reports of Mr. Stryker and Mr. Chaffe.
 - 20 -

1988) (quoting Ebben v. Commissioner, 783 F.2d 906, 909 (9th Cir.

1986), affg. in part and revg. in part T.C. Memo. 1983-200),

affg. in part and revg. in part on another ground T.C. Memo.

1986-318. We are not bound by the formulae and opinions prof-

fered by expert witnesses, especially when they are contrary to

our judgment. See Silverman v. Commissioner, 538 F.2d 927, 933

(2d Cir. 1976), affg. T.C. Memo. 1974-285; Estate of Davis v.

Commissioner, supra. Instead, we may reach a determination of

value based on our own examination of the evidence in the record.

See Lukens v. Commissioner, 945 F.2d 92, 96 (5th Cir. 1991)

(citing Silverman v. Commissioner, supra at 933), affg. Ames v.

Commissioner, T.C. Memo. 1990-87; Estate of Davis v. Commis-

sioner, supra. The persuasiveness of an expert's opinion depends

largely upon the disclosed facts on which it is based. See Tripp

v. Commissioner, 337 F.2d 432, 434 (7th Cir. 1964), affg. T.C.

Memo. 1963-244; Estate of Davis v. Commissioner, supra. Where

experts offer divergent estimates of fair market value, we shall

decide what weight to give those estimates by examining the

factors used by those experts to arrive at their conclusions.

See Estate of Davis v. Commissioner, supra; Casey v. Commis-

sioner, 38 T.C. 357, 381 (1962). While we may accept the opinion

of an expert in its entirety, see Estate of Davis v. Commis-

sioner, supra; Buffalo Tool & Die Manufacturing Co. v. Commis-

sioner, 74 T.C. 441, 452 (1980), we may be selective in the use
 - 21 -

of any part of such an opinion, see Estate of Davis v. Commis-

sioner, supra; Parker v. Commissioner, 86 T.C. 547, 562 (1986).

We also may reject the opinion of an expert witness in its

entirety. See Palmer v. Commissioner, 523 F.2d 1308, 1310 (8th

Cir. 1975), affg. 62 T.C. 684 (1974); Estate of Davis v. Commis-

sioner, supra.

The parties and their respective stock valuation experts

agree that, in ascertaining the fair market value of decedent's

interest in Marrero Land on the valuation date, it is necessary,

inter alia, to determine as of that date the aggregate fair

market value of Marrero Land's assets and the aggregate amount of

its liabilities in order to calculate its net asset value as of

that date. Based on the stipulations of the parties, we have

found that as of the valuation date the aggregate fair market

value of Marrero Land's assets, excluding the remaining unim-

proved real properties, was $50,643,118, and the parties agree

that the aggregate liabilities of the Company as of that date

totaled $15,943,694. Although the parties did not stipulate the

fair market value on the valuation date of each of the remaining

unimproved real properties, they did stipulate that the aggregate

value of those properties on that date without regard to an

absorption discount is $20,366,470.

According to the estate, in order to arrive at the aggregate

fair market value of the remaining unimproved real properties,
 - 22 -

and ultimately at the net asset value of Marrero Land as of the

valuation date, it is necessary to apply an absorption discount

to the stipulated aggregate value of those properties. To

support that position, the estate relies on its real estate

valuation expert Mr. Egan. According to respondent, no absorp-

tion discount is warranted. To support that position, respondent

relies on respondent's real estate valuation expert Mr. Guice and

a new theory advanced for the first time in respondent's answer-

ing brief.

We turn first to respondent's new theory. In respondent's

opening brief, respondent relied on Estate of Andrews v. Com-

missioner, 79 T.C. 938, 940 (1982), for the following two prop-

ositions: "Valuation of stock for tax purposes is a question of

fact", and "Where the property to be valued is stock that has

never been publicly traded, and there is no evidence of arms-

length sales of the stock, the value of the stock must be de-

termined indirectly." For the first time in respondent's an-

swering brief, respondent relies on Estate of Andrews v. Com-

missioner, supra for the following proposition: "Entity owned

real estate is ineligible for a market absorption discount in the

estate tax arena."4 Respondent appears to be arguing that Estate

4
To support respondent's new theory, respondent also cites
Estate of Auker v. Commissioner, T.C. Memo. 1998-185, which in
turn relies on Estate of Andrews v. Commissioner, 79 T.C. 938
(continued...)
 - 23 -

of Andrews holds that, as a matter of law, an absorption discount

may never be allowed in determining the value of real estate

owned by a corporation (or other entity) for estate tax pur-

poses.5 We disagree.

In Estate of Andrews v. Commissioner, supra, we were asked

to determine the date-of-death fair market value of certain

shares of stock in four closely held corporations that were held

by the decedent involved in that case. All four of those cor-

porations were involved in the ownership, operation, and man-

agement of commercial real estate, and they also held some liquid

assets like stocks, bonds, and cash. See Estate of Andrews v.

Commissioner, supra at 939. The real estate holdings of the four

corporations in question included warehouses, apartment build-

ings, factories, offices, and retail stores, most of which were

leased to small tenants under leases for periods of less than

4
(...continued)
(1982). We are convinced that respondent is advancing respon-
dent's new theory in the answering brief because Estate of Auker
v. Commissioner, supra, was decided by the Court between the date
on which respondent filed the opening brief in this case and the
date on which it was required to file the answering brief herein.
5
We find respondent's position that "Entity owned real
estate is ineligible for a market absorption discount in the
estate tax arena" to be inconsistent with the stipulation of
respondent and petitioner in this case that, except for the
remaining unimproved real properties owned by Marrero Land on the
valuation date, the respective values of the unimproved real
properties owned by Marrero Land on that date were determined by
using a discounted cash-flow analysis which included an absorp-
tion discount.
 - 24 -

five years. See id. One of respondent's experts in Estate of

Andrews performed an appraisal of the assets held by those

corporations. See id. at 941. In the case of the real estate

assets, that expert used the following three methods of val-

uation: Comparable sales, replacement costs, and income-pro-

ducing capacity. After correlating the values found under each

of those methods, respondent's expert in Estate of Andrews

arrived at values for the respective assets held by the four

corporations in which the decedent there involved owned certain

shares of stock. See id. at 941-942. Although the estate in

Estate of Andrews v. Commissioner, supra, did not attack the

valuations by respondent's expert of the underlying assets of the

four corporations in question, it

argued that in arriving at overall net asset value,
adjustments should have been made to reflect costs that
would have been incurred if the corporations had liq-
uidated all their real estate properties and placed
them on the market at one time. The adjustments sought
by petitioner are for blockage [i.e., absorption dis-
count], capital gains tax to the seller, real estate
commissions, and real estate taxes and special assess-
ments constituting a lien against the real estate.
* * *

We rejected the foregoing argument of petitioner in Estate

of Andrews v. Commissioner, supra. We held: "When liquidation

is only speculative, the valuation of assets should not take

these costs into account because it is unlikely they will ever be

incurred." Id. In so holding, we relied on the parties' agree-
 - 25 -

ment, which was supported by the record in Estate of Andrews,

that there was no reasonable prospect of liquidating the real

estate properties involved there. See id. We did not hold in

Estate of Andrews that, as a matter of law, no adjustment is

allowable, inter alia, for blockage (i.e., an absorption dis-

count) with respect to the corporate-owned real properties there

involved.6

Similarly, our holding in Estate of Auker v. Commissioner,

T.C. Memo. 1998-185, that "the entity-owned real estate is

ineligible for a market absorption discount" was based on the

facts that

the entities were viable going concerns on the applica-
ble valuation date, and neither a sale nor a liquida-
tion of the entity-owned real estate was contemplated
at that time * * *.

We did not hold in Estate of Auker v. Commissioner, supra, that,

as a matter of law, no absorption discount may be applied in

determining the fair market value of entity-owned real estate.

To the extent that respondent is arguing under respondent's

new theory that, as a matter of law, "Entity owned real estate is

ineligible for a market absorption discount in the estate tax

arena", we reject that argument. In determining the fair market

6
Nor did we hold in Estate of Andrews v. Commissioner,
supra, that, as a matter of law, no adjustment is allowable,
inter alia, for so-called built-in capital gains tax. See Estate
of Davis v. Commissioner, 110 T.C. 530 (1998).
 - 26 -

value of property includible in decedent's estate, the appropri-

ate inquiry is a factual one: What would a hypothetical willing

seller and a hypothetical willing buyer take into account in

arriving at a price for the remaining unimproved properties?

See, e.g., Estate of Davis v. Commissioner, 110 T.C. 530 (1998);

see also sec. 20.2031-1(b), Estate Tax Regs.7

Respondent contends for the first time in respondent's

answering brief that "Marrero Land did not contemplate liquidat-

ing its remaining vacant land".8 To the extent that respondent

is arguing under respondent's new theory that, as a factual

matter, no absorption discount is warranted under Estate of

Andrews v. Commissioner, 79 T.C. 938 (1982), in valuing the

7
Since valuation is a question of fact, and not of law, in
at least one case decided after Estate of Andrews v. Commis-
sioner, 79 T.C. 938 (1982), we allowed an absorption discount in
a situation involving corporate-owned real estate. See Carr v.
Commissioner, T.C. Memo. 1985-19. In Carr, we were asked to
determine the fair market value of certain stock in a corporation
which owned real estate and the principal business activity of
which was purchasing undeveloped land, subdividing and improving
it, and selling the lots either as such or with homes that it
built. We also allowed an absorption discount in a situation
involving corporate-owned real estate before Estate of Andrews v.
Commissioner, supra, was decided. See Estate of Folks v. Com-
missioner, T.C. Memo. 1982-43; Estate of Grootemaat v. Commis-
sioner, T.C. Memo. 1979-49.

8
Respondent also contends that Marrero Land "had no plans to
liquidate". Although it is true that Marrero Land had no plans
to liquidate as of the valuation date, that fact is not determi-
native of whether an absorption discount may be taken into
account in valuing the remaining unimproved real properties that
it owned on that date.
 - 27 -

remaining unimproved real properties, we shall not consider that

argument.9 It is well settled that the Court will not consider

issues raised for the first time on brief when to do so would

prevent the opposing party from presenting evidence that that

party might have proffered if the issue had been timely raised.

See DiLeo v. Commissioner, 96 T.C. 858, 891 (1991), affd. 959

F.2d 16 (2d Cir. 1992); Shelby U.S. Distribs., Inc. v. Commis-

sioner, 71 T.C. 874, 885 (1979). In the present case, the estate

had no opportunity to argue, let alone present evidence, relating

to respondent's new theory.

We shall now determine whether, based on the record before

us, an absorption discount should be applied in determining the

aggregate fair market value of the remaining unimproved real

properties owned by Marrero Land on the valuation date and, if

so, the amount of such a discount. The concept of an absorption

9
Even if we were to consider such an argument, respondent
would have the burden of proof, and the record does not support
respondent's contention that "Marrero Land did not contemplate
liquidating its remaining vacant land". To the contrary, we have
found that it was anticipated as of the valuation date that the
highest and best use of at a minimum approximately 75 percent of
the remaining unimproved real properties was to sell them.
Indeed, respondent complains in respondent's answering brief that
Marrero Land did not "contemplate selling all the vacant land
[remaining unimproved real properties] as a 'portfolio' or unit",
thereby conceding that Marrero Land did contemplate selling that
land. On the record before us, we find the instant case to be
distinguishable from Estate of Andrews v. Commissioner, 79 T.C.
938 (1982), and Estate of Auker v. Commissioner, T.C. Memo. 1998-
185, and respondent's reliance on those cases to be misplaced.
 - 28 -

discount with respect to real estate derives from the concept of

a blockage discount with respect to stock. According to the

concept of a blockage discount with respect to stock, a block of

stock may be so large in relation to the actual sales on the

existing market that it could not be liquidated within a rea-

sonable period of time without depressing the market. See, e.g.,

Phipps v. Commissioner, 127 F.2d 214, 216-217 (10th Cir. 1942),

affg. 43 B.T.A. 1010 (1941); Page v. Howell, 116 F.2d 158 (5th

Cir. 1940); Estate of Damon v. Commissioner, 49 T.C. 108, 117

(1967); sec. 20.2031-2(e), Estate Tax Regs. In the case of real

estate, the principle of supply and demand may warrant applica-

tion of an absorption discount. That is because the disposition

within a reasonable period of time of similar real properties

would result in those properties being in direct competition with

each other and other similar real properties in the marketplace.

Such an abrupt increase in supply would depress the price for

which those properties would sell, assuming that demand were to

remain constant. The element of competition, which is a price

depressant that is taken into account where similar real proper-

ties are valued as a whole, is not taken into account where such

properties are valued individually and the different values are

totaled.

In deciding whether to apply an absorption discount to the

stipulated value (viz., $20,366,470) of the remaining unimproved
 - 29 -

real properties and, if so, the amount of such a discount, we

shall consider the opinions of the parties' respective real

estate valuation experts to see if they are of any assistance to

us. Prior to the trial in this case, the parties informed those

experts that they had agreed that the aggregate value of the

remaining unimproved real properties without taking into account

an absorption discount was $20,366,470. The parties instructed

those experts to use that stipulated value in determining the

aggregate fair market value of those properties.

We note initially that the parties' respective real estate

valuation experts agree that the value of the remaining unim-

proved real properties was negatively affected by the economic

conditions prevailing as of the valuation date in the market in

New Orleans, Louisiana, in which those properties were located.10

It is the opinion of Mr. Egan, the estate's real estate valuation

expert, that the stipulated value of the remaining unimproved

real properties, which was determined pursuant to the comparable

sales method under which sales of comparable real properties are

used to determine value, is only the first step in the valuation

analysis for determining the aggregate fair market value of the

properties in question. That is because Mr. Egan believes

10
In fact, Mr. Guice, respondent's real estate valuation
expert, stated in his expert report that he expected those
adverse economic conditions to continue until the mid-1990's.
 - 30 -

(1) that as of the valuation date the supply of unimproved real

estate in the market in which the remaining unimproved real

properties were located far exceeded the demand for such real

estate and (2) that those properties could not have been sold

within a reasonable period of time after the valuation date,

which, in his opinion, was one year. Consequently, Mr. Egan

applied an absorption discount of $12,339,871, which he deter-

mined pursuant to a discounted cash-flow analysis, to the stipu-

lated value of the remaining unimproved real properties in order

to determine the aggregate fair market value of those properties

on the valuation date.

Mr. Guice, respondent's real estate valuation expert,

conceded at trial that as of the valuation date the supply of

unimproved real estate in the market in which Marrero Land's

remaining unimproved real properties were located far exceeded

the demand for such real estate. When cross examined at trial

about the remaining unimproved real properties that were zoned as

commercial, industrial, multifamily residential, and wetlands,

which accounted for approximately 94 percent of the stipulated

value of the remaining unimproved real properties, Mr. Guice also

admitted that those properties could not have been sold within

one year after the valuation date. Nonetheless, Mr. Guice

refused to apply an absorption discount in determining the

aggregate fair market value of those or any other remaining
 - 31 -

unimproved real properties. According to Mr. Guice, the com-

parable sales method is the preferred method of valuing real

estate, and that method was used in arriving at the stipulated

value as of the valuation date (i.e., $20,366,470) of the re-

maining unimproved real properties. Consequently, in Mr. Guice's

opinion, that stipulated value is the aggregate fair market value

on that date of those properties.

Mr. Guice's approach to determining the fair market value of

each of the remaining unimproved real properties appears to be

inconsistent with his approach to determining the fair market

value of each of the other unimproved real properties that

Marrero Land owned on the valuation date. With respect to the

remaining unimproved real properties, the fair market values of

which are in dispute, Mr. Guice did not apply an absorption

discount; with respect to the other unimproved real properties,

the fair market values of which the parties have stipulated, Mr.

Guice used a discounted cash-flow analysis which included an

absorption discount. In an attempt to explain the apparent

inconsistency in his approaches, Mr. Guice stated in his expert

report:

(1) The properties in question ($20,366,470) consist of
varying size lots and parcels of ground (varying from a
few thousand square feet up to ± 13 acres) both with
and without building improvements.
 - 32 -

(2) These various individual sites lie in developed
subdivisions having different zoning classifications
and different highest and best uses.

(3) Unlike large tracts of raw land, many of these
subdivisions were developed more than a decade ago;
hence there is no reasonable definitive pattern of
recent sales and pricing.

(4) The appraiser can only rely on pertinent market
activity, market expectations, and market experience.
Market value and the Discounted Cash Flow (DCF) Anal-
ysis should be supported by market-derived data, and
the assumptions should be both market and property
specific.

The appraiser judged that there was not a reasonable
pattern of market activity and market expectations for
said properties. The appraiser chose to arrive a [sic]
the indicated value of these various properties using
the Sales Comparison or Market Data Approach of direct
comparison using recent sales of similar or like prop-
erties.

We do not believe that the foregoing points justify Mr.

Guice's view that no absorption discount should be applied in

valuing the remaining unimproved real properties. In our opin-

ion, points (1) and (2) above set forth Mr. Guice's concerns

about the manner in which Mr. Egan, the estate's real estate

valuation expert, calculated the amount of the absorption dis-

count that he applied to the remaining unimproved real prop-

erties; they do not support Mr. Guice's opinion that no such

discount should be applied. With respect to point (3) above, we

agree with Mr. Egan that that point supports Mr. Egan's valuation

approach because
 - 33 -

A potential purchaser, cognizant that in a ten year old
subdivision where there is "no reasonable definitive
pattern of recent sales and pricing," would anticipate
that extended marketing periods would be encountered on
unsold remaining inventory and that holding costs would
be incurred.

With respect to point (4) above, we also agree with Mr. Egan that

if an absorption analysis that was market and property
specific had been performed "pertinent market activity"
would have come to light. Such an analysis would have
tested the sensitivity of zoning, size and location.
By his [Mr. Guice's] own admission, there was "not a
reasonable pattern of market activity or market ex-
pectations for said properties." This is precisely why
a normal marketing period would not have been expected
and an orderly sell-off over time needed to be con-
sidered.

Mr. Guice also failed to explain satisfactorily, inter alia,

why an absorption discount should apply to certain unimproved

real properties owned by Marrero Land on the valuation date but

not to the remaining unimproved real properties that it owned on

that date, which were in the same geographic market and some of

which had the same types of zoning and were directly contiguous

to the unimproved real properties to which he applied a dis-

counted cash-flow analysis which included an absorption discount.

Mr. Guice admitted at trial that the fact that real properties

are not contiguous does not determine whether or not to apply a

discounted cash-flow analysis which included an absorption

discount, and he conceded that he had applied such a discounted

cash-flow analysis to certain real properties that were not
 - 34 -

contiguous to each other and that therefore did not constitute a

subdivision.

Mr. Guice acknowledged in a deposition which was taken by

the estate prior to the trial in this case and which was read

into the record at that trial that if an attempt were made to

sell as one unit certain of the parcels of real estate owned by

Marrero on the valuation date, an absorption discount would have

to be applied. He also acknowledged at trial that he would have

applied an absorption discount if several parcels of land that

comprised the remaining unimproved real properties were sold as

one unit. In addition, Mr. Guice admitted at trial that there

generally is a difference between valuing individual parcels of

real estate separately and valuing an entire portfolio of parcels

as a whole.

Furthermore, Mr. Guice admitted at trial that an absorption

discount analysis involves considering the time that it takes to

sell property in relation to the time value of money. That is to

say, cash today is worth more than cash in hand in the future.

Mr. Guice also acknowledged that, for purposes of valuing mul-

tiple parcels of vacant land, it is necessary to discount the

cash flow to be derived from the sale of those parcels.

In Mr. Guice's rebuttal report, which contains inappropriate

references to and attachments of matters that were the subject of

settlement discussions between the parties in this case, Mr.
 - 35 -

Guice does not set forth a reasoned analysis in rebuttal to the

analysis of Mr. Egan. Instead, in his rebuttal report, Mr.

Guice's criticism of the aggregate fair market value of the

remaining unimproved real properties that Mr. Egan determined

appears to be grounded in Mr. Guice's conclusion that the value

arrived at by Mr. Egan simply was too low, especially when

considered in relation to the aggregate value of the remaining

unimproved real properties that Mr. Egan had determined in his

valuation analysis before he applied an absorption discount and

before the parties agreed to stipulate to the aggregate value of

those properties without applying such a discount.11

On the instant record, Mr. Guice has failed to persuade us

that no absorption discount should be applied to any of the

remaining unimproved real properties. We did not find Mr.

Guice's opinion as to the aggregate fair market value of those

properties to be reliable, and we shall not rely on it in making

that determination.

According to Mr. Egan, in attempting to value multiple real

properties, it is necessary to determine the length of time that

it would take to sell such properties and, depending on market

11
Upon questioning by the Court, Mr. Egan indicated that he
would use the methodology described in his expert report regard-
less whether or not the parties had agreed to an aggregate value
of the remaining unimproved real properties that was higher or
lower than the value to which they ultimately stipulated.
 - 36 -

conditions, to apply a discounted cash-flow analysis which

included an absorption discount, which he also referred to as a

subdivision analysis, to arrive at the values of such properties.

Mr. Egan acknowledged that if all the remaining unimproved real

properties could have been sold within a reasonable period of

time after the valuation date, which he assumed to be one year,

the prices established under the comparable sales method would

have been the equivalent of the fair market value of each of

those properties. However, Mr. Egan opined, and Mr. Guice

conceded, that, because of market conditions, the remaining

unimproved real properties could not have been sold within a one-

year period of time. Consequently, as a result of the prevailing

market conditions on the valuation date, Mr. Egan concluded that

it was necessary to use a discounted cash-flow analysis, which he

considers to be the same as a subdivision analysis. According to

Mr. Egan, such an analysis considers a regular stream of income

over a period of time from the sale of multiple properties, such

as the remaining unimproved properties that Marrero Land owned on

the valuation date, and discounts the net periodic cash flow

projected for such properties to a present value with an ap-

propriate discount rate that reflects market conditions. Mr.

Egan indicated that a discounted cash-flow analysis or subdivi-

sion analysis, which includes an absorption discount, is not

limited to multiple parcels of real property that are in a single
 - 37 -

subdivision or tract of land, but is used in any valuation of

multiple real properties if they cannot be sold within a rea-

sonable period of time.

In applying a discounted cash-flow analysis to the remaining

unimproved real properties, Mr. Egan separated those properties

into the following categories or types, based on the zoning

applicable to those properties: Commercial, industrial, multi-

family residential, single-family residential, wetlands, un-

restricted, and miscellaneous. Except for the wetlands and

unrestricted categories for which no empirical data were avail-

able, Mr. Egan estimated based on available data how long it

would take for the market to absorb each category or type of

property by comparing (1) the volume of unimproved real estate

located on the west bank of the Mississippi River in the New

Orleans metropolitan area that fit within each such category and

that was sold over certain time periods to (2) the value of the

remaining unimproved real properties of each such category that

Marrero Land owned on the valuation date and that also was

located on the west bank of the Mississippi River in that area.

Mr. Egan assumed that as of the valuation date Marrero Land could

have captured 50 percent of the demand for real estate in the

prevailing market. He estimated that, except for the wetlands

and the unrestricted categories of real property, it would have

taken the market from two years to 13 years, depending on the
 - 38 -

type of property, to absorb the remaining unimproved real prop-

erties. As for the wetlands and unrestricted categories of real

property, Mr. Egan estimated that it would have taken five years

for the market to absorb those types of property because of the

large amount of land within those categories that Marrero Land

owned on the valuation date. Mr. Egan allocated the stipulated

value of the remaining unimproved real properties (viz.,

$20,366,470) to the different types of such properties and to the

years over which each of those types of properties would be

absorbed by the market (projected absorption period) in order to

determine the projected gross receipts therefrom. Mr. Egan

projected the costs, such as marketing costs, sales commissions,

overhead and administration, and property taxes, that would be

incurred as a result of sales efforts during the projected

absorption period for each category of the remaining unimproved

real properties. With respect to each year of the applicable

projected absorption period for each such category, Mr. Egan

reduced the projected gross receipts by those projected costs and

projected developer's profit for that year to arrive at Marrero

Land's prospective cash flow before debt service. Mr. Egan then

determined a discount rate of 23 percent for the applicable

projected absorption period for each category of property, which

was supposed to reflect investor risk and market conditions with

respect to each such category. In determining that discount
 - 39 -

rate, Mr. Egan relied on the rate of return on the sale by a

partnership between 1990 and 1995 of industrial real estate

situated in an industrial park in the metropolitan New Orleans

area, which he adjusted to take account of the respective pro-

jected absorption periods and risks that he determined for the

various categories of the remaining unimproved real properties.

Finally, Mr. Egan discounted the prospective cash flow for each

year of each projected absorption period back to the valuation

date in order to arrive at the fair market value of the prop-

erties within each of the categories of remaining unimproved real

properties on that date and totaled each such value to arrive at

the aggregate fair market value on that date of those properties,

which he determined to be $8,026,599.

Respondent points to certain alleged deficiencies in Mr.

Egan's analysis. Respondent contends that Mr. Egan's application

of an absorption discount as part of his discounted cash-flow

analysis is not warranted when real estate is already developed

and awaiting sale to the ultimate consumer. We disagree. We

have applied an absorption discount in valuing developed lots of

real estate. See, e.g., Carr v. Commissioner, T.C. Memo. 1985-

19. On the instant record, we find that a willing hypothetical

buyer and a willing hypothetical seller would consider the rate

of absorption of similar real properties, whether developed or
 - 40 -

undeveloped, in the prevailing market in deciding the price for

such properties.

Respondent also contends that Mr. Egan improperly assumed

that all of the properties within each of the different catego-

ries of the remaining unimproved real properties would have

competed in the marketplace. We agree with respondent. We

believe that only those real properties in each category (1) that

are similar in size and (2) that are valued before application of

an absorption discount at approximately the same price per square

foot would have competed with one another.

We are also concerned with certain other aspects of Mr.

Egan's valuation analysis. Mr. Egan included all of the re-

maining unimproved real properties in his discounted cash-flow

analysis, even though, in his view, the highest and best use of

certain of those properties was not "for retail sale". We

believe that Mr. Egan should have included in his discounted

cash-flow analysis only those remaining unimproved real proper-

ties whose highest and best use was to sell them. See Estate of

Andrews v. Commissioner, 79 T.C. at 942.

Mr. Egan does not explain how he arrived at an absorption

period of five years for the unrestricted and wetlands categories

of those properties. In addition, Mr. Egan states that "research

was conducted for comparable sales transactions by property type

for the period 1979 through 1988" with respect to the industrial
 - 41 -

category of the properties in question, and that "case research

was limited to the 1985-88 time frame" for the commercial,

multifamily residential, and single-family residential categories

of those properties. However, he does not adequately explain why

different time frames were used for the industrial and for the

commercial, multifamily residential, and single-family residen-

tial categories of the remaining unimproved real properties.

Furthermore, while Mr. Egan claims to have considered the time

period consisting of 1985 through 1988 with respect to the two

residential categories of properties in question, in fact he

used, with no explanation, comparable sales transactions from

1984 through 1987 for the multifamily residential category and

from 1984 through 1986 for the single-family residential cat-

egory.

We also found the basis on which Mr. Egan calculated the

discount rate that he applied to be unacceptable. Mr. Egan

calculated that rate based on the rate of return on the sale by a

partnership between 1990 and 1995 of industrial real estate

situated in an industrial park in the metropolitan New Orleans

area, which he adjusted to take account of the respective pro-

jected absorption periods and risks that he determined for the

various categories of the remaining unimproved real properties.

That sale took place well after the valuation date of February 7,

1988, was not reasonably foreseeable on that date, and should not
 - 42 -

have been taken into account in valuing the remaining unimproved

real properties as of that date. See Estate of Spruill v.

Commissioner, 88 T.C. 1197, 1228 (1987). Moreover, even assuming

arguendo that it had been appropriate to use the postvaluation

date sale on which Mr. Egan relied in valuing the remaining

unimproved real properties, we are not persuaded that the rate of

return by one partnership on one sale of an industrial park is

necessarily the rate of return that could be expected with

respect to the different categories of the remaining unimproved

real estate properties.

Taking into account the foregoing problems that we have with

Mr. Egan's valuation analysis, and bearing in mind that valuation

is necessarily an approximation and a matter of judgment, rather

than of mathematics, see Estate of Davis v. Commissioner, 110

T.C. at 554, on which the estate has the burden of proof, see

Rule 142(a), we find that an absorption discount of $1.7 million

should be applied to the stipulated value (viz., $20,366,470) of

the remaining unimproved real properties in arriving at the

aggregate fair market value of those properties on the valuation

date. Consequently, we further find that as of that date the

aggregate fair market value of those properties was $18,666,470
 - 43 -

and that the aggregate fair market value of Marrero Land's assets

was $69,309,588.12

We shall now consider the views of the parties' respective

stock valuation experts, each of whom determined the fair market

value of decedent's interest in Marrero Land on the valuation

date. We turn first to respondent's stock valuation expert, Mr.

Moore. Mr. Moore applied the following three approaches in

valuing decedent's interest in Marrero Land: Discounted net

asset value approach, public market multiples approach, and

liquidation value approach. In arriving at a value under the

discounted net asset value approach, Mr. Moore applied a real

estate company discount of 30 percent to the net asset value of

Marrero Land as of the valuation date. Mr. Moore determined that

net asset value by relying on, inter alia, Mr. Guice's determina-

tion of the aggregate fair market value of the remaining unim-

proved real properties on that date. He then applied a 35-

percent lack-of-marketability discount and arrived at a value for

decedent's interest in Marrero Land as of the valuation date of

$8,364,731. Mr. Moore considered the discounted net asset value

approach to be "quite realistic".

12
We have considered all of the contentions of respondent
regarding Mr. Egan's valuation of the remaining unimproved real
properties that are not discussed herein, and we find them to be
without merit.
 - 44 -

Under the public market multiples approach, Mr. Moore

applied a 30-percent real estate company discount to the ag-

gregate value of the unimproved real properties owned by Marrero

Land on the valuation date. He determined that value by using,

inter alia, Mr. Guice's determination of the aggregate fair

market value of the remaining unimproved real properties as of

that date. Application by Mr. Moore of a 30-percent real estate

company discount to the value of unimproved real properties owned

by Marrero Land on the valuation date resulted in what Mr. Moore

described as the implied public market capitalization of the

Company's unimproved real properties. Mr. Moore then capitalized

the earnings, book value, and dividends, respectively, of Marrero

Land to arrive at what he referred to as the implied public

market capitalization of the Company's income-producing prop-

erties using each of those factors. He then added the implied

public market capitalization of the unimproved real properties

owned by Marrero Land as of the valuation date to the implied

public market capitalizations of its income-producing properties

determined by using earnings, book value, and dividends, re-

spectively, which resulted in what he characterized as the

implied market capitalization of Marrero Land using each of those

factors. He determined what he described as the respective

implied public market values of decedent's interest in Marrero

Land as of the valuation date using earnings, book value, and
 - 45 -

dividends, respectively, by multiplying the respective implied

market capitalizations of Marrero Land using those factors by the

percentage interest of decedent in the Company as of that date.

Finally, Mr. Moore applied a 35-percent lack-of-marketability

discount to each of those implied public market values to arrive

at the following values of decedent's interest in Marrero Land on

the valuation date using earnings, book value, and dividends,

respectively: $7,255,468, $6,812,280, and $7,266,956. According

to Mr. Moore, the public market multiples "approach is essen-

tially a different way of valuing the improved real estate. To

our view, it is a less exact approach than the discounted net

asset value approach which utilizes the appraised value of the

improved real estate investments."

Under the liquidation value approach, Mr. Moore applied a

10-percent bulk sales discount to the aggregate value of the real

properties owned by Marrero Land on the valuation date, which he

determined by relying on, inter alia, Mr. Guice's value of the

remaining unimproved real properties. The resulting product was

what Mr. Moore characterized as the liquidation value of Marrero

Land's real properties as of the valuation date. He reduced that

liquidation value by the book value of those real properties to

determine what he described as "Capital gain in liquidation".

Mr. Moore applied a 34-percent capital gains tax rate to that

capital gain, resulting in a capital gains tax of $12,293,109.
 - 46 -

He reduced the aggregate value of the real properties of Marrero

Land on the valuation date by the amount of that capital gains

tax in order to arrive at the net proceeds from real properties

"in liquidation". Mr. Moore added the value of the other assets

owned by the Company on the valuation date to those net proceeds

to arrive at what he characterized as total assets of the Com-

pany. He reduced those total assets by the aggregate liabilities

that the Company had as of the valuation date to arrive at what

he termed the liquidation value of the Company, viz.,

$36,799,147. Mr. Moore applied a minority discount of 23 percent

to that liquidation value, which resulted in what he character-

ized as an implied market capitalization of $28,335,343. He

determined what he described as the implied public market value

of decedent's interest in Marrero Land on the valuation date by

multiplying the implied market capitalization by the percentage

interest in Marrero Land that decedent owned on that date. Mr.

Moore then applied a 35-percent lack-of-marketability discount to

the implied public market value of decedent's interest in Marrero

Land on the valuation date to arrive at a value of that interest

under the liquidation value approach of $6,146,153. Mr. Moore

considered the liquidation value approach to be "significant".

Mr. Moore indicated in his expert report that he was in-

structed by respondent to ignore the effect of amended article VI

and the voting trust in determining the fair market value of
 - 47 -

decedent's interest in Marrero Land on the valuation date. Mr.

Moore admitted at trial that if he had not been instructed to

ignore amended article VI and the voting trust, he would have

applied an additional 15-percent discount in determining the fair

market value of decedent's interest in Marrero Land, approxi-

mately four percent to six percent of which was attributable to

the voting trust.

Mr. Moore acknowledged at trial that, in valuing decedent's

interest in Marrero Land, he placed the greatest weight on its

net asset value as of the valuation date, determined by using,

inter alia, Mr. Guice's value for the remaining unimproved real

properties. That was the case not only under Mr. Moore's dis-

counted net asset value approach, but also under his public

market multiples approach and his liquidation value approach.13

In this connection, Mr. Moore had only one material criticism of

the respective valuation analyses by Mr. Chaffe and Mr. Stryker

that were within the realm of his expertise as a stock valuation

expert.14 According to Mr. Moore, in their respective expert

13
To the extent Mr. Moore relied on his liquidation value
approach, which does not appear to be the case despite his having
indicated that such an approach is "significant", we find such
reliance to be unwarranted. That is because decedent's interest
in Marrero Land as of the valuation date was a minority interest
that could not force the liquidation of the Company.
14
Most of Mr. Moore's rebuttal report attempted to rebut Mr.
Egan's valuation analysis of the remaining unimproved real
(continued...)
 - 48 -

reports, the estate's stock valuation experts "seemed to turn

their backs on standard methodology of valuing a real estate

holding company (which calls for important weight to be given to

net asset value)".

Contrary to Mr. Moore's assertion, Marrero Land is not

merely a real estate holding company. It is an operating company

that acquires, develops, manages, improves, maintains, leases,

and sells real estate. We have examined the respective reports

and the testimony of the estate's stock valuation experts and

find that they properly took all those facts into account in

their respective valuation analyses of decedent's interest in

Marrero Land on the valuation date. We have examined Mr. Moore's

reports and his testimony at trial. Based on that examination,

we believe that Mr. Moore improperly accorded disproportionate

weight to the Company's net asset value (determined by relying

on, inter alia, Mr. Guice's opinion as to the value of the

remaining unimproved real properties) in determining the fair

market value of decedent's interest in Marrero Land on the

valuation date. On the record before us, we are not persuaded

14
(...continued)
properties. Respondent offered Mr. Moore, and we found him to be
qualified, as a stock valuation expert, not a real estate val-
uation expert. At trial, respondent stipulated that the portions
of Mr. Moore's rebuttal report addressing real estate valuation
matters should be deemed stricken from the record in this case,
and the Court so ordered.
 - 49 -

that Mr. Moore's opinion as to the fair market value of dece-

dent's interest in Marrero Land is reliable, and we shall not

rely on it.

In determining the value of decedent's interest in Marrero

Land on the valuation date, the estate's stock valuation expert

Mr. Stryker examined, inter alia, the history, ownership, man-

agement, employees, and financial condition of Marrero Land, as

well as the outlook for the Company, as of that date. Mr.

Stryker considered each of the following three principal ap-

proaches to value prescribed by the Uniform Standards of Pro-

fessional Appraisal Practice: The cost approach, the market

approach, and the income approach. Mr. Stryker used the cost

approach and the market approach. He considered but did not use

the income approach because the management of Marrero Land had

not prepared long-term income projections for the Company.

Under the cost approach, Mr. Stryker used the net asset

value method to determine the fair market value of decedent's

interest in Marrero Land. He determined the net asset value of

Marrero Land on the valuation date by using, inter alia, the

value of the remaining unimproved properties determined by Mr.

Egan. Mr. Stryker discounted that net asset value by 40 percent

based on his analysis of the Company and of data relating to the

discount from net asset value at which certain publicly traded

real estate operating entities were being freely traded on the
 - 50 -

public market. He then applied a 35-percent discount for lack-

of-marketability. After applying those discounts, Mr. Stryker

determined under the cost approach that the fair market value on

the valuation date of the common stock of Marrero Land on a

minority, noncontrolling basis was $33,406 per share.

Under the market approach, Mr. Stryker first determined the

value of the stock of Marrero Land as if it were freely traded.

He computed that value by analyzing and comparing the operating

performances and financial conditions of selected comparable

publicly traded real estate companies and of Marrero Land. In

comparing Marrero Land and the comparable companies, Mr. Stryker

examined size, profit margins, earning power (i.e., turnover

ratios and rates of return), long-term return (i.e., annual

growth rates), and financial risk (i.e., capital structure and

fixed-charges coverage). Mr. Stryker indicated that investors in

freely traded common stocks of public companies generally eval-

uate those stocks with investor appraisal ratios, such as price-

to-earnings ratios, price-to-cash flow ratios, and price-to-

tangible book value ratios, and dividend yields. Because Marrero

Land was an S corporation as of the valuation date and its 1987

and expected future distributions were not comparable to div-

idends paid by public companies, Mr. Stryker did not consider

dividend yields in his market approach to value.
 - 51 -

Mr. Stryker's expert report set forth the price-to-earnings

ratios and the price-to-cash flow ratios of the comparable public

companies that he selected based on average five-year, average

three-year, latest year, and latest 12-months earnings and cash

flow,15 respectively. Mr. Stryker's expert report set forth the

price-to-tangible book value ratios of the comparable public

companies that he selected by comparing each such company's

public price during the valuation period to its latest year-end

tangible book value and its return on equity for the latest year

and median for the latest five years. In determining the price-

to-earnings ratios, price-to-cash flow ratios, and price-to-

tangible book value ratios for Marrero Land based on an examina-

tion of those respective ratios for the comparable public compa-

nies that Mr. Stryker selected, Mr. Stryker made adjustments that

he considered to be appropriate for differences between Marrero

Land and those companies. Mr. Stryker calculated the respective

price-to-earnings ratios and the price-to-cash flow ratios for

Marrero Land based on average three-year and latest year earnings

and cash flow (determined both as net income plus depreciation

15
The price-to-cash flow ratios of the comparable companies
that Mr. Stryker selected contained price-to-cash flow ratios of
those companies based on (1) average five-year, average three-
year, latest-year, and latest 12-months cash flow defined as net
income plus depreciation and amortization and (2) total capital-
ization to average five-year, average three-year, latest-year,
and latest 12-months pretax, pre-interest cash flow (EBITDA).
 - 52 -

and amortization and EBITDA). In determining the respective

price-to-earnings ratios and price-to-cash flow ratios of Marrero

Land, Mr. Stryker gave the greatest weight to the respective

indicated values based on its latest year earnings and cash flow

(determined both as net income plus depreciation and amortization

and EBITDA). With respect to the price-to-tangible book value

ratios, Mr. Stryker concluded that the comparable public compa-

nies that he selected sold at between 74.2 percent and 666.3

percent of tangible book value. According to Mr. Stryker,

Marrero Land's rates of returns on equity of 8.7 percent for the

latest year and median of 12.8 percent for the latest five years

did not compare favorably with the rates of those public compa-

nies. As a result, Mr. Stryker determined that a ratio of price-

to-tangible book value of 100 percent was applicable to Marrero

Land's common stock as of the valuation date.

The indicated values that Mr. Stryker determined on the

basis of an examination of price-to-earning ratios, price-to-cash

flow ratios, and price-to-tangible book value ratios resulted in

the following indicated values per share of stock of Marrero Land

as of the valuation date:
 - 53 -

Indicated
Appraisal Ratios Value Per Share
Price-to-earnings $19,200
Price-to-cash flow (net income
plus depreciation and
amortization) 22,200
Price-to-cash flow (EBITDA) 22,000
Price-to-tangible book value 25,900

In reconciling the foregoing indicated values, Mr. Stryker gave

the greatest weight to the indicated value based on price-to-

earnings ratios and the least weight to the respective indicated

values based on price-to-cash flow ratios (EBITDA) and price-to-

tangible book value ratios.

Mr. Stryker concluded under the market approach that the

freely traded value of the common stock of Marrero Land as of the

valuation date was $21,200 (rounded) per share. Mr. Stryker then

applied a discount of 35 percent because "the holder of a mi-

nority and noncontrolling interest in the common stock of

Marrero, unlike the holders of common stock in the selected

public companies, had no market for his or her shares other than

by a private sale, and could not compel registration".16 After

applying that discount, Mr. Stryker determined under the market

approach that the fair market value on the valuation date of the

common stock of Marrero Land on a minority, noncontrolling basis

was $13,800 per share.

16
In determining that discount, Mr. Stryker did not consider
amended article VI, but he did give consideration to the voting
trust.
 - 54 -

Mr. Stryker gave equal weight to the respective values that

he determined under the cost approach and the market approach and

determined that the fair market value of decedent's interest in

Marrero Land on the valuation date was $23,600 (rounded) per

share, or $3,933,412.17

In determining the fair market value of decedent's interest

in Marrero Land on the valuation date, Mr. Chaffe, who also was

the estate's stock valuation expert, took into account factors

unique to Marrero Land that were similar to the factors con-

sidered by Mr. Stryker. Mr. Chaffe determined that fair market

value by using the following approaches: (1) A market approach

using comparative analyses to publicly traded (a) guideline

companies and (b) real estate investment trusts (REIT's) and real

estate operating companies (REOC's); (2) an income approach

utilizing a discounted cash flow model; and (3) an asset approach

utilizing a liquidation model (asset approach/liquidation model).

17
Although Mr. Stryker considered in his valuation process
the book value price set forth in amended article VI, he did not
use that price in determining the fair market value of decedent's
interest in Marrero Land on the valuation date because his de-
termination of that fair market value was less than that price.
He concluded that no person would decide to buy decedent's in-
terest in Marrero Land at book value pursuant to amended article
VI, since that value would have been higher on the valuation date
than the fair market value of that interest that he determined.
 - 55 -

We turn first to the asset approach/liquidation model used

by Mr. Chaffe. Under that approach, Mr. Chaffe considered a

liquidation model of Marrero Land on the valuation date under

which he assumed that its assets were sold on that date at their

respective fair market values. The aggregate fair market value

on the valuation date of the remaining unimproved real properties

that Mr. Chaffe used was that value determined by Mr. Egan.

Although Mr. Chaffe considered the asset approach/liquidation

model, he concluded that it was not an appropriate approach to

use in determining the value of decedent's interest in Marrero

Land, which was a minority interest that had no ability to force

the Company's liquidation or the disposition of its assets. The

results that Mr. Chaffe obtained under the asset approach/liq-

uidation model were used by him only as an indication of an

outside limit or range of value.

Under the market approach, Mr. Chaffe analyzed and compared

certain financial data of five publicly traded guideline com-

panies and Marrero Land. Mr. Chaffe made adjustments for dif-

ferences between those companies and Marrero Land and, by im-

plicit weighting, concluded under the market approach that the

marketable, minority value of the common stock of Marrero Land

using publicly traded guideline companies was $17,100,000.

Because Marrero Land's primary asset on the valuation date

was real estate, Mr. Chaffe also did a comparison under the
 - 56 -

market approach of Marrero Land to a group of publicly traded

REIT's and REOC's that he selected from the Realty Stock Review,

which publishes a market analysis of REIT's and REOC's, their net

asset values, and dividend yields. Mr. Chaffe indicated in his

expert report that the selection of REIT's and REOC's as a guide-

line for comparison was intended to give actual free market

pricing comparisons for the common stock of Marrero Land which

did not trade freely in an open marketplace. The following is a

summary of the various pricing calculations and tests that Mr.

Chaffe performed:

REIT's Value Indication
Net asset value18 $26,200,588
Pretax earnings 14,712,697
Actual distribution 8,156,459
Assuming Marrero Land
pays out 95% of 14,673,153
earnings

Finding of value by
implicit weighting $18,000,000

REOC's Value Indication
Net asset value19 $24,969,430
After-tax earnings 13,267,949
Dividends 14,435,484

Finding of value by
implicit weighting $17,000,000

18
In determining the net asset value of Marrero Land, Mr.
Chaffe relied on, inter alia, Mr. Egan's valuation of the re-
maining unimproved real properties.
19
See supra note 18.
 - 57 -

Mr. Chaffe concluded under the market approach that the

marketable, minority value as of the valuation date of the common

stock of Marrero Land as voting stock was $18 million using the

REIT models and $17 million using the REOC models.

Under the income approach, Mr. Chaffe essentially used a

discounted cash flow model under which current expected cash flow

was used as a basis for determining the fair market value of the

common stock of Marrero Land on the valuation date. The dis-

counted cash flow model that Mr. Chaffe used was based on cash

flow available to a minority shareholder. According to Mr.

Chaffe,

A discounted cash flow ("DCF") model is a method used
to determine the minority equity price of a Company by
a discount or present value method applied to the
future cash flow of the Company available to the mi-
nority shareholder through dividends or growth from
retained earnings. In such a DCF model, the investor
receives the free cash flow, which is the cash gen-
erated by the Company that is available to pay div-
idends or be reinvested to produce future profits. The
future stream of annual cash flow and the terminal or
residual value must be discounted to arrive at the
present value.

In applying the discounted cash flow model, Mr. Chaffe

assumed that cash flow is the amount of money available to

benefit minority shareholders. Based on historical cash flows of

Marrero Land, the outlook for the Company and for the industry,

and discussions with the Company's management, Mr. Chaffe de-

termined that $1,409,676 was the appropriate level of free cash
 - 58 -

flow in the base year (to December 31, 1987) of the discounted

cash flow model. The model that Mr. Chaffe used considered a

seven-year period of cash flow of the Company, which Mr. Chaffe

assumed would remain level throughout the discounting period.

Mr. Chaffe adjusted the discount rate because he assumed that

there would be no growth in the cash flow of Marrero Land over

that seven-year period. Mr. Chaffe's discounted cash flow model

further assumed a terminal value equal to the liquidation value

of Marrero Land, which, according to Mr. Chaffe, assured sale of

the real estate held by the Company at its appraised value. The

discount rate that Mr. Chaffe used was the rate of return that an

investor would require to assume the risk of owning stock of the

Company. In determining that discount rate, Mr. Chaffe con-

sidered returns available on other investments as well as an

evaluation of the risk level of Marrero Land and a comparison of

that risk level with market-based returns on equity securities

with similar risks. Mr. Chaffe used a discount rate of 20.2

percent based on the yield on Treasury bonds as of the valuation

date and historical equity premiums.20

20
The yield on a seven-year Treasury bond in February 1988
was 8.2 percent (risk free rate). As reported in Ibbotson
Associates 1988 Yearbook (Ibbotson Yearbook), the equity risk
premium based on a broad list of traded equities (S&P 500 Index)
was 8.3 percent. Mr. Chaffe added the small-company stock risk
premium of 3.7 percent, which he also took from the Ibbotson
Yearbook, to the historical risk premium of the Standard & Poor
(continued...)
 - 59 -

Mr. Chaffe determined under the income approach utilizing a

discounted cash flow model that the marketable, minority value of

the Company's stock as of the valuation date was $12,549,597.

The value indications that Mr. Chaffe arrived at for the

marketable, minority value of the common stock of Marrero Land on

the valuation date under the different valuation approaches that

he used were:

Valuation Approach Value Indication
Market approach
Publicly traded
guideline companies $17,100,000
REIT's 18,000,000
REOC's 17,000,000
Income approach using
discounted cash flow model 12,549,597

Based on a review of the various tests of value that he used

and using implicit weighting, Mr. Chaffe determined that the

aggregate "as if traded" value of the common stock in minority

blocks of shares of Marrero Land as of the valuation date was

$18,000,000. That value resulted from a weighting upward from

the respective values that he determined under the market ap-

proach using publicly traded guideline companies and the income

approach utilizing a discounted cash flow model to the market

20
(...continued)
500 Index. Adding those three rates indicated an expected return
rate for the smaller-company traded stocks of 20.2 percent (8.2
percent risk free rate plus 8.3 percent S&P 500 Index plus 3.7
percent small-company stock premium). Mr. Chaffe did not add a
specific company risk premium because he used a no-growth model
of future cash flow.
 - 60 -

approach using REIT models, which emphasized asset values and

pretax levels of earnings and cash flow.

Mr. Chaffe applied a discount of approximately five percent

in order to reflect the fact that decedent's interest in Marrero

Land was governed by the voting trust and therefore was a non-

voting interest and a discount for lack of marketability of 40

percent. Mr. Chaffe determined that the fair market value of

decedent's interest in Marrero Land on the valuation date was

$20,917 per share, or $3,486,167.21

Respondent asserts that we should not rely on the respective

opinions of Mr. Stryker and Mr. Chaffe. Respondent contends

that, in considering the price-to-earnings ratios of publicly

traded companies under Mr. Stryker's market approach, he used the

latest-year earnings rather than the higher average three-year

earnings or the even higher average five-year earnings. Mr.

Stryker did not use the average five-year earnings because that

earnings level "was much higher than Marrero's expected future

recurring earnings level." We agree with Mr. Stryker's judgment

not to use the average five-year earnings. Mr. Stryker used the

average three-year earnings for 1985-1987 and the latest year

21
Mr. Chaffe considered in his valuation analysis amended
article VI. However, because he determined that the fair market
value of decedent's interest in Marrero Land on the valuation
date was less than that book value and that, consequently, "the
book value purchase options would not be exercised", Mr. Chaffe
did not use that book value price in his valuation analysis.
 - 61 -

(1987) earnings. However, he gave the greatest weight to the

indicated value based on the latest year (1987) earnings. Given

the economic conditions extant in 1987 relative to 1985 and 1986,

we agree with Mr. Stryker's judgment to give the greatest weight

to 1987 earnings in determining indicated value using the price-

to-earnings ratios method.

Respondent claims that Mr. Chaffe did not use, but should

have used, the net asset value approach in valuing decedent's

interest in Marrero Land. While respondent is correct that Mr.

Chaffe did not use the net asset value approach, Mr. Chaffe did

place very substantial weight on Marrero Land's net asset value

in his market approach using REIT's. Mr. Chaffe placed the

greatest weight on that approach in determining the aggregate "as

if traded" value of the common stock in minority blocks of

Marrero Land as of the valuation date, to which he applied

discounts for nonvoting stock and lack of marketability in order

to arrive at the fair market value of decedent's interest in

Marrero Land on that date.

On the record before us, we are satisfied with the respec-

tive valuation analyses of Mr. Stryker and Mr. Chaffe in deter-

mining the fair market value of decedent's interest in Marrero

Land on the valuation date.22 However, each of those respective

22
We have considered all of the arguments of respondent
(continued...)
 - 62 -

analyses must incorporate our finding as to the aggregate fair

market value on that date of the remaining unimproved real

properties of Marrero Land. We have incorporated that finding

into the respective valuation analyses of Mr. Chaffe and Mr.

Stryker, which results in a fair market value on the valuation

date of decedent's interest in Marrero Land of $4,611,417 under

Mr. Stryker's analysis and $4,000,328 under Mr. Chaffe's analy-

sis. On the instant record, we find that those values set the

appropriate range from which we may determine the fair market

value of that interest on that date.

Based on our examination of the entire record in this case,

and bearing in mind that valuation is necessarily an approxima-

tion and a matter of judgment, rather than of mathematics, see

Estate of Davis v. Commissioner, 110 T.C. at 560, on which the

estate has the burden of proof, see Rule 142(a), we find that on

the valuation date the fair market value of decedent's interest

in Marrero Land is its book value, i.e., $4,316,920.23

22
(...continued)
relating to the estate's stock valuation experts that are not
addressed herein, and we find them to be without merit.

23
Because the fair market value of decedent's interest in
Marrero Land on the valuation date that we have found does not
exceed the book value of that interest (i.e., $4,316,920) de-
termined under amended article VI, we shall not address the
estate's alternative position that, because amended article VI
controls the fair market value for estate tax purposes, the
(continued...)
 - 63 -

To reflect the foregoing,

Decision will be entered

under Rule 155.

23
(...continued)
maximum fair market value of that interest on that date is its
book value.