Estate of Weinberg v. Commissioner

T.C. Memo. 2000-51

UNITED STATES TAX COURT

ESTATE OF ETTA H. WEINBERG, DECEASED, MELLON BANK, DONALD
H. HERMAN AND LOUISE W. ALBERT, EXECUTORS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5076-97. Filed February 15, 2000.

Steven T. Stern and David J. Ackerman, for petitioners.

Alan S. Kline, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHALEN, Judge: Respondent determined a deficiency

of $760,515 in the Federal estate tax of the estate of

Mrs. Etta H. Weinberg, herein referred to as the decedent.

After concessions by the parties, the sole issue for

decision is the fair market value of a limited partnership
 - 2 -

interest over which the decedent had a general power of

appointment on the date of her death.

Throughout this opinion, all section references are to

the Internal Revenue Code as in effect on the date of

decedent's death, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are found

accordingly. The stipulation and the accompanying exhibits

are incorporated herein.

The decedent died on December 15, 1992. She was a

resident of Philadelphia, Pennsylvania, at that time. She

was also a widow. Her husband, Mr. Bernard Weinberg, had

died in 1964. She was survived by two children from her

marriage to Mr. Weinberg, Mr. Paul S. Weinberg and

Ms. Louise W. Brown.

On the date of her death, the decedent possessed a

general power of appointment over the principal of a so-

called marital deduction trust that had been created under

the last will and testament of her late husband (referred

to herein as Trust A). Trust A held a 25.235-percent

interest in a limited partnership, the Hill House Limited

Partnership (Hill House).
 - 3 -

Hill House owned and operated an apartment complex

that consisted of an 11-story building containing 188

apartment units, an office suite, a two-level underground

parking garage, and a swimming pool. The apartment complex

had been constructed in 1964. At the time of the

decedent's death, only three of the apartment units in the

complex were vacant. As of December 31, 1992, there was

one mortgage on the property in the principal amount of

$448,544. The mortgage was payable in monthly installments

of $18,406, including principal and interest at the annual

rate of 6.25 percent. The final mortgage payment was due

on April 1, 1993. The parties agree that on the date of

the decedent’s death the fair market value of the apartment

complex was $10,050,000.

Hill House is governed by the Hill House Limited

Partnership Agreement of May 1, 1980. Article IV of the

agreement governs distributions to the partners. Paragraph

4.1 of the agreement gives the general partner sole

discretion to determine when distributions are made. It

further provides: “Such distributions shall be made pro

rata to the Partners in accordance with their respective

Percentage Interests.” Article VII of the agreement

governs the transferability of partnership interests, and

paragraph 7.3 thereof gives all partners a right of first
 - 4 -

refusal under which a partner who wishes to transfer his,

her, or its interest in Hill House to a third party must

first offer to sell the interest to the other partners on

the same terms and conditions offered by the third party.

Paragraph 7.4 of the agreement gives the general partner

absolute discretion to consent to or deny the substitution

of a limited partner, unless the purchaser is already a

partner.

The Limited Partnership Agreement sets forth the

following list of partners and the percentage interest of

each:

General Partner Percentage Interest

Paul S. Weinberg 1.000

Limited Partners

Trust A 25.235
Paul Trust 14.982
Etta H. Weinberg, copartner 14.395
in M.E.L. Realty Co.
Anne K. Gross, copartner 8.648
of M.E.L. Realty Co.
Barbara G. Reines, copartner 8.648
in M.E.L. Realty Co.
Paul Trust, copartner 14.395
in M.E.L. Realty Co.
Anne K. Gross 9.390
Max and Esther S. Oppenheim 3.307

As shown above, the decedent’s son, Mr. Paul S.

Weinberg, was the sole general partner of Hill House and
 - 5 -

held a 1-percent interest in the partnership in that

capacity. He was also the sole beneficiary of the Paul S.

Weinberg Testamentary Trust that had been created under his

father’s last will and testament (referred to above and

herein as the Paul Trust). The Paul Trust had a limited

partnership interest of 14.982 percent in Hill House and

an additional interest of 14.395 percent in Hill House as

a copartner of M.E.L. Realty Co.

On November 2, 1984, the decedent created an inter

vivos trust, and on February 17, 1989, she substantially

amended it. The amended trust directed that upon the

decedent’s death the trustees were to distribute all the

decedent’s interests in Hill House to a trust that she had

created earlier for the benefit of her son, Mr. Paul S.

Weinberg, and his issue (the Paul Family Trust). This

distribution was to include the 25.235-percent interest in

Hill House held in Trust A, over which the decedent

possessed a general power of appointment. The decedent’s

will states that the decedent exercised her power of

appointment over the subject limited partnership interest

as provided in the amended trust. Her will states as

follows:

I exercise in full the power of appointment
given to me under Article III of the Last Will
 - 6 -

and Testament of my late husband, BERNARD
WEINBERG, and direct that all assets governed
thereby be distributed to my Trustees under my
Trust executed November 2, 1984, as amended,
whereunder I am now Trustee. In the event that
such Trust, for any reason, is not in existence
at the time of my death, I exercise my power of
appointment in favor of my Executors.

The financial statements of Hill House for the years

1990 through 1992 report the following:

1990 1991 1992

Rental income $1,928,127 $2,003,912 $2,057,151
Total income 1,996,306 2,082,707 2,137,058
Net income 754,465 893,678 843,275
Cash 722,128 836,450 801,078
Mortgage payable 810,211 635,012 48,544
Distributions 650,000 600,000 800,000

On the estate tax return filed on behalf of the

decedent’s estate, the executors of the estate reported

$1,075,000 as the value of the 25.235-percent interest in

Hill House over which the decedent held a general power of

appointment. The estate now claims that the fair market

value is $971,838. In the notice of deficiency, respondent

determined that the fair market value of the subject

interest in Hill House was $2,422,500. Respondent now

claims that the fair market value is $1,770,103.
 - 7 -

OPINION

Section 2031(a) provides that the value of the gross

estate of a decedent is determined by including the value

at the time of the decedent's death of all property, real

or personal, tangible or intangible, wherever situated.

Section 2041 provides generally that a decedent's gross

estate shall include the value of all property over which

the decedent has a general power of appointment at the time

of his or her death. See sec. 2041(a)(2).

As mentioned above, at the time of her death, the

decedent possessed a general power of appointment over a

25.235-percent limited partnership interest in Hill House.

In this opinion, we sometimes refer to this interest as the

subject limited partnership interest. Thus, the decedent’s

gross estate includes the value of this interest. The sole

issue for decision in this case is the fair market value of

the subject limited partnership interest.

Fair market value is defined for Federal estate and

gift tax purposes 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 all the relevant facts.

See sec. 20.2031-1(b), Estate Tax Regs.; United States v.
 - 8 -

Cartwright, 411 U.S. 546, 551 (1973); Estate of Andrews

v. Commissioner, 79 T.C. 938, 940 (1982). This is an

objective test based upon hypothetical buyers and sellers

in the marketplace and is not based upon a particular buyer

or seller. See Estate of Bright v. United States, 658 F.2d

999, 1005-1006 (5th Cir. 1981); Estate of Andrews v.

Commissioner, supra at 956.

The value of an item of property as of the date of a

person's death is a question of fact. See Hamm v. Commis-

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

1961-347; Estate of Newhouse v. Commissioner, 94 T.C. 193,

217 (1990). The taxpayer bears the burden of proving that

respondent's determination of fair market value of property

is incorrect. See Rule 142(a). The Court as the trier of

fact must weight all relevant evidence and draw appropriate

inferences. See, e.g., Estate of Hall v. Commissioner, 92

T.C. 312, 335 (1989).

The determination of fair market value is an

inherently imprecise process. See Estate of Gilford v.

Commissioner, 88 T.C. 38, 50 (1987); Buffalo Tool & Die

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

On numerous occasions, this Court has stressed the

appropriateness of settling valuation issues. See Estate
 - 9 -

of Andrews, supra at 956; Buffalo Tool & Die Manufacturing

Co. v. Commissioner, supra at 452; Messing v. Commissioner,

48 T.C. 502, 512 (1967); Furman v. Commissioner, T.C. Memo.

1998-157.

In this case, the parties agree that in valuing the

subject limited partnership interest a minority discount

and a lack of marketability discount must be applied. The

minority discount accounts for a decedent’s lack of control

over the property. See Ward v. Commissioner, 87 T.C. 78,

106 (1986); Harwood v. Commissioner, 82 T.C. 239, 267

(1984), affd. without published opinion 786 F.2d 1174 (9th

Cir. 1986); Estate of Andrews v. Commissioner, supra at

953. The lack of marketability discount accounts for the

fact that there is no ready market for a decedent’s

interest in the property. See Estate of Andrews v.

Commissioner, supra at 953. While the parties agree that

both discounts are appropriate, they disagree about the

amount of each discount, and, thus, they disagree about

the value of the subject limited partnership’s interest.

To establish the value of the subject limited

partnership interest, the parties rely upon the testimony

and report of their respective expert witnesses. The Court

evaluates an expert opinion in light of the demonstrated
 - 10 -

qualifications of the expert and all other evidence of

value. See Estate of Newhouse v. Commissioner, supra at

217; Parker v. Commissioner, 86 T.C. 547, 561 (1986). The

Court is not bound by the opinion of any expert witness.

See Estate of Newhouse v. Commissioner, supra at 217;

Estate of Hall v. Commissioner, supra at 338; Parker v.

Commissioner, 86 T.C. at 561. The Court may adopt an

expert's entire opinion or selectively choose to adopt

some portion of the expert's opinion. See Parker v.

Commissioner, supra at 562. Because valuation necessarily

results in an approximation, the value at which the Court

arrives need not be one as to which there is specific

testimony if it is within the range of values that may

properly be arrived at from consideration of all the

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

(2d Cir. 1976), affg. T.C. Memo. 1974-285.

Petitioners' Expert

Petitioners rely on the expert report of Mr. Robert

M. Siwicki of Howard, Lawson & Co. Mr. Siwicki is an

accredited senior appraiser with the American Society of

Appraisers and holds a master's degree in finance from the

Wharton School.
 - 11 -

Mr. Siwicki valued the subject limited partnership

interest using both the capitalization of income approach

and the net asset value approach. Under the capitalization

of income approach, it is necessary to identify the income

stream to be capitalized. The income stream is then

capitalized using a rate of return realized by hypothetical

investors on comparable investments. Under the net asset

value approach, it is necessary to determine the net asset

value of the asset. If necessary, that value is then

discounted to reflect the minority ownership of the

interest.

Mr. Siwicki started his valuation in this case by

reviewing the data on 85 publicly registered real estate

partnerships compiled in the May/June 1992 edition of "The

Perspective", a bimonthly publication of Partnership

Profiles, Inc., which provides market data for publicly

registered limited partnership interests. Mr. Siwicki

focused on limited partnerships that invested in

residential property, had little or no debt, and made cash

distributions to the limited partners. He identified seven

publicly registered real estate partnerships that he

believed were comparable to Hill House. They are listed
 - 12 -

below with their yield and discount to net asset value

(NAV):

Type of Discount
Partnership Investment Yield to NAV

American Insured Mortgage 86 M 10.6% 35%
American Insured Mortgage 88 M 9.1% 30%
Hutton/ConAm Realty Investors 4 E 8.9% NA3
IDS/Balcor Income Properties E 11.1% 51%
Krupp Insured Plus M 10.9% 29%
Krupp Insured Plus II M 10.1% 13%
Shearson Lehman Sr. Income Fund E 11.5% NA3
3
Not available.

Four of the above partnerships, those with an “M” in the

column entitled Type of Investment, did not own real

properties but invested in portfolios of federally insured

mortgages. Mr. Siwicki believed that they were “less risky

than their equity-based counterparts” and “would be

expected to have lower discounts to NAV compared to equity-

based real estate partnerships.” He selected the IDS

Balcor Income Properties, a partnership that owned only two

apartment buildings, as the limited partnership that was

most comparable to Hill House that owned a single property.

The data for IDS Balcor reported a yield of approximately

11 percent and a net asset value discount of 51 percent.

In identifying an appropriate income stream,

Mr. Siwicki noted that there was a "disconnect between the

performance of the [Hill House] partnership and the amount

of distributions being made". For that reason, he chose as
 - 13 -

the income stream a 3-year average of the cash

distributions made during the years 1990 through 1992,

$683,333 (i.e., total distributions during 3-year period,

$2,050,000, divided by 3). In calculating the average

distributions, Mr. Siwicki did not adjust the average to

take into account the final mortgage payment due on

April 1, 1993.

A 25.235-percent share of the 3-year average of cash

distributions (i.e., the share attributable to the subject

limited partnership interest) is $172,439 (i.e., $683,333

x 25.235 percent). Mr. Siwicki capitalized that amount,

$172,439, by 11 percent, the approximate yield of an

interest in IDS Balcor, to arrive at $1,567,627 as the

value of the subject limited partnership interest.

As mentioned above, the parties agree, for purposes

of this case, that the fair market value of the Hill House

apartment complex on the date of death was $10,050,000.

On the basis of the financial statements of Hill House

for 1992 and the fair market value of the property as

stipulated by the parties, Mr. Siwicki determined that the

net asset value of Hill House on the date of the decedent’s

death was $10,332,769. Thus, the subject 25.235-percent

interest in the net asset value of Hill House was
 - 14 -

$2,607,474. By applying the discount of 51 percent

identified in the case of IDS Balcor, Mr. Siwicki computed

$1,277,662 as the value of the subject limited partnership

interest using the net asset value approach (i.e.,

$2,607,474 x .49).

Mr. Siwicki combined the values he computed under the

two approaches by weighting the capitalization approach by

75 percent and the net asset value approach by 25 percent.

Mr. Siwicki felt a 3-to-1 ratio adequately emphasized the

fact that the capitalization approach was the more

important approach for this partnership interest. This

resulted in a value of the subject limited partnership

interest of $1,495,136.

Mr. Siwicki then applied a 35-percent discount to the

above value to account for the lack of marketability of the

subject limited partnership interest. He reviewed various

market studies on illiquid securities to arrive at the

amount of this discount. In particular, he relied on a

study by the Securities and Exchange Commission (SEC) that

compared sales between 1966 and 1969 of the restricted

stock of companies that also had freely tradable, publicly

traded counterparts.
 - 15 -

After analyzing the various market studies on illiquid

securities, Mr. Siwicki concluded that the lack of

marketability discount for the subject limited partnership

interest was most comparable to the portion of the SEC

study that reported a 30-percent discount for restricted

securities of nonreporting over-the-counter issuers.

However, Mr. Siwicki believed the subject limited

partnership interest warranted a greater discount due to

two differences. First, he found that there was no

prospect of a public market ever developing for this

interest. Second, he found that the restrictions on the

sale of this interest were perpetual, as opposed to the

restrictions in the studies which lasted for only 1 to 3

years. Thus, Mr. Siwicki concluded a 35-percent discount

represented the lack of marketability of the interest.

After applying this discount, Mr. Siwicki concluded that

the fair market value of the subject limited partnership

interest on the date of death was $971,838.

Mr. Siwicki's analysis is summarized as follows:
 - 16 -

Capitalization Net Asset Value
Petitioner's Expert Approach Approach

Distributions during 1990 $650,000.00 Value of apartment complex $10,050,000.00
Distributions during 1991 600,000.00 Other assets 840,075.00

Distributions during 1992 800,000.00 Total liabilities 557,306.00

Total distributions 2,050,000.00 Net Asset Value of Hill House 10,332,769.00

Average annual distributions 683,333.33
Percentage interest 0.25235 Percentage interest 0.25235

Share of average annual distributions 172,439.17 Share of Net Asset Value 2,607,474.26

Percentage yield of IDS Balcor Income Properties 0.11 Less: Discount of 51% 1,329,811.87

Value of Hill House before marketability discount 1,567,628.82 Value of Hill House before marketability discount 1,277,662.39

Weight of capitalization approach 0.75 Weight of Net asset value approach 0.25

1,175,721.61 319,415.60 $1,495,137.21
Less: Marketability discount of 35% 523,298.02
Fair Market Value of the subject limited partnership interest 971,839.19
 - 17 -

The values computed by Mr. Siwicki are slightly different

from the above values because of rounding.

Respondent's Expert

Respondent relies on the testimony and expert report

of Dr. Samuel J. Kursh who is certified as a business

appraiser by the Institute of Business Appraisers, Inc.,

and holds a doctorate in business administration from

George Washington University.

Dr. Kursh valued the subject limited partnership

interest using only the capitalization of income approach.

According to Dr. Kursh, the net asset value approach is

inappropriate for valuing the subject interest in Hill

House because the partnership's underlying asset was

income-producing real estate. Respondent argues that the

net asset value is irrelevant because a hypothetical buyer

could not control the sale of the underlying property or

the liquidation of the partnership.

Dr. Kursh began his valuation by computing a discount

rate. To do this, he selected comparables from the limited

partnerships referenced in the May/June 1993 edition of

"The Perspective". This is the same publication used by

petitioner’s expert but a later edition. Dr. Kursh
 - 18 -

selected partnerships that owned real estate (residential

and/or commercial), had low debt or leverage, had cash

flows greater than their distributions and capital

expenditures, and had assets that were valued by

independent appraisers. Dr. Kursh's criteria produced 16

comparables. According to his report, investors in these

16 comparables “anticipated annual returns from cash

distributions ranging from 9.31 percent to 11.58 percent.”

Dr. Kursh selected the midpoint of those yields, 10.45

percent, as the rate of return an investor would require

for a minority interest investment in a limited partnership

with the characteristics of the comparables.

Dr. Kursh then made three adjustments to the average

yield of the comparables to take into account the

particular characteristics of Hill House. First, Dr. Kursh

added 50 basis points to account for the fact that Hill

House owned only one piece of property and thus lacked

diversity, while the comparables owned multiple pieces of

property. Second, Dr. Kursh subtracted 100 basis points to

account for the fact that the general partner of Hill House

was also a limited partner. According to Dr. Kursh, this

commonality of interest would tend to ensure cash
 - 19 -

distributions to the limited partners. Again, this

characteristic was not present in the comparables. Lastly,

Dr. Kursh subtracted 25 basis points to account for the

fact that the data for the comparables might include

distressed sales. Dr. Kursh based this adjustment on the

following editor's note in "The Perspective":

Limited partnership investments are
generally illiquid, long term investments.
Sellers of such investments are often con-
sidered distressed for various reasons and find
it necessary to accept discounted sales prices.
As a result, the above price information may
not reflect the intrinsic value of a limited
partnership interest.

After making the above adjustments to the average yield,

Dr. Kursh concluded that a potential purchaser would

require an investment in Hill House to yield a rate of

return of 9.7 percent (i.e., 10.45 + .50 - 1.00 - .25).

For an income stream, Dr. Kursh used the cash

distributions made by Hill House in 1992, $800,000. A

25.235-percent share of the 1992 cash distributions is

approximately $202,000. Because the only liability on the

property was the mortgage that was due to be fully paid on

April 1, 1993, Dr. Kursh believed that the partnership

would realize a substantial increase in income after that
 - 20 -

date. Dr. Kursh reasoned that the aggregate distributions

made during 1992 were at the minimum level of distributions

that a potential buyer would anticipate. Applying the

discount rate of 9.7 percent to the decedent's 1992

distributions of $202,000, Dr. Kursh computed the value of

the decedent’s interest in Hill House of $2,082,474 (i.e.,

$202,000 ÷ 9.7 percent).

Dr. Kursh then applied a marketability discount. In

order to determine the amount of this discount, he used the

Quantitative Marketability Discount Model (QMDM) that is

described in a book written by Mr. Z. Christopher Mercer

entitled Quantifying Marketability Discounts (1997). The

QMDM is an economic model that attempts to relate the

present value of the future returns of an investment in the

form of distributions and capital appreciation to the

amount an investor is willing to pay for the investment.

The QMDM incorporates various factors, including: The

expected distribution yield (i.e., the expected annual

return through distributions), the expected growth rate of

value (i.e., the expected growth in the underlying asset

value), the required holding period return (i.e., the rate

of return on similar investments), and the assumed holding
 - 21 -

period. The QMDM consists of various summary tables in

which implied marketability discounts are enumerated for

each set of the above four factors.

As to this case, Dr. Kursh assumed the expected growth

rate of value to be between 3 and 4 percent. Dr. Kursh

based this determination on the historical inflation rate.

He assumed the expected distribution yield to be 10

percent, based on the yields for comparable real estate

investments. He assumed a required holding period return

of 16.4 percent. This percentage was calculated using the

rates of return on publicly traded securities as modified

by specific characteristics of the particular investment.

And lastly, Dr. Kursh assumed a holding period of 10 to

15 years. From the QMDM tables, Dr. Kursh's assumptions

produced a marketability discount of 15 percent.

After applying the 15-percent marketability discount,

Dr. Kursh concluded that the fair market value of the

subject limited partnership interest on the date of death

is $1,770,103. Dr. Kursh's analysis is summarized as

follows:
 - 22 -

Respondent’s Expert Capitalization Approach

Distributions during 1992 $800,000.00
Percentage interest 0.25235

Share of distributions during 1992 201,880.00
Rounded 202,000.00
Average yield of 16 comparables 10.45%
Plus: Adjustment for lack of diversity 0.50%
Less: Adjustment for commonality -1.00%
Less: Adjustment for distressed sales -0.25%
Percentage yield 9.70

Value of Hill House before 2,082,474.23
marketability discount

Less: Marketability discount of 15% 312,371.13

Fair market value of the subject 1,770,103.10
limited partnership interest

Analysis and Conclusions

As described above, both experts determined the fair

market value of the subject limited partnership interest

and then calculated and applied an appropriate discount to

account for the diminished marketability of the interest.

Strictly speaking, neither expert computed a minority

discount. They both computed the fair market value of the

subject limited partnership interest as a minority

interest. Nevertheless, it is useful to compare the

minority discounts that are implied in the experts’

computations. It is also helpful to compare the combined

discounts implied in their computations. The following

schedule shows the values of the subject limited
 - 23 -

partnership interest and the marketability discounts

determined by the experts and the minority discounts and

the combined discounts implied by the experts’

computations:

Petitioner’s Expert Respondent’s Expert

Net asset value of Hill House $10,332,769.00 $10,332,769.00

25.235-percent share 2,607,474.26 2,607,474.26

Minority discount percentage 42.6596 20.1344

FMV of the subject interest 1,495,136.00 2,082,474.00
before marketability discount

Marketability discount percentage 35.00 15.00

FMV of the subject interest 971,838.00 1,770,103.00

Combined discount percentage 62.7287 32.1143

As shown above, the computations of petitioner’s expert

imply a combined discount of 62.7287 percent and the

computations of respondent’s expert imply a combined

discount of 32.1143 percent. We do not fully agree with

either expert. Set out below is our view of some of the

points about which the parties’ experts disagree and our

conclusion regarding the fair market value of the subject

limited partnership interest.

First, we agree with petitioner’s expert that it is

appropriate to consider the fair market value of the
 - 24 -

subject limited partnership interest as computed under both

the net asset value and the capitalization approaches. We

also agree with petitioner that a weighted average of 75

percent for the capitalization approach and 25 percent for

the net asset value approach adequately reflects the

attributes of this partnership.

In Estate of Andrews v. Commissioner, 79 T.C. 938

(1982), we considered the value of the decedent’s stock in

four closely held corporations, each of which was engaged

principally in the ownership, operation, and management

of commercial real estate properties. In valuing the

decedent’s 20-percent stock interest in each of the

corporations, the parties differed over the weight to be

given to earnings and to the net asset value of the

corporations. The taxpayer argued that the corporations

should be characterized as operating companies and greater

weight should be placed on earnings and dividend-paying

capacity than on net asset values. See id. at 944. The

Commissioner argued, contrary to the Government’s position

in this case, that the corporations were in the nature of

investment companies and would be valued by a hypothetical

investor based upon a buyer’s right to share in the value
 - 25 -

of the corporation’s underlying net assets. See id. at

943. For that reason, the Commissioner argued that the

corporations should not be valued using earnings and

dividend-paying capacity. See id. In resolving that

dispute, we stated as follows:

[R]egardless of whether the corporation is seen
as primarily an operating company, as opposed to
an investment company, courts should not restrict
consideration to only one approach to valuation,
such as capitalization of earnings or net asset
values. * * * Certainly the degree to which the
corporation is actively engaged in producing
income rather than merely holding property for
investment should influence the weight to be
given to the values arrived at under the
different approaches but it should not dictate
the use of one approach to the exclusion of all
others. [Id. at 945; citations omitted.]

In this case we do not agree with respondent that the

net asset value approach is irrelevant on the ground that a

hypothetical buyer of the subject limited partnership

interest would have no control over when the underlying

property was sold or when the partnership was liquidated.

The net asset value should still be considered because the

value of the underlying real estate will retain most of its

inherent value even if the corporation is not efficient in

securing a stream of rental income. See id. at 944. Thus,
 - 26 -

weight must be given to the net asset value of the

partnership’s underlying assets even though a hypothetical

buyer of the subject limited partnership interest would

have no ability to directly realize the value by forcing

liquidation. See id. at 945.

Second, we agree with petitioner’s expert that for

purposes of computing the fair market value of the subject

limited partnership interest under the capitalization of

income approach, it is appropriate to use the average of

the distributions made during the years 1990 through 1992,

rather than the amount of the 1992 distribution. As

mentioned above, paragraph 4.1 of the partnership agreement

grants the general partner sole discretion to determine

when distributions are made. While there is no guaranty

that past distributions will reflect the distributions to

be made in the future, we believe that an average of the

distributions over 3 years better reflects the cash

distributions that an investor could reasonably anticipate

in the future, than the distributions made during 1992 of

$800,000, an amount that exceeds the 3-year average by

$116,667. We do not agree with respondent’s position that

an investor would consider the 1992 distributions of
 - 27 -

$800,000 to be the minimum future distributions because the

final mortgage payment was to be made in April 1993.

Third, we agree with respondent’s expert’s use of 16

comparables. Respondent's expert selected 16 comparables

and found the midpoint of the returns of those comparables,

10.45 percent. He made three adjustments and arrived at

9.7 percent as the return that an investor would require

from Hill House. On the other hand, petitioner’s expert

in effect based the yield used in his computation on a

single comparable. We believe that the use of a single

comparable can be problematic, and we prefer the approach

of respondent’s expert in using a number of comparables.

Cf. Estate of Hall v. Commissioner, 92 T.C. 312, 339-340

(1989).

As noted above, respondent’s expert did not use the

net asset value approach. Nevertheless, using the 16

comparables that respondent’s expert selected, it appears

that an investor would discount the net asset value of Hill

House by 53.4 percent to arrive at the fair market value of

the subject limited partnership interest under the net

asset value approach. We computed this discount using a
 - 28 -

method similar to the method used by Dr. Kursh in computing

the rate of return of 10.45 percent used in his analysis.

Finally, we do not agree with the marketability

discount computed by either expert. We disagree with the

discount computed by Dr. Kursh on the basis of the QMDM

model because slight variations in the assumptions used in

the model produce dramatic differences in the results. For

example, if the holding period for the investment were

extended from 10 to 15 years, the period assumed by

Dr. Kursh, to 15 to 20 years, and the required holding

period return were increased to 20 percent from the return

assumed by Dr. Kursh of between 16 to 18 percent, the QMDM

table produces a 30-percent discount, twice the amount of

the discount produced using Dr. Kursh's assumptions.

Because the assumptions are not based on hard data and a

range of data may be reasonable, we did not find the QMDM

helpful in this case.

Similarly, we disagree with Mr. Siwicki's computation

of a marketability discount. Mr. Siwicki arrived at an

initial marketability discount, 30 percent, based upon

his review of an SEC study of unregistered shares of

nonreporting over-the-counter companies. He increased the
 - 29 -

discount by 5 percent to reflect the perpetual restrictions

on this interest and the slim prospect of the interest ever

being publicly traded. We believe that Mr. Siwicki failed

adequately to take into account certain characteristics of

the subject limited partnership interest that suggest a

decrease in the marketability discount. These factors

include consistent dividends, the nature of the underlying

assets, and a low degree of financial leverage.

Based on all the evidence of record, we find that a

marketability discount of 20 percent should be applied to

the subject limited partnership interest.

Valuation

Based upon the entire record of this case, we find the

date-of-death fair market value of the subject limited

partnership interest is $1,309,650.64. Our analysis is

summarized in the following schedule:
 - 30 -

Court’s Analysis Capitalization Net Asset Value
Distributions during 1990 $650,000.00 Value of apartment complex $10,050,000.00
Distributions during 1991 600,000.00 Other assets 840,075.00

Distributions during 1992 800,000.00 Total liabilities 557,306.00

Total distributions 2,050,000.00 Net Asset Value of Hill House 10,332,769.00

Average annual distributions 683,333.33
Percentage interest 0.25235 Percentage interest 0.25235

Share of average annual distributions 172,439.17 Share of Net Asset Value 2,607,474.26
Average yield of 16 comparables 10.45%
Plus: Adjustment for lack of diversity 0.50%
Less: Adjustment for commonality -1.00%
Less: Adjustment for distressed sales -.025% _________
1,392,391.25
Percentage yield 9.70% Less: Discount of 53.4% approach
Value of Hill House before marketability discount 1,777,723.40 Value of Hill House before marketability discount 1,215,083.01
Weight of capitalization approach _______0.75% Weight of net asset value approach 0.25
Fair market value of the subject limited partnership interest 1,333,292.55 303,770.75 $1,637,063.30
Less: Marketability discount of 20% 327,412.66
Fair market value of the subject limited partnership interest 1,309,650.64
 - 31 -

Based upon the foregoing, and concessions,

Decision will be entered

under Rule 155.