Estate of Pauline Welch, Deceased, Newton G. Welch, Jr. and Lois Welch McGowan, Co-Executors - Page 7

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          they were planning to purchase replacement property within the              
          replacement period.                                                         
               ESI's 1994 tax return shows a net operating loss (NOL)                 
          carryover generated for 1993 in the amount of $120,990: $87,443             
          of the carryover was utilized in 19904; leaving $33,547 available           
          for carryover to 1994.  The $33,547 NOL was used in 1994 to                 
          offset taxable income of $19,465.  ESI's 1995 tax return shows an           
          available NOL carryover of $14,217, used to offset taxable income           
          of $21,587.  After application of the NOL, ESI's 1994 and 1995              
          taxable income was zero and $7,370, respectively.  ISC's 1994 and           
          1995 tax returns show no NOL carryover, $195,462 and $21,182 in             
          taxable income, respectively, and $59,480 and $3,177 in total tax           
          due, respectively.                                                          
               On September 27, 1996, respondent issued a notice of                   
          deficiency which determined, among other things, that the fair              
          market value of decedent's shares in ESI and ISC was $328,294 and           
          $365,419, respectively, rather than the $264,398 and $330,491               
          shown on the estate tax return.  The primary difference between             
          respondent's determined value and the estate's returned value               
          stems from respondent's disallowance of the built-in capital                
          gains discount.5                                                            

               4  This data indicates that ESI either had losses or broke             
          even in 1992 and 1993.                                                      
               5  Respondent's determined value also reflects an increase             
                                                             (continued...)           




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