Estate of Cullison v. Commissioner

T.C. Memo. 1998-216

UNITED STATES TAX COURT

ESTATE OF SUZANNE W. CULLISON, DECEASED, J. GREG CULLISON,
PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11573-96. Filed June 17, 1998.

James Powers, for petitioner.

Rick V. Hosler, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Respondent determined a deficiency in Federal

gift tax against petitioner for 1989 of $559,435 and a deficiency

in Federal estate tax of $506,298.

After concessions, the issues for decision are:
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(1) Whether Suzanne W. Cullison (decedent) transferred four

parcels of farmland totaling approximately 530 acres to her

grandchildren in late 1988, rather than on August 29, 1989. We

hold the transfer occurred on August 29, 1989.

(2) The fair market value of the farmland, as of the date of

its transfer by decedent to her grandchildren. We find it was

$1,865,500.

(3) The value of the private annuity the grandchildren

agreed to pay decedent in exchange for the farmland. We find it

was $1,360,724.

(4) Whether the private annuity transaction qualifies as a

transaction in the ordinary course of business under section

25.2512-8, Gift Tax Regs. We hold that it does not.

All section references are to the Internal Revenue Code in

effect either at the date of transfer or the date of decedent's

death (whichever is applicable), and all Rule references are to

the Tax Court Rules of Practice and Procedure, unless otherwise

indicated.

FINDINGS OF FACT

Some of the facts and certain documents have been stipulated

for trial pursuant to Rule 91 and are found accordingly. We

incorporate the parties' stipulations in this opinion by

reference.
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Decedent, a resident of Phoenix, Arizona, died on January

19, 1992. Decedent was survived by her son and only child Jerry

Cullison (Jerry) and her four grandchildren, J. Gregory Cullison

(Greg), Janet L. O'Mara (Janet), Kimberly Ann Cullison

(Kimberly), and Lori Ann Cullison (Lori). Greg and Janet are the

children of Jerry and his first wife; Lori is Jerry's daughter by

his second wife; and Kimberly is his daughter by his third wife.

When the petition herein was filed, Greg, the personal

representative of decedent's estate, resided in Arizona.

Since the 1960's, decedent had owned four parcels of

farmland totaling approximately 530 acres outside Wellton,

Arizona, a farming community in Yuma County. Each parcel is

situated in the Wellton-Mohawk Drainage District and receives

water from the Colorado River for irrigation. Decedent and her

then husband (who had been a professor in the agricultural

education department of Arizona University and later served as

the State of Arizona's director of agricultural education) had

started acquiring farmland in the Wellton area about 1951,

shortly before water from the Colorado River was first provided

to the area upon the Wellton-Mohawk drainage project's

completion. The four parcels of farmland involved in the instant

case were acquired by decedent and her husband at various times

during the 1960's. Following their divorce in 1974, decedent

became the sole owner of the four parcels.
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Although her family has been farming in the Wellton area

since 1952, both decedent and her husband, before and after their

divorce, had continued to reside for most of the year in Phoenix.

Decedent's husband hired individuals to farm some of their land,

and he and decedent also rented out some of their farmland. In

1959, shortly after his graduation from college, Jerry moved to

Wellton to farm some of their land full time. At some point, a

family partnership among decedent, her husband, and their son was

established to farm this land. After the divorce in 1974, Jerry

continued to farm some of the four parcels of land in issue,

pursuant to a family partnership arrangement he had with

decedent. In addition, Jerry eventually acquired farmland of his

own in the Wellton area.

Later, shortly after his graduation from college in about

1985, Greg joined Jerry in his Wellton farming operations for 6

to 12 months. By 1988, Greg had moved to Wellton to farm full

time.

Originally, decedent had planned to leave a larger portion

of her estate in her will to her grandchildren Greg and Janet

than she planned to leave to her two other grandchildren,

Kimberly and Lori. She felt closer to Greg and Janet because she

had cared for them for 18 months following their mother's death.

Decedent's last will and testament, a holographic will which she

executed on June 19, 1984, reflects her testamentary plan for
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this unequal disposition of her estate among her four

grandchildren. With respect to the four parcels of farmland

involved in the instant case, the will generally provided that

two of the parcels would be given to Greg, one parcel would be

given to Janet, and one parcel would be given to Lori. In the

will decedent further stated that she expected "any land to

remain in the family. If any heir wishes to sell his or her

land, the other heirs are to be given an option to buy it at

current market price."

Ultimately, the above holographic will provisions concerning

the four parcels never became operative because of certain

discussions that took place between Jerry and decedent. In their

discussions sometime after decedent's execution of the June 19,

1984, holographic will, Jerry persuaded her to treat her

grandchildren, Greg, Janet, Kimberly, and Lori, equally. Jerry

told decedent that if she implemented her testamentary plan to

treat the grandchildren unequally, he would remedy any disparity

by leaving more of his own property to those who received less

from her.

As a result of his first wife's death in the early 1960's,

Jerry became acquainted with Steve Shadle, an attorney practicing

in Yuma County who specializes in estate work and estate

planning. Over the years, Mr. Shadle had also performed

occasional legal work for decedent and her former husband.
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In early 1987, decedent consulted with Mr. Shadle and Vince

Schulte (a certified public accountant practicing in Yuma County

who previously had done some accounting and tax work for the

family). Decedent had been considering selling her four parcels

of farmland to her grandchildren on an installment basis. During

his meeting with decedent, Jerry, and Mr. Schulte, Mr. Shadle

raised and further discussed with them the alternative

possibility of decedent's selling the four parcels to her

grandchildren in exchange for a private annuity.

Although decedent initially had been contemplating selling a

separate parcel to each grandchild, she was concerned that one or

more of them might later decide to sell their land to outside

parties. Of decedent's grandchildren, only Greg intended to farm

the four parcels. Decedent thus also indicated to Mr. Shadle

that she wanted those of her grandchildren still keeping their

parcels to have an option to purchase the land of any grandchild

wanting to sell.

Mr. Shadle then proposed to decedent that (1) the four

parcels be sold by decedent to her four grandchildren jointly in

exchange for a private annuity from them, but (2) the land

immediately be contributed to a family partnership the

grandchildren would establish to manage and farm the land. Under

this proposed family partnership agreement, the grandchildren

would each be granted reciprocal rights to purchase the
 - 7 -

partnership's land in the event the partnership terminated.

During 1988, decedent advised Mr. Shadle that she wished to

proceed with the above plan. She further instructed him to tell

her grandchildren that her sale of the four parcels to them would

be conditioned upon their agreeing to contribute the land to the

family partnership Mr. Shadle would help them organize and

establish.

In connection with helping decedent to effectuate the

private annuity transaction, Mr. Shadle needed to obtain

valuations of (1) the four parcels decedent would sell to her

grandchildren and (2) the private annuity the grandchildren would

promise to pay her in exchange for the land. As an experienced

estate planner, Mr. Shadle believed that there should be no

potential Federal estate and gift tax liabilities on decedent's

part from the private annuity transaction if the value of the

private annuity decedent received equaled the value of the land

she transferred to her grandchildren. Before advising decedent

with respect to the private annuity transaction in issue, Mr.

Shadle had helped other clients to arrange between 5 and 10

private annuity transactions. These earlier private annuity

transactions mostly involved certain ranch properties. In these

earlier transactions, either a Big Six accounting firm or the

client's accountant had determined the annual payment to be made

under each of the private annuities.
 - 8 -

As Jerry was familiar with decedent's land and knowledgeable

about farmland prices in the Wellton area, he helped her and Mr.

Shadle to value each of her four parcels. In valuing decedent's

land, Jerry further considered detailed information on recent

sales of farmland in the area which he obtained from a title

company. Jerry concluded that decedent's four parcels had a

total combined market value of $1,865,500.

As a result, Mr. Shadle knew that, if decedent were to avoid

potential Federal estate and gift tax liabilities in connection

with the private annuity transaction, the private annuity payable

to her should also have a value of $1,865,500. He provided this

information to Mr. Schulte, decedent's accountant, since Mr.

Schulte would determine the annual payment the grandchildren

should make to decedent under the private annuity.

On the basis of certain information contained in Table V of

section 1.72-9, Income Tax Regs.,1 Mr. Schulte concluded that a

person decedent's age of about 81 years in late 1988 would have a

1
Although Mr. Schulte testified he used Table V in sec.
1.72-5, Income Tax Regs., he apparently meant and was referring
to Table V in sec. 1.72-9, Income Tax Regs., as there is no Table
V in sec. 1.72-5, Income Tax Regs. It is further to be noted
that Table V and other similar tables in sec. 1.72-9, Income Tax
Regs., are used in determining the exclusion ratio specified in
sec. 72(b). In general, this exclusion ratio is applied for
Federal income tax purposes in determining the portion of an
annuity payment excludable from a taxpayer's gross income as a
nontaxable return of the taxpayer's investment in the annuity
contract. See generally sec. 72(b); sec. 1.72-4(a), Income Tax
Regs. Table V thus is not directly applicable to the valuation
of annuities for Federal estate and gift tax purposes.
 - 9 -

life expectancy of 8.9 years. Mr. Schulte further concluded that

it would be appropriate to use a 9-percent interest rate factor

in connection with the private annuity arrangement involving

decedent, as he believed 9 percent to be a slightly higher

interest rate than the prevailing interest rate currently charged

on land sale contracts in Arizona. He then consulted a loan

amortization table to learn what annual loan payment would have

to be made to amortize over 8.9 years a $1,865,500 loan paying 9-

percent interest per annum. The amortization table he consulted,

however, provided no information with respect to a loan for an

8.9-year term. As a result, Mr. Schulte examined the information

the table provided concerning a similar 9-year-term loan. From

that information, he computed that an annual loan payment of

$311,165 would be required to amortize a $1,865,500 loan over 9

years. Mr. Schulte thus concluded and advised Mr. Shadle that

$311,165 should be the annual payment made to decedent by her

grandchildren under the private annuity.

Decedent, Greg, Janet, Kimberly, and Lori entered into an

annuity agreement pursuant to which decedent would convey to each

grandchild an undivided one-fourth interest in her four parcels

of farmland, in exchange for the four grandchildren's agreeing to

pay $311,165 to decedent on September 1 of each year during her

life, beginning September 1, 1990. This annuity agreement, which

had been drafted by Mr. Shadle, states that the agreement was
 - 10 -

being entered into by decedent, Greg, Janet, Kimberly, and Lori

on August 29, 1989. The agreement further states that all of the

parties thereto agreed that the fair market value of decedent's

land was $1,865,500.

Decedent signed the annuity agreement on December 23, 1988,

with her signature to the document being acknowledged before a

notary public on that same date. Her grandchildren's respective

signatures to the annuity agreement are stated to have been

acknowledged by them to Mr. Shadle, acting as a notary public, on

August 29, 1989.

Mr. Schulte had performed similar work in connection with

the creation and establishment of private annuities by two other

clients. During his engagement by decedent, however, Mr. Schulte

was not aware of the recent enactment of section 7520, whose

provisions concerning the valuation of private annuities would be

effective for transactions occurring after April 30, 1989.

Although Mr. Schulte subscribed to and received a weekly Federal

income tax service, he did not subscribe to a Federal estate and

gift tax service.

The annuity agreement provided that decedent would transfer

to the grandchildren all of her interest in the four parcels by

warranty deed and that decedent would have no further interest in

the land after the August 29, 1989, date of the annuity agreement

and decedent's delivery of the warranty deed to the
 - 11 -

grandchildren. The annuity agreement further provided that the

land decedent transferred would not be security for the annuity

payments due from the grandchildren to decedent. The agreement

also provided that each grandchild's undivided one-fourth

interest in the four parcels was to be that grandchild's sole and

separate property.

On August 29, 1989, decedent by warranty deed conveyed to

each of her grandchildren an undivided one-fourth interest in the

four parcels. The warranty deed was executed by decedent on

August 29, 1989, and was recorded by the grandchildren on

September 8, 1989.

Decedent's four grandchildren entered into their Cullison

Enterprises partnership agreement (partnership agreement) on

August 29, 1989. The partnership agreement provided that the

partnership would commence on August 29, 1989. The partnership's

stated purpose was to own, manage, or perform work on any farms

or agricultural lands. The partnership agreement restricted the

partners' ability to sell their interests in the partnership to

third parties. In addition, upon the partnership's liquidation,

any partner would have the right to bid on the partnership's

assets, and the bid would have to be accepted unless an

outsider's bid on the assets was at least 20 percent higher.
 - 12 -

On August 29, 1989, Janet's husband executed a Consent of

Spouse, pursuant to which he agreed to abide by the terms of the

partnership agreement.

On August 30, 1989, decedent's grandchildren by warranty

deed conveyed to their Cullison Enterprises partnership the land

decedent had transferred to them. This warranty deed, which had

been executed by them on August 30, 1989, was recorded by them on

September 8, 1989.

From late 1988 until August 29, 1989, decedent continued to

be the land's sole owner. Decedent was entitled to the rents

payable by tenants for their use of the land until that date, and

she was also liable for any real property taxes imposed covering

the period of her ownership up until that date.

From September 1, 1990, through January 19, 1992, decedent's

grandchildren never made any of the annual payments they owed to

decedent pursuant to the annuity agreement.

Decedent died on January 19, 1992, when she was 84 years and

2 months old. Neither decedent nor petitioner ever filed any

Federal gift tax returns.

During the examination of petitioner's estate tax return,

the Internal Revenue Service (IRS) estate tax examiner asked Mr.

Shadle (who was petitioner's attorney) to obtain and provide him

with an appraisal report concerning the value of the land

decedent had transferred to her grandchildren. As a result, Mr.
 - 13 -

Shadle retained the services of a qualified real estate appraiser

in Yuma County and directed him to value the land as of August

29, 1989, because that was the effective date of the annuity

agreement. In his report, dated October 10, 1994, this appraiser

concluded that the land had a fair market value of $1,945,925 as

of August 29, 1989.

In the notice of deficiency dated March 13, 1996,

respondent, among other things, determined that decedent's

transfer of the land was a gift subject to gift tax. The March

13, 1996, notice of deficiency stated, in pertinent part:

Gift of Real Property in Yuma County, AZ

Your transfer of Yuma County, Arizona Real Property
with a value of $1,945,925 to Kimberly Ann Cullison,
Janet L. O'Mara, J. Gregory Cullison and Lori Ann
Cullison was a gift for Federal gift tax purposes.
Accordingly, your total gifts for 1989 are increased by
$1,945,925.[2]

Alternatively, if it is determined that your transfer
of the Yuma County, Arizona, real property was a bona
fide transfer in exchange for a private lifetime
annuity, then the excess of the fair market value of
the real property transferred over the present value of
the annuity constitutes a gift for Federal gift tax
purposes. The value of the gift is computed as
follows:

Fair Market Value of Yuma Co.
real property $1,945,925
Present Value of Private
lifetime annuity 1,360,724
Value of Gift 585,201

2
Respondent no longer contends that the entire transfer
was a gift. See infra note 3.
 - 14 -

In the notice of deficiency dated March 21, 1996, respondent

determined, among other things, that in calculating petitioner's

estate tax liability, adjusted taxable gifts should be increased

as a result of decedent's 1989 gift of land to her grandchildren.

In its petition seeking review of the above two notices of

deficiency, petitioner maintained that decedent had transferred

the land to her grandchildren on or about August 29, 1989. The

petition alleged, in pertinent part:

5. Facts upon which Petitioner relies, as the basis of
Petitioner's case, are as follows:

* * * * * * *

b. On or about August 29, 1989, the Decedent,
being then a single woman, entered into an
agreement with her four grandchildren
pursuant to which she transferred to them
farming property of substantial value.

c. In consideration of the foregoing transfer
of ownership, the four children
contemporaneously agreed to pay, on the first
day of September beginning with the year
1990, an annuity payment of $311,165 for as
long as Decedent might live.

d. The transfer of real estate was a transfer
for full and adequate consideration and was
not a taxable gift.
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OPINION

Section 2001(a) imposes an estate tax on the transfer of the

taxable estate of every decedent who is a citizen or resident of

the United States. The tax imposed is equal to the excess of the

tentative tax on the sum of the amount of the taxable estate and

the amount of adjusted taxable gifts, over the amount of tax

which would have been payable as a gift tax with respect to gifts

made by a decedent after December 31, 1976. Sec. 2001(b). The

term "adjusted taxable gifts" means the total amount of taxable

gifts (within the meaning of section 2503) made by a decedent

after December 31, 1976, other than gifts which are included in

the gross estate of the decedent. Sec. 2001(b). Section 2503(a)

defines "taxable gifts" as the total amount of gifts made during

a calendar year, less certain statutory deductions. Thus,

decedent's transfer of her farmland constitutes an adjusted

taxable gift within the meaning of section 2001 only if it is

also a taxable gift within the meaning of section 2503. See

Estate of DiMarco v. Commissioner, 87 T.C. 653, 656-657 (1986).

Section 2501 imposes a tax on property transferred by gift.

Sec. 2501(a); see also sec. 2511(a). If property is transferred

for less than adequate and full consideration in money or money's

worth, the amount by which the value of the property exceeds the

value of the consideration is deemed a gift. Sec. 2512(b);

Commissioner v. Wemyss, 324 U.S. 303, 306-307 (1945). In
 - 16 -

Commissioner v. Wemyss, supra at 306-307, the Supreme Court

interpreted section 2512 as dispensing with the test of "donative

intent" in favor of a "much more workable external test" that

"where 'property is transferred for less than an adequate and

full consideration'", then the excess "'shall, for * * * [the

purpose of gift tax] be deemed a gift'". Thus, the Federal gift

tax provisions reach further than the common law concept of gifts

and embrace sales and other exchanges of property where the value

of the property transferred exceeds the value of the

consideration received. Sec. 25.2512-8, Gift Tax Regs. As a

result, in determining whether the private annuity transaction in

the instant case is subject to gift tax, we must determine the

value of decedent's land and the value of the private annuity

(i.e., the consideration decedent received).3

Transfers of property in the ordinary course of business,

however, are not subject to gift tax. Sec. 25.2512-8, Gift Tax

Regs. To qualify, the transaction must be bona fide, at arm's

length, and free from donative intent. Id.; see Harwood v.

Commissioner, 82 T.C. 239, 257-258 (1984), affd. without

3
Respondent no longer contends (as was originally
determined in the Mar. 13, 1996, notice of deficiency) that no
private annuity, in fact, was payable to decedent. On its estate
tax return, petitioner included in decedent's gross estate the
two outstanding annuity payments owed to decedent by her
grandchildren. The parties have now further stipulated that the
gross estate is to be increased by an additional $46,072 to
reflect the accrued interest owed on these annuity payments.
 - 17 -

published opinion 786 F.2d 1174 (9th Cir. 1986); see also Carson

v. Commissioner, 641 F.2d 864, 866 (10th Cir. 1981), affg. 71

T.C. 252 (1978). As we further noted in Harwood v. Commissioner,

supra at 258: "Transactions within a family group are subject to

special scrutiny, and the presumption is that a transfer between

family members is a gift."

Section 7520 generally requires (with certain exceptions not

applicable here) the value of any annuity, interest for life or

term of years, remainder, or reversionary interest to be

determined under tables or formulas prescribed by the Secretary

in regulations thereunder. Each such valuation under section

7520 is to consist of (1) an interest rate component (rounded to

the nearest .2 percent) equal to 120 percent of the Federal

midterm rate in effect under section 1274(d)(1) for the month in

which the valuation date falls and (2) a mortality component,

reflecting the most recent mortality data from the U.S. census

(updated every 10 years). Sec. 7520(a)(1) and (2), (c)(1), (3);

sec. 20.7520-1(c), (b)(1)(i), (2), Estate Tax Regs.; sec.

25.7520-1(c), (b)(1)(i), (2), Gift Tax Regs.
 - 18 -

Section 75204 (which was enacted on November 10, 1988, as

part of the Technical and Miscellaneous Revenue Act of 1988

(TAMRA), Pub. L. 100-647, sec. 5031(a), 102 Stat. 3342, 3368) is

effective for transactions with valuation dates after April 30,

1989. TAMRA sec. 5031(c), 102 Stat. 3369. Generally, the

valuation date for gift tax purposes is the date upon which the

gift is made. Sec. 25.7520-1(b)(1)(ii), Gift Tax Regs.

In the instant case, petitioner contends that the private

annuity payable to decedent is not to be valued under section

7520, because the private annuity transaction occurred before the

May 1, 1989, effective date of section 7520. Petitioner

maintains that the transaction took place in late 1988, when the

4
Before the enactment of sec. 7520, the estate and gift
tax regulations long had contained actuarial tables to assist in
the computation of the fair market value of annuities, life
estates, terms for years, remainders, and reversions. Although
use of these tables was not statutorily mandated, they were
provided as an administrative necessity, and their general use
was approved by the courts. Simpson v. United States, 252 U.S.
547, 550-551 (1920); Estate of Fabric v. Commissioner, 83 T.C.
932, 941 (1984). As a result, these administrative actuarial
tables were regularly applied in valuing contingent property
interests given that they "afford a reasonable norm and some
degree of certainty in ascertaining the value of property and the
consequent tax liabilities of beneficiaries thereof." Miami
Beach First Natl. Bank v. United States, 443 F.2d 116, 119 (5th
Cir. 1971). Indeed, as the U.S. Court of Appeals for the Ninth
Circuit noted in Estate of Christ v. Commissioner, 480 F.2d 171,
172-173 (9th Cir. 1973) (quoting Hanley v. United States, 105 Ct.
Cl. 638, 63 F. Supp. 73, 80 (1945)), affg. 54 T.C. 493 (1970),
the Commissioner's administrative tables were to be used unless
their use would produce "'a result substantially at variance with
the facts.'"
 - 19 -

annuity agreement was allegedly signed by both decedent and her

grandchildren, rather than on the agreement's stated entry date

of August 29, 1989.

Respondent, on the other hand, contends that the private

annuity is to be valued under section 7520, because the

transaction occurred on August 29, 1989. Respondent points out

that the grandchildren's signatures to the annuity agreement are

stated to have been notarized before Mr. Shadle (a notary and

decedent's attorney) on August 29, 1989. According to

respondent, the testimony petitioner offered concerning the

grandchildren's alleged late 1988 execution of the annuity

agreement is not credible and should not be accepted by the Court

in light of the convincing other evidence of record. We

essentially agree with respondent.

The record reflects that although decedent signed the

annuity agreement in late 1988, she retained title to and was the

owner of the land until August 29, 1989. Indeed, during his

testimony, Mr. Shadle acknowledged that he had drafted the

annuity agreement and had written in by hand the August 29, 1989,

entry date specified in the contract document. Certainly by late

1988, decedent had already decided to sell her land to her

grandchildren pursuant to the planned private annuity

transaction, and she and her advisers were engaged in preparing

to make the sale. However, even if we were to accept (which we
 - 20 -

do not) petitioner's offered testimony concerning the

grandchildren's alleged signing of the annuity agreement in late

1988, there would only, at best, have been an executory agreement

on decedent's part to transfer her land to them. An executory

agreement to sell is not a sale. See Armstrong v. Commissioner,

6 T.C. 1166, 1173-1174 (1946), affd. per curiam 162 F.2d 199 (3d

Cir. 1947). Moreover, petitioner's own petition asserted that

the transaction occurred on or about August 29, 1989, not in late

1988, as petitioner now contends. We hold that decedent's

transfer of the land in connection with the private annuity

transaction occurred on August 29, 1989, after the effective date

of section 7520.5 See sec. 25.2511-2, Gift Tax Regs. (providing

that for gift tax purposes a gift is made on the date upon which

5
We would note that if the transaction had taken place in
late 1988, as petitioner contends, the annuity then should have
been valued under the applicable estate and gift tax regulations
in effect for transfers made after Nov. 30, 1983, but before May
1, 1989. See T.D. 7955, 1984-1 C.B. 40; sec. 20.2031-7A(d)(6)
(Table A), Estate Tax Regs.; sec. 25.2512-5A(d)(1)(i) and (ii),
(2)(i), (6), Gift Tax Regs. If decedent's accountant had valued
decedent's annuity pursuant to the pertinent actuarial table (see
Table A in sec. 20.2031-7A(d)(6), Estate Tax Regs.) provided
under the regulations in effect in late 1988, then he presumably
would have computed a value for the annuity of at most
$1,305,866.20 ($311,165 multiplied by 4.1967). That
$1,305,866.20 value is even lower than the $1,360,724 value
respondent has computed for the annuity, pursuant to sec. 7520,
in the Mar. 13, 1996, notice of deficiency. Further, decedent's
tax advisers should have been aware of the estate and gift tax
regulations in effect in 1988, as those regulations (including
Table A) were originally issued in 1984, well before the time
when decedent and they were planning the annuity transaction.
See T.D. 7955, 1984-1 C.B. at 41, 86-87.
 - 21 -

the gift is complete); see also sec. 25.7520-1(b)(1)(ii), Gift

Tax Regs.

With respect to the value of the four parcels decedent

transferred, petitioner contends that the land had a fair market

value of $1,865,500, whereas respondent contends the land's fair

market value was $1,945,925. No expert testimony was offered by

the parties. Respondent relies heavily upon the appraisal report

that petitioner obtained and provided to the estate tax examiner.

In that appraisal report, the real estate appraiser concluded

that the fair market value of decedent's land was $1,945,925, as

of August 29, 1989. Jerry, however, testified that the land was

worth only $1,865,500, as two of the parcels were worth somewhat

less than the real estate appraiser had estimated. Jerry

explained that the appraiser had failed to take into account (1)

the significant portions of sand on these two parcels and (2) the

thinner topsoil layers making them less suitable for certain

crops. We found Jerry's testimony to be credible, as he was

familiar with decedent's land, had considerable experience in

farming, and was knowledgeable about farmland prices in the

Wellton, Arizona, area. In addition, we would note that the

appraisal report, though prepared by a qualified real estate

appraiser, was expressly stated to be only a "preliminary

valuation" of the four parcels. We hold that decedent's land had

a fair market value of $1,865,500, as of August 29, 1989.
 - 22 -

With respect to the private annuity, petitioner contends

that the annuity, as of August 29, 1989, had a value of

$1,865,500, and that the accountant hired to determine the annual

payment decedent was to receive employed a "reasonable and

proper" procedure in valuing the annuity at $1,865,500.

Petitioner maintains that respondent's $1,360,724 valuation of

the annuity is somehow suspect and that the valuation methodology

respondent employed is not, in fact, required by section 7520 and

the regulations thereunder. We disagree.

Following the enactment of section 7520 on November 10,

1988, the IRS published temporary guidance to taxpayers for

transfers occurring after April 30, 1989, that would be subject

to section 7520. Notice 89-24, 1989-1 C.B. 660, published on

March 6, 1989, sets forth the formulas for computing the present

value of an annuity on the basis of the appropriate applicable

Federal midterm rate and the prior mortality experience. Notice

89-60, 1989-1 C.B. 700, published on May 30, 1989, provides

tables of actuarial factors to be used in determining the present

value of an annuity on the basis of more recent mortality

experience. Although final regulations under section 7520 were

not promulgated until June 10, 1994, the regulations eventually

issued provide certain transitional rules which were made

retroactive to May 1, 1989. Under these transitional rules,

where the valuation date is after April 30, 1989, and before June
 - 23 -

10, 1994, executors or donors can rely on Notice 89-24, supra, or

Notice 89-60, supra, in valuing the transferred interest. Sec.

20.7520-4, Estate Tax Regs.; sec. 25.7520-4, Gift Tax Regs.

Thus, contrary to petitioner's argument, the valuation

methodology respondent employed is specifically required by the

transitional rules provided in section 25.7520-4, Gift Tax Regs.

Applying Notice 89-24, supra, and Notice 89-60, supra,

respondent, in the notice of deficiency dated March 13, 1996,

determined that the private annuity decedent received had a value

of $1,360,724.

In addition, the record discloses that decedent's accountant

did not reasonably value the annuity decedent was to receive.

The accountant did not follow the procedure specified in Notice

89-24, supra, and Notice 89-60, supra, as he testified that he

had been unaware of the enactment of section 7520. Moreover, he

did not even value the annuity pursuant to the actuarial table

prescribed under the estate and gift tax regulations in effect in

late 1988, which were issued in 1984. See supra note 5. He

used an interest rate of 9 percent (which he believed was a rate

slightly higher than the then prevailing interest rate charged on

land sales contracts in Arizona), notwithstanding that the

actuarial tables contained in the estate and gift tax regulations

then in effect (in late 1988 when decedent's accountant

apparently valued the annuity) used an interest rate factor of 10
 - 24 -

percent. See H. Conf. Rept. 100-1104 (Vol. II), at 112 (1988),

1988-3 C.B. 473, 602. Thus, the 9-percent interest rate the

accountant used was not a reasonable interest rate, as a higher

rate should have been used to reflect the private annuity's

unsecured nature. Unlike a seller under a land sale contract,6

decedent under the private annuity would have only an unsecured

right to receive a specified annual payment during her life.

We hold that the private annuity decedent received had a

value of $1,360,724 as of August 29, 1989. Sec. 7520; sec.

25.7520-4, Gift Tax Regs.; Notice 89-60, supra; Notice 89-24,

supra.7 Thus, the $1,865,500 worth of land decedent transferred

6
In general, in an installment land sale contract, the
seller retains record title to the real property but agrees to
give the buyer immediate possession and to issue later to the
buyer a deed to the property upon the buyer's full payment of the
purchase price. See Ariz. Rev. Stat. Ann. secs. 33-741 to 33-749
(West 1990); see also Maciborski v. Chase Serv. Corp., 161 Ariz.
557, 779 P.2d 1296, 1298-1299 (Ariz. Ct. App. 1989).
7
As indicated above, respondent's $1,360,724 valuation of
the annuity is in accordance with the mandated standards of sec.
7520; that is, in valuing the annuity, respondent employed (1) an
interest rate based on the applicable Federal midterm rate and
(2) a mortality component based on more recent U.S. census data.
We would note that even under the pre-sec. 7520 case law, to
justify a departure from respondent's administrative actuarial
tables, petitioner would have had to offer, among other things,
convincing expert actuarial testimony establishing respondent's
table to be old or outmoded. See Estate of Christ v.
Commissioner, 480 F.2d at 174. Petitioner offered no such expert
testimony at trial. Even if petitioner had offered evidence
attempting to do so, respondent's interest rate and mortality
assumptions here (which are those prescribed by sec. 7520) can
hardly be considered old or outmoded.
 - 25 -

to her grandchildren substantially exceeded the $1,360,724 value

of the annuity.

Petitioner, nevertheless, asserts that decedent's transfer

of the land is not subject to gift tax, because the transaction

qualifies as a sale in the ordinary course of business under

section 25.2512-8, Gift Tax Regs. We disagree.

Transactions between family members are subject to special

scrutiny. Harwood v. Commissioner, 82 T.C. at 258. Also, one of

the major purposes of the gift tax is to prevent an avoidance of

estate tax by an inter vivos transfer of property. See Carson v.

Commissioner, 641 F.2d at 866 n.6.

The record reflects that no arm's-length bargaining took

place between decedent and her grandchildren. Indeed, the

private annuity transaction was structured by decedent's attorney

and accountant and was devised as a substitute for decedent's

earlier planned testamentary disposition of her land to certain

of her grandchildren.

We hold that the private annuity transaction between

decedent and her grandchildren is not a transaction in the

ordinary course of business within the meaning of section

25.2512-8, Gift Tax Regs. See Harwood v. Commissioner, supra at

257-258.

In conclusion, decedent's August 1989 sale of her farmland

to her grandchildren is subject to gift tax, as the value of the
 - 26 -

land exceeded the value of the private annuity she received.

Commissioner v. Wemyss, 324 U.S. at 306-307; sec. 25.2512-8, Gift

Tax Regs. In addition, in computing petitioner's estate tax

liability under section 2001, adjusted taxable gifts must be

increased to reflect decedent's August 1989 gift to her

grandchildren.

To reflect the foregoing and the parties' concessions,

Decision will be entered

under Rule 155.