rejecting a witness's opinion as to a valuation because it was "full of holes"
How later courts described this case
- rejecting a witness's opinion as to a valuation because it was "full of holes"
Written by the judges who cited it.
The opinion
T.C. Memo. 1998-185
UNITED STATES TAX COURT
ESTATE OF ELDON L. AUKER, DECEASED, KIMBERLEE J. AUKER,
INDEPENDENT PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER
OF INTERNAL REVENUE, Respondent
Docket No. 13150-96. Filed May 19, 1998.
E's estate includes real estate and interests in
five family-owned entities, the assets of which include
real estate and interests in two other family-owned
entities that own real estate. E's real estate
consists of three apartment complexes. Collectively,
the entities' real estate consists of commercial rental
property, residential rental property, vacant land, and
developed property held for sale. R and E agree that
all the real estate mentioned above must be valued in
order to determine the value of E's gross estate; and
they agree on the value of each parcel of real estate,
before any discount for market absorption; and they
agree that large marketability and control discounts
apply to most of the interests. R and E dispute
whether a market absorption discount inheres in the
value of E's real estate and the entities' real estate.
Held: A 6.189-percent market absorption discount
inheres in the value of each apartment complex; none of
- 2 -
the other real estate is valued by reference to a
market absorption discount.
Russell E. Bowers and Bernard L. McAra, for petitioner.
Trevor T. Wetherington, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: The Estate of Eldon L. Auker, Deceased,
Kimberlee J. Auker, Independent Personal Representative,
petitioned the Court to redetermine respondent's determination of
a $1,810,737 deficiency in Federal estate tax. Following
concessions by the parties, the only issue left to decide is
whether a discount for market absorption inheres in the
August 12, 1992, fair market value of certain assets included in
the Estate of Eldon L. Auker (the estate). The assets consist of
three apartment complexes (collectively, the apartment complexes)
and interests in five family-owned entities the assets of which
include real estate and interests in two other family-owned
entities that own real estate.
We hold that a 6.189-percent market absorption discount
inheres in the fair market value of each apartment complex, and
that the values of the decedent's interests in the entities are
not determined by reference to a market absorption discount.
Unless otherwise stated, section references are to the applicable
provisions of the Internal Revenue Code. Rule references are to
the Tax Court Rules of Practice and Procedure.
- 3 -
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulated facts and the exhibits submitted therewith are
incorporated herein by this reference. When the subject petition
was filed, the estate's legal address was in Grand Blanc,
Michigan.1 Grand Blanc and Flint, Michigan, are located in
Genesee County. The center of Grand Blanc is approximately
7.5 miles south-southeast from the center of Flint.
The decedent developed and managed commercial and
residential real estate in Genesee County until his death on
August 12, 1992. His oldest child, Kimberlee J. Auker-Cooper
(Ms. Auker-Cooper), is the personal representative of his estate.
On November 9, 1993, Ms. Auker-Cooper timely filed the estate's
Form 706, United States Estate (and Generation-Skipping Transfer)
Tax Return, with the Commissioner of Internal Revenue (the
Commissioner). Less than 3 years later, the Commissioner issued
Ms. Auker-Cooper, in her capacity as the estate's representative,
a notice of deficiency listing a $1,810,737 deficiency in Federal
estate tax.
During his lifetime, the decedent established a revocable
trust (the Trust), named the “Eldon L. Auker Living Trust”, by
executing an instrument dated October 1, 1980, the provisions of
1
The record does not reveal the personal representative's
residence at the time of the petition.
- 4 -
which were restated in an instrument he executed on May 22, 1992.
On December 11, 1989, the decedent transferred to the Trust his
title interest, as sole proprietor, in the apartment complexes
which were named The Landings at Fountain Pointe (The Landings),
Fox Hill Glens (Fox Hill), and Stonehenge Gates (Stonehenge).
The Landings was built in the 1970's, and it is sited on 40.6
acres in Grand Blanc. The Landings consists of 37 buildings with
a total of 468 living units (424 one- or two-bedroom apartments
and 44 townhouses), a clubhouse, a swimming pool, and tennis
courts. Grand Blanc is one of Genesee County's more affluent
communities, and its population was growing on the applicable
valuation date.
Fox Hill was built from 1985 through 1987, and it is sited
on 31.18 acres in Grand Blanc. Fox Hill consists of 22 buildings
with a total of 286 living units (264 one- or two-bedroom
apartments and 22 townhouses), a clubhouse, a swimming pool,
tennis courts, and a jogging trail. Fox Hill is located
approximately 3.5 miles from The Landings.
Stonehenge was built in two phases; approximately two-thirds
of the complex was built from 1979 through 1980, and the rest,
which generally consists of five of the more luxurious apartment
buildings in the complex, was built from November 1985 through
January 1986. Stonehenge is sited on 19.09 acres in Flint, and
it consists of 15 buildings, each with 12 living units (for a
- 5 -
total of 180 living units, all of which are one- or two-bedroom
apartments), a clubhouse, a swimming pool, and tennis courts.
Flint is the largest city in Genesee County, and it is the site
of General Motors (GM) and other large employers. The population
and economy of Flint were growing on the applicable valuation
date, and it had one of the strongest retail markets in Michigan.
Approximately 32 months after the decedent transferred the
apartment complexes to the Trust, he transferred to the Trust his
complete stock interests in family corporations named Auker
Investments, Inc.; Grand Pointe, Inc.; K.A.A., Inc.; and The
Aukers, Community Developers, Ltd.; and his complete ownership
interest in a family general partnership named Eldon L. Auker
Enterprises. When the decedent died, the Trust owned equity
interests in these entities as follows: (1) A 100-percent
interest in Auker Investments, Inc., (2) a 5-percent interest in
Grand Pointe, Inc., (3) a 25-percent interest in K.A.A., Inc.,
(4) a 26-percent interest in The Aukers, Community Developers,
Ltd., and (5) a 35.08-percent interest in Eldon L. Auker
Enterprises. Also at that time, Auker Investments, Inc., owned a
25.57-percent equity interest in Eldon L. Auker Enterprises; The
Aukers, Community Developers, Ltd., owned a 20.27-percent equity
interest in Eldon L. Auker Enterprises and a 20.74-percent equity
interest in a family general partnership named Auker Enterprises;
and Eldon L. Auker Enterprises and Auker Enterprises each owned a
- 6 -
50-percent equity interest in Auker Homes.2 See the appendix for
a chart of the relationships between the various entities and the
Trust. The assets, liabilities, and net worth of these entities,
at the values stipulated by the parties without regard to market
absorption discounts, were as follows on the date of the
decedent's death (the applicable valuation date):3
Auker Investments, Inc.
Assets
25.57% Interest in Eldon L. Auker Enterprises
$512,000
Total 512,000
Liabilities
Total -0-
Net Worth
Total 512,000
Grand Pointe, Inc.
Assets
Cash $3,607
Accounts and notes receivable 41,137
Receivables--other 55,425
Commercial rental property--Fenton Hill Shopping Center 525,000
1040 Hill Road, Grand Blanc
Land under development--held for sale 2,660,000
Equipment and/or vehicles 773
Total 3,285,942
Liabilities
Total 2,258,664
Net Worth
Total 1,027,278
K.A.A., Inc.
2
Each remaining equity interest in all of the entities
mentioned above was owned by a member of the Auker family,
either directly or indirectly.
3
To the extent that a real estate interest listed below as
an asset does not reference a street address, we are unable to
determine the specifics of the parcel or parcels of real estate
that relate to that interest.
- 7 -
Assets
Cash $6,650
Construction in progress 115,880
Receivable--Eldon L. Auker Enterprises 55,526
Receivable--other 10,950
Accrued interest on receivables 21,931
100% interest in vacant land 17,400
Equipment and/or vehicles 12,504
Total 240,841
Liabilities
Total 226,511
Net Worth
Total 14,330
The Aukers, Community Developers, Ltd.
Assets
Prepaid Taxes $1,974
20.72% interest in Eldon L. Auker Enterprises
415,000
20.74% interest in Auker Enterprises 514,161
Total 931,135
Liabilities
Total -0-
Net Worth
Total 931,135
Eldon L. Auker Enterprises
Assets
Cash $3,494
Inventory-supplies 2,024
Accounts and notes receivable 462,069
Receivable--Auker Homes 510,187
Receivable--K.A.A. Enterprises 306,800
Accrued interest on receivables 60,515
Land contracts receivable 22,567
Commercial Rental Property--Burger King
303,500
11325 S. Saginaw Street,
Grand Blanc
Commercial Rental Property--Gingerbread House
113,000
11319 S. Saginaw Street,
Grand Blanc
100% interest in residential rental properties 191,800
50% interest in residential rental properties
93,440
100% interest in vacant land 55,000
50% interest in vacant land 135,160
33.3% interest in vacant land 41,166
50% interest in Auker Homes 1,576,847
Equipment and/or vehicles 345
1
Total 3,878,544
Liabilities
- 8 -
Total 797,588
Net Worth
Total 3,080,956
1
We recognize that the total value of these assets is $3,877,914. The parties
have stipulated that the total value is $3,878,544, and they have not explained the
difference between their stipulated value and the actual value. We proceed using
the stipulated value.
Auker Homes
Assets
Cash
$4,942
Escrow account--sales in process
93,123
Inventory-supplies
14,290
Accounts and notes receivable
13,026
Receivable--Kings Pointe Enterprises
960,124
Receivable--Grand Pointe, Inc.
1,532,150
Mortgage receivable--Kings Pointe Enterprises
500,000
Accrued interest on receivables
228,758
Land contracts receivable
353,906
Commercial rental property--Victoria Square Shopping Mall
775,000
4501 Hill Road, Grand Blanc
Commercial rental property--Kingsley Square
600,000
6070 Fenton Road, Flint
Commercial rental property--Ponderosa
515,000
1030 Hill Road, Grand Blanc
Commercial rental property--Richfield Road Medical Center
140,000
5529 Richfield Road, Flint
Residential rental properties
263,930
Sage Lake Property
475,000
Developed residential lots held for sale
370,170
Tri-Park development costs
145,240
Land held for sale
283,200
Equipment and/or vehicles
19,536
Total
1
7,242,395
Liabilities
Total
1,986,238
- 9 -
Net Worth
Total
5,256,157
1
We recognized that the total value of these assets is $7,287,395. The
parties have stipulated that the total value is $7,242,395, and they have not
explained the difference between their stipulated value and the actual value. We
proceed using the stipulated value.
Auker Enterprises
Assets
Cash
$756,890
Construction in progress
4,757
Receivable--Auker Homes
145,220
Accrued interest on receivables
24,499
Land contracts receivable
78,800
Commercial rental property--5124 Hill Road, Grand Blanc
145,000 Commercial rental property--6063 Fenton, Grand Blanc
310,000
50% interest in commercial rental properties
82,400
100% interest in residential rental properties
385,493
50% interest in residential rental properties
11,040
100% interest in vacant land
177,300
50% interest in vacant land
135,160
33.3% interest in vacant land
41,163
50% interest in Auker Homes
1,576,847
Equipment and/or vehicles
31,486
Total
3,906,055
Liabilities
Total
92,085
Net Worth
Total
3,813,970
All of the real estate mentioned above (including the apartment
complexes), which we collectively refer to as the subject
property, is located in Genesee County, with the exception of
- 10 -
vacant land on Holly Road, Holly Township, Michigan, which is
located in Oakland County, Michigan.
Following the decedent's death, the estate paid $39,450 to
the real estate appraising and consulting firm of Allied Real
Estate Appraisers, Inc., to ascertain the "current market value"
on August 12, 1992, of each parcel of the subject property for
Federal estate tax purposes. Wayne E. Knecht (Mr. Knecht), MAI,4
and Lawrence F. Piper (Mr. Piper), SRA5 (collectively referred to
as the appraisers), two of the firm's certified real estate
appraisers, inspected and valued most of the larger interests,
taking into account the "highest and best use" of each parcel and
assuming that each of the apartment complexes, the Burger King
property located at 11325 S. Saginaw St., Grand Blanc, and the
residential rental property at 6642 Kings Pointe, Grand Blanc,
would be marketed for a period of 18 months, 1 year, and 3 to 6
months, respectively.6 The appraisers arrived at their values by
employing a sales comparison method, income capitalization
4
The designation of MAI is awarded to qualifying members of
the American Institute of Real Estate Appraisers, and it is the
most highly recognized appraisal designation within the appraisal
community. Mr. Knecht has held this designation for
approximately 35 years.
5
The designation of Senior Residential Appraiser is awarded
to qualifying members of the Society of Real Estate Appraisers.
6
In 1992, the average listing for residential property in
Genesee County was 92 days, and the average listing for unsold
properties of all types was 170 days.
- 11 -
method, and cost method. The appraisers took into account
various data on Genesee County, including its location,
composition, demographics, population density, and accessibility.
The appraisers followed an industry definition of the term
"market value", under which the term meant:
MARKET VALUE--The most probable price in terms of money
which a property should bring in a competitive and open
market under all conditions requisite to a fair sale,
the buyer and seller, each acting prudently,
knowledgeably and assuming the price is not affected by
undue stimulus.
Implicit in this definition is the consummation of a
sale as of a specific date and the passing of title
from seller to buyer under conditions whereby:
1) buyer and seller are typically motivated.
2) both parties are well informed or well advised,
and each acting in what they consider their own
best interest.
3) a reasonable time if [sic] allowed for exposure in
the open market.
4) payment is made in cash or its equivalent.
5) financing, if any, is on terms generally available
in the community at the specified date and typical
for the property type in its locale.
6) the price presents a normal consideration for the
property sold unaffected by special financing
amounts and/or terms, services, fees, costs, or
credits incurred in the transaction.*
*REAL ESTATE APPRAISAL TERMINOLOGY, (REVISED EDITION),
1984, pages 160 & 161.
The appraisers explained in their appraisal reports that the
sales comparison method compares a property with similar
- 12 -
properties of the same type which sell close to the valuation
date, and that adjustments are made to the sale price of each
comparable property to ascertain the value of the property under
consideration. Comparable properties, the reports state, are
properties which compare to the property under consideration as
to time and condition of sale (with special emphasis on the
condition of the market), location, physical characteristics,
income characteristics, and terms of financing.
The reports also state that the income capitalization method
ascertains from market transactions the ratio of selling price to
net operating income at the time of sale in order to arrive at a
capitalization rate, and that this capitalization rate is applied
to similar property, on the basis of the similar property's net
operating income, in order to value it. As to the cost method,
the reports state, this method ascertains value through the
following three-step process: (1) The estimated value of the
land that is part of the property to be valued is ascertained
using the sales comparison method, (2) the cost to reproduce the
property under consideration is estimated at current costs, and
(3) the estimated land value is added to the estimated cost of
reproduction, less depreciation, to arrive at the value of the
property under consideration.
In applying the sales comparison method to each of the
apartment complexes, the appraisers could not find any sales in
- 13 -
Genesee County of property similar to the apartment complexes,
which occurred near the applicable valuation date.7 Thus, the
appraisers looked to sales of "large apartment complexes in
different parts of the state" and ascertained and analyzed the
five following sales: (1) The $5,500,000 sale of a 280-unit
complex in Kalamazoo, Michigan, in June 1990, to a Michigan
limited partnership, (2) the $3,050,000 sale of a 142-unit
complex in Ypsilanti, Michigan, in November 1991, to Geo Nyman,
(3) the $1,506,000 sale of a 70-unit complex in Woodhaven,
Michigan, in August 1992, to Kulish, (4) the $2,625,000 sale of
an 81-unit complex in Springfield Township, Michigan, in
September 1991, to Ron Iacobelli, and (5) the $2,590,000 sale of
a 72-unit complex in Ann Arbor, Michigan, in December 1992, to
Sandy Nam. The appraisers concluded that the respective values
under the sales comparison method for The Landings, Fox Hill, and
Stonehenge were $8,300,000, $9,030,000, and $4,745,000.
In applying the cost method to each of the apartment
complexes, the appraisers analyzed three sales of vacant land
near the applicable valuation date and the cost to reproduce each
of the apartment complexes. The appraisers concluded that the
respective values under the cost method for The Landings, Fox
Hill, and Stonehenge were $8,956,000, $9,640,000, and $4,957,000.
7
Very few apartment complexes in Genesee County actually
compare to the apartment complexes in issue.
- 14 -
In applying the income capitalization method to each of the
apartment complexes, the appraisers used the band of investment
technique to ascertain a capitalization rate for each complex;
the band of investment technique ascertains an overall rate of
return by reference to a mortgage constant (or loan component)
and an equity dividend rate (or equity component). Each
complex's total income, expenses, and net operating income for
1991 were:
The Landings Fox Hill Stonehenge
Total income $2,074,746 $1,703,700 $945,215
Total expenses 1,968,850 706,700 407,592
Net operating income 105,896 997,000 537,623
and the appraisers ascertained the following pro forma operating
statements to factor into their analysis under the income
capitalization method:
The Landings Fox Hill Stonehenge
Gross possible rent $2,826,720 $1,860,780 $1,014,060
Less rebates (448,560) (52,380) (37,020)
Gross rents after rebates 2,378,160 1,808,400 977,040
Laundry rental income 39,000 10,400 7,600
Carports rental income 14,400 29,754 13,306
Total income 2,431,560 1,848,554 997,946
Vacancy (356,724) (90,420) (48,852)
Effective gross income 2,074,836 1,758,134 949,094
Less expenses (996,100) (590,700) (351,000)
Net income 1,078,736 1,167,434 598,094
On the basis of market data, the appraisers calculated an
overall rate of return of 10.238 percent for The Landings. The
components of this rate were: (1) A mortgage constant of 7.238
percent, which was based on an 8.5-percent loan with a 25-year
- 15 -
amortization, 5-year call, and 75-percent loan to value, and
(2) an equity dividend rate of 3 percent, which was based on a
12-percent equity yield on 25 percent of value. The appraisers
calculated an overall rate of return of 9.738 percent for
Stonehenge and Fox Hill. The components of this rate were:
(1) A mortgage constant of 7.238 percent, which was based on an
8.5-percent loan with a 25-year amortization, 5-year call, and
75-percent loan to value, and (2) an equity dividend rate of
2.5 percent, which was based on a 10-percent equity yield on
25 percent of value.8 The appraisers ascertained the
capitalization rate of each complex by adding the corresponding
overall rate of return to a tax cap rate of 2.96 percent. The
appraisers then ascertained each complex's market value under the
income capitalization method by dividing its pro forma net income
by its capitalization rate. The appraisers concluded that the
respective values under the income capitalization method for The
Landings, Fox Hill, and Stonehenge were $8,172,000, $9,190,000,
and $4,710,000.
In connection with the income capitalization method, the
appraisers also ascertained the capitalization rates of the
following six properties: (1) The 280-unit complex in Kalamazoo,
Michigan, that sold in June 1990, (2) the 70-unit complex in
8
The appraisers applied an equity dividend rate to The
Landings that was higher than for the other two complexes because
The Landings had the highest vacancy rate.
- 16 -
Woodhaven, Michigan, that sold in August 1992, (3) the 81-unit
complex in Springfield Township, Michigan, that sold in
September 1991, (4) the 80-unit complex in Ann Arbor, Michigan,
that sold in December 1992, (5) an apartment complex in
Farmington, Michigan, that sold in May 1991, and (6) a 228-unit
apartment in Meridian Township, Michigan, that sold in August
1990. The appraisers considered each property's gross income
expectancy, expected reduction in gross income for less than full
occupancy and collection losses, expected annual operating
expenses, the pattern and duration of the property's income
stream, and the anticipated value of the resale of other real
property interest reversions. The appraisers took into account
the relationship of supply and demand, information on trends and
market anticipation, and the fact that two insurance companies
were looking in August 1992 to make a low-interest loan on the
purchase of income-producing property in or near Genesee County.
The appraisers concluded that the values derived under the
income capitalization method were the best indicia of value for
each of the apartment complexes, and that the market values of
The Landings, Fox Hill, and Stonehenge were $8,172,000,
$9,190,000, and $4,710,000, respectively.
The appraisers used one or more of the three valuation
methods to ascertain the following market values of the other
parcels of real estate which they had inspected. This real
- 17 -
estate, and the values ascertained by the appraisers, is set
forth below by category:9
Commercial Rental Properties
G-5529 Richfield Rd., Flint (Richfield Rd. Medical Center) $140,000
4501 Hill Rd., Grand Blanc (Victoria Square Shopping Mall) 775,000
6070 Fenton Rd., Flint (Kingsley Square Shopping Center) 600,000
1040 Hill Rd., Grand Blanc (Fenton Hill Center) 525,000
1030 Hill Rd., Grand Blanc (Ponderosa) 515,000
11325 S. Saginaw St., Grand Blanc (Burger King) 303,500
11319 S. Saginaw St., Grand Blanc (Gingerbread House) 113,000
5451 S. Saginaw St., Grand Blanc 95,000
5459 S. Saginaw St., Grand Blanc 111,000
5124 E. Hill Rd., Grand Blanc 145,000
6063 Fenton Rd., Flint 310,000
3,632,500
Residential Rental Properties
6642 Kings Pointe, Grand Blanc $175,000
2381 E. Hill Rd., Grand Blanc 154,000
329,000
Vacant Land
S/E 1/4 of section 17, Porter Rd., Grand Blanc $45,000
Holly Rd., Holly Township 190,000
Section 11, Hill Rd.--West of NBD Bank, Grand Blanc 45,000
S/E corner of Reid Rd. & Dort Highway, Grand Blanc 294,000
Section 11, Hill Rd.--East of NBD Bank, Grand Blanc 32,000
Hill Rd., East of Jennings Rd. (Edson Farm), Mundy Township 89,000
Section 29, Baldwin Rd., Grand Blanc 72,000
North Side of Hill Road, East of Genesee Road, Grand Blanc 160,000
927,000
The attributes of these parcels are as follows:
Commercial Rental Properties
Location: G-5529 Richfield Rd., Flint
Site size: 21,760 square feet
Zoning: C-1 (Light commercial)
Occupancy: Dental office referred to as Richfield Rd.
Medical center
Improvements: Dental office
Condition of improvements: Good
Highest and best use: Dental office
9
The parties have stipulated that these values are the
values of some of the parcels of real estate owned by one or more
of the entities, as set forth supra pp. 6-8.
- 18 -
Location: 4501 Hill Rd., Grand Blanc
Site size: 162,965 square feet
Zoning: B-1 (local business district--commercial)
Occupancy: Victoria Square Shopping Mall
Improvements: One story masonry constructed strip
shopping center with 8 tenants and
containing a total of 22,535 square feet
Condition of improvements: Average
Highest and best use: As improved
Location: 6070 Fenton Rd., Flint
Site size: 73,870 square feet
Zoning: C-3 (regional retail district)
Occupancy: Kingsley Square Shopping Center
Improvements: One story masonry constructed strip
shopping mall containing 11,230 square
feet, along with site improvements
Condition of improvements: Good
Highest and best use: As improved
Location: 1040 Hill Rd., Grand Blanc
Site size: Approximately 1.3 acres
Zoning: B-2 (community business district)
Occupancy: Fenton Hill Center, a strip center
Improvements: One story masonry constructed strip center
mall containing total of 9,000 square
feet, along with site improvements
Condition of improvements: Good
Highest and best use: As improved
Location: 1040 Hill Rd., Grand Blanc
Site size: Approximately 1.45 acres
Zoning: B-2 (community business district)
Occupancy: Ponderosa Steak House
Improvements: One story masonry constructed franchise-
type restaurant containing 6,164 square
feet, along with site improvements
Condition of improvements: Average
Highest and best use: As improved
Location: 11325 S. Saginaw St., Grand Blanc
Site size: 47,916 square feet
Zoning: B-3 (general business district--
commercial)
Occupancy: Burger King
Improvements: Fast food restaurant with 3,441 square
feet
Condition of improvements: Average
Highest and best use: Fast food
- 19 -
Location: 11319 S. Saginaw St., Grand Blanc
(Gingerbread House)
Site size: 24,829 square feet, including 90 feet of
road frontage
Zoning: B-3 (general business district--
commercial)
Occupancy: Tenant--Chiropractor
Improvements: Asphalt parking lot and 2-story building
with 4,056 square feet
Condition of improvements: Average to above average
Highest and best use: Present use for medicine
Location: 5451 S. Saginaw St., Grand Blanc
Site size: 10.2 acres
Zoning: B-3 (general business district--
commercial)
Occupancy: Residence
Improvements: One story house of 1,232 square feet
Condition of improvements: Illegal residence
Highest and best use: Commercial use/development of vacant site
Location: 5459 S. Saginaw St., Grand Blanc
Site size: 1.4 acres, with 349 foot road frontage
Zoning: B-3 (general business district--
commercial)
Occupancy: Used car sales
Improvements: Commercial one-story building with 1,384
square feet
Condition of improvements: Below average
Highest and best use: Present use with potential for future
commercial development
Location: 5124 E. Hill Rd., Grand Blanc
Site size: 25,000 square feet
Zoning: RM-1 (multiple family residential
district)
Occupancy: Tenant occupied as Food Plus Party Store
Improvements: One story masonry constructed commercial
type building containing 2,400 square
feet, along with site improvements
Condition of improvements: Average
Highest and best use: As improved
Location: 6063 Fenton Rd., Flint
Site size: 31,680 square feet
Zoning: B-1 (local business district--commercial)
Occupancy: Tenant named Trialon Corp.
Improvements: One story office building with 5,712 quare
feet
Condition of improvements: Good
Highest and best use: As improved
- 20 -
Residential Rental Properties
Location: 6642 Kings Pointe, Grand Blanc
Site size: 18,157 square feet
Zoning: Residential
Improvements: 5 bedroom, 2.5 bath two story house (19
years old), with 3,508 square feet of
living area and attached garage
Highest and best use: Residential
Location: 2381 E. Hill Rd., Grand Blanc
Site size: 3 acres
Zoning: B-1 (local business district-commercial)
Occupancy: Residence
Improvements: Two story frame house with 1,728 square
feet
Condition of improvements: Poor with no value
Highest and best use: Commercial use/development of vacant site
Vacant Land
Location: S/E 1/4 of section 17, Porter Rd., Grand
Blanc
Site size: 30.51 acres plus two outlots of 60' x 95'
and 60' x 190'
Zoning: R-2 (single family houses; farm animals
allowed if site over 10 acres)
Occupancy: Vacant land
Improvements: None
Highest and best use: Residential land
Location: Holly Rd., Holly Township
Site size: Approximately 176 acres
Zoning: AG/RE agricultural residential
Occupancy: Vacant land
Improvements: None
Highest and best use: Residential land
Location: Section 11, Hill Rd.--west of NBD Bank,
Grand Blanc
Site size: Approximately 6.48 acres
Zoning: west 180' of total parcel: RM-1
(multiple family residential district)
Balance of the site: B-1 (local
business district--commercial)
Occupancy: Vacant land
Improvements: None
Highest and best use: Multi family
- 21 -
Location: S/E corner of Reid Rd. & Dort Highway,
Grand Blanc
Site size: 68.49 acres (gross)
Zoning: Light industrial and light industrial
research park
Occupancy: Vacant land
Improvements: Single family house with 1,381 square feet
Condition of improvements: Average or less
Highest and best use: Industrial
Location: Section 11, Hill Rd.--east of NBD Bank,
Grand Blanc
Site size: 4.54 acres
Zoning: East 271' of total parcel: RM-1
(multiple family residential district)
Balance of the site: B-1 (local
business district--commercial)
Occupancy: Vacant land
Improvements: None
Highest and best use: Multi family
Location: Hill Rd., East of Jennings Rd. (Edson
Farm), Mundy Township
Site size: 81.30 acres
Zoning: R/A--residential agricultural
Occupancy: Vacant land
Improvements: None
Highest and best use: Residential/agricultural
Location: Section 29, Baldwin Rd., Grand Blanc
Site size: Approximately 60 acres
Zoning: AG/RE agricultural residential
Occupancy: Vacant land
Improvements: None
Highest and best use: Residential
Location: North Side of Hill Road, east of Genesee
Road, Grand Blanc
Site size: 22.67 acres
Zoning: B-1 (Local business district-commercial)
Occupancy: Vacant land
Improvements: None
Highest and best use: Multi family--condominium
As to the other parcels of the subject property, none of
which the appraisers inspected, the appraisers did not use any of
the valuation methods mentioned above to ascertain value.
- 22 -
The appraisers arrived at the values for this property by
multiplying each property's State equalized value by 2. These
parcels of property, for which the record does not disclose
individual values or specifics other than general classifications
of category, are set forth below by category:
Residential Rental Properties
142 Eddington, Flint
4492 American Heritage, Grand Blanc
2517 Torrence, Flint
2317 Humboldt, Flint
Wagonwheel, Grand Blanc
1421 Vermilya, Flint
829 Campbell, Flint
623 Neubert, Flint
3608 Dakota, Flint
2369 E. Hill Rd., Grand Blanc
1117 Neubert, Flint
1116 Victoria, Flint
5255 Perry Rd., Grand Blanc
5273 Perry Rd., Grand Blanc
1127 Belsay Rd., Grand Blanc
Vacant Land
2269 E. Hill Rd., Grand Blanc
Ottawa Park Lots, Grand Blanc
Bushdale Lots, Fenton Rd., Flint
Branda (Green Valley), Grand Blanc
Lot 33 Lapeer Heights, Burton
Land next to Victoria Shopping Mall, Grand Blanc
Lake of the north, lot 296, Pineview No. 2, Antrim County
Developed Property Held For Sale--Residential Lots
Kings Pointe--Swamp Lot, Grand Blanc
Kings Pointe--Lot 180, Grand Blanc
Kings Pointe--Lot 296, Grand Blanc
Kings Pointe--Lot 330, Grand Blanc
Kings Pointe--Lot 331, Grand Blanc
Kings Pointe--Lot 332, Grand Blanc
Kings Pointe--Lot 333, Grand Blanc
Kings Pointe--Lot 336, Grand Blanc
- 23 -
Kings Pointe--Lot 342, Grand Blanc
Kings Pointe--Lot 343, Grand Blanc
Developed Property Held For Sale--Other
Tri-Park Property
Grand Pointe Property
After the estate received the appraisers' list of values for
each parcel of the subject property, the estate paid $14,003 to
John J. Stockdale (Mr. Stockdale), a certified public accountant
(C.P.A.) and appraiser of business interests, to appraise the
decedent's equity interests, taking into account the value of the
real estate as ascertained by the appraisers and any discounts
considered appropriate by Mr. Stockdale. Mr. Stockdale
ascertained that certain discounts, one of which was not a
discount for market absorption, inhered in the equity interests.
The discounts ascertained by Mr. Stockdale, and the interests to
which they attached, are as follows: (1) The decedent's
5-percent interest in Grand Pointe, Inc.--35-percent discount for
lack of marketability and lack of control, (2) the decedent's
26-percent interest in The Aukers, Community Developers, Ltd.--
35-percent discount for lack of marketability and lack of
control, (3) the decedent's 35.08-percent interest in Eldon L.
Auker Enterprises--35-percent discount for lack of marketability
and lack of control, (4) each 50-percent interest in Auker
Homes--40 percent discount for lack of marketability and lack of
control, (5) the 20.27-percent interest in Eldon L. Auker
- 24 -
Enterprises held by The Aukers, Community Developers, Ltd.--
35-percent discount for lack of marketability and lack of
control, (6) the 25.57-percent interest in Eldon L. Auker
Enterprises held by Auker Investments, Inc.--35-percent discount
for lack of marketability and lack of control, and (7) the
20.27-percent interest in Eldon L. Auker Enterprises held by The
Aukers, Community Developers, Ltd.--35-percent discount for lack
of marketability and lack of control.
The estate did not use Mr. Stockdale's values on the
decedent's Federal estate tax return. After receiving
Mr. Stockdale's values, the estate asked its accounting firm of
Rachor, Purman & Tucker, C.P.A.'s (Rachor, Purman), to apply
market absorption discounts in addition to the discounts
ascertained by Mr. Stockdale. Rachor, Purman applied a
15-percent market absorption discount to each parcel of the
subject property, and the estate reported the values ascertained
by Mr. Stockdale, as adjusted by these 15-percent discounts, on
the decedent's Federal estate tax return. The decedent's Federal
estate tax return reported that the applicable value of the
decedent's gross estate for Federal estate tax purposes was
$5,592,994, and that the decedent's taxable estate totaled
$3,968,403. The estate estimated that it would pay Rachor,
Purman a total of $170,000 for their services in accounting for
the estate. Whereas the estate paid Allied Real Estate
- 25 -
Appraisers, Inc., and Mr. Stockdale to appraise the subject
property, Rachor, Purman's services did not include an appraisal
of any of the subject property.
The estate reported the following assets at the values set
forth below:
Eldon L. Auker Enterprises $641,000
The Aukers, Community Developers, Ltd. 144,000
Auker Investments, Inc. 467,000
K.A.A., Inc. - 0 -
Grand Pointe, Inc. 18,000
The apartment complexes 2,133,953
These values were derived as follows:
Eldon L. Auker Enterprises
(1) The estate reduced by $270,563 the $3,878,544 asset
value ascertained by the appraisers to take into account a
15-percent market absorption discount on the real estate
interests owned by Eldon L. Auker Enterprises or by Auker Homes,
an entity in which Eldon L. Auker Enterprises owned a 50-percent
interest. The real estate interests owned by Eldon L. Auker
Enterprises, and to which the estate applied 15-percent market
absorption discounts aggregating $139,960, were as follows:
Commercial rental property (Burger King) valued at $303,500,
commercial rental property (Gingerbread House) valued at
$113,000, 100-percent interest in residential rental properties
valued at $191,800, 50-percent interest in residential rental
properties valued at $93,440, 100-percent interest in vacant land
valued at $55,000, 50-percent interest in vacant land valued at
- 26 -
$135,160, and 33.3-percent interest in vacant land valued at
$41,166. The real estate interests owned by Auker Homes, and to
which the estate applied 15-percent market absorption discounts
aggregating $435,346 ($130,603 of which was attributed to
Eldon L. Auker Enterprises after taking into account its
50-percent ownership interest and the 40-percent discount
ascertained by Mr. Stockdale for lack of marketability and lack
of control), were as follows: Commercial rental property valued
at $775,000, commercial rental property valued at $600,000,
commercial rental property valued at $515,000, commercial rental
property valued at $140,000, residential rental properties valued
at $263,930, developed residential lots held for sale valued at
$370,170, and land held for sale valued at $283,200.
(2) The estate ascertained the value of the decedent's
35.08-percent interest in Eldon L. Auker Enterprises by
subtracting Eldon L. Auker Enterprises' liabilities of $797,588
from its adjusted asset value of $3,607,981 ($3,878,544 -
$270,563) and multiplying the balance of $2,810,393 by .3508 to
arrive at $985,886.
(3) The estate reduced the $985,886 amount by the 35-percent
discount ascertained by Mr. Stockdale for lack of marketability
and lack of control and rounded the $640,826 balance up to
$641,000.
- 27 -
Auker Investments, Inc.
(1) The estate reduced by $45,000 the $512,000 asset value
ascertained by the appraisers to take into account 15-percent
market absorption discounts on the real estate interests owned by
Eldon L. Auker Enterprises, an entity in which Auker Investment,
Inc., owned a 25.57-percent interest, and 15-percent market
absorption discounts on the real estate interests owned by Auker
Homes, an entity in which Eldon L. Auker Enterprises owned a
50-percent interest. The real estate interests owned by Eldon L.
Auker Enterprises, and to which the estate applied 15-percent
market absorption discounts aggregating $270,563 ($45,000 of
which was attributed to Auker Investments, Inc., after taking
into account its 25.57-percent ownership interest, the 35-percent
discount ascertained by Mr. Stockdale for lack of marketability
and lack of control, and rounding), were set forth above in the
discussion of Eldon L. Auker Enterprises. The real estate
interests owned by Auker Homes, and to which the estate applied
15-percent market absorption discounts aggregating $435,346
($130,603 of which was attributed to Eldon L. Auker Enterprises
after taking into account its 50-percent ownership interest, the
40-percent discount ascertained by Mr. Stockdale for lack of
marketability and lack of control, and rounding), were also set
forth above in the same discussion.
- 28 -
(2) The estate ascertained the value of the decedent's
100-percent interest in Auker Investments, Inc., by subtracting
Auker Investment, Inc.'s liabilities of zero from its adjusted
asset value of $467,000 ($512,000 - $45,000) to arrive at
$467,000.
K.A.A. Inc.
(1) The estate reduced by $2,610 the $240,841 asset value
ascertained by the appraisers to take into account a 15-percent
market absorption discount on K.A.A., Inc.'s 100-percent interest
in vacant land valued at $17,400.
(2) The estate ascertained the value of the decedent's
25-percent interest in K.A.A., Inc., by subtracting K.A.A.,
Inc.'s liabilities of $226,511 from its adjusted asset value of
$238,231 ($240,841 - $2,610) to arrive at $11,720 and then
multiplying the balance by .25. The estate reported that the
balance equaled zero.
Grand Pointe, Inc.
(1) The estate reduced by $477,750 the $3,285,942 asset
value ascertained by the appraisers to take into account
15-percent market absorption discounts on Grand Pointe, Inc.'s
commercial rental property valued at $525,000 and land under
development held for sale valued at $2,660,000.
- 29 -
(2) The estate ascertained the value of the decedent's
5-percent interest in Grand Pointe, Inc., by subtracting Grand
Pointe, Inc.'s liabilities of $2,258,664 from its adjusted asset
value of $2,808,192 ($3,285,942 - $477,750) to arrive at $549,528
and then multiplying the balance by .05 to arrive at $27,476.
(3) The estate reduced the $27,476 amount by the 35-percent
discount ascertained by Mr. Stockdale for lack of marketability
and lack of control and rounded the $17,859 balance up to
$18,000.
Apartment Complexes
(1) The estate reduced by $3,310,800 the $22,072,000
aggregate value of the apartment complexes ascertained by the
appraisers ($8,172,000 + $9,190,000 + $4,710,000) to take into
account 15-percent market absorption discounts.
(2) The estate added $243,697 to the adjusted value of
$18,761,200 ($22,072,000 - $3,310,800) to reflect other assets
attributable to the apartment complexes and subtracted
$16,870,944 from the resulting amount to reflect the apartment
complexes' total liabilities.
(3) The $2,133,953 net fair market value of the apartment
complexes ($19,004,897 - $16,870,944), as reported by the estate,
is broken down as follows:
- 30 -
The Landings Fox Hill Stonehenge Total
Value of apartment complexes as
ascertained by the appraisers $8,172,000 $9,190,000 $4,710,000 $22,072,000
Market absorption discount @ 15% (1,225,800) (1,378,500) (706,500) (3,310,800
Value of apartment complexes
after discount 6,946,200 7,811,500 4,003,500 18,761,200
Other assets 48,257 188,975 6,465 243,697
Total liabilities (6,768,483) (6,462,079) (3,640,382) (16,870,944)
Net fair market value 225,974 1,538,396 369,583 2,133,953
Respondent made the following relevant adjustments:
Reported Value Determined Value
Eldon L. Auker Enterprises $641,000 $703,000
Auker Investments, Inc. 467,000 512,000
K.A.A., Inc. 0 14,000
Grand Pointe, Inc. 18,000 33,000
Apartment complexes 2,133,953 5,727,267
Respondent's adjustments stem primarily from disallowing the market
absorption discounts claimed by the estate. For some unexplained
reason, respondent did not adjust the large discounts ascertained by
Mr. Stockdale for lack of marketability and lack of control.
During his life, the decedent helped administer all the subject
property, and he was a focal point in each of the businesses that
held the property. Shortly after his death, many people expressed
interest in whether the subject property would be sold or retained by
the estate or beneficiaries thereof. These interested persons
included local and Detroit-based real estate agents who inquired as
to whether the subject property would be marketed for sale, and
whether they could get information on any of the real estate that
would be, or was, offered for sale. The estate anticipated that
other people would be calling with respect to the subject property.
- 31 -
Ms. Auker-Cooper, who during the life of the decedent assisted him in
most transactions concerning the subject property, never pursued any
of these inquiries. Ms. Auker-Cooper never attempted, or intended,
to sell (or cause an entity to sell) any of the subject property
following the decedent's death.
The apartment complexes comprised in the aggregate
approximately: (1) 19 percent of the total number of comparable
complexes in Genesee County, (2) 20 percent of the total number of
comparable units in Genesee County, and (3) 23 percent of the total
assessed value of comparable complexes in Genesee County. Sales of
real property in Genesee County totaled $224,118,947, $233,473,144,
$254,681,378, $334,900,262, $416,229,204, $467,763,158, and
$484,248,800 in 1990 through 1996, respectively. Of the total sales
in 1992, which were 4,015 in number, $7,725,174 was attributable to
vacant land (321 sales), $2,168,270 to income-producing property
(42 sales), and $2,706,475 to commercial property (39 sales).
Most of the other sales during 1992 were attributable to the sale of
owner-occupied homes.
OPINION
Disputes over valuation fill our dockets, and for good reason.
We approximate that 243 sections of the Code require fair market
value estimates in order to assess tax liability, and that 15 million
tax returns are filed each year on which taxpayers report an event
- 32 -
involving a valuation-related issue. It is no mystery, therefore,
why valuation cases are ubiquitous. Today, valuation is a highly
sophisticated process. We cannot realistically expect that litigants
will, will be able to, or will want to, settle, rather than litigate,
their valuation controversies if the law relating to valuation is
vague or unclear. We must provide guidance on the manner in which we
resolve valuation issues so as to provide a roadmap by which the
Commissioner, taxpayers, and valuation practitioners can comprehend
the rules applicable thereto and use these rules to resolve their
differences. Clearly articulated rules will also assist appellate
courts in their review of our decisions in the event of an appeal.
We decide whether a market absorption discount applies to any of
the subject property, mindful that the estate bears the burden of
proof and that the presence of a market absorption discount is never
presumed. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933);
see Estate of Gilford v. Commissioner, 88 T.C. 38, 57 (1987); see
also Rushton v. Commissioner, 498 F.2d 88 (5th Cir. 1974), affg.
60 T.C. 272 (1973); Maytag v. Commissioner, 187 F.2d 962 (10th Cir.
1951), affg. a Memorandum Opinion of this Court; Staley v.
Commissioner, 41 B.T.A. 752, 775 (1940); Estate of Sawade v.
Commissioner, T.C. Memo. 1984-626, affd. 795 F.2d 45 (8th Cir. 1986).
The estate argues that a 15-percent market absorption discount
applies to each parcel of the subject property. The estate claims
- 33 -
that a sale of all this property at once would depress the market and
force a seller to accept less for the property than the seller would
otherwise receive if the properties were sold separately over time.
Respondent counters that a market absorption discount should not be
applied in this case. Respondent claims that the estate has failed
to show that skilled brokers could not sell all the subject property
in a reasonable time. Respondent claims that the apartment buildings
could be sold to one buyer to allow the buyer to take advantage of
economies of scale. Respondent claims that the economic condition of
the subject market has no bearing on the application of a market
absorption discount under the facts herein because the market's
economic condition has been taken into account in ascertaining the
parties' stipulated values.
We do not agree with either party in all regards. Fair market
value is a question of fact, and the trier of fact must weigh all
relevant evidence of value and draw appropriate inferences.
Commissioner v. Scottish Am. Inv. Co., 323 U.S. 119, 123-125 (1944);
Helvering v. National Grocery Co., 304 U.S. 282, 294 (1938);
Symington v. Commissioner, 87 T.C. 892, 896 (1986); Zmuda v.
Commissioner, 79 T.C. 714, 726 (1982), affd. 731 F.2d 1417 (9th Cir.
1984). Fair market value is measured on the applicable valuation
date, which, in this case, is the date the decedent died. See
Estate of Proios v. Commissioner, T.C. Memo. 1994-442; see also
- 34 -
Pabst Brewing Co. v. Commissioner, T.C. Memo. 1996-506. Fair market
value is the price that a willing buyer would pay a willing seller,
both persons having reasonable knowledge of all relevant facts and
neither person compelled to buy or to sell. United States v.
Cartwright, 411 U.S. 546, 551 (1973); Snyder v. Commissioner, 93 T.C.
529, 539 (1989); Estate of Hall v. Commissioner, 92 T.C. 312, 335
(1989); see also sec. 20.2031-1(b), Estate Tax Regs. The willing
buyer and the willing seller are hypothetical persons, instead of
specific individuals or entities, and the characteristics of these
hypothetical persons are not always the same as the personal
characteristics of the actual seller or a particular buyer.
Estate of Bright v. United States, 658 F.2d 999, 1005-1006 (5th Cir.
1981); Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990).
The views of both hypothetical persons are taken into account, and
focusing too much on the view of one of these persons, to the neglect
of the view of the other, is contrary to a determination of fair
market value. See, e.g., Pabst Brewing Co. v. Commissioner, supra;
Estate of Scanlan v. Commissioner, T.C. Memo. 1996-331, affd. without
published opinion 116 F.3d 1476 (5th Cir. 1997); Estate of Cloutier
v. Commissioner, T.C. Memo. 1996-49.
Relevant evidence of value may include consideration of a market
absorption discount. Such a discount emanates from the law of
blockage, under which courts and the Commissioner have long
- 35 -
recognized that the sale of a large block of publicly traded stock
over a reasonable period of time usually depresses the price for
shares of that stock as quoted on the market.10 See, e.g., Maytag v.
Commissioner, supra at 965; Commissioner v. Estate of Stewart,
153 F.2d 17, 18-19 (3d Cir. 1946), affg. a Memorandum Opinion of this
Court; Groff v. Munford, 150 F.2d 825, 827-828 (2d Cir. 1945);
Phipps v. Commissioner, 127 F.2d 214, 216-217 (10th Cir. 1942), affg.
43 B.T.A. 1010 (1941); Helvering v. Maytag, 125 F.2d 55, 63 (8th Cir.
1942), affg. a Memorandum Opinion of this Court; Page v. Howell,
116 F.2d 158 (5th Cir. 1940); Gamble v. Commissioner, 101 F.2d 565
(6th Cir. 1939), affg. 33 B.T.A. 94 (1935); Helvering v. Kimberly,
97 F.2d 433, 434 (4th Cir. 1938), affg. per curiam a Memorandum
Opinion of this Court; Helvering v. Safe Deposit & Trust Co., 95 F.2d
806, 811-812 (4th Cir. 1938), affg. 35 B.T.A. 259 (1937);
Commissioner v. Shattuck, 97 F.2d 790, 792 (7th Cir. 1938); Estate of
Damon v. Commissioner, 49 T.C. 108, 117 (1967); Standish v.
Commissioner, 8 T.C. 1204, 1210-1212 (1947); Avery v. Commissioner,
10
"Blockage" is the "Recognition in the field of taxation
of fact that in some instances a large block of stock cannot be
marketed and turned into cash as readily as a few shares. * * *
The discount at which a large block of stock sells below the
price of a smaller block is blockage." Black's Law Dictionary
172 (6th ed. 1990); see also Campbell v. United States, 228 Ct.
Cl. 661, 661 F.2d 209, 219 n.12 (1981). The term "market
absorption" is more commonly used in the valuation industry to
describe the blockage effect on assets other than stock. We use
the term "market absorption" when we refer to blockage as applied
to assets other than stock.
- 36 -
3 T.C. 963, 970-971 (1944); Estate of McKitterick v. Commissioner,
42 B.T.A. 130, 136-137 (1940); sec. 20.2031-2(e), Estate Tax Regs.;11
sec. 25-2512-2(e), Gift Tax Regs. (language similar to that in sec.
20.2031-2(e), Estate Tax Regs.). In other words, the quoted price
for shares of a certain type of stock generally reflects the selling
price of a relatively small number of those shares, and the presence
on the market of a sufficiently large number of those shares tends to
depress the quoted price. The market can handle only a certain
number of shares of a given stock at a quoted price, and, when a
seller attempts to sell more shares than the market can handle, the
large block of shares tends to flood the market, forcing the seller
to accept a price for all shares that is less than the price set by
11
As stated in sec. 20.2031-2(e), Estate Tax Regs.:
Where sales at or near the date of death are few or of
a sporadic nature, such sales alone may not indicate
fair market value. In certain exceptional cases, the
size of the block of stock to be valued in relation to
the number of shares changing hands in sales may be
relevant in determining whether selling prices reflect
the fair market value of the block of stock to be
valued. If the executor can show that the block of
stock to be valued is so large in relation to the
actual sales on the existing market that it could not
be liquidated in a reasonable time without depressing
the market, the price at which the block could be sold
as such outside the usual market, as through an
underwriter, may be a more accurate indication of value
than market quotations. * * * On the other hand, if
the block of stock to be valued represents a
controlling interest, either actual or effective, in a
going business, the price at which other lots change
hands may have little relation to its true value.
- 37 -
the market for some of those shares. As explained in an opinion of
the Court of Appeals for the Second Circuit authored by Judge
Augustus Hand:
It is common knowledge that sales of small lots of
stock on an exchange afford no reliable criterion of value
per share for large lots which if disposed of rapidly are
likely to flood the market and thus depress the price.
Every skillful broker who wishes to dispose of a block of
stock larger than the market is likely to absorb without
sacrifice in price will liquidate slowly by sales of small
units. If he disposes of the stock too slowly, he runs the
risk that a recession in current prices may occur and that
the prices of his sales may suffer on that account. If he
sells too quickly, he is likely to suffer from forcing an
amount of stock on the market which exceeds the normal
demand, so that purchasers will only buy at less than going
rates. That "the size of the gift of any security is not a
relevant factor" for consideration in determining market
value, as the Regulations in force in 1936 prescribed, is
quite contrary to experience. If the block is large enough
and the market thin, size under ordinary circumstances will
certainly count. To be sure some unusual factor like a
struggle for corporate control might cause a large block to
sell at a higher rate than would a small lot had no such
struggle begun, but the size of the block to be offered is
surely a matter for consideration in finding value.
[Groff v. Munford, supra at 827.]
This Court has expanded the concept of blockage to the sale of
other assets such as art, Calder v. Commissioner, 85 T.C. 713,
722-723 (1985) (market absorption discount applied to gifts of a
large number of works of art created by one artist); Estate of Smith
v, Commissioner, 57 T.C. 650, 658 (1972) (market absorption discount
applied to 425 works of art created by and kept in sculptor's
collection), affd. on other grounds 510 F.2d 479 (2d Cir. 1975);
Estate of O'Keeffe v. Commissioner, T.C. Memo. 1992-210 (market
- 38 -
absorption discount applied to approximately 400 works or groups of
works of art); sheet music, Rimmer v. Commissioner, T.C. Memo.
1995-215 (market absorption discount applied to charitable
contribution of collection of sheet music containing approximately
85,000 pieces); manuscripts, Jarre v. Commissioner, 64 T.C. 183
(1975) (market absorption discount applied to charitable contribution
of large collection of original music manuscripts and other related
material); books, Skripak v. Commissioner, 84 T.C. 285, 324 (1985)
(market absorption discount applied to charitable contribution of
large collection of books); animal trophies, Epping v. Commissioner,
T.C. Memo. 1992-279 (market absorption discount applied to charitable
gift of mainly animal mounts); Estate of Miller v. Commissioner,
T.C. Memo. 1991-515 (market absorption discount applied to donation
of animal trophies), affd. without published opinion 983 F.2d 232
(5th Cir. 1993); and real estate, Estate of Sturgis v. Commissioner,
T.C. Memo. 1987-415 (20-percent market absorption discount applied to
11,298.86 acres of undeveloped land); Carr v. Commissioner, T.C.
Memo. 1985-19 (30-percent market absorption discount applied to
175 developed lots; no discount applied to 437.5 undeveloped lots);
Estate of Folks v. Commissioner, T.C. Memo. 1982-43 (20-percent
market absorption discount applied to five leased lumberyards with
the same tenant and in the same geographical area); Estate of
Grootemaat v. Commissioner, T.C. Memo. 1979-49 (15-percent market
- 39 -
absorption discount applied to undeveloped lots totaling 302 acres).
The law of supply and demand supports our application of the concept
of blockage to these assets in that a sale of an exceptionally large
block of one type of property may generate less proceeds than if the
seller were to sell each piece of that block separately at the market
price. The market may only handle so many pieces of one type of
property in a limited time, and, when the tendered number of a single
type of property is greater than the number that the market can
absorb, the market is unable to handle the exceptionally large block
at that time. Thus, a seller desiring to sell such a large block at
that time may be forced to sell the block at a price per piece that
is less than the quoted price for each piece.
Respondent and the estate both rely on the testimony of experts
to support their respective positions on the presence in this case of
the market absorption discount. We have wide discretion when it
comes to accepting the testimony of an expert. Sometimes, he or she
will help us decide a case. See, e.g., Booth v. Commissioner,
108 T.C. 524, 573 (1997); Trans City Life Ins., Co. v. Commissioner,
106 T.C. 274, 302 (1996); see also M.I.C. Ltd. v. Commissioner,
T.C. Memo. 1997-96. Other times, he or she will not. See, e.g.,
Estate of Scanlan v. Commissioner, T.C. Memo. 1996-331; Mandelbaum v.
Commissioner, T.C. Memo. 1995-255, affd. without published opinion
91 F.3d 124 (3d Cir. 1996). We weigh an expert's testimony in light
- 40 -
of his or her qualifications and with proper regard to all other
credible evidence in the record. We may accept or reject an expert's
opinion in toto, or we may pick and choose the portions of the
opinion which we choose to adopt. Helvering v. National Grocery Co.,
304 U.S. at 294-295; Parker v. Commissioner, 86 T.C. 547, 562 (1986);
see also Pabst Brewing Co. v. Commissioner, T.C. Memo. 1996-506.
We turn to the qualifications and testimony of the four
witnesses whom the Court recognized as experts for purposes of this
proceeding. First, the Court recognized Mark J. Perry, Ph.D. (Dr.
Perry), as an expert on economics with specialized knowledge on the
economy of Genesee County in 1992. Dr. Perry received a bachelor of
arts in finance and a master of business administration in finance in
1985 and 1987, respectively, and he received a master of arts in
economics and a Ph.D. in economics in 1991 and 1993, respectively.
He has taught finance and economics at the university level from 1991
to date, and his employment in the real estate industry consists of
working as a real estate broker from 1982 through 1987 in the area of
St. Paul, Minnesota. He currently teaches at the Flint campus of the
University of Michigan as an assistant professor of economics and
finance, and he has been in Genesee County for approximately 1 year.
Dr. Perry was retained by the estate to examine the economic
conditions in Genesee County from 1990 through 1996, focusing on 1992
vis-a-vis the remaining 6 years. Dr. Perry testified that the U.S.
- 41 -
economy suffered a recession from July 1990 through March 1991 and
that a recession in Genesee County began at the same time, but did
not end until late 1993. Dr. Perry testified that a "recession"
occurs whenever the gross domestic product decreases for two
consecutive quarters. Dr. Perry ascertained the following seven
facts concerning the condition of the commercial real estate market
in Genesee County and concluded that these facts affected negatively
the condition of that market and the real estate values therein:
(1) The average annual increase in rent for one- and two-bedroom
apartments in Genesee County for 1987, 1989, 1991, and 1992 was less
than the rate of inflation for the corresponding year, (2) rental
income from the apartment complexes decreased from 1987 through 1992,
(3) Fox Hill's vacancy rate was slightly higher than the average for
the Grand Blanc area, (4) the office vacancy rates in Flint and Grand
Blanc were 21 and 17 percent, respectively, (5) investment in
apartment buildings between 1986 and 1992 declined nationally,
(6) the rate of return on investments in apartment buildings declined
nationally between 1990 and 1992, and the rate of return was negative
in 1992, and (7) the economy in Genesee County was heavily dependent
upon the automobile industry during the years under his review, and
an economic contraction in this industry from 1990 through 1993 had a
negative impact on the economy in Genesee County during those years.
- 42 -
Second, the Court recognized Steven Jon Shanker, C.P.A. (Mr.
Shanker), as an expert on the market absorption discount. The estate
retained the accounting firm of Coopers & Lybrand, L.L.P., to
ascertain the rate of the market absorption discount that applied to
each parcel of the subject property, and Mr. Shanker, a partner in
that firm who specializes in valuation, was assigned the job.
Mr. Shanker has a Bachelor of Arts in Accounting and a Master of
Business Administration in Taxation, and he is a senior member in the
business valuation area of the American Society of Appraisers.
He has never appraised real estate or applied a market absorption
discount to real estate (before the instant case), but he has valued
many entities whose assets included real estate and has been involved
in numerous blockage situations related to the valuation of stock.
Many (if not all) of the entities valued by Mr. Shanker were his
clients.
Mr. Shanker concluded that a 20-percent market absorption
discount applied to each parcel of the subject property. In so
doing, he reviewed the appraisers' appraisals and financial,
economic, and census data on Genesee County real estate. He
analogized an underwriter's role in disposing of stock to the role of
the Resolution Trust Corporation (RTC) in disposing of real estate;
Congress formed the RTC to dispose of real estate held by insolvent
savings and loan institutions (S&L's). He concluded that "It would
- 43 -
be improper to determine Fair Market Value of a large block of real
estate on a market comparable method of single parcels of real estate
without applying a discount."
Mr. Shanker performed a four-factor analysis in reaching his
conclusion on the applicability of a 20-percent discount. He began
by analyzing the depth of the market. He stated:
Depth of the market can be described as the quantity of
transactions, interest in the properties, and potential
activity both on the buying and the selling sides of the
market. Depth is a product of many factors, including the
total amounts of properties, the breadth of distribution
among the general public and the overall activity in the
market. If the block is so large that it would be
difficult to sell over a short period, the application of a
market absorption discount is necessary to arrive at Fair
Market Value.
Mr. Shanker concluded that the applicable market at hand had a
"limited market depth" because the appraisers had to look outside the
Genesee County area to find data on comparable sales. Mr. Shanker
concluded that this factor was a "strong indicator" that a market
absorption discount should be applied to the subject property.
Mr. Shanker then analyzed the size of the subject property
vis-a-vis the total property in the market in terms of both the
actual number of properties being sold and the level of activity in
the market. He concluded that this factor favored applying a market
absorption discount to the subject property. He stated that the
apartment complexes totaled approximately 20 percent of the
comparable apartment market based on number of units. He stated that
- 44 -
real estate in the Flint area totaled $1.5 billion, excluding real
estate owned by GM, and approximately $2.2 billion if GM was
included. He stated that reported real estate sales in Genesee
County totaled $255 million in 1992.
Mr. Shanker next analyzed the amount of time that was needed to
dispose of the subject property and concluded that this factor
supported applying a market absorption discount.12 He looked to each
parcel of the subject property separately and concluded that it would
take 18 months to sell each parcel. He stated that the appraisers
assumed that each parcel of the subject property had to be marketed
for 18 months in order to sell it.
Mr. Shanker then analyzed the trend of the market as it applied
to a blockage discount. According to Mr. Shanker, an upward trend in
the market indicates that a block of shares can be sold at the quoted
price within a reasonable amount of time, which negates the
applicability of a blockage discount, while a downward trend leads to
the contrary proposition. He concluded that this factor supported
applying a market absorption discount to the subject property. He
stated that the value of real estate in Flint peaked in 1990 at $2.35
billion and declined to $2.25 billion at the end of 1992.
After analyzing his factors and concluding that a market
absorption discount applied to the subject property, Mr. Shanker
12
Mr. Shanker believes that a market absorption discount
applies to any asset if it takes more than 6 months to sell it.
- 45 -
turned to ascertaining the amount of this discount. He analyzed nine
RTC transactions that occurred in Michigan from December 28, 1990,
through July 20, 1992, and ascertained that these properties sold at
discounts from appraised values ranging from 11 to 94 percent, with a
mean of 31 percent and a median of 20 percent. Mr. Shanker settled
on a discount rate of 20 percent. Mr. Shanker reviewed some court
cases and some academic studies on blockage discount to assure
himself that 20 percent was the correct discount rate.
The third witness whom the Court recognized as an expert was
Douglas K. Hodge, MAI, ARA (Mr. Hodge).13 Mr. Hodge was retained by
respondent to complete a market absorption study on the apartment
complexes, and we recognized Mr. Hodge as an expert on real estate
appraisals, including the applicability of a market absorption
discount. Mr. Hodge has been the president of Hodge Appraisal Group,
Ltd., from 1991 to date, he received a bachelor of science in finance
in 1983, and he has lived in Michigan all his life. He began
appraising real estate in 1983, and he is a certified real estate
appraiser in the States of Michigan, Ohio, and Colorado and an ASA
candidate with the American Society of Appraisers. He has valued a
number of multifamily, retail, and industrial properties in the Flint
area, and he has valued many large apartment complexes in Genesee
13
The designation of ARA is awarded to qualifying members
of the American Society of Farm Managers and Rural Appraisers,
and it is the highest professional designation offered by that
society.
- 46 -
County. He has testified as an expert in probate court, circuit
courts, Federal bankruptcy court, and this Court.
Mr. Hodge concluded that a market absorption discount did not
apply to any of the apartment complexes mainly because no discount
would be necessary in order to market the properties, given an
adequate and standard marketing period of 4 to 6 months.14 Before
writing his report, which was received in evidence, Mr. Hodge toured
the apartment complexes, and he researched extensively the economics
and demographics of both Genesee County and the apartment complexes
in that county. He also spoke to potential investors and to brokers
as to the amount of time that the apartments would have to be
marketed in order to sell them.
Mr. Hodge spent approximately 90 hours, or more than twice the
amount of time spent by Mr. Shanker, in examining the applicability
of a market absorption discount to the apartment complexes.
Mr. Hodge ascertained from market data that properties such as the
apartment complexes have an appeal outside the general community, and
that one- or two-apartment complexes in Genesee County which were
similar to the complexes at issue sold to nonindividual investors
between the years 1990 and 1995. Mainly, Mr. Hodge concluded,
investors purchase apartment complexes like the ones at hand as part
of an investment vehicle such as a real estate investment trust.
14
In fact, Mr. Hodge concluded, an investor could pay a
premium to acquire all three complexes.
- 47 -
Fourth, the Court recognized Bruce G. Pollack (Mr. Pollack), who
the estate called as a rebuttal witness, as an expert in the real
estate industry, but whose expertise did not extend to the appraisal
of real estate. Mr. Pollack is a realtor, and he serves as the
president of a general real estate brokerage business that bears his
name. He began his real estate career in 1948 in Genesee County and
has continued to work in that county ever since, specializing in
general commercial real estate since 1966. He has handled
approximately $200 million of real estate in his 49-year career. He
testified that it would have taken him from 3 to 10 years to sell all
three apartment complexes in 1992 at their "appraisal value", and
that he uses the term "appraisal value" to mean "a ready, willing and
able purchaser and a ready, willing and able seller get together and
determine to do business and arrive at a price with no duress, no
pushing from either side."
We do not find any of these experts to be extremely helpful to
us. With respect to Dr. Perry, his testimony goes directly to the
subject property's market value (i.e., fair market value without
regard to a market absorption discount), and the parties have agreed
that the properties' market values equal the amounts ascertained by
the appraisers. The appraisers knew about the economic condition of
Genesee County at the time of the decedent's death, and they took
this condition into account when they formulated their opinion on
- 48 -
each property's market value. The same is true with respect to the
seven facts ascertained by Dr. Perry on the condition of the real
estate market in Genesee County. The appraisers knew about each of
these facts at the time of their appraisals, and we find nothing in
the record to persuade us that they did not give each of these facts
proper regard in arriving at their values. Discounting the
appraisers' values to reflect the economic condition in Genesee
County on the applicable valuation date, as the estate asks us to do,
would be to double count this effect. See Estate of Gilford v.
Commissioner, 88 T.C. 38, 58 n.25 (1987). We decline to do so.15
Nor are we satisfied with the testimony of Mr. Shanker. To be
sure, he is biased. He works professionally valuing assets for his
clients, and we would be advancing his interests as well as the
interests of his clients were we to adopt blindly his opinion, which
is unsupported by the record, on the presence of an across-the-board
20-percent market absorption discount. We decline to accept the
opinion of a man whose only appearance in this case seems to be as a
spokesman for the interests of his clients and the estate.
Laureys v. Commissioner, 92 T.C. 101, 129 (1989). The Court informed
the parties at the start of Mr. Shanker's testimony that we had
15
The estate also argues that market absorption discounts
are warranted because the apartment complexes had a high vacancy
rate and the rental rates were not keeping up with inflation. We
reject these arguments for the same reason as above; namely, that
the appraisers took these factors into consideration in arriving
at their values.
- 49 -
concerns with his ability to testify persuasively on market
absorption discount, and, now that we have heard his testimony and
reviewed the record in full, our concerns have blossomed into firm
convictions.
Even if we were to consider Mr. Shanker's opinion on its merits,
we still would not adopt it. It is full of holes. First, he assumed
incorrectly that the appraisers valued the subject property by a
"market comparable method". The appraisers valued the apartment
complexes on the basis of an income capitalization method, and they
valued the remaining parcels of real estate on the basis of an
assortment of methods, one of which was a sales comparison method.
Second, he assumed incorrectly that the appraisers' values of the
subject property were based on the necessity of marketing each parcel
for 18 months. The only marketing periods taken into account by the
appraisers were an 18-month period for each of the apartment
complexes, a 1-year period for the Burger King property, and a
3-to-6-month period for the residential rental property at 6642 Kings
Pointe, Grand Blanc. Third, he assumed incorrectly that any market
absorption discount for the subject property could be tied directly
to the RTC's disposition of real estate held by insolvent S&L's. The
RTC was obligated to sell the S&L's real estate within a relatively
short time; the hypothetical seller, on the other hand, has a
reasonable time in which to sell the subject property. The RTC
- 50 -
information also pertained to properties that were not comparable to
the subject property, and we do not know the length of time that the
RTC marketed the properties before selling them. Fourth, he assumed
incorrectly that an across-the-board discount could apply to each
parcel of the subject property. We discuss below why this assumption
is incorrect. Fifth, he assumed incorrectly that a market absorption
discount equals the difference between a property's appraised value
and its actual sale value. Although it is true that fair market
value for Federal tax purposes could in certain cases equal a
property's appraised value, this does not mean, as Mr. Shanker would
have us hold, that a market absorption discount applies to that
property to the extent that the property actually sells after the
valuation date for less than its appraised value. Sixth, he assumed
incorrectly that a market absorption discount applies when competing
properties, even if not comparable, are offered for sale in the same
geographical market, and the properties cannot sell within 6 months.
We discuss below why this assumption is incorrect, but note here that
even the estate acknowledges in its brief that properties compete
against each other only if similar. Seventh, he acknowledged that
there are individuals and organizations interested in investing large
sums of money in apartment complexes, yet he spoke to no brokers
about selling properties, or how they would go about selling the
properties. Nor did he perform any independent research on sales or
- 51 -
purchasers of apartment complexes on or before the applicable
valuation date. Eighth, he cites in his report numerous sales in
1990 through 1992 in which property sold for less than its appraised
value, yet tells us almost nothing about the manner in which the
appraised values were ascertained, let alone the situs or description
of the property sold.
We also have concerns with the testimony of Mr. Hodge.
The thrust of his opinion is that the apartment complexes had an
appeal to investors outside the Genesee County area, and, that, given
this fact, the apartment complexes were readily marketable. Although
we agree with Mr. Hodge that potential buyers may come from outside
Genesee County, we simply do not believe that this fact, standing
alone, means that a market absorption discount is inapplicable to
this case. We also have trouble with his conclusion that "investment
vehicles" usually purchase large apartment complexes such as the ones
at hand. As a point of fact, only one of the five "comparable"
complexes referenced by the appraisers in their analysis of the sales
comparison method sold to an entity rather than an individual.
Finding none of the experts dispositive to our decision in this
case,16 we address the issue on the basis of the record before us,
16
Mr. Pollack was merely a rebuttal witness, and he
testified only to the fact that he would have needed 3 to 10
years to sell the apartments complexes. His testimony does not
mean that another broker, working alone or in concert with other
brokers, would have been unable to sell the apartment complexes
(continued...)
- 52 -
which is abundant with data on the subject properties and their
marketability. In passing on whether a market absorption discount
applies in the instant setting, and the amount of such a discount if
it does apply, we utilize a five-part analysis. First, we examine
the assets to be valued and categorize these assets by type. Second,
we ascertain the market value (i.e., the fair market value without
consideration of a discount for market absorption) of each asset in
each category, assuming that each asset will be marketed separately.
Third, we compare the number of assets in each category to the number
of assets of that type which are traded in the market over a
reasonable period of time. Fourth, we ascertain how much longer than
this reasonable time period it would take to sell at market value (as
defined above) each asset that could not be sold in this reasonable
time period. Fifth, we discount the value of each asset in the
category of assets that cannot be sold within a reasonable time
period, taking into account the time value of money and the period of
time that the category of assets would have to be marketed in order
to sell each asset therein.
1. Assets To Be Valued
We start by examining the assets to be valued and categorizing
these assets by type. Blockage applies to narrowly drawn classes;
namely, shares of stock that are trading on an established market.
16
(...continued)
more quickly.
- 53 -
See Amerada Hess Corp. v. Commissioner, 517 F.2d 75, 83 (3d Cir.
1975), revg. on other grounds White Farm Equip. Co. v. Commissioner,
61 T.C. 189 (1973). The fact that a seller may aim to sell shares of
various classes of stock issued by a single corporation does not
necessarily mean that blockage will occur when the total shares to be
sold are greater than the demand for shares of one class but less
than the demand for shares of all classes. The same rationale
applies to the sale of real estate. The mere fact that many parcels
of real estate are marketed contemporaneously does not mean that a
discount for market absorption applies to any or all parcels. Vacant
land, for example, is different than residential rental property,
which, in turn, is different than commercial rental property. The
market for vacant land, therefore, may not be affected directly by
whether multiple parcels of residential and/or commercial rental
property are also on the market. The same is not necessarily true
when the parcels of real estate are the same general type, for
example, multiple parcels of commercial rental property. Properties
of the same general type will compete against each other when they
are in the same market. To the extent that the market cannot absorb
all parcels of one type of property, the value for a single parcel as
set by the market without competition from similar parcels will
usually be driven down.17 See Amerada Hess Corp. v. Commissioner,
17
In certain cases, the price may be driven up because the
(continued...)
- 54 -
supra at 83; Heiner v. Crosby, 24 F.2d 191, 193 (3d Cir. 1928).
The estate recognizes the fact that only similar properties
compete against each other in the market. The estate argues that
parcels of real estate are similar when they are used for the same
purpose, for example, as commercial rental property. According to
the estate, multiple pieces of similar use property will compete in
the market, regardless of each parcel's personal characteristics, and
a market absorption discount will apply when the market cannot absorb
all competing properties. We do not agree. We believe that two or
more parcels of real estate will compete against each other only when
the parcels are essentially similar in attributes such as use, value,
size, composition, and quality.
The estate, relying somewhat on the law of blockage as applied
to stock, argues that an across-the-board discount of 15 percent
applies to each parcel of the subject property. We do not agree.
In the case of stock, the shares of a single class of stock are
fungible, so the market draws no distinction between one share of
that class and another. Thus, a blockage discount that applies to
17
(...continued)
market may place a premium on owning multiple properties of that
type. Rushton v. Commissioner, 498 F.2d 88, 90 n.3 (5th Cir.
1974), affg. 60 T.C. 272 (1973); see Bankers Trust Co. v. United
States, 207 Ct. Cl. 422, 518 F.2d 1210, 1222 n.8 (1975).
Although the subject properties were associated with the
decedent, a well-known developer, before his death, and much
interest in the subject properties was shown following the
decedent's death, we do not believe that a hypothetical buyer
would have paid a premium to buy any of the subject property.
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one share applies equally to every other share in that class. In the
case of real estate, however, a different rule applies. No two
parcels of real estate are the same. Thus, the application of a
single discount to various parcels of dissimilar real estate, which
by its very nature ignores the uniqueness of each parcel, is usually
inappropriate. See Estate of O'Keeffe v. Commissioner, T.C. Memo.
1992-210 (same rationale applied to works of art). Single rates of
discount apply to each group of essentially similar assets.
We analyze the assets at hand. When he died, the decedent owned
the apartment buildings and various interests in numerous entities
that owned real estate or interests in other entities that owned real
estate. The estate and Mr. Shanker ask us to look through the
various interests that the decedent owned at the time of his death
and conclude that the decedent owned 58 parcels of real estate. This
we will not do. The decedent structured his business affairs so that
the subject property was owned by various entities, rather than by
him personally. We will not now disregard the separate entities and
treat the decedent as owning all the subject property. Because the
entities were viable going concerns on the applicable valuation date,
and neither a sale nor a liquidation of the entity-owned real estate
was contemplated at that time, we conclude that the entity-owned real
estate is ineligible for a market absorption discount. See, e.g.,
Estate of Andrews v. Commissioner, 79 T.C. 938, 942 (1982), and the
- 56 -
cases cited therein. Although the District Court in Obermer v.
United States, 238 F. Supp. 29 (D. Haw. 1964), did consider a
"'built-in' capital gains tax" in determining the value of a
corporate interest, as we explained in Estate of McCormick v.
Commissioner, T.C. Memo. 1995-371:
We do not understand * * * [that case] to stand for a
general legal principle requiring or even suggesting a
separate discount or consideration of tax effect to the
"willing buyer". As we understand * * * [that case, it
stands] for the principle that a willing buyer would
consider the tax effects, among other things, in the
process of price formulation.
As to the apartment complexes, these parcels of real estate may
qualify for a market absorption discount because they were owned
directly by the decedent. We compare each complex's use, location,
size, age, quality, and value. We compare the number and type of
units at each complex, and the size of the grounds and the amenities
offered thereon. We find from our comparisons that each apartment
complex is essentially similar to each other apartment complex.
We conclude that the apartment complexes are in the same category,
and apply our remaining analysis to these three complexes.
2. Market Value
We must determine the market value of each apartment complex,
assuming that each complex will be marketed separately. We are
assisted in this case by the fact that the parties agree that the
market values of the complexes are the values ascertained by the
- 57 -
appraisers under an income capitalization method. Although a
blockage or market absorption discount has almost always been applied
when a market value was ascertained by a sales comparison method, see
generally Bogdanski, Federal Tax Valuation par. 4.04[4], at 4-11
(1996), we believe that a market absorption discount may apply to
market values ascertained by other methods.
We conclude that the market values of the apartment complexes
are the values ascertained by the appraisers under the income
capitalization method.
3. Assets Traded in the Market
We compare the number of apartment complexes owned by the
decedent to the number of comparable apartment complexes that are
traded in the market over a reasonable period of time. As has been
previously observed, a market absorption discount is applied to
property when the record contains "persuasive evidence that at the
critical time the market was such that it could not absorb sales in
the larger volume at the price level obtaining for small lots".
Richardson v. Commissioner, 151 F.2d 102, 103 (2d Cir. 1945), affg. a
Memorandum Opinion of this Court. We proceed to define the relevant
market for the apartment complexes, and analyze whether the market
could have handled a hypothetical sale of all three complexes.
The record reveals numerous sales of apartment complexes in the
State of Michigan. With respect to sales in Genesee County, however,
- 58 -
we find little market activity in apartment complexes similar to the
three at hand. We conclude that the market could not have handled
the sale of all three apartment complexes, the aggregate value of
which was $22,072,000, even if the estate were afforded a limited
period of time in which to market them. To be sure, the appraisers
came to the same conclusion. They based their value of the complexes
on the assumption that each complex would be marketed for 18
months.18 We also bear in mind that sales of real property in
Genesee County totaled $254,681,378 in 1992, and that the annual
growth in real estate sales in Genesee County was approximately
4.1 and 9.1 percent in 1991 and 1992, respectively, before ballooning
to approximately 31.5 and 24.3 percent in 1993 and 1994,
respectively. Although a hypothetical person on the applicable
valuation date would have known about an upward trend in sales and
could have expected the upward trend to continue into 1993 and 1994,
we do not believe that he or she could have predicted the large
increases that occurred in 1993 and 1994.
4. Reasonable Time To Market
We ascertain how long after the valuation date it would have
taken to sell each apartment complex at its market value. For
blockage purposes, the test is not the amount of proceeds that
18
Although the appraisers arrived at their values on the
basis of a "competitive and open market", we read nothing in
their reports to suggest that their competitive market included
competition from the other subject properties.
- 59 -
numerous shares of stock would bring if each share was sold on the
same day. Estate of Van Horne v. Commissioner, 78 T.C. 728, 742
(1982), affd. 720 F.2d 1114 (9th Cir. 1983); see also Helvering v.
Safe Deposit & Trust Co., 95 F.2d at 812. The test is the amount
that a hypothetical seller could realize if skilled brokers disposed
of all shares in a reasonable period of time in accordance with
prudent practices of liquidation. See Richardson v. Commissioner,
supra at 103; Mott v. Commissioner, 139 F.2d 317 (6th Cir. 1943),
affg. a Memorandum Opinion of this Court; Helvering v. Maytag,
125 F.2d at 63; Bull v. Smith, 119 F.2d 490, 492 (2d Cir. 1941);
Estate of Van Horne v. Commissioner, supra at 742; Frank v.
Commissioner, 54 T.C. 75, 100 (1970), affd. 447 F.2d 552 (7th Cir.
1971); Estate of Prell v. Commissioner, 48 T.C. 67, 72 (1967). We
believe that the same test applies in ascertaining the presence of a
market absorption discount. If hypothetical brokers could have sold
all essentially similar assets within a reasonable period of time
after the valuation date, at the per-piece market rate, then no
discount for market absorption is appropriate. The assets could be
absorbed by the market quickly, making the quoted market price the
most representative indicium of the assets' value on the valuation
date. Rushton v. Commissioner, 498 F.2d 88, 92 n.10 (5th Cir. 1974),
affg. 60 T.C. 272 (1973); Bankers Trust Co. v. United States, 207 Ct.
Cl. 422, 518 F.2d 1210, 1222 (1975).
- 60 -
The amount of time that a hypothetical broker would need to
dispose of assets is a factual question. In Estate of Van Horne v.
Commissioner, supra at 742, the Court found no blockage where stock
could have been sold in small blocks without depressing the market
"over a comparatively brief period of, at most, several weeks".
Earlier, the Court in du Pont v. Commissioner, 2 T.C. 246, 253, 257
(1943), a Court-reviewed Opinion, valued a large block of stock based
on market conditions existing over a 90-day period. The Court of
Appeals for the Second Circuit has indicated that the price that
could have been obtained for a block of stock if the block had been
liquidated over a 10-day period, without activity to develop the
market, failed to establish the taxpayer's entitlement to a blockage
discount. Richardson v. Commissioner, supra at 104.
All in all, we believe that 6 months is the most time that a
hypothetical broker should be given to dispose of the apartment
complexes before a market absorption discount will inhere in their
fair market value. The appraisers assumed that each complex had to
be marketed for 18 months in order to be sold, and they factored this
18-month period into their appraisals. Although the appraisers knew
of the presence of all three complexes, we do not believe that the
appraisers meant for this 18-month period to be the period of time in
which all three complexes would sell. We believe it would take
- 61 -
18 months to sell one apartment complex.19 In other words, in the
18-month period following the applicable valuation date, a
hypothetical broker could sell either The Landings, Fox Hill, or
Stonehenge. With respect to the other two complexes, we believe it
would take another 12 months to sell one of them, and another
12 months to sell the other one. Because the dollar amount of real
estate sales in Genesee County was greater in 1992 than 1991, and
given the public's stated interest in the subject property, we do not
believe that a hypothetical broker would have needed as much time to
market the last two complexes, as the first.
5. Applicable Discount
We must discount the value of each apartment complex that cannot
be sold within a reasonable time, taking into account the time value
of money and the time that each complex must be marketed in order to
be sold. For purposes of our analysis, we use the following formula
to calculate the applicable present value rates: 1 - (1 + i/n)-ny;
i equals the discount rate, n equals the number of months over which
the discount rate is compounded,20 and y equals the number of years
19
As to respondent's assertion that investors would most
likely buy the apartment complexes as a block, we find nothing in
the record supports this assertion. The record merely shows that
many individuals and organizations were interested in investing
large sums of money in apartment complexes.
20
To simplify our calculations, we compound monthly.
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involved. We round percentages to the third decimal point, and we
round dollar amounts to the nearest dollar.
The appraisers factored an 18-month marketing period into their
market value of each apartment complex. Thus, we do not take the
18-month period after the applicable valuation date into account to
arrive at the market absorption discount that applies herein. We
have concluded that it would take a total of 42 months to sell all
three complexes, or, in other words, 18 months after the end of the
6-month reasonable period of time starting 18 months after the
applicable valuation date. Thus, one complex would sell within the
reasonable time and the other two would not; of the two that would
sell outside this time, one would sell 6 months after the end of it
and the other would sell 18 months after the end of it.
The appraisers applied 9.738-percent capitalization rates to
Stonehenge and Fox Hill and a 10.238-percent capitalization rate to
The Landings in order to ascertain their values. We believe that
this capitalization rate reflects the time value of money, and that a
weighted average of the rates (i.e., 9.905 percent) is the
appropriate annual rate to use to determine the complexes' market
absorption discount. As to the base to which this rate is applied,
we use the average market value of the three complexes. We must
determine how much lower than the market value a hypothetical seller
will have to drop his or her price for each complex in order to sell
all three within a reasonable time after the applicable valuation
date. It would be inappropriate to apply the full discount to all
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three complexes because only two must be discounted in order to sell
them within the reasonable time. However, if we were to discount two
complexes, but not the other one, the discounted complexes, which are
essentially similar to the remaining complex, but for the discount,
would sell and the complex that was not discounted would not. To
overcome this dilemma, we determine the discount on each complex that
will not sell within the reasonable of time and apportion one-third
of the aggregate discount to each complex so that a hypothetical
buyer will buy all three complexes within the reasonable time.
Because we are unsure which complexes will not sell within the
reasonable time, we determine the discount on the basis of the
complexes' average market value.
The complexes' average market value is $7,357,333 (($8,172,000
+ $9,190,000 + $4,710,000)/3), and the discount rates for the
complexes that will not sell for 30 and 42 months are 4.813 and
13.754 percent, respectively. Thus, we apply a 6.189-percent
discount to each apartment complex ((4.813% + 13.754%)/3). The
dollar discount for each of the complexes is as follows:
The Landings $505,765 ($8,172,000 x 6.189%)
Fox Hill $568,769 ($9,190,000 x 6.189%)
Stonehenge $291,502 ($4,710,000 x 6.189%)
6. Conclusion
A market absorption discount of 6.189 percent inheres in the
fair market value of each apartment complex. None of the other real
estate is valued by reference to a discount for market absorption.
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In reaching our conclusions, we have considered all arguments
made by the parties, and, to the extent not addressed above, find
them to be irrelevant or without merit. To reflect the foregoing,
Decision will be entered
under Rule 155.