other as trustee. On Bruno's and Bertha's deaths, held, the corpora Charles H. Miller, Michael L. Hirschfeld, Jesse Safir, and Arthur L. Kimmelfield, for the petitioners. Marion Westen and Peter Matwiczyk, for the respondent. FAY, Judge: Respondent determined a deficiency in petitioners' Federal estate taxes in docket No. 312-72 in the amount of $747,719.01 and in docket No. 1035-73 in the amount of $1,010,775.40. Other issues having been disposed of by agreement of the parties, the issues remaining for decision are: (1) Whether the estate tax valuation of decedents' interests in F. B. Associates and Frank Brunckhorst Co. is limited to the amount provided for and paid under the partnership restrictive buy-sell provisions in effect on the date of decedents' deaths; (2) Whether the trust corpora of certain trusts created by decedents for the benefit of their grandchildren are includable in their gross estates under either section 2036(a)(2) or 2038(a)(1);1 (3) The fair market value for purposes of the Federal estate tax of decedents' partnership interests in a real estate holding company. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Bruno Bischoff and his wife, Bertha, were residents of Roslyn Heights, N. Y., when they died testate. Bruno died on August 1, 1967, and Bertha died on May 7, 1969. Herbert Bischoff2 and Alvina Martin, Bruno's and Bertha's only children, were appointed coexecutors of their estates. At the time of the filing of the petitions in these cases, both executors resided in New York. At their deaths Bruno and Bertha each owned interests in two limited partnerships: Frank Brunckhorst Co., a company en 'All statutory references are to the Internal Revenue Code of 1954, as in effect at the time of decedents' deaths. 2Herbert Bischoff died in 1973. gaged in the wholesale distribution of processed pork products, and F. B. Associates, an investment company the assets of which consisted principally of stock in two closely held pork processing companies, Boar's Head Provisions Co., Inc. (Boar's Head), and Fred Weinkauff, Inc. (Weinkauff, Inc.), and also a portfolio of marketable securities. Bruno's and Bertha's involvement in the pork processing business began in the 1930's when Bruno, his brother-in-law Frank Brunckhorst, and Theodore Weiler organized Boar's Head and Frank Brunckhorst Co. Boar's Head conducted the pork processing activities of the business while Frank Brunckhorst Co. handled product distribution. In addition to these two companies, a third, Specsal Realty Corp. (Specsal), owned and leased to Boar's Head and Frank Brunckhorst Co. their jointly used production and distribution facility. In the late 1940's Bruno, Frank Brunckhorst, and Theodore Weiler acquired a controlling interest in another smaller pork processing and distribution company, Weinkauff, Inc. They also acquired a controlling interest in the real estate holding company Ridgewood Provision Co., Inc. (Ridgewood), which owned the Weinkauff, Inc., plant facilities and leased those facilities to Weinkauff, Inc. Prior to 1960, ownership of the 5,000-issued and outstanding shares of Boar's Head stock was divided among seven individuals, as follows: Also prior to 1960, ownership of the 100 issued and outstanding shares of Weinkauff, Inc., stock was as follows: During 1960 this pattern of stock ownership, as well as that of Specsal and Ridgewood, underwent a change. Prior to 1960, four members of the Bischoff family (Bruno, Bertha, and their two children-Herbert Bischoff and Alvina Martin), and four members of the Brunckhorst family (Frank, Lillian, and their two children-Barbara Brunckhorst Stravitz and F. Tony Brunckhorst), had been partners in a small, private investment company which was organized as a general partnership. In 1960 these eight individuals transferred to that partnership their holdings in Boar's Head and Weinkauff, Inc., and also their holdings in Specsal and Ridgewood, the respective real estate holding companies. As a result of these transfers of minority interests by each of the transferors, the general partnership, which was the immediate predecessor of F. B. Associates (formed the following year), acquired a 75-percent stock interest in Boar's Head and Specsal, and a 51.31-percent stock interest in Weinkauff, Inc., and Ridgewood. The shares transferred to the general partnership were valued essentially at book value. For example, the then book value of Boar's Head was $1.8 million, which was nearly 8 times average earnings over the previous 5 years. The 75-percent interest transferred by the two families was thus valued at $1.35 million, to which was applied a discount for possible liabilities, bringing the total value of the Boar's Head stock transferred by the families to $1.2 million, "which was felt to be the fair value at the time."4 By agreement dated August 22, 1961, the partners in the general partnership converted their partnership into a limited partnership known as F. B. Associates. Frank Brunckhorst and Bruno Bischoff, who, among the partners, were the principal operating officers of the pork processing business, became the general partners of F. B. Associates, and the remaining individuals became limited partners. The 1961 agreement of limited partnership provided that the limited partners could sell their partnership interests or their interests in the partnership assets to members of their immediate families. This agreement was replaced in 1963 by an amended agreement of limited partnership dated as of January 1, 1963. *Also, at this time the interest of Henry Holste in Weinkauff, Inc., was redeemed by the corporation pursuant to a restrictive shareholders' agreement. The holdings of Theodore and Renee Weiler remained unchanged. The identity of the partners, general and limited, remained the same. However, the agreement placed an absolute prohibition upon inter vivos transfers of partnership interests, provided that partnership interests could be redeemed only by the partnership, and further provided a mandatory settlement or "buy-out" of a partner's interest upon his death at a price computed in accordance with a "formula" contained in the agreement. The formula price represented the retired partner's capital account with adjustments reflecting partnership income and withdrawals. These restrictions upon transferability were intended to accomplish two objectives. First, they were intended to maintain ownership and control of the businesses of the four corporations, of which F. B. Associates was the majority stockholder, within the Bischoff and Brunckhorst families and thereby assure their continuing ability to carry on their pork processing business without outside interference. Second, the restrictions were intended to provide continuity of management; in effect, the restrictions were to assure that the younger memebers of the Bischoff and Brunckhorst families would remain with the companies after the deaths or retirements of the older members. On July 31, 1964, F. Tony Brunckhorst withdrew from F. B. Associates. As a result of his withdrawal, the 1963 partnership agreement was amended to provide for the retirement of the interest held in trust for him. At the same time, the capital account of the trust for the benefit of Barbara Brunckhorst Stravitz was increased by the amount of F. Tony Brunckhorst's redeemed account. Since that date, four partners, including decedents, have died.5 The partnership interest of each of these deceased partners has been retired in accordance with the provisions of the 1963 agreement. At his death, Bruno held a 12.5-percent interest in F. B. Associates which was retired in accordance with the agreement for $454,794.70, and at her death, Bertha held a 14.286-percent interest in F. B. Associates which was likewise retired for $342,605.35. As a result of the retirement of these interests and the interests of two other deceased partners, the total interests held by the Bischoff family in F. B. Associates have been, at various times, one-half, three-sevenths, one-third, and are now "Frank Brunckhorst died in 1972, and Herbert Bischoff died in 1973. one-quarter. Alvina Martin, the sole surviving Bischoff family partner in F. B. Associates, presently owns an interest that is substantially smaller than the collective interest which she and her parents, the decedents, held in 1963. The decedents' interests in Frank Brunckhorst Co. (the partnership that distributed Boar's Head products) were held at their deaths pursuant to a limited partnership agreement, dated January 1, 1966, which superseded all prior partnership agreements. Like the 1963 F. B. Associates partnership agreement, this agreement placed an absolute prohibition upon inter vivos transfer of partnership interests (which could be redeemed only by the partnership) and provided a mandatory retirement of a partner's interest upon his or her death. The redemption or retirement price is computed in accordance with a "formula" contained in the agreement. The formula price represented the retired partners' capital account with adjustments reflecting partnership income and withdrawals. These restrictive provisions, like those in the F. B. Associates partnership agreement, were intended to exclude outsiders and assure managerial continuity. At his death, Bruno owned a 3.406-percent interest in Frank Brunckhorst Co. which was retired in accordance with the partnership agreement for $26,523.16, and at her death, Bertha owned a 3.526-percent interest in Frank Brunckhorst Co. which was likewise retired for $28,147.56. In addition to the partnership interests in Frank Brunckhorst Co. which Bruno and Bertha owned at death, they had previously held additional interests therein which they had transferred in trust for the benefit of their grandchildren. By agreements dated December 31, 1957, Bruno created identical trusts for the benefit of his and Bertha's four grandchildren. The corpus of each trust, when created, was 7.5 percent of Bruno's then 10-percent interest in Frank Brunckhorst Co., constituting a 0.75-percent interest in the company. The trusts were irrevocable and were to terminate upon the beneficiaries' reaching 21 years of age. The trustee of each trust was authorized to apply income and principal for the benefit of the beneficiary and to accumulate income not so applied. Bertha was named trustee of each trust, and, in the event of her death, resignation, or failure to act, Frank Brunckhorst was appointed substitute and successor trustee in each case. On January 1, 1958, Bertha created four identical trusts for |