T.C. Memo. 1995-590
UNITED STATES TAX COURT
ESTATE OF GOLDA E. RIXON KOKERNOT, DECEASED,
MARY ANN K. LACY, EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16088-94. Filed December 13, 1995.
Before trial, the parties negotiated a settlement
specifying the manner of resolving all issues raised in
R's notice of deficiency. During discussions regarding
the proposed stipulated decision document, P sought to
raise an issue as to its entitlement to use the special
use valuation provisions of sec. 2032A, I.R.C. This
issue was not covered in R's notice of deficiency, and
was not raised or preserved by P in the pleadings or
the stipulated settlement agreement. Held: The issue
raised by P is a new issue that is not before the
Court.
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Stanard T. Klinefelter, for petitioner.
Susan T. Mosley, for respondent.
MEMORANDUM OPINION
LARO, Judge: This matter is before the Court on the
parties' cross-motions for entry of decision in accordance with a
stipulation of settlement filed July 3, 1995. We must decide
whether the subject decision should reflect the application of
section 2032A.1 We hold that it should not.
We refer to Golda E. Rixon Kokernot as decedent. At the
time of her death decedent was a resident of the State of Texas.
We refer to Mary Ann Kokernot Lacy as Executrix. At the time
Executrix filed her petition with the Court she was also a
resident of the State of Texas.
Background
Decedent died on December 7, 1990. At the time of her death
decedent owned a large cattle ranch located in Brewster and Jeff
Davis Counties, Texas, called the "Kokernot 06 Ranch" (Ranch).
On September 7, 1991, Mary Ann K. Lacy as the Executrix for the
estate of Golda E. Rixon Kokernot, filed the estate's Federal
estate tax return, in which Executrix reported the fair market
1
Unless otherwise stated, section references are to the
Internal Revenue Code in effect for the date of the decedent's
death, and Rule references are to the Tax Court Rules of Practice
and Procedure.
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value of the Ranch as $2,696,536. Decedent's estate’s tax return
included a Schedule A-1 "Section 2032A Valuation," on which
Executrix made a protective election pursuant to section
20.2032A-8(b), Estate Tax Regs.2 The estate tax return was
subsequently selected for audit. The principal issue on audit
centered on the fair market value of the Ranch. Unable to
resolve the fair market value issue at the audit level,
respondent issued a notice of deficiency to Executrix on June 9,
1994. Respondent's notice makes no mention of Executrix's
protective election under section 2032A and the regulations
thereunder. Nor does the petition filed with this Court by the
Executrix.
The case was set for the trial session in Washington, D.C.,
commencing on June 19, 1995. At the suggestion of the Court, the
parties engaged in negotiations prior to the start of this
session in an attempt to resolve the fair market value of the
Ranch. During these negotiations Executrix never mentioned
2
Enacted by the Tax Reform Act of 1976, Pub. L. 94-455,
sec. 2003, 90 Stat. 1856, primarily to encourage the continued
operation of family farms, sec. 2032A permits qualified real
property to be valued for estate tax purposes by reference to its
use in the farming activity, rather than at its value based on
its highest and best use. Where it is not certain that property
meets the requirements for special use valuation, an estate may
under sec. 20.2032A-8(b), Estate Tax Regs., make a protective
election to specially value qualified real property, contingent
on the property values as finally determined meeting the
requirements of sec. 2032A.
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section 2032A, and she never mentioned that she might want to
consider the application of that section once the parties finally
agreed to the fair market value of the Ranch. On June 19, 1995,
when the case was called for trial, counsel for respondent
announced that the parties had reached a basis for settlement on
all issues raised in the notice of deficiency. Subsequently, on
July 3, 1995, the parties filed a three-page stipulation of
settled issues. The agreement contains no reference to section
2032A or to Executrix's protective election under that section.
In relevant part the stipulation of settlement states:
3. The parties stipulate to the following terms of
settlement:
a. With respect to the increase in the value of
real estate included in the gross estate, the issues
were resolved as follows:
I. The parties agree to the value of the
entire 103,843 acres of the cattle ranch at
$80.00 per acre.
ii. In addition, the parties agree that
petitioner is entitled to a discount of 20%
on the entire 103,843 acres to reflect the
deceased's partial interest in the property.
iii. In addition, petitioner concedes that
the gifts made on January 24, 1990 under the
authority of the power of attorney should be
included in the gross estate for tax
purposes.
b. With respect to the $18,867.00 increase in
miscellaneous property due to the inclusion of ranch
lease income, the petitioner concedes the issue in
full, as reflected in petitioner's amended return filed
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subsequent to the issuance of the statutory notice of deficiency.
c. With respect to the issues of the disallowed
claim against the estate in the amount of $500,000.00,
respondent concedes petitioner is entitled to an
adjustment of $500,000.00 reducing the amount of the
gross estate reported on petitioner's estate tax
return. This adjustment is in lieu of the claim
against the estate in the amount of $500,000.00.
d. With respect to the increase in adjusted
taxable gifts in the total amount of $21,578.00, the
petitioner concedes the issue in full, as reflected in
petitioner's amended return filed subsequent to the
issuance of the statutory notice of deficiency.
4. In addition, the parties agree that petitioner is
entitled to deductions for additional expenses incurred
in administering the property of the estate which
expenses were incurred subsequent to the filing of the
estate tax return. These deductions will be allowed as
verified.
The parties agree to this STIPULATION OF SETTLEMENT.
Based on the stipulation of settlement, the Court allowed
the parties time to exchange information regarding additional
administrative expenses, to compute the correct amount of estate
tax due, and to prepare decision documents. After reviewing the
agreed upon fair market value for the Ranch, petitioner's counsel
advised respondent that Executrix intended to pursue its
protective election under section 20.2032A-8(b), Estate Tax Regs.
Consequently, on August 26, 1995, Executrix mailed respondent an
amended Federal estate tax return in which she made an election
under section 2032A for the Ranch.
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Discussion
The compromise and settlement of tax cases are governed by
general principles of contract law. A settlement stipulation is
in essence a contract. Each party agrees to concede some rights
which he or she may assert against his or her adversary as
consideration for those secured in the settlement agreement.
Saigh v. Commissioner, 26 T.C. 171, 177 (1956). Like contracts,
stipulations of settlement bind the parties thereto to the terms
thereof. Stamos v. Commissioner, 87 T.C. 1451, 1455 (1986). In
determining the proper meaning of the terms, we focus on the
language of the stipulation and the circumstances surrounding its
execution. Robbins Tire & Rubber Co. v. Commissioner, 52 T.C.
420, 435-436 (1969); see also Brink v. Commissioner, 39 T.C. 602,
606 (1962), affd. 328 F.2d 662 (6th Cir. 1964). We will enforce
a stipulation of settlement, whether filed or orally stipulated
into the record, unless justice requires that we do otherwise.
Adams v. Commissioner, 85 T.C. 359, 375 (1985); Sennett v.
Commissioner, 69 T.C. 694 (1978); Saigh v. Commissioner, 26 T.C.
171, 177 (1956).
Respondent contends that the Executrix failed to preserve a
claim to special use valuation under section 2032A. Respondent
argues that Executrix's claim to section 2032A valuation involves
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new factual issues that would require additional evidence
including, perhaps, expert testimony. Respondent maintains that
the settlement agreement filed with the Court on July 3, 1995,
incorporates the full terms of the parties' agreement and that
the agreement speaks for itself. Since the deficiency notice,
the petition and other pleadings, and the settlement document are
all silent with respect to the application of section 2032A,
respondent contends, Executrix is not entitled to the benefits of
that section and the regulations thereunder.
Executrix argues that the parties' stipulation of settlement
encompasses only those issues raised in the notice of deficiency,
i.e., the fair market value of the Ranch. Executrix contends
that the settlement agreement covered neither the amount of the
deficiency, nor its computation. Executrix maintains that the
estate's use of section 2032A is a "mechanical computation", and
that Executrix's election of that section's provisions is
necessarily dependent on the fair market value of all of the
decedent's property, as finally determined or agreed to following
an examination of the return. Executrix argues that respondent's
failure to consider the possible impact of Executrix's protective
election during the settlement negotiations does not constitute a
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valid basis to deny the benefits of that election in computing
the decedent's estate tax.
We disagree with Executrix. Whether petitioner is entitled
to the benefits of section 2032A requires the determination of
several factual issues; consequently, the application of 2032A is
not merely computational.3 The ability of Executrix to use
section 2032A raises a new issue that was not mentioned in the
subject notice of deficiency, the instant pleadings, or the
negotiations surrounding the settlement agreement. Indeed,
Executrix acknowledges in her memorandum of law that she did not
advise respondent's counsel that she (Executrix) might want to
perfect her protective election under section 2032A once the
parties finally reached an agreement. With this in mind, we
refuse to allow Executrix to raise this issue at this time. The
agreement to settle this lawsuit, voluntarily entered into, must
be given binding effect. It is no answer to say that the need to
follow such a course could not have been ascertained until the
3
To qualify for special-use valuation under sec. 2032A,
property must satisfy a series of requirements, relating to (1)
the nature of the property itself, (2) its use on the date of the
decedent's death and during the immediately preceding 8-year
period, (3) the relationship between the decedent and the person
acquiring the property from the decedent, and (4) the fair market
value of the property as compared with the fair market value of
the decedent's adjusted gross estate (i.e., the 50 percent and 25
percent tests). See sec. 2032A(b).
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fair market value of the Ranch was finally determined. Executrix
could have pleaded special use valuation as an alternative
position in this case. For reasons unknown to the Court, she did
not do so.
In short, the settlement agreement shows that the parties
agreed on the “value” of the ranch, and we believe that
respondent was entitled to infer that “value” in this context
meant value for estate tax purposes. We have no doubt that
respondent entered into the stipulation on that assumption,
thereby forgoing the higher “value” asserted in the deficiency
notice. Executrix would have us hold that the “value” ought to
be lower than in the stipulation due to the application of a
special form of valuation that is not mentioned in the pleadings,
in the stipulation, or in the negotiations leading to the
stipulation. We refuse to do so. The parties struck a bargain
in the stipulation, and Executrix must live with the benefits and
burdens of it. Each party bore the responsibility to negotiate a
written settlement that accurately reflected that party’s
position. In agreeing to the written settlement here, Executrix
failed to preserve her claim to special use valuation under
section 2032A.
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We have considered all of Executrix's arguments and, to the
extent not addressed above, have found them to be without merit.
To reflect the foregoing,
An appropriate order will be
issued granting respondent's motion
for entry of decision and denying
petitioner's cross-motion for entry
of decision and decision will be
entered for respondent.