Estate of Lehmann v. Commissioner , 74 T.C.M. 415 ( 1997 )

ESTATE OF GEORGE A. LEHMANN, DECEASED, WALTER G. KEALY, JR. PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Estate of Lehmann v. Commissioner

Docket No. 1282-96

United States Tax Court

T.C. Memo 1997-392; 1997 Tax Ct. Memo LEXIS 471; 74 T.C.M. (CCH) 415;

August 26, 1997, Filed

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Decision will be entered under Rule 155.

James M. Kefauver and Lawrence L. Bell, for petitioner.

Warren P. Simonsen and Susan T. Mosley, for respondent.

HAMBLEN, Judge

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HAMBLEN

MEMORANDUM FINDINGS OF FACT AND OPINION

HAMBLEN, Judge: Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $ 266,970. Petitioner is the Estate of George A. Lehmann (decedent). The issue for decision is whether petitioner correctly valued the partnership interests in LKB Associates for purposes of decedent's gross estate.

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect as of 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 of facts and accompanying exhibits are incorporated herein by this reference.

The Decedent died testate on April 1, 1992 (valuation date). Decedent resided in Montgomery County, Maryland. At the time the petition was filed, Walter G. Kealy, Jr., decedent's personal representative, resided in Gaithersburg, Maryland.

Decedent and his sister, Marie Louise Kealy, each owned, as tenants in common, one-half interest in the land located at L Street, in Washington, D.C. (property). On December 21, 1962, they agreed to lease the property for 99 years beginning as of January 1, 1963.

The lease required the lessee to construct any type of office building or commercial structure having a value of at least $ 500,000 in excess of the value of the land, but the agreement gave the lessee sole discretion in the design and subsequent demolition of the constructed structure during the first 69 years of the lease term. Thereafter, the lease required the lessee to seek permission before making any structural changes. The lease also permitted the lessee to sublet the property. During 1963 and 1964, the lessee improved the property by constructing a hotel on the property.

Decedent and Marie Louise Kealy and the lessee amended the ground lease on March 29, 1963, October 28, 1963, June 2, 1964, and November 4, 1964. The ground lease included procedures for resolving any disputes arising between the landlords and the tenant, providing in pertinent part:

14. The Lessors and the Lessee shall each appoint a disinterested real estate appraiser not related to any of them by consanguinity or affinity and who shall have knowledge of the value of commercial real estate in Washington, D.C. Written notice of such appointments by each party shall be given to the other on or before the twentieth (20th) day following the [designated] adjustments dates of the particular year, and the two appraisers so appointed shall on or before the tenth (10th) day thereafter appoint a third appraiser of like qualifications and non-interest who shall act as their chairman.

* * * *

18. In the event that for any reason, whether through failure to appoint appraisers, or failure of the appraisers to act, no report of the fair market value is made within the time or times, respectively, * * * either party may apply to the American Arbitration Association or its successor for the appointment of an appraiser or appraisers to the end that the fair market value as contemplated by this Lease shall be determined.

19. In the event of a refusal or failure by the American Arbitration Association or its successor to appoint an appraiser or appraisers either party may apply to the president or senior office of the Washington Real Estate Board or its successor for the appointment of an appraiser. No appraisal shall be invalid by reason of having been delayed or not having been made within the time or times, respectively * * *. Whenever an appraisal is so delayed, it shall be effective and binding upon the parties as to the rentals to be paid by the Lessee to the Lessors commencing on the adjustment date that a new rental basis shall begin according to the terms [of the lease]. The cost of any such appraisal made under this paragraph shall be borne and paid by the parties hereto whose neglect or default had made such appraisal necessary.

On December 19, 1983, decedent and his sister formed LKB Associates, a limited partnership organized under the laws of the District of Columbia (partnership). After forming the partnership, decedent and his sister conveyed the land subject to the 99-year lease to the partnership.

During his lifetime, decedent made gifts of partnership interests to various family members and to trusts, of which family members were beneficiaries. As of the valuation date, decedent owned a 1-percent general partnership interest and a 23.965903-percent limited partnership interest (decedent's interest). The partnership agreement granted the partners a right of first refusal, which required the selling partner to offer his or her interest to the other partners on the same terms before selling the interest to a third party. The agreement provided in pertinent part:

The interest of any Limited Partner may be assigned, transferred, sold, exchanged or otherwise disposed of ( * * * collectively referred to as "assigned") in whole or in part, and each Limited Partner shall have a right to substitute an assignee as a Limited Partner in his place and stead, without in either case the consent of the General Partners, unless such assignment would cause a termination of the Partnership for federal income tax purposes, but any such assignment shall not relieve the assigning Partner of his obligations hereunder, unless consented to by the other Partners; provided, however, that no such assignment to a person other than a person related by blood or marriage to Marie Louise Kealy, Walter G. Kealy or George A. Lehmann shall be effective unless the interest assigned is first offered to the Partners, both collectively and individually, on the same terms and conditions for a period of ninety (90) days [hereafter referred to as right of first refusal].

The partnership agreement granted the general partners sole discretion in setting the management fee that they were entitled to receive from the partnership. Historically, the rate had been 2 percent of the partnership's gross rental income. In 1991, the general partners raised the fee from 2 percent to 5 percent of such income.

During 1983, a lawsuit was filed regarding the interpretation of certain terms of the ground lease. To resolve the dispute, the partnership and the lessee amended the terms of the lease on January 30, 1984, to provide for, inter alia, periodic rent adjustments during the life of the lease (fifth amendment). The lease and the fifth amendment directed that the rent was to be adjusted every 10 years, beginning on January 1, 1993, to an amount equal to a specified percentage per annum (rental rate) of the fair market value of the land on the first day of the 10-year period as if the land were not encumbered by the lease (unencumbered land).

The fifth amendment specified that the rental rates for the periods from January 1, 1993, through December 31, 1998, and from January 1, 1999, through December 31, 2012, were 5.44 percent and 6.4 percent, respectively. Thereafter, the partnership and the lessee were to negotiate the rental rate for each 10-year period beginning on January 1, 2013, through the end of the lease, but in any event the negotiated rate was not to be less than 6.4 percent or more than 7.7 percent. The fifth amendment also required the partnership and the lessee to set the fair market value of the unencumbered land as of the first day of the 10-year period (adjustment date).

The fifth amendment added additional procedures for resolving disputes, providing in pertinent part:

If the parties are unable to agree on the * * * Rental rate to be applicable in the following period prior to any decennial rent adjustment date from and after January 1, 2013, the appropriate percentage (not less than 6.4% or more than 7.7%) shall be determined by appraisers appointed to determine such * * * Rental rate consistent with the procedure for determining the fair market value of the unimproved land under the [ground lease].

As of the valuation date, the principal assets of the partnership were the leased fee interest in the property and a cash balance of $ 64,339. In addition, as of that date, the lessee maintained a 99-room hotel with an occupancy rate of 65 percent.

In connection with the preparation of the estate tax return, petitioner obtained a valuation of decedent's interest from P. Richard Zitelman of the Zitelman Group, Inc. Zitelman determined that, as of the valuation date, the fair market value of decedent's interest was $ 399,000. Petitioner included this amount in the gross estate. Respondent determined the fair market value of the decedent's interest as of the date of death was $ 1,070,000. Subsequently, respondent conceded $ 262,000 of that adjustment.

OPINION

We must decide whether petitioner properly valued decedent's interest in the partnership for purposes of section 2031(a). Petitioner must prove that respondent's determination of value set forth in the notice of deficiency is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); Estate of Gilford v. Commissioner, 88 T.C. 38">88 T.C. 38, 51 (1987).

The parties agree that decedent's interest should be valued as a limited partnership interest notwithstanding the fact that decedent held a 1-percent general partnership interest as of the valuation date but do not agree upon the value of that interest or upon the method by which decedent's interest should be valued. Respondent's expert used the fractional discount method, whereas petitioner's expert used the discounted cash-flow (DCF) method.

The parties primarily rely upon their experts' testimony and reports to support their respective positions. Expert testimony sometimes aids the Court in determining valuation. Other times, it does not. See Laureys v. Commissioner, 92 T.C. 101">92 T.C. 101, 129 (1989).We evaluate such opinions in light of the demonstrated qualifications of the expert and all other evidence of value. Estate of Newhouse v. Commissioner, 94 T.C. 193">94 T.C. 193, 217 (1990); Parker v. Commissioner, 86 T.C. 547">86 T.C. 547, 561 (1986); Johnson v. Commissioner, 85 T.C. 469">85 T.C. 469, 477 (1985). We are not bound, however, by the opinion of any expert witness when that opinion is contrary to our judgment. Estate of Newhouse v. Commissioner, supra at 217; Parker v. Commissioner, supra at 561. Although we may accept the opinion of an expert in its entirety, Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74 T.C. 441">74 T.C. 441, 452 (1980), we also may be selective in the use of any portion of such an opinion, Parker v. Commissioner, supra at 562. Consequently, we will take into account expert opinion testimony to the extent that it aids us in arriving at the fair market value of the property.

The value of decedent's gross estate is the fair market value of property includable in the gross estate. Sec. 2031. Fair market value is defined 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." United States v. Cartwright, 411 U.S. 546">411 U.S. 546, 551 (1973); Estate of Newhouse v. Commissioner, supra at 217; sec. 20.2031-1(b), Estate Tax Regs. Because valuation is necessarily an approximation, the figure at which the Court arrives need not be one as to which there is specific testimony, if it is within the range of figures that may properly be deduced from the evidence. Silverman v. Commissioner, 538 F.2d 927">538 F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285; Alvary v. United States, 302 F.2d 790">302 F.2d 790, 795 (2d Cir. 1962).

The willing buyer-willing seller standard generally is used in valuing transferred property. United States v. Cartwright, supra. The standard is an objective test using hypothetical buyers and sellers in the marketplace, and is not a personalized one which envisions a particular buyer and seller. Estate of Andrews v. Commissioner, 79 T.C. 938">79 T.C. 938, 956 (1982); Kolom v. Commissioner, 71 T.C. 235">71 T.C. 235, 244 (1978), affd. 644 F.2d 1282">644 F.2d 1282 (9th Cir. 1981). Generally, for estate tax purposes, property is valued at its fair market value based on its highest and best use. Sec. 2031(a); sec. 20.2031-1(b), Estate Tax Regs.

A. Respondent's Expert

Respondent relies upon the report and testimony of an expert, Richard L. Parli. Parli is a certified general real property appraiser.

Parli considered two methods of estimating the value of decedent's partial interest in the partnership: (1) The income discounting method and (2) the fractional discounting method. Ultimately, Parli concluded that the fractional discounting method was the appropriate method because, in his view, land is not inherently income producing.

Parli first determined the present value of the rents due pursuant to the terms of the ground lease and from the partnership's reversionary interest in the land and then calculated decedent's pro rata share of those amounts. Under Parli's calculations, the present value and decedent's pro rata share were $ 4,680,000 and $ 1,154,043, respectively.

Parli next considered factors affecting the value of decedent's pro rata share including, inter alia: (1) Relative risk of the partnership's assets; (2) historical consistency of the partnership's earnings; (3) condition of the partnership's assets; (4) market growth potential; (5) portfolio diversification; (6) strength of management; (7) size of decedent's interest; (8) liquidity; (9) potential ability to influence management and (10) relative ease of analyzing the partnership's assets. Parli assigned individual discounts for each factor and calculated an aggregate discount factor of 30 percent. Based upon such a discount factor, he assigned a value to decedent's interest of $ 808,000.

B. Petitioner's Expert

Petitioner relies upon the report and testimony of its expert, P. Richard Zitelman. Zitelman is the president of The Zitelman Group, a firm providing investment advisory and investment services.

Zitelman also considered two methods of evaluating the fair market value of decedent's interest: (1) The liquidation method, and (2) the DCF method. Ultimately, Zitelman selected the DCF method because, in his view, a "potential buyer" of decedent's interest would be an individual or entity seeking long-term cash-flows but having no expectation of receiving the return of its invested capital.

Under the DCF method, Zitelman estimated the fair market value of decedent's interest by calculating the present value of decedent's pro rata share of the partnership's expected net cash-flows. He calculated the net income due pursuant to the lease and the net reversionary interest in the land.

For purposes of calculating the annual rent, Zitelman assumed that the fair market value of the unencumbered land, as of the valuation date and as of January 1, 1993, was $ 5,479,883. Thereafter, Zitelman assumed the value increased annually at a rate of 2.6 percent. He also assumed the rental rate for the lease period of January 1, 2013, through March 31, 2062, was 7.05 percent.

In estimating all of the expenses for 1992 except for the management fees and the franchise tax, Zitelman averaged the deductions reported upon the partnership's Federal income tax returns for taxable years 1989 through 1991. See appendix A. Thereafter, he treated the expenses as increasing at a rate of 2.6 percent per year.

Zitelman estimated the management fee as equal to 5 percent of the gross rental income and the franchise tax expense as equal to the product of the estimated net income and the tax rates in effect as of the valuation date.

Zitelman made several assumptions regarding the rate of return a hypothetical buyer would demand. He initially noted that, as of the valuation date, the rate of return of 30-year Treasury bonds was 7.9 percent and assumed that the applicable discount rate would have to be at least between 9.9 percent and 11.9 percent. Zitelman assumed that the discount rate necessary to achieve an acceptable rate of return required that such a discount rate should be increased for each of the following perceived risks: (1) The partnership agreement permits the general partners to make loans at (a) the prime rate to the partners for estate taxes, estate administrative expenses, and medical expenses or (b) the rate at which petitioner borrowed the funds; (2) there is a likelihood of a disagreement between the lessee and the partnership as to the future rental rates or the value of the property; (3) a potential buyer would have to invest substantial time, energy, aggravation, and cost to evaluate decedent's interest; (4) the partnership agreement granted the other partners a right of first refusal; and (5) the potential buyer did not have control over the partnership's management. Zitelman concluded that a hypothetical buyer would demand a purchase price based upon a discount rate between 15.3 percent and 22.6 percent. Ultimately, Zitelman averaged the present values calculated based upon these rates and assigned a fair market value to decedent's interest in the partnership of $ 399,000.

The divergent methodologies of the experts that testified in this case reveal that the determination of the value of a minority interest in a partnership holding real estate is a matter of judgment to be resolved on the basis of the entire record. See Estate of Lauder v. Commissioner, T.C. Memo. 1994-527. Parli failed to explain adequately how he derived the individual discounts. Rather, Parli summarily concluded that each individual discount is "typical" without providing any evidence, e.g., comparables or market data, establishing the basis of these conclusions. Giving due consideration to each of the expert reports, and weighing all of the facts and circumstances presented, we conclude that Zitelman's methodology provides the most reliable basis for valuing the decedent's interest as of the valuation date. The value of any interest in real property that has an income stream can be estimated by the DCF method. See Estate of Bennett v. Commissioner, T.C. Memo. 1993-34; Estate of Hatchett v. Commissioner, T.C. Memo 1989-637">T.C. Memo. 1989-637. The evidence before the Court shows that the property had a determinable income stream.

Respondent concedes that the DCF method is an appropriate appraisal method in some contexts but argues that, based upon Parli's testimony, the method is not appropriate when the current use of the property is not its highest and best use. Respondent relies upon Parli's view that the highest and best use of the property is as office space rather than as a hotel. ¹

Respondent's contention ignores the fact that the property was encumbered by a long-term lease. The lessee, possessing a leasehold interest, occupies the land on which its particular hotel is located. Such an interest reduces the value of the partnership's interest in the land because the lessee's contractual right to occupy the land prevents the partnership from re-leasing the property at a higher rate or from demolishing the hotel and using the land for another, perhaps more profitable, purpose. The lessee, not the partnership, has the option to use the land to construct an office building or to sublet the property at a profit. Consequently, it is unrealistic to contend that the value of the partnership's interest in the land is equivalent to the value of the land at its highest and best use as though the land were vacant. See Marks v. Commissioner, T.C. Memo. 1985-179; Appraisal Institute, The Appraisal of Real Estate, 280 n.5, 282 (10th ed. 1992). Respondent's assertions fail to consider reality as it existed on the valuation date. We are satisfied that the DCF method is a viable means of determining the value of decedent's interest.

Although we accept that the DCF method is an appropriate approach in the instant case, we have found weaknesses in Zitelman's analysis. The DCF method generally requires assumptions regarding the future revenue, operating costs, and trends, see generally Estate of Cartwright v. Commissioner, T.C. Memo. 1996-286, but some of Zitelman's assumptions are unreasonable.

We are not convinced that the perceived risks cited by Zitelman would depress the hypothetical purchase price as significantly as petitioner would have us believe. Zitelman correctly notes that the partnership agreement permits the general partners to lend money to the estate of a deceased partner, and obviously, in making such loans, the general partners would be motivated in part by their family ties to the deceased partner, but the partnership agreement also provides that the deceased partner's interest in the partnership must secure such a loan, and the loan must be at the prime rate or the rate at which the partnership borrows the funds. Accordingly, we do not see such lending as particularly jeopardizing the partnership's cash-flow.

Nor do we find that the risk of future litigation over determining the rental rates or the fair market values of the unencumbered land substantially affected decedent's potential share of the cash-flows. To a large extent, the ground lease and the amendments eliminated these risks by setting forth a mechanism for settling such disputes through the use of appraisers.

Similarly, we disagree with Zitelman's view that the hypothetical buyer would demand a higher rate of return because of the "substantial amount of time, energy, aggravation, and cost" required to value decedent's interest. Although such an interest is not as easy to value as other investments, such as a 30-year Treasury bond or annuity, the present value of the cash-flows is, nevertheless, not so difficult or inconvenient to calculate as to justify a significant increase in such a rate of return. The partnership principally owns only one income-producing asset. Zitelman's own analysis evidences the relative ease by which decedent's interest may be valued.

We are not convinced that the right of first refusal significantly affected the value of decedent's interest. The partnership agreement does not provide a price or a formula for determining the fair market value of a transferred partnership interest. The absence of a fixed price clearly has a less dramatic effect than fixed-price restrictions, see, e.g., Worcester County Trust Co. v. Commissioner, 134 F.2d 578">134 F.2d 578, 581-582 (1st Cir. 1943), revg. Estate of Smith v. Commissioner, 46 B.T.A. 337">46 B.T.A. 337 (1942); Estate of Reynolds v. Commissioner, 55 T.C. 172">55 T.C. 172, 188-190 (1970); Mandelbaum v. Commissioner, T.C. Memo 1995-255">T.C. Memo. 1995-255, affd. without published opinion 91 F.3d 124">91 F.3d 124 (1996). Indeed, a right of first refusal without a fixed price does not limit the buyers to whom a seller could sell the interest or the price for the interest, but merely governs the order in which prospective buyers must stand in line to purchase. Mandelbaum v. Commissioner, supra.Given the fact that such a right actually protects and benefits the other partners, the depressant effect (if any) upon the value of a privately held partnership interest subject to a right of first refusal is not necessarily substantial.

Overall, from our perspective, Zitelman's report lacks a wholly objective analysis of the willing buyer/willing seller standard. Consequently, we do not find the report as compelling as petitioner suggests. Rather, Zitelman focuses exclusively upon the hypothetical willing buyer. Zitelman failed to consider whether a hypothetical seller would sell his or her interest in the partnership for $ 399,000. The test of fair market value rests upon the concept of a hypothetical willing buyer and a hypothetical willing seller. We find incredible the proposition that any partner, limited or general, would be willing to sell his or her interest for such a low amount as to generate an internal rate of return of approximately 15 percent to 22 percent. Ignoring the views of a willing seller is contrary to this well-established rule. Id. In this regard, Zitelman's failure to consider a hypothetical willing seller of an interest in the partnership weakens his analysis.

Zitelman's assertion at trial that the fact the lessee is not a major hotel chain also depresses the value and accordingly increases the discount rates lacks merit. In light of the lessee's other options for developing the property, we do not see the financial success or lack thereof in the hotel business as a significant risk.

Zitelman's calculations are also inaccurate. First, we found several errors in the calculations of the partnership's rental income. Zitelman ignored the appreciation in the fair market value of the unencumbered land between the valuation date and January 1, 1993, for purposes of calculating the expected rent due. Zitelman claimed to be treating the fair market value of the unencumbered land as appreciating at a rate of 2.6 percent per year, yet he estimated the value of that land, as of the valuation date, to be $ 5,479,883 and used that amount without adjustment for estimating the rental income for the period of January 1, 1993, through December 31, 2002. Moreover, Zitelman calculated the net cash-flow to be received during the period after decedent's death through December 31, 1992, but he failed to include any part of that cash-flow in the total values assigned to decedent's interest. See appendix B. In addition, Zitelman treated the net cash-flows arising from the lease as being received upon the last day of the year. The lease agreement, however, specifically provides that the lessee is to pay the rent on the first of each month. Further, the partnership had a cash balance of $ 64,339 as of the valuation date. Zitelman's analysis does not provide adequate support or explanation of treatment of that cash or his assumptions regarding the projected interest income.

Second, we find Zitelman's estimate of the expected expenses is likewise flawed. For example, Zitelman assumed that the management fees equal 5 percent of the gross rentals each year. These fees, however, are subject to the discretion of the general partners. We see no reason to assume that the fee will always be 5 percent rather than 2 percent, as it was in taxable years 1989 and 1990. Zitelman included expense amounts and reductions in the expected cash-flows for which he offered no explanation. We have disregarded those amounts. Zitelman's calculation of the franchise taxes appears to be too low, but the record does not provide adequate information by which to recalculate those amounts.

Finally, Zitelman estimated the liquidation costs at the end of the lease term in 2062. We find these amounts to be too speculative, conjectural, and remote. See Estate of Bennett v. Commissioner, T.C. Memo 1993-34">T.C. Memo. 1993-34.

Despite our concerns, Zitelman's analysis makes several valid conclusions. With the weaknesses discussed above in mind, we have estimated the value of decedent's interest by modifying Zitelman's analysis. See appendices C and D. Under our calculation, we conclude that the value of decedent's interest, as of the valuation date, was $ 699,853. We have considered all of the other arguments made by the parties and, to the extent we have not addressed them, find them to be without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

Appendix A

Actual amounts reported upon the Federal partnership
tax returns of LKB Associates
	Rental	Interest	Professional Management			Bank
Year	Income	Income	Depreciation	Fees	Fees	Taxes	Charges
1989	313,600	1,259	236	1,000	6,272	21,026	15
1990	313,600	1,063	236	1,195	6,272	22,238	66
1991	313,600	1,322	236	2,831	14,112	22,040	94

Appendix B

Zitelman's Analysis

	Rental	Interest	Professional Management
Year	Income	Income	Depreciation	Fees	Fees	Taxes
1992	313,600	2,400	236	1,675	15,680	21,404
1993	298,103	1,500	236	1,719	14,905	20,252
1994	298,103	1,500	236	1,764	14,905	20,249
1995	298,103	1,500	236	1,809	14,905	20,245
1996	298,103	1,500	236	1,856	14,905	20,242
1997	298,103	1,500	236	1,905	14,905	20,238
1998	298,103	1,500	236	1,954	14,905	20,234
1999	350,709	1,500	236	2,005	17,535	23,904
2000	350,709	1,500	236	2,057	17,535	23,900
2001	350,709	1,500	236	2,111	17,535	23,896
2002	350,709	1,500	236	2,166	17,535	23,892
2003	453,337	1,500	236	2,222	22,667	31,053
2004	453,337	1,500	236	2,280	22,667	31,049
2005	453,337	1,500	236	2,339	22,667	31,044
2006	453,337	1,500	236	2,400	22,667	31,040
2007	453,337	1,500	236	2,462	22,667	31,035
2008	453,337	1,500	236	2,526	22,667	31,030
2009	453,337	1,500	236	2,592	22,667	31,025
2010	453,337	1,500	236	2,659	22,667	31,020
2011	453,337	1,500	236	2,728	22,667	31,015
2012	453,337	1,500	236	2,799	22,667	31,009
2013	645,511	1,500	236	2,872	32,276	44,422
2014	645,511	1,500	236	2,947	32,276	44,417
2015	645,511	1,500	236	3,023	32,276	44,411
2016	645,511	1,500	236	3,102	32,276	44,405
2017	645,511	1,500	236	3,183	32,276	44,399
2018	645,511	1,500	236	3,265	32,276	44,392
2019	645,511	1,500	236	3,350	32,276	44,386
2020	645,511	1,500	236	3,437	32,276	44,379
2021	645,511	1,500	236	3,527	32,276	44,373
2022	645,511	1,500	236	3,618	32,276	44,366
2023	834,406	1,500	236	3,713	41,720	57,548
2024	834,406	1,500	236	3,809	41,720	57,548
2025	834,406	1,500	236	3,908	41,720	57,533
2026	834,406	1,500	236	4,010	41,720	57,525
2027	834,406	1,500	236	4,114	41,720	57,518
2028	834,406	1,500	236	4,221	41,720	57,509
2029	834,406	1,500	236	4,331	41,720	57,501
2030	834,406	1,500	236	4,443	41,720	57,492
2031	834,406	1,500	236	4,559	41,720	57,484
2032	834,406	1,500	236	4,677	41,720	57,475
2033	1,078,576	1,500	236	4,799	53,929	74,515
2034	1,078,576	1,500	236	49,24	53,929	74,505
2035	1,078,576	1,500	236	5,052	53,929	74,495
2036	1,078,576	1,500	236	5,183	53,929	74,485
2037	1,078,576	1,500	236	5,318	53,929	74,475
2038	1,078,576	1,500	236	5,456	53,929	74,465
2039	1,078,576	1,500	236	5,598	53,929	74,454
2040	1,078,576	1,500	236	5,744	53,929	74,443
2041	1,078,576	1,500	236	5,893	53,929	74,431
2042	1,078,576	1,500	236	6,046	53,929	74,420
2043	1,394,198	1,500	236	6,203	69,710	96,446
2044	1,394,198	1,500	236	6,365	69,710	96,434
2045	1,394,198	1,500	236	6,530	69,710	96,421
2046	1,394,198	1,500	236	6,700	69,710	96,408
2047	1,394,198	1,500	236	6,874	69,710	96,395
2048	1,394,198	1,500	236	7,053	69,710	96,382
2049	1,394,198	1,500	236	7,236	69,710	96,368
2050	1,394,198	1,500	236	7,424	69,710	96,353
2051	1,394,198	1,500	236	7,617	69,710	96,339
2052	1,394,198	1,500	236	7,815	69,710	96,324
2053	1,802,180	1,500	236	8,018	90,109	124,795
2054	1,802,180	1,500	236	8,227	90,109	124,780
2055	1,802,180	1,500	236	8,441	90,109	124,763
2056	1,802,180	1,500	236	8,660	90,109	124,747
2057	1,802,180	1,500	236	8,885	90,109	124,730
2058	1,802,180	1,500	236	9,117	90,109	124,712
2059	1,802,180	1,500	236	9,354	90,109	124,694
2060	1,802,180	1,500	236	9,597	90,109	124,675
2061	1,802,180	1,500	236	9,846	90,109	124,657
2062	1,802,180	1,500	236	10,102	90,109	124,637
Sale Proceeds
Discount Rates proposed by Petitioner's						22.600%
Expert
Values as calculated by						$ 302,625
Petitioner's Expert
Value assigned by Petitioner's Expert

						Estimated
	Bank	Other	Decrease	Available	Estate	Land
Year	Charges	Expenses	in Cash	Cash	Share	Value
1992	58		42,000	235,182	57,994	4,900,000
1993	60	75,000		187,667	46,277	5,479,833
1994	61			262,624	64,761	5,479,833
1995	63			262,581	64,750	5,479,833
1996	65			262,535	64,739	5,479,833
1997	66			262,489	64,727	5,479,833
1998	68			262,442	64,716	5,479,833
1999	70			308,695	76,121	5,479,833
2000	72			308,646	76,109	5,479,833
2001	73			308,594	76,096	5,479,833
2002	75			308,541	76,083	5,479,833
2003	77			398,818	98,345	7,083,386
2004	79			398,762	98,331	7,083,386
2005	81			398,705	98,317	7,083,386
2006	84			398,646	98,302	7,083,386
2007	86			398,587	98,288	7,083,386
2008	88			398,526	98,273	7,083,386
2009	90			398,463	98,257	7,083,386
2010	93			398,398	98,241	7,083,386
2011	95			398,331	98,225	7,083,386
2012	97			398,264	98,208	7,083,386
2013	100			567,341	139,901	9,156,185
2014	103			567,269	139,883	9,156,185
2015	105			567,195	139,865	9,156,185
2016	108			567,120	139,846	9,156,185
2017	111			567,043	139,827	9,156,185
2018	114			566,964	139,808	9,156,185
2019	117			566,882	139,788	9,156,185
2020	120			566,799	139,767	9,156,185
2021	123			566,712	139,746	9,156,185
2022	126			566,625	139,724	9,156,185
2023	129			732,796	180,700	11,835,543
2024	133			732,696	180,676	11,835,543
2025	136			732,609	180,654	11,835,543
2026	140			732,511	180,630	11,835,543
2027	143			732,411	180,605	11,835,543
2028	147			732,309	180,580	11,835,543
2029	151			732,203	180,554	11,835,543
2030	155			732,096	180,528	11,835,543
2031	159			731,984	180,500	11,835,543
2032	163			731,871	180,472	11,835,543
2033	167			946,666	233,439	15,298,955
2034	171			946,547	233,409	15,298,955
2035	176			946,425	233,379	15,298,955
2036	180			946,299	233,348	15,298,955
2037	185			946,169	233,316	15,298,955
2038	190			946,036	233,283	15,298,955
2039	195			945,900	233,250	15,298,955
2040	200			945,761	233,215	15,298,955
2041	205			945,618	233,180	15,298,955
2042	211			945,471	233,144	15,298,955
2043	216			1,223,123	301,610	19,775,860
2044	222			1,222,968	301,572	19,775,860
2045	227			1,222,810	301,533	19,775,860
2046	233			1,222,647	301,493	19,775,860
2047	239			1,222,480	301,452	19,775,860
2048	246			1,222,308	301,409	19,775,860
2049	252			1,222,132	301,366	19,775,860
2050	258			1,221,952	301,322	19,775,860
2051	265			1,221,767	301,276	19,775,860
2052	272			1,221,577	301,229	19,775,860
2053	279			1,580,478	389,731	25,562,834
2054	286			1,580,277	389,681	25,562,834
2055	294			1,580,073	389,631	25,562,834
2056	302			1,579,862	389,579	25,562,834
2057	309			1,579,646	389,525	25,562,834
2058	317			1,579,425	389,471	25,562,834
2059	326			1,579,198	389,415	25,562,834
2060	334			1,578,965	389,357	25,562,834
2061	343			1,578,725	389,298	25,562,834
2062	352			1,578,480	389,238	25,562,834
Sale Proceeds				31,391,077	7,740,735	33,043,239
Discount Rates proposed by				15.300%
Petitioner's Expert
Values as calculated by				$ 494,972
Petitioner's Expert
Value assigned by Petitioner's Expert				$ 399,000

Appendix C

	Rental	Interest	Professional	Management	Franchise
Year	Income	Income	Fees	Fees	Taxes
1992	313,600	1,215	1,675	8,885	21,404
1993	303,916	1,247	1,719	9,116	20,252
1994	303,916	1,279	1,763	9,353	20,249
1995	303,916	1,312	1,809	9,597	20,245
1996	303,916	1,346	1,856	9,846	20,242
1997	303,916	1,381	1,904	10,102	20,238
1998	303,916	1,417	1,954	10,365	20,234
1999	357,548	1,454	2,005	10,634	23,904
2000	357,548	1,492	2,057	10,911	23,900
2001	357,548	1,531	2,110	11,194	23,896
2002	357,548	1,571	2,165	11,485	23,892
2003	462,177	1,611	2,222	11,784	31,053
2004	462,177	1,653	2,279	12,090	31,049
2005	462,177	1,696	2,339	12,405	31,044
2006	462,177	1,740	2,399	12,727	31,040
2007	462,177	1,786	2,462	13,058	31,035
2008	462,177	1,832	2,526	13,398	31,030
2009	462,177	1,880	2,592	13,746	31,025
2010	462,177	1,928	2,659	14,103	31,020
2011	462,177	1,979	2,728	14,470	31,015
2012	462,177	2,030	2,799	14,846	31,009
2013	658,098	2,083	2,872	15,232	44,422
2014	658,098	2,137	2,946	15,628	44,417
2015	658,098	2,193	3,023	16,035	44,411
2016	658,098	2,250	3,102	16,452	44,405
2017	658,098	2,308	3,182	16,879	44,399
2018	658,098	2,368	3,265	17,318	44,392
2019	658,098	2,430	3,350	17,769	44,386
2020	658,098	2,493	3,437	18,231	44,379
2021	658,098	2,558	3,526	18,705	44,373
2022	658,098	2,624	3,618	19,191	44,366
2023	850,677	2,692	3,712	19,690	57,548
2024	850,677	2,762	3,809	20,202	57,548
2025	850,677	2,834	3,908	20,727	57,533
2026	850,677	2,908	4,009	21,266	57,525
2027	850,677	2,983	4,113	21,819	57,518
2028	850,677	3,061	4,220	22,386	57,509
2029	850,677	3,141	4,330	22,968	57,501
2030	850,677	3,222	4,443	23,565	57,492
2031	850,677	3,306	4,558	24,178	57,484
2032	850,677	3,392	4,677	24,807	57,475
2033	1,099,609	3,480	4,798	25,452	74,515
2034	1,099,609	3,571	4,923	26,113	74,505
2035	1,099,609	3,664	5,051	26,792	74,495
2036	1,099,609	3,759	5,182	27,489	74,485
2037	1,099,609	3,857	5,317	28,204	74,475
2038	1,099,609	3,957	5,455	28,937	74,465
2039	1,099,609	4,060	5,597	29,689	74,454
2040	1,099,609	4,165	5,743	30,461	74,443
2041	1,099,609	4,274	5,892	31,253	74,431
2042	1,099,609	4,385	6,045	32,066	74,420
2043	1,421,385	4,499	6,202	32,899	96,446
2044	1,421,385	4,616	6,364	33,755	96,434
2045	1,421,385	4,736	6,529	34,632	96,421
2046	1,421,385	4,859	6,699	35,533	96,408
2047	1,421,385	4,985	6,873	36,457	96,395
2048	1,421,385	5,115	7,052	37,405	96,382
2049	1,421,385	5,248	7,235	38,377	96,368
2050	1,421,385	5,384	7,423	39,375	96,353
2051	1,421,385	5,524	7,616	40,399	96,339
2052	1,421,385	5,668	7,814	41,449	96,324
2053	1,837,322	5,815	8,017	42,527	124,795
2054	1,837,322	5,966	8,226	43,632	124,780
2055	1,837,322	6,122	8,440	44,767	124,763
2056	1,837,322	6,281	8,659	45,931	124,747
2057	1,837,322	6,444	8,884	47,125	124,730
2058	1,837,322	6,612	9,115	48,350	124,712
2059	1,837,322	6,783	9,352	49,607	124,694
2060	1,837,322	6,960	9,595	50,897	124,675
2061	1,837,322	7,141	9,845	52,221	124,657
2062	1,837,322	7,327	10,101	53,578	124,637

				Estimated	Petitioner's Share
	Bank	Available	Estate	Land	of the monthly
Year	Charges	Cash	Share	Value	net cash flows
1992	58	282,792	69,734	5,586,690	5,811
1993	60	274,016	67,570	5,731,944	5,631
1994	61	273,768	67,508	5,880,974	5,626
1995	63	273,515	67,446	6,033,880	5,621
1996	65	273,254	67,382	6,190,760	5,615
1997	66	272,987	67,316	6,351,720	5,610
1998	68	272,713	67,248	6,516,865	5,604
1999	70	322,389	79,498	6,686,303	6,625
2000	72	322,101	79,427	6,860,147	6,619
2001	74	321,805	79,354	7,038,511	6,613
2002	75	321,501	79,279	7,221,512	6,607
2003	77	418,652	103,236	7,409,272	8,603
2004	79	418,332	103,157	7,601,913	8,596
2005	81	418,004	103,076	7,799,563	8,590
2006	84	417,667	102,993	8,002,351	8,583
2007	86	417,322	102,908	8,210,412	8,576
2008	88	416,967	102,820	8,423,883	8,568
2009	90	416,604	102,730	8,642,904	8,561
2010	93	416,230	102,638	8,867,619	8,553
2011	95	415,847	102,544	9,098,178	8,545
2012	97	415,455	102,447	9,334,730	8,537
2013	100	597,555	147,351	9,577,433	12,279
2014	103	597,141	147,249	9,826,446	12,271
2015	105	596,717	147,145	10,081,934	12,262
2016	108	596,281	147,037	10,344,064	12,253
2017	111	595,835	146,927	10,613,010	12,244
2018	114	595,377	146,814	10,888,948	12,235
2019	117	594,907	146,698	11,172,061	12,225
2020	120	594,425	146,579	11,462,534	12,215
2021	123	593,929	146,457	11,760,560	12,205
2022	126	593,421	146,332	12,066,335	12,194
2023	129	772,290	190,439	12,380,060	15,870
2024	133	771,748	190,306	12,701,941	15,859
2025	136	771,207	190,172	13,032,192	15,848
2026	140	770,645	190,034	13,371,029	15,836
2027	143	770,067	189,891	13,718,675	15,824
2028	147	769,476	189,745	14,075,361	15,812
2029	151	768,868	189,595	14,441,320	15,800
2030	155	768,245	189,442	14,816,795	15,787
2031	159	767,604	189,284	15,202,031	15,774
2032	163	766,948	189,122	15,597,284	15,760
2033	167	998,157	246,136	16,002,814	20,511
2034	171	997,467	245,966	16,418,887	20,497
2035	176	996,758	245,791	16,845,778	20,483
2036	180	996,031	245,612	17,283,768	20,468
2037	185	995,285	245,428	17,733,146	20,452
2038	190	994,519	245,239	18,194,208	20,437
2039	195	993,734	245,045	18,667,257	20,420
2040	200	992,928	244,846	19,152,606	20,404
2041	205	992,102	244,643	19,650,574	20,387
2042	211	991,253	244,433	20,161,488	20,369
2043	216	1,290,120	318,131	20,685,687	26,511
2044	222	1,289,227	317,911	21,223,515	26,493
2045	227	1,288,311	317,685	21,775,326	26,474
2046	233	1,287,371	317,453	22,341,485	26,454
2047	239	1,286,406	317,215	22,922,364	26,435
2048	246	1,285,416	316,971	23,518,345	26,414
2049	252	1,284,401	316,721	24,129,822	26,393
2050	258	1,283,360	316,464	24,757,197	26,372
2051	265	1,282,290	316,200	25,400,884	26,350
2052	272	1,281,193	315,930	26,061,307	26,328
2053	279	1,667,519	411,194	26,738,901	34,266
2054	286	1,666,364	410,909	27,434,113	34,242
2055	294	1,665,180	410,617	28,147,400	34,218
2056	302	1,663,965	410,318	28,879,232	34,193
2057	309	1,662,718	410,010	29,630,092	34,168
2058	317	1,661,439	409,695	30,400,475	34,141
2059	326	1,660,126	409,371	31,190,887	34,114
2060	334	1,658,780	409,039	32,001,850	34,087
2061	343	1,657,398	408,698	32,833,898	34,058
2062	352	1,655,981	408,349	33,687,580	34,029
Decedent's Pro-Rata Share			$ 8,307,030
of the Reversionary
Interest

Appendix D

Discount rate computed on a monthly basis	1.040%
Present value of decedent's share of the
net cash flows
Net present value of rents	$ 697,597
Present value of reversionary interest	2,256
Total value of decedent's interest	$ 699,853

---

Footnotes

• 1. Petitioner does not argue that it made an election pursuant to sec. 2032A. Sec. 2032A permits an estate to elect to value qualified real property used for farming and small business purposes on the basis of income capitalization rather than on the basis of highest and best use. Sec. 2032A(e) (7); Williamson v. Commissioner, 93 T.C. 242">93 T.C. 242, 244 (1989), affd. 974 F.2d 1525">974 F.2d 1525 (9th Cir. 1992); Estate of Heffley v. Commissioner, 89 T.C. 265">89 T.C. 265, 271 (1987), affd. 884 F.2d 279">884 F.2d 279↩ (7th Cir. 1989).