T.C. Memo. 2000-193
UNITED STATES TAX COURT
ESTATE OF REBECCA A. WINEMAN, DECEASED,
ELEANOR TRUOCCHIO AND DEAN WINEMAN,
CO-EXECUTORS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27339-96. Filed June 28, 2000.
1. Decedent (D) gave an aggregate 24-percent
interest in her homestead property to her children. In
the years following the transfer, she continued to
reside on the property. R determined that the 24-
percent interest is includable in D’s gross estate
pursuant to sec. 2036, I.R.C. Held: D’s continued use
of the homestead property as her residence following
the transfer of minority interests in the property to
her children was not a retained life estate in the
property interests conveyed to her children.
Consequently, the value of the minority interests is
not includable in her estate under sec. 2036, I.R.C.
2. D rented her interests in certain real estate
to Coastal Ranches, a corporation owned by her
children, at a below-market rent. R determined that
the annual difference between fair market rent and
actual rent constituted taxable gifts. Held: R’s
computation of the amount of taxable gifts sustained.
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3. On its Form 706, U.S. Estate (and Generation-
Skipping Transfer) Tax Return, P valued D’s real estate
at $2,261,800. R determined that the fair market value
was $2,785,248. Held: The fair market value was
$2,417,491.
4. P elected special use valuation of certain
farm real property on its Form 706. R disallowed the
election because P failed to document comparable rental
property in accordance with sec. 2032A(e)(7), I.R.C.,
and the regulations thereunder. See sec. 20.2032A-4,
Estate Tax Regs. Held: P may not value its elected
properties under the valuation formula of sec.
2032A(e)(7), I.R.C. Held, further, by reason of sec.
20.2032A-4, Estate Tax Regs. (which provides that if an
executor does not identify comparable property and cash
rentals as required by sec. 2032A(e)(7), I.R.C., all
specially valued real property must be valued under the
rules of sec. 2032A(e)(8), I.R.C.), P may value the
properties under the provisions of sec. 2032A(e)(8),
I.R.C. Held, further, P’s special use valuation under
sec. 2032A(e)(8), I.R.C., is allowed.
John W. Ambrecht and Gregory Arnold, for petitioner.
Steven M. Roth, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined an estate tax
deficiency of $775,626 and an addition to tax under section 6662
of $3,844. After concessions,1 the issues for decision are:
1
The parties conceded several items in a stipulation of
agreed adjustments, filed Sept. 14, 1998. Petitioner's
concessions are described therein and will not be repeated here.
Respondent has conceded that petitioner is not liable for the
addition to tax. On brief, respondent conceded that the fair
market values of decedent's interests in two parcels of estate
(continued...)
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1) Whether Rebecca A. Wineman (decedent) retained a life
estate in partial interests in her homestead property transferred
to her children. We hold that she did not.
2) Whether decedent rented her ranch properties to a
closely held corporation owned by her children at below-market-
value rates, thereby making taxable gifts to her children. We
hold that she did.
3) Whether the cumulative fair market value of certain real
property includable in the gross estate was $2,261,800 as
returned by petitioner, $2,785,248 as determined by respondent,
or some other figure. We hold that the fair market value was
$2,417,491.
4) Whether petitioner’s election of special use valuation
qualified as a valid election under section 2032A.2 We hold that
it did.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts is incorporated herein by this
reference.
1
(...continued)
property, the Homestead (parcel 3) and the Machado Ranch (parcel
8), were $52,000 and $231,000, respectively.
2
All section references are to the Internal Revenue Code as
in effect for the date of decedent’s death, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
All monetary amounts have been rounded to the nearest dollar.
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Rebecca A. Wineman (decedent) died on June 24, 1992 (the
valuation date). Petitioner’s coexecutors resided in Santa
Maria, California, at the time the petition in this case was
filed.
Ranch Operations
The Wineman family has been grazing cattle in the Nipomo,
California, area for approximately 115 years. Decedent and her
husband, Vernon Wineman (Mr. Wineman), were full-time cattle
ranchers from the 1930's until their deaths.3 Until early 1992,
decedent performed numerous activities relating to the cattle
operation. Her activities included feeding the cattle, deciding
which breed to run, helping brand cattle, cooking for the
branding crew, deciding when to buy and sell cattle and at what
prices, making decisions regarding feed purchases, negotiating
purchases of real estate and coordinating all the legal and sales
activities for the purchases, arranging for Land Bank lending,
painting and assisting in the repair and maintenance of corrals
and cattle facilities, and attending bull and cattle sales in San
Luis Obispo, Kern, and Santa Barbara Counties. Decedent also
belonged to local and national cattle organizations.
Coastal Ranches, a C corporation organized in 1979,
continues the cattle operations conducted by decedent and Mr.
3
Mr. Wineman died on Jan. 22, 1962.
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Wineman. Decedent owned no interest in Coastal Ranches.
Decedent and Mr. Wineman’s three children, Dean Wineman (Dean),
Eleanor Truocchio (Eleanor), and Marian Hanson (Marian), each own
21 percent of Coastal Ranches, and the remaining 37 percent is
owned by Mr. Wineman's testamentary trust (the trust), of which
the three children are beneficiaries. Dean and Eleanor are full-
time cattle ranchers. Marian lives in Montana and occasionally
participates in the cattle operation.
Nipomo Properties
The Nipomo properties (parcels 3, 5, 6, 9, and 10) are
located within the greater urban area of Santa Maria, a city at
the northern end of Santa Barbara County, California. The Santa
Maria area has a population of approximately 100,000. Santa
Maria is primarily a farming community. Other parts of the
coastal zone are more upscale, such as the Santa Ynez and Santa
Ynez River Valleys to the south. Arroyo Grande, to the north and
west of Santa Maria and along the Pacific coast, is the location
of many second homes, attracting people seeking to escape the
summer heat of the San Joaquin Valley. Further north along the
coast, the coastal towns of Morro Bay and Cambria are also
popular with tourists. The area has attracted resort and second
home development.
Although Santa Maria is within Santa Barbara County, the
town of Nipomo and the Nipomo properties are in San Luis Obispo
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County. These properties are at the southern entrance to San
Luis Obispo County. As of the valuation date, the county
government intended to preserve this entrance as a scenic area
that extended back almost to the first range of hills.
Specifically, the San Luis Obispo County land use element in
effect at the valuation date placed the ranches in the South
County Planning Area. Permitted uses of properties in this area
were limited to certain specified agricultural uses.
As of the valuation date, the Nipomo properties were part of
an agricultural preserve and had been continuously since the
early 1970's. A property is placed in an agricultural preserve
by the land owner by a contract with the county. In exchange for
keeping the property as rural, open space agricultural land, the
land owner receives a preferential property tax rate. Each
property in the agricultural preserve is encumbered by a 20-year
evergreen contract, which renews day to day. Under the contract,
a landowner has the right to notify the county of an intent to
terminate the contract on its anniversary date, and once such
notice is provided, the contract will expire 20 years later.
The Winemans did not provide notice of intention to terminate the
evergreen contracts on the Nipomo properties at any time before
their deaths.
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The Homestead Property
Decedent's homestead property (parcel 3) is the site of two
residences. One is a larger house with three bedrooms. Decedent
occupied one bedroom at the time of her death and had the use of
the living room, kitchen, and dining area. Dean used a second
bedroom as an office, where he kept his desk and all his
bookkeeping papers, although he had moved out of the main house
in 1979 or 1980 after his marriage. Decedent used the other
bedroom as a guest bedroom, primarily for Marian when she visited
from Montana. The main house also had a separate office that was
the corporate headquarters for Coastal Ranches.
The second house on the homestead property is a smaller
house of approximately 1,500 square feet. Dean has lived there
since 1979 or 1980 as a ranch employee. He has never paid rent
for his use of the smaller house.
In addition to the residences, parcel 3 has two large barns,
a small barn, a granary, cattle scales and corrals, a farm shop,
two garages, and a small orchard.
During each of the years 1968, 1969, and 1970, decedent gave
each of her three children one-third of an undivided 8-percent
interest in her homestead property, for a total gift to all three
children after the 3-year period of 24 percent. At the time of
her death, decedent owned a 51-percent interest in the homestead
property. The trust owned the remaining 25 percent.
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Coastal Ranches stored hay in the barns, used the corrals
and farm shop, and kept vehicles in a garage and in one of the
big barns. Coastal Ranches maintained and paid utilities for the
houses. Coastal Ranches also sealed the driveway, installed a
sidewalk, and provided decedent with a pickup truck for her use.
Workers provided by Coastal Ranches assisted with yard
maintenance, including cutting down and pruning trees, repairing
water pipes, and removing bushes. Coastal Ranches was also
responsible for replacing fences and corrals in the event of a
fire.
Some of the soil on parcel 3 was contaminated by the
spillage of gasoline in a refueling area near one of the barns.
On February 9, 1996, NG Chemical estimated the soil remediation
expenses on parcel 3 to be $36,256.
As of the valuation date, the fair market value of
decedent's interest in the homestead property, including land,
buildings, and site improvements, was $52,000.
The Nipomo Pasturelands
The Nipomo pasturelands consisted of Rancho El Suey (parcel
5), Rancho Nipomo (parcel 6), Lot 74 (parcel 9), and the Pit
(parcel 10). As of the valuation date, all of these properties
were vacant, unimproved lands used only for cattle grazing.
Decedent owned 51 percent of parcel 5, which was an oblong,
irregularly shaped property consisting of 1,487 acres located on
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the north side of Highway 166 between Temettate Ridge and
Twitchell Reservoir. On the valuation date, the property carried
approximately 50 cows.
Decedent owned 50 percent of parcel 6, which was a squarish,
648-acre property situated immediately west of Temettate Ridge
and parcel 5. The easternmost corner of parcel 6 adjoined the
westernmost corner of parcel 5, but the properties did not
otherwise share a common boundary. On the valuation date, the
property carried 20-25 cows.
Decedent owned 100 percent of parcel 9, which was a
rectangular parcel of 90 acres, situated directly northwest of
parcel 6. The longer side of the rectangle (the southeast
boundary) was also the northwest boundary of parcel 6. The
record does not reflect parcel 9's carrying capacity as of the
valuation date.
Decedent owned 100 percent of parcel 10, a triangular parcel
created by the realignment of Highway 166, which severed Parcel
10 from other Wineman properties. Parcel 10 is bisected by two
ravines. At 7 acres, it is below the minimum parcel size allowed
by local zoning. Thus, it would be valuable only to a
neighboring landowner wishing to expand his acreage.
Average annual precipitation on the properties ranged from
14 to 18 inches. With the exception of only a few acres, the
soil composition and steep slopes made the properties unsuitable
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for farming. A variety of factors made these ranch properties
unattractive for residential development, including limited water
supplies and land use restrictions. As of the valuation date,
the highest and best use of these properties was their continued
use as grazing land and pastureland.
As of the valuation date, the fair market values of
decedent's interests in the Nipomo properties were as follows:
Parcel no. Parcel name Fair market value
5 Rancho El Suey $580,153
6 Nipomo Ranch 247,860
9 Lot 74 81,000
10 The Pit 1,750
The Machado Ranch
Decedent owned a 25-percent interest in the Machado Ranch
(parcel 8), which consisted of approximately 1,204 acres of
unimproved grazing land located just behind the first ridge of
the Santa Lucia Mountains, approximately 8 miles west of the city
of San Luis Obispo. Approximately 562 acres are steep, rocky, or
brushy, which limits the grazing utility of the property. The
pasture quality is about average for the area. The property is
perimeter fenced. However, the topography of the property makes
the ranch difficult to manage. Because of the steep slopes and
brushy canyons throughout the property, livestock are difficult
to round up, and extra labor is required to do so. As of the
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valuation date, the property carried 56 cows. During 1998, it
was carrying about 75 cows.
Parcel 8 is zoned for agricultural use, and the zoning is
burdened with a "geologic hazard" overlay. Like the Nipomo
properties, Machado Ranch is in an agricultural preserve and is
the subject of a 20-year evergreen contract.
The applicable land use laws permit rural residential use of
the property. However, the steep terrain, rough-graded access
roadway, and third-party easement rights severely restrict the
desirability for residential use. The property is also situated
in an area at risk for wildfires, and portions of the ranch were
burned in fires during 1985 and 1994. There are no developed
utilities, and the ranch roads are usable only by four-wheel-
drive vehicles.
As of the valuation date, the fair market value of
decedent's interest in parcel 8 was $231,000.
Rental of Decedent’s Ranch Properties
During 1989, 1990, and 1991, decedent leased her interests
in the ranch properties to Coastal Ranches, pursuant to oral
agreements. Coastal Ranches paid decedent $5,000 per year during
1989 and 1990 and $10,000 per year during 1991 for the right to
graze cattle on her ranch properties. The rate of rent was not
negotiated. For these years, decedent informed her children what
rent she intended to charge, and the children accepted that rent
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without question. Decedent did not tell her children how she
calculated the rent. In 1989, 1990, and 1991, the fair market
rent for the ranch properties was $16,595 per year, net of
property taxes.
Coastal Ranches contributed an unspecified amount of labor
and materials in connection with its lease of decedent's ranch
properties. During 1989, 1990, and 1991, Coastal Ranches paid
property taxes, maintained fences, and paid utilities and other
expenses associated with the Wineman properties.
In 1989, 1990, and 1991, decedent gave $10,000 in cash to
each of her three children.
The Special Use Valuation Election
On its Form 706, U.S. Estate (and Generation-Skipping
Transfer) Tax Return, petitioner claimed special use valuation
for parcels 5, 6, 7, 8, and 9, pursuant to section 2032A. The
election reduced petitioner's reported gross estate by $750,000,
the maximum then permitted by law.
Respondent's estate tax attorney, Patricia Hiles (Ms.
Hiles), sent a letter with an attached document request to the
attorney for the estate on September 13, 1995. Paragraph 23 of
the document request stated:
The estate has submitted a one page computation of the
Special Use Valuation which is not adequate to
substantiate the special use valuation as required by
IRS Regulations. If the estate wishes to retain the
special use valuation reduction, and not have it
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denied, then we will need the following within the next
60 days:
a. Who did this calculation submitted with the
706?
b. If there are any other data to support it,
please submit copies.
c. It appears that the valuation is based upon
what deceased received on her ranching operations.
Please supply copies of those leases.
d. Please comply with Regulation 20.2032A-4 (copy
enclosed for your convenience) that requires
documentation which identifies specific comparable
rentals and taxes for five years prior to date of
death, arms length transactions, to determine the
net rents. (I am also enclosing a copy of the Tax
Management discussion and example of how special
valuations must be done in order to qualify.) The
Farm Credit Bank rate for the Sacramento
District for 1992 was 11.50%. (See copy of Revenue
Ruling 92-12 enclosed.) A rate cannot be
“assumed”.
e. If the appropriate documentation for the
special use valuation is not supplied, the
$750,000 reduction will be disallowed, see
Strickland, 92 TC 16, copy enclosed.
At a meeting with the estate's attorney, Richard Weldon, and
the coexecutors on September 21, 1995, Ms. Hiles described the
requirements of electing special use valuation pursuant to
section 2032A(e)(7). Ms. Hiles did not mention section
2032A(e)(8) because she did not believe the estate could properly
elect special use valuation under that section. After the
meeting, Ms. Hiles extended the period for supplying the
requested information to 90 days. On December 12, 1995 (within
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the 90-day period), petitioner, through its appraisal firm,
Reeder, Gilman & Associates, submitted a section 2032A valuation
report.
The report listed 10 properties in the vicinity of
decedent's ranch properties and listed the then-current rates of
rent, which ranged from $4.50 per acre to $15 per acre depending
upon the carrying capacity of the land. The report did not set
forth the specific lease rates for any comparable properties in
the 5 years preceding 1992, but stated:
Rents for the land types on the subject have been
static and current levels are representative of rents
over the last five to ten years and are considered
indicative of a five year average.
The report concluded:
Parcels 5, 6, and 9 are more arid and would
compete relatively low in the range. Parcel 7,
although the net grazing land is of good quality,
competes lower than Parcel 8 because the difficulty of
the terrain reduces the carrying capacity. * * *
Parcel 8 is good grazing and competes well above the
Nipomo parcels and the San Luis Obispo Ranch.
Petitioner's Special Use Valuation Report ultimately concluded
that rental values for the properties were: $6 per acre for
parcels 5, 6, and 9; $7 per acre for parcel 7; and $8 per acre
for parcel 8.
The report stated the following information with respect to
taxes:
The Williamson Act, which governs the taxing of
land in Ag Preserves, sets up a methodology for
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assessing land based upon rental values and built up
capitalization rates. As a result taxes, county-wide,
are based upon the average income producing ability of
like properties. Since the tax assessment methods
produce the same effect as an average, our estimate of
taxes is based upon average of the 5 years prior to
1992.
The report did not list the taxes assessed and paid on the
comparable ranch properties.
In calculating the special use values for each of decedent's
properties, the report multiplied the gross rental per-acre value
by the number of acres, then subtracted the actual taxes for that
property to arrive at the net annual rent. Each parcel's special
use value was calculated by dividing net annual rental by 11.5
percent, the Farm Bank rate for June 1992 (Sacramento District).
Finally, the estate's pro rata share of the special use value was
calculated by multiplying each parcel's special use value by the
estate's percentage ownership. According to the report, the
total special use value for all elected properties was $127,681.4
OPINION
I. Retained Life Estate in Parcel 3
The first issue for decision is whether decedent retained a
life interest in the partial interests in her homestead property
that she gave to her children. Respondent increased decedent's
4
Petitioner's report uses the figure $127,936, which
included $255 attributable to parcel 10, although petitioner did
not elect special use valuation for parcel 10 on its Form 706.
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gross estate by the value of a life estate in the aggregate 24-
percent interest of her homestead property (parcel 3) that
decedent gave to her children. Respondent asserts that the value
of that interest is properly includable in decedent's gross
estate pursuant to section 2036(a) because she retained a life
estate in that interest.5 Petitioner does not dispute
respondent's valuation of the purported life estate but contends
that decedent retained no such interest in her homestead
property. Petitioner bears the burden of proof. See Rule
142(a); Welch v. Helvering, 290 U.S. 111 (1933).
In support of its contention that decedent retained no life
estate in the children's partial interests, petitioner points out
5
The pertinent part of sec. 2036 provides:
SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.
(a) General Rule.--The value of the gross estate
shall include the value of all property to the extent
of any interest therein of which the decedent has at
any time made a transfer (except in case of a bona fide
sale * * *), by trust or otherwise, under which he has
retained for his life or for any period not
ascertainable without reference to his death or for any
period which does not in fact end before his death--
(1) the possession or enjoyment of, or
the right to the income from, the property,
or
(2) the right, * * * to designate the persons
who shall possess or enjoy the property or the
income therefrom.
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that decedent used much less than 76 percent of parcel 3 and the
main house.6 Petitioner also points to Dean’s testimony to the
effect that no agreement existed, implied or otherwise, for
decedent to retain the possession and enjoyment of the partial
interests at the time she transferred those interests to her
children. Respondent argues that Dean’s testimony is self-
serving and contrary to the objective facts and circumstances.
Although Dean’s testimony was clearly self-serving, we disagree
with the assertion that the testimony was contrary to the
objective facts and circumstances, and we ultimately agree with
petitioner that decedent did not retain a life estate includable
in her gross estate under section 2036.
A decedent's reservation of a life interest need not be
provided for expressly in the instrument of transfer or
enforceable under local law to be includable under section 2036.
See Estate of McNichol v. Commissioner, 29 T.C. 1179 (1958),
affd. 265 F.2d 667 (3d Cir. 1959). An implied agreement at the
time of transfer for the decedent to continue possession or
enjoyment of the property is sufficient and may be inferred from
all the circumstances surrounding the transfer. See Guynn v.
6
Petitioner's argument implies that decedent owned 76
percent of the homestead property. However, the parties
stipulated that decedent owned 51 percent. At trial, Dean
testified that his father's testamentary trust owned the
remaining 25 percent.
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United States, 437 F.2d 1148, 1150 (4th Cir. 1971). In
determining whether an implied agreement existed, “all facts and
circumstances surrounding the transfer and subsequent use of the
property must be considered.” Estate of Rapelje v. Commissioner,
73 T.C. 82, 86 (1979); sec. 20.2036-1(a), Estate Tax Regs.
Decedent gave her children, collectively, a 24-percent
interest in parcel 3. Parcel 3 consisted of just over 10 acres
and had two houses, two large barns, a small barn, a granary, a
farm shop, cattle scales and corrals, two garages, and a small
orchard. Pursuant to its leases of decedent's properties,
Coastal Ranches stored hay in the barns, used the corrals and
farm shop, and kept vehicles in a garage and one of the big
barns. Decedent occupied the larger house, although Dean kept
his desk and bookkeeping papers in one of the bedrooms and used
it as an office. Another bedroom was used primarily by Marian
when she visited from Montana. Coastal Ranches used an office in
the main house. Dean resided in the smaller house on the
homestead property. Other than the main house, decedent's
personal use of parcel 3 was limited to the garden and small
orchard next to the main house.
Decedent’s limited personal use of the property does not
prove the absence of an implied agreement. In fact, the record
is silent as to whether decedent could designate who might enjoy
the property. See sec. 2036(a)(2); see also United States v.
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Byrum, 408 U.S. 125, 145 (1972) (possession and enjoyment are
synonymous with substantial present economic benefit). The fact
that decedent personally used less than all of the property does
not demonstrate that she did not possess and enjoy the entire
property.
In contrast, where a decedent continues exclusive possession
and continues to pay taxes and other property expenses after the
transfer and the owner of record title neither charges rent nor
takes possession of the property, these facts are highly
indicative of an implied agreement. See Guynn v. United States,
supra at 1150; Estate of Rapelje v. Commissioner, supra at 87.
Here, however, decedent shared the property with Dean and his
wife and rented the property at a below-market rent (discussed in
more detail infra sec. II) to Coastal Ranches. Pursuant to its
leases, Coastal Ranches paid the taxes and other property
expenses associated with parcel 3. These facts do not of
themselves prove the absence of an implied agreement.
On balance, the objective facts convince us that an implied
agreement giving decedent continuing possession and enjoyment of
the entire homestead property did not exist. Unlike the
authority that has been cited in respondent’s brief, this case
involves a transfer of less than a fee simple interest in
property. The majority owner’s continued use and possession of
real property following transfer of a minority interest is not
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unusual. Cf. Gutchess v. Commissioner, 46 T.C. 554, 557 (1966)
(where a husband transferred his entire interest in a homestead
property to his wife, who then allowed him to live in the house
without charge, the donor's continued use and enjoyment is a
natural use which does not diminish the wife's enjoyment and
possession). In this case, decedent's continued use and
possession of parcel 3, of which she owned a controlling
interest, is natural in light of the children's minority
ownership. It is not surprising that the children did not seek
to partition the property, since they also used the property
regularly and they had only a minority interest in the property.
In addition to the objective facts, our decision rests
heavily on Dean’s testimony that there was no understanding
between decedent and her children. While his testimony was
clearly self-serving, Dean's testimony was straightforward,
unequivocal, and credible. Respondent’s counsel chose not to
cross-examine him on this point. Because we credit his
testimony, we hold that petitioner has carried its burden of
proving that there was no implied agreement. Cf. Hendry v.
Commissioner, 62 T.C. 861, 872 (1974).
II. Taxable Gifts Adjustment
The second issue is whether decedent rented ranch property
to her children at a below-market rate, thereby making a taxable
gift to her children. In the notice of deficiency, respondent
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determined that decedent had made taxable gifts to her children
amounting to $53,784 that are properly includable in decedent's
adjusted taxable gifts. Only $23,784 of that determination
remains at issue and encompasses two types of gifts: (1) Checks
of $10,000 delivered to each of decedent's three children and (2)
below-market-value rental of decedent's ranch properties. After
reducing the amount of the gifts by $10,000 to account for the
annual exclusion, respondent determined that decedent had made
taxable gifts to her children amounting to $5,595 in 1989,
$11,595 in 1990, and $6,594 in 1991.
The parties stipulated that decedent made the first type of
gifts. Respondent asserts that the information submitted by
petitioner’s expert on comparable rentals demonstrates that
decedent's rate of rent was less than the market rate.
Petitioner argues that decedent charged a market rate because
Coastal Ranches paid various property-related expenses. We agree
with respondent.
Petitioner's special use valuation report indicated that the
annual fair market rent of decedent's pro rata interest in the
parcels rented to Coastal Ranches was $14,725. The report did
not identify a fair market rent for parcel 3. Respondent
estimated that the annual fair market rent of decedent's 51-
percent interest in parcel 3's land and improvements (excluding
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the main house) was $1,872.7 Respondent determined that the
fair market rent of decedent's interests totaled $16,595, and
that the difference between actual rent charged and fair market
rent constituted a taxable gift.8
It is conceded that Coastal Ranches paid property taxes and
other expenses in connection with its leases of decedent’s ranch
properties. Dean testified that Coastal Ranches paid all the
property taxes, insurance, and maintenance (collectively, the
property expenses) on all the fences and ranch buildings.
However, petitioner was not able to establish the amounts of
those expenditures.9
Petitioner argues that the Court should estimate the amounts
of the property expenses paid pursuant to the leases and thereby
find that decedent charged a fair market rent. See Cohan v.
7
The difference between the sum of these figures, $16,597,
and the figure used in the notice, $16,595, is unexplained.
8
The parties stipulated that decedent rented the ranch
lands, in toto, to Coastal Ranches for $5,000 in 1989, $5,000 in
1990, and $10,000 in 1991.
9
Petitioner failed to share the salient documents with
respondent's counsel 15 days before trial, as required by the
Court's Standing Pre-Trial Order. Respondent objected to a
question put to Dean regarding the amounts of property-related
expenses, on the grounds that the records themselves were the
best evidence of the expenses. We sustained the objection.
Because the records had not been exchanged 15 days before trial
as required by the Court's Standing Pre-Trial Order, we also
sustained respondent's objection to petitioner's introduction of
the records themselves into evidence.
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Commissioner, 39 F.2d 540 (2d Cir. 1930). Respondent argues that
the Court should make no estimate, because the Court lacks any
evidentiary basis from which an estimate could be made.
Petitioner contends that the rent charged by decedent
corresponded to a market rate because Coastal Ranches paid many
expenses associated with maintaining the properties, including
property taxes. However, petitioner overlooks the fact that the
fair market rental values, as calculated by petitioner’s expert
and used by respondent in the notice of deficiency, are net of
property taxes; respondent used the net figures in computing the
amount of taxable gifts. The record does not reflect amounts
paid for other property-related expenses.
We need not invoke the Cohan rule when the failure to
introduce documentary evidence stems from the taxpayer's own
intransigence. See Lerch v. Commissioner, 877 F.2d 624, 629 (7th
Cir. 1989), affg. T.C. Memo. 1987-295. Moreover, we agree with
respondent that the rule is inapplicable where, as here, the
record lacks any evidentiary basis from which an estimate could
be made. See Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985). Petitioner has failed to prove that the rent charged by
decedent corresponded to a market rate. Since there is no
- 24 -
dispute that the below-market rent is a taxable gift under
section 2503, respondent is sustained on this issue.10
III. Fair Market Value of Decedent's Real Estate
A. Introduction
The penultimate issue in this case is the determination of
the fair market value of decedent's interest in the Nipomo
properties. The positions of the parties and our conclusions
with respect to the properties in dispute are as follows:
Petitioner's Respondent's
Parcel Form 706 Expert Notice1 Expert Court
5 - El Suey $485,000 $485,000 $732,105 $819,000 $580,153
6 - Nipomo 205,000 205,000 302,315 331,000 247,860
9 - Lot 74 65,000 65,000 76,500 108,000 81,000
10 - The Pit nominal 150 34,950 8,000 1,750
1
Statutory Notice of Deficiency.
Our analysis is set forth below.
Fair market value is “the price at which the property would
change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or to sell and both
having reasonable knowledge of relevant facts.” United States v.
Cartwright, 411 U.S. 546, 551 (1973); sec. 20.2031-1(b), Estate
Tax Regs. The willing buyer and the willing seller are purely
10
A computational adjustment will be required to give effect
to the parties’ stipulation regarding decedent’s cash gifts. The
parties stipulated that decedent gave $10,000 in cash to each
child in 1989, although the taxable gifts adjustment in the
notice of deficiency was based on a determination that decedent
made an $8,000 gift to each child in that year. The stipulated
figure is given binding effect. See Rule 91(e).
- 25 -
hypothetical. See Propstra v. United States, 680 F.2d 1248,
1251-1252 (9th Cir. 1982); Estate of Robinson v. Commissioner, 69
T.C. 222, 225 (1977). Fair market value of property as of any
given date is a question of fact to be determined from the entire
record. See Lio v. Commissioner, 85 T.C. 56, 66 (1985), affd.
sub nom. Orth v. Commissioner, 813 F.2d 837 (7th Cir. 1987).
While we must consider the entire record, we have broad
discretion in deciding which facts are most important in reaching
a decision because “finding market value is, after all, something
for judgment, experience, and reason”. Colonial Fabrics, Inc. v.
Commissioner, 202 F.2d 105, 107 (2d Cir. 1953), affg. a
Memorandum Opinion of this Court dated Jan. 22, 1951.
The determinations of value in respondent's statutory notice
of deficiency are presumptively correct. See Welch v. Helvering,
290 U.S. 111 (1933). Petitioner bears the burden of proving that
the fair market values of the properties are less than those
determined by respondent. See Rule 142(a). Respondent bears the
burden of proof with respect to any increases in value beyond
those determined in the notice of deficiency. See id.
In support of their positions, both parties presented expert
testimony. Both expert witnesses are appraisers: Leslie J.
Gilman (Mr. Gilman) for petitioner and David F. Hamel (Mr. Hamel)
for respondent. We do not list or discuss here the
qualifications of the experts, because our decision is not based
- 26 -
on comparing qualifications, and listing them would unduly
lengthen this opinion. The focus of our opinion is on the degree
to which the experts’ opinions are supported by the evidence.
In reviewing the conclusions of each expert, we may accept
or reject expert testimony according to our own judgment, and we
may be selective in deciding what parts of an expert's opinion,
if any, we will accept. See Parker v. Commissioner, 86 T.C. 547,
562 (1986). Conclusory opinions that are unexplained or contrary
to the factual evidence will be rejected. See Compaq Computer
Corp. v. Commissioner, T.C. Memo. 1999-220.
B. Petitioner's Expert
Mr. Gilman appraised decedent's real estate interests in
conjunction with the filing of petitioner's Form 706. He also
prepared an update of that appraisal as an expert report in
conjunction with this litigation. Mr. Gilman used the sales
comparison approach11 to determine the fair market value of
decedent's interest in the properties. Mr. Gilman chose nine
properties that he determined were comparable to the ranch
11
The sales comparison approach, also known as the
comparable sales or market data approach, is “‘generally the most
reliable method of valuation, the rationale being that the market
place is the best indicator of value, based on the conflicting
interests of many buyers and sellers.’” Estate of Spruill v.
Commissioner, 88 T.C. 1197, 1229 n.24 (1987) (quoting Estate of
Rabe v. Commissioner, T.C. Memo. 1975-26, affd. without published
opinion 566 F.2d 1183 (9th Cir. 1977)).
- 27 -
properties. He also supplied sales data for two sales that
occurred after his original appraisal.
Mr. Gilman or his associate, Ed Hawkes, verified each sale
and personally inspected each comparable property. In his report
Mr. Gilman provided the date of sale, location, price, number of
acres, and price per acre of each comparable property. Prices
per acre ranged from a low of $200 (an 11,250-acre ranch near
King City, about 120 miles to the north of decedent's Nipomo
properties) to $1,100 (several properties in Santa Barbara, San
Luis Obispo, and Monterey Counties). The report contained a
summary description of each comparable property, with comments
indicating similarities and differences between the comparable
and subject properties.
Without indicating exactly what adjustments were necessary
between the comparable and subject properties, Mr. Gilman
concluded:
It is our opinion based on the sales data that a
sales price of $1,000 per acre is an appropriate
estimate of value for ranches with strong residential
characteristics or ranches that are located in areas
with strong urban influence that appeals to upscale
buyers. It is our opinion that Machado Ranch fits
within this category. Because of its shape,
topography, and location the Rancho El Suey presents
fewer opportunities for residential development. The
Rancho Nipomo parcels appear to offer access
difficulties and even greater topographic difficulties
than the Rancho El Suey. It is our opinion that these
parcels compete lower in the range; inferior to the
sales with strong residential characteristics, but
superior to the strictly grazing properties and the
- 28 -
parcels with the most difficult problems. It is our
opinion that the appropriate estimate of market value
for each of these parcels is $750 per acre.
Because of its marginal utility, it is our opinion
that * * * [parcel 10–the Pit] is of less value per
acre than the lowest priced sales. It is our opinion
that the only possible market for the parcel is a
neighboring land owner. Since the parcel would add
little or no utility to the neighboring parcel, its
value is accordingly nominal.
Respondent criticized Mr. Gilman's failure to specify in his
report whether an adjustment was made to comparable properties
located in an agricultural preserve. Mr. Gilman's report does
not indicate whether the comparable properties were in
agricultural preserves; however, if they were not, a positive
adjustment would have been required because a hypothetical
willing buyer would likely prefer the absence of such a
contractual restriction. If the comparable properties were
located in agricultural preserves, no adjustment would have been
required. Thus, we agree with petitioner that the lack of
adjustment, if any had been required, would have tended to result
in an overvaluation of decedent's property interests.
After determining that the value of a fee simple interest
was $750 per acre for the Nipomo ranch properties and $1,000 per
acre for the Machado Ranch, Mr. Gilman proceeded to calculate the
value of decedent's partial interests in the properties. He
examined six sales of partial interests and determined the
partial interest discount for each comparable sale. Comparing
- 29 -
actual sale prices to the estimated pro rata share of market
value, Mr. Gilman concluded that a 15-percent discount would be
appropriate for decedent's 50- and 51-percent interests (parcels
5, 6, and 10), and that a 20-percent discount was appropriate for
decedent's 25-percent interest in parcel 8.12 Mr. Gilman
multiplied the estimated value of a fee simple interest in each
property by decedent's pro rata ownership interest and reduced
the product by his indicated discount rate. We find Mr. Gilman’s
analysis regarding the partial interest discounts helpful and
incorporate that analysis into our findings.
In contrast, we do not find the portion of Mr. Gilman’s
report that analyzed the per-acre values of the Nipomo properties
helpful. In that section, the report is far too conclusory and
suffers generally from a dearth of data. While the report lists
comparable properties, it lacks any detailed analysis of those
properties in relationship to the subject properties. We also
have concern over Mr. Gilman's choice of comparable properties.
Some of the properties are hundreds of miles away from the
subject properties. Although Mr. Gilman explained his selection
of these properties as providing the value based on grazing use
12
Mr. Gilman's analysis that a partial interest discount was
warranted for parcel 10 was predicated on his assumption that
decedent owned 51 percent of that property. As discussed infra
sec. III.D.2, on the record before us, we find that decedent
owned 100 percent of parcel 10.
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alone, i.e., the lower range of indicated value, we reject that
explanation. Mr. Gilman did not select any comparable properties
that would provide an upper range of indicated value, such as
ranches in the Santa Ynez Valley. We are unable to determine how
much weight Mr. Gilman gave the various comparable properties
because of the lack of an adjustment grid. Ultimately, these
flaws lead us to reject the per-acre values indicated by his
report. See Buffalo Tool & Die Manufacturing Co. v.
Commissioner, 74 T.C. 441 (1980).
C. Respondent's Expert
Mr. Hamel also used the Sales Comparison Approach to
determine the fair market value of decedent's interests in the
ranch properties. In contrast to Mr. Gilman, who valued each
parcel individually, Mr. Hamel valued the four Nipomo properties
as if they were one integrated ranch property of 2,242 acres.13
Mr. Hamel's selection of comparable ranch properties
included 12 sales occurring before the valuation date and four
sales occurring within 3 years thereafter. Mr. Hamel's report
contains photos of the subject and comparable properties,
topographic and plat maps, and an adjustment grid reflecting
adjustments for parcel size and market timing. In the text of
13
Petitioner did not criticize Mr. Hamel on this point. We
treat this as a concession that the integrated ranch approach is
appropriate in this case for the Nipomo properties, with the
exception of parcel 10.
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his report, Mr. Hamel stated that he relied more heavily upon 10
of the 16 comparable sales for his opinion.
Of those 10 properties, sale prices per acre ranged from
$600 (a 3,500-acre parcel known as the Biddle Ranch, sold almost
3 years after the valuation date) to $1,996 (a 248-acre parcel
located east of Nipomo and roughly 10 miles to the northwest of
decedent's Nipomo properties). Mr. Hamel adjusted the latter
sale downward by $500 to account for the small size of the parcel
relative to the combined size of the Nipomo properties. Mr.
Hamel added $388 per acre to the Biddle Ranch sale as a market
timing adjustment. After adjustment, these properties were
valued at $988 and $1,496, respectively. Similar adjustments for
size and market timing were made to a few other comparables.
From his data, Mr. Hamel concluded that the value of a fee simple
interest in the Nipomo properties was $1,200 per acre.
Petitioner criticized Mr. Hamel’s selection of comparable
properties, claiming his selection resulted in an overestimation
of the fair market value of decedent’s ranch properties. We
agree with this criticism. Mr. Hamel's selection of comparable
properties included properties in the Santa Ynez River Valley,
yet no location adjustment was indicated for those properties.
In fact, no location adjustment was made for any of Mr. Hamel's
comparable properties, including those sold to Hollywood
celebrities who presumably were not interested in using the
- 32 -
properties for grazing. Under cross-examination, Mr. Hamel
admitted that the Nipomo and Santa Maria properties had not
achieved the cachet of the Santa Ynez River Valley. Inclusion of
these properties, without location adjustment, leaves us with
serious concerns as to Mr. Hamel's conclusions regarding market
value.
Similarly, Mr. Hamel did not make any adjustment for the
presence of irrigated cropland in at least one of his comparable
sales,14 nor did he make any adjustment for water supply, zoning,
or topography. Other than a downward adjustment to smaller
parcels, the only adjustment Mr. Hamel made to the comparables
was a market timing adjustment. Although Mr. Hamel stated under
cross-examination that he gave the sale containing irrigated row
crops less weight in his overall analysis, his report does not so
state.
Respondent explains the absence of adjustments for zoning,
water supply, and location by asserting that no adjustment was
necessary because all the comparable properties were cattle
ranches. We reject respondent’s explanation because it ignores
the increased value that agricultural property may derive from
proximity to a metropolitan or resort area. See, e.g., Estate of
14
Interestingly, Mr. Hamel had adjusted for the presence of
the irrigated cropland in a sales data sheet prepared in 1991
while he was employed by Reeder, Gilman & Associates.
- 33 -
Hughan v. Commissioner, T.C. Memo. 1991-275. Such an increase in
value can be seen even where the agricultural land is subject to
land use restrictions similar to those burdening the properties
at issue in this case. See id. At a minimum, Mr. Hamel should
have adjusted the comparables to reflect the difference between
those cattle ranches that are desirable for second home use, such
as those from which distant ocean views are available, and those
properties that are not so desirable.
In a similar vein, respondent defends Mr. Hamel’s lack of
water supply adjustment on the grounds that the subject
properties all had adequate water for grazing. Because we think
that a hypothetical buyer and seller would attribute a higher
value to a property with good water, all other things being
equal, we do not accept that explanation. See sec. 20.2031-1(b),
Estate Tax Regs. The class of hypothetical buyers is not limited
to those interested solely in the grazing value of the land.
Mr. Hamel added $399 to $621 per acre (1.5 percent per
month) as a market timing adjustment for those comparable
properties sold after the valuation date. He based his market
timing adjustment on sales in the vicinity of the subject
properties and concluded that property values peaked as of June
1992. On cross-examination regarding his market timing
adjustment, Mr. Hamel acknowledged that graphs from published
surveys on market trends, included in the addendum to his report,
- 34 -
indicated a somewhat different state of affairs. Despite
admitting that he was probably one of the authors of the reports
from which the graphs were taken, Mr. Hamel sought to discredit
these graphs on the basis that they merely indicated the
consensus of the five or six individuals on the various
committees. After reviewing the information as presented in his
report, we do not find Mr. Hamel’s explanation convincing. The
inconsistency causes us to question his conclusion that market
values for San Luis Obispo County rangeland peaked as of the
valuation date, leaving us with skepticism regarding the
propriety and amount of his market timing adjustment.
1. Mr. Hamel’s Adjustments for Decedent’s Partial
Interests
Once the per-acre value was obtained, the value of
decedent’s pro rata interest in each Nipomo property was obtained
by multiplying the number of acres in each property by $1,200.
The resulting figure was reduced by the percentage corresponding
to decedent's pro rata ownership in each parcel. A partial
interest discount was then calculated.
To calculate the amount of the partial interest discount,
Mr. Hamel examined 21 sales of partial interests. He found that
an inverse relationship existed between the size of the pro rata
interest and the amount of the adjustment, and he predicted that
smaller fractional interests would lead to larger discounts. He
- 35 -
concluded that a discount of 10 percent was appropriate for
parcels 5 and 10, of which decedent owned 51-percent interests.
For parcel 6, of which decedent owned a 50-percent interest, Mr.
Hamel concluded that a 15-percent discount was appropriate.
We do not agree with Mr. Hamel’s conclusions regarding the
appropriate discount, because we disagree with his inclusion of
certain data in his analysis. Some of the purportedly comparable
sales of partial interests, such as the sale that indicated a 4-
percent discount, resulted in the purchaser’s owning a 100-
percent interest. A buyer consolidating all the fractional
interests is likely to pay a premium for those interests. Such a
sale does not indicate the appropriate discount applicable
between the hypothetical willing buyer and willing seller for a
partial interest. Inclusion of those sales skewed Mr. Hamel’s
analysis; as a result we find Mr. Gilman’s conclusions regarding
the appropriate discount more reliable.
Ultimately, we find the conclusions in Mr. Hamel's report to
be questionable, in light of the analytical flaws mentioned
above. Mr. Hamel’s use of data was incomplete and his
conclusions, therefore, suspect.
D. Conclusions Regarding Fair Market Value
Recognizing that valuation is not an exact science, see
Messing v. Commissioner, 48 T.C. 502, 512 (1967), and selecting
those portions of each expert's report that we found helpful, see
- 36 -
Parker v. Commissioner, 86 T.C. at 562, we conclude the following
with respect to the fair market value of decedent's interest in
each of the Nipomo properties.
1. Per-Acre Value of the Nipomo Properties
We conclude that the per-acre value of a fee simple interest
in parcels 5, 6, and 9 was $900. This represents a 25-percent
reduction from Mr. Hamel's indicated value of $1,200.
Considering the paramount importance of location in valuing real
estate, Mr. Hamel’s failure to adjust for location in his report
was material. Our determination of fair market values takes into
account his failure to adjust for location and for differences in
zoning, irrigated land, water rights, and other factors for which
he should have adjusted but did not.
We conclude that the fair market value of a fee simple
interest in parcel 10 was $1,750, or approximately $250 per acre.
Petitioner claimed that the per-acre value of the property was
approximately $50, while Mr. Hamel valued it at $1,200, the same
as the other Nipomo parcels. However, in the text of his report,
Mr. Hamel noted the difficulties associated with this parcel:
Parcel 10 is, in my opinion, an uneconomic remnant that
was the result of a realignment of Highway 166.
Planning officials in San Luis Obispo have stated that
bisection by a public road generally does not result in
the creation of a new legal parcel.
Because we think that a transaction between a hypothetical
willing buyer and willing seller would factor in the possibility
- 37 -
that land use restrictions might yield to development of parcel
10, we find that the parcel had more than nominal value.
However, we cannot agree with Mr. Hamel that parcel 10 had a per-
acre value equal to that of the other Nipomo properties.
2. Decedent's Pro Rata Interest
The parties agree as to decedent's percentages of pro rata
ownership of the Nipomo properties, except with respect to parcel
10. We find that decedent owned 100 percent of parcel 10. In
their respective briefs, petitioner asserted that decedent's
ownership was “not specified”, and respondent asserted that it
was 100 percent. In the statutory notice, respondent specified
whether a partial interest was associated with each property and
did not so specify with regard to parcel 10. In its petition,
petitioner alleged that respondent erred as to his valuation of
parcel 10 as follows: “i. The fair market value of a 6.99 acre
parcel of land in a hole at the southwest corner of Highway 154
and Bull Canyon Road * * * was $0.00.” The record lacks any
evidence that indicates that decedent owned less than a fee
simple interest in parcel 10, even assuming that petitioner
alleged error with respect to this issue by amended pleading.
See Rule 41(b). Thus, we sustain respondent's determination of
decedent's ownership interest in parcel 10, see Rule 142(a),
although, as indicated above, we do not sustain respondent’s
determination of the parcel’s value.
- 38 -
3. Partial Interest Discount
Both parties agree that a partial interest discount is
appropriate in this case. Their positions differ only as to the
size of the discount. For parcels 5 and 6, we find that a 15-
percent partial interest discount is warranted. As discussed
above, in calculating the appropriate amount of the partial
interest discount, we found the calculations of petitioner’s
expert more helpful and reliable than those of respondent’s
expert. Accordingly, we have used the discounts suggested by
petitioner’s expert in reaching our conclusion.15 See Parker v.
Commissioner, supra at 562; Buffalo Tool & Die Manufacturing Co.
v. Commissioner, 74 T.C. at 452.
4. Calculation of the Fair Market Value of Decedent’s
Interests
We calculated the fair market values of decedent’s interests
in parcels 5, 6, 9, and 10 in accordance with the following
formula:
No. of FMV Decedent’s Partial interest
Parcel acres X per acre X pro rata interest X discount = Total
5 1,487 $900 .51 .85 $580,153
6 648 900 .50 .85 247,860
9 90 900 1.00 1.00 81,000
10 7 250 1.00 1.00 1,750
15
Respondent’s expert also concluded that decedent’s 50-
percent interest in parcel 6 warranted a 15-percent partial
interest discount.
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IV. The Special Use Valuation
A. Introduction
The last issue for decision concerns petitioner’s election
to value the interests in certain ranch properties under section
2032A. On its Form 706, petitioner elected special use valuation
for several properties, claiming that it is entitled to the
$750,000 reduction in value for special use under section 2032A.
Respondent contends that petitioner may not take advantage of
section 2032A because it failed to comply with the statutory and
regulatory requirements for an election pursuant to that section.
Section 2032A allows an executor to elect to value real
property on the basis of its value for farming purposes rather
than its fair market value. See Stovall v. Commissioner, 101
T.C. 140, 146 (1993); sec. 20.2032A-3(a), Estate Tax Regs. A
reduction of up to $750,000 is permitted.16 See sec. 2032A(a)(2).
Congress enacted the provisions allowing special use valuation
with the goal of reducing the estate tax burden on small family
farms and businesses, thereby limiting the liquidity problems and
forced sales of those businesses, with the ultimate goal of
allowing continued family operation of the qualifying farms and
16
Sec. 501(b) of the Taxpayer Relief Act of 1997, Pub. L.
105-34, 111 Stat. 846, amended sec. 2032A(a) to provide an
adjustment for inflation, effective for estates of decedents
dying after Dec. 31, 1997. As decedent died before the effective
date, the adjustment for inflation is not applicable.
- 40 -
businesses. See Estate of McAlpine v. Commissioner, 96 T.C. 134,
139 (1991), affd. 968 F.2d 459 (5th Cir. 1992).
The requirements for a valid section 2032A election are
numerous, technical, and complex. Although section 2032A is a
relief statute designed to encourage the continuation of family
farms, it provides for “exceptionally favorable tax treatment”,
and taxpayers must “come within its demanding terms”. Martin v.
Commissioner, 783 F.2d 81, 84 (7th Cir. 1986), affg. 84 T.C. 620
(1985). Over the years since enactment, procedural foot faults
have cost many estates the benefits that section 2032A might have
afforded. See, e.g., Estate of Strickland v. Commissioner, 92
T.C. 16 (1989); Estate of McDonald v. Commissioner, 89 T.C. 293
(1987), affd. as to this issue 853 F.2d 1494 (8th Cir. 1988);
Estate of Johnson v. Commissioner, 89 T.C. 127 (1987).
In general, estates that make timely elections that fail to
contain all required information have 90 days to provide the
missing information after notification of the defects. See sec.
2032A(d)(3).17
17
Sec. 2032A(d)(3) provides:
SEC. 2032A(d). Election; Agreement.--
* * * * * * *
(3) Modification of election and agreement to
be permitted.–-The Secretary shall prescribe procedures
which provide that in any case in which–-
(continued...)
- 41 -
B. Respondent’s Motion in Limine
Respondent sought to exclude two documents pertaining to
petitioner’s section 2032A election by motion in limine. In his
motion, respondent argues that neither document is relevant to
the issue of whether petitioner made a valid section 2032A
election solely because petitioner’s notice of election failed to
comply substantially with the regulations. The Court deferred
ruling on the motion until such time as the exhibits were
introduced. At that time, respondent renewed his objections.
For the reasons that follow, we deny respondent’s motion.
By letter dated September 13, 1995, respondent’s estate tax
attorney, Ms. Hiles, notified the executors that the estate’s
17
(...continued)
(A) the executor makes an election under
paragraph (1) within the time prescribed for
filing such election, and
(B) substantially complies with the
regulations prescribed by the Secretary with
respect to such election, but–-
(i) the notice of election, as filed,
does not contain all required information, or
(ii) signatures of 1 or more persons
required to enter into the agreement
described in paragraph (2) are not included
on the agreement as filed, or the agreement
does not contain all required information,
the executor will have a reasonable period of time
(not exceeding 90 days) after notification of such
failures to provide such information or
agreements.
- 42 -
computation of special use valuation was inadequate because the
documentation submitted did not identify “specific comparable
rentals and taxes for five years prior to date of death, arms
length transactions to determine the net rents” as required by
section 20.2032A-4, Estate Tax Regs. Ms. Hiles’ notification,
however, contained no reference to section 2032A(e)(8) and did
not identify any deficiencies with respect to the requirements of
section 2032A(e)(8). On December 12, 1995, petitioner submitted
additional documentation (hereinafter Exhibit 13-M) through its
appraisal firm, Reeder, Gilman & Associates. This additional
documentation was received by respondent within the 90-day
curative period provided under section 2032A(d)(3).
On August 6, 1998, Reeder, Gilman & Associates completed an
update to its special use valuation report of December 12, 1995
(hereinafter Exhibit 29). Obviously, Exhibit 29 was submitted
well beyond the 90-day curative period, which ended on December
12, 1995.
Before 1997, the availability of the 90-day curative period
depended upon the estate’s substantial compliance with the
regulations. See Estate of Strickland v. Commissioner, supra at
23. In 1997, Congress deleted the substantial compliance
requirement of section 2032A(d)(3), effective for estates of
decedents dying after August 5, 1997. See Taxpayer Relief Act of
1997, Pub. L. 105-34, sec. 1313(a), 111 Stat. 1045. Despite the
- 43 -
effective date, respondent concedes on brief that the amended
statute is applicable to petitioner.18
There is no dispute that petitioner timely submitted the
recapture agreement described in section 2032A(d)(2). Because
Congress deleted the requirement of substantial compliance in
1997, and respondent has now conceded the amendment’s retroactive
application to petitioner, the only remaining requirement for
curative information is that it be timely submitted after notice
of defect has been given. Here, there is no dispute that Exhibit
13-M was timely. Thus, we must deny respondent’s motion with
respect to that exhibit because it bears directly upon the issue
of whether a valid section 2032A election was made. With respect
to Exhibit 29, however, this information was clearly submitted
well beyond the 90-day period allowed by statute. But since the
notification provided pursuant to section 2032A(d)(3) did not
identify any deficiencies in petitioner’s election as it relates
to section 2032A(e)(8), the 90-day curative period with respect
to section 2032A(e)(8) has not commenced and, consequently, does
not foreclose submission of additional material arguably relevant
to the section 2032A(e)(8) requirements. For these reasons,
18
Congress intended that, “with respect to technically
defective 2032A elections made prior to the date of enactment,
prior law should be applied in a manner consistent with the
provision.” H. Conf. Rept. 105-220, at 720 (1997).
- 44 -
therefore, we deny respondent’s motion and admit the subject
reports.
C. Requirements for Special Use Valuation
Only one of the requirements for a valid section 2032A
election is at issue here; i.e., the requirement that a notice of
election contain the method of valuation based on use. See sec.
20.2032A-8(a)(3)(viii), Estate Tax Regs. Section 2032A(e)(7)
provides the general formula and method to be used in valuing
farm property:
(7) Method of valuing farms.--
(A) * * * the value of a farm for farming
purposes shall be determined by dividing–-
(i) the excess of the average
annual gross cash rental for comparable
land used for farming purposes and
located in the locality of such farm
over the average annual State and local
real estate taxes for such comparable
land, by
(ii) the average annual effective
interest rate for all new Federal Land
Bank loans.
For purposes of the preceding sentence, each average
annual computation shall be made on the basis of the 5
most recent calendar years ending before the date of
the decedent’s death.
* * * * * * *
(C) Exception.-–The formula provided by
subparagraph (A) shall not be used-–
(i) where it is established that
there is no comparable land from which
- 45 -
the average annual gross cash rental may
be determined * * *, or
(ii) where the executor elects to
have the value of the farm for farming
purposes determined under paragraph (8).
Petitioner maintains that its special use valuation report
provided sufficient information to satisfy section 2032A(e)(7)
and the regulations thereunder. In the alternative, petitioner
maintains that its method of valuation qualified under section
2032A(e)(8). Respondent disagrees with both assertions.
1. Section 2032A(e)(7)
The regulations interpreting section 2032A(e)(7) provide
that, in general, the special use value of farm real property is
determined by:
(1) Subtracting the average annual state
and local real estate taxes on actual tracts
of comparable real property in the same
locality from the average annual gross cash
rental for that same comparable property, and
(2) Dividing the results so obtained by the
average annual effective interest rate charged on
new Federal land bank loans. [Sec. 20.2032A-
4(a)(1) and (2), Estate Tax Regs.]
The first issue we must decide is whether petitioner complied
with paragraph (1), above. It is undisputed that petitioner did
not submit information on property taxes on comparable
properties. Petitioner asserts that this lack of information
should not invalidate its election because the omission has not
- 46 -
operated to respondent’s detriment. Respondent does not address
this argument squarely but maintains that the omission of
property tax information is fatal to the election.
Petitioner makes a creative, if not entirely convincing,
argument. Information on property taxes is a required element of
the capitalization of rents formula. See sec. 2032A(e)(7)(A)(i);
Estate of Strickland v. Commissioner, 92 T.C. at 26. Under the
statutory formula, plugging in the number zero to the formula in
the absence of tax information would yield higher special use
values. Thus, petitioner’s argument that the information is
optional is not without some appeal in logic and common sense.
However, the requirement that an estate provide information on
the property taxes paid on the comparable properties also serves
to substantiate the claimed special use valuation.19 See Estate
of Strickland v. Commissioner, supra at 24. In any event, we
need not and do not decide whether the absence of property tax
information, standing alone, is fatal to petitioner’s special use
election because other requirements of section 2032A(e)(7) and
the regulations thereunder were not satisfied within the 90-day
curative period.
19
Information on property taxes may serve to substantiate
the gross cash rental figures used in the calculation, because
some rough proportionality between the figures would normally be
expected.
- 47 -
In order to measure the special use value of a farm under
section 2032A(e)(7), an executor must use information on actual
tracts of comparable real property for each of the 5 calendar
years preceding the year in which the decedent died. See sec.
2032A(e)(7)(A); sec. 20.2032A-4(a), Estate Tax Regs. In this
case, the applicable years are 1987 through 1991. Appraisals or
other statements regarding rental value or areawide averages of
rentals, including those compiled by the U.S. Department of
Agriculture, may not be used because they are not true measures
of the actual cash rental value of comparable properties in the
same locality as the specially valued property. See sec.
20.2032A-4(b)(2)(iii), Estate Tax Regs.
Petitioner’s special use valuation report, submitted on
December 12, 1995, within the 90-day period, provided current
lease information on 10 comparable properties and stated that
“Rents for the land types on the subject have been static and
current levels are representative of rents over the last five to
ten years and are considered indicative of a five year average.”
Petitioner argues that it complied with the regulations
because the assertion that rents were static rendered unnecessary
any separate listing of actual rents during 1987-91. However,
the language of the report belies petitioner’s claim that the
current rents on each property were static. Regarding rents, the
report asserts that “rental levels are * * * indicative of a five
- 48 -
year average.” Thus, the report does not indicate the actual
cash rentals of comparable real property for the period 1987-91.
Instead, the report provides actual cash rentals of 10 comparable
properties for 1995 and an impermissible appraisal asserting that
the 1995 rental values were indicative of the 1987-91 rental
values. See sec. 2032A-4(b)(2)(iii), Estate Tax Regs. As in
Estate of Strickland, petitioner has failed to identify annual
gross cash rentals of comparable real property and State and
local taxes for such comparable properties for the requisite 5
calendar years preceding decedent’s date of death. Petitioner’s
failure to comply with the requirements of section 2032A(e)(7)(A)
and the regulations thereunder precludes special use valuation
for the properties under that section. See Estate of Strickland
v. Commissioner, supra at 33.
2. Section 2032A(e)(8)
Petitioner maintains, in the alternative, that it was
entitled to value the properties under section 2032A(e)(8), that
the information submitted to the Service within the 90-day period
was adequate for that purpose, and that, in essence, respondent’s
failure to mention section 2032A(e)(8) at any time before trial
makes the requirements of that section new matter. Respondent
takes exception to all aspects of petitioner’s alternative
argument. In essence, respondent contends that petitioner may
not switch theories in midstream, and that, even if petitioner
- 49 -
were entitled to use the valuation formula of section
2032A(e)(8), it has not supplied sufficient information to comply
with the requirements of that section. We reject respondent’s
contentions and hold that petitioner made a valid election to
value the properties under section 2032A(e)(8).
a. Section 20.2032A-4(b)(2)(i), Estate Tax Regs.
The first issue is whether petitioner elected to value the
property under section 2032A(e)(8). Citing section 20.2032A-
4(b)(2)(i), Estate Tax Regs., petitioner argues that it made an
election, by default, to value the properties under the method
provided by section 2032A(e)(8). Respondent disagrees.20
20
Respondent’s position on brief contradicts the position
taken in a motion in limine. In that motion, respondent stated
as follows:
Even though an estate initially has elected to
value farm property pursuant to § 2032A(e)(7), the
estate can still avail itself of the special use
valuation provided under I.R.C.§ 2032A(e)(8). Section
20.2032A-4(2)(i), Estate Tax Regs. states, in part,
“[i]f the executor does not identify such property and
cash rentals, all specially valued real property must
be valued under the rules of section 2032A(e)(8) if
special use valuation has been elected.” Therefore, if
the estate attempts to comply with § 2032A(e)(7) but
fails to identify the comparable property and cash
rentals, the estate may qualify under § 2032A(e)(8),
provided the information submitted by the estate
substantially complies with the requirements of the
regulations. * * *
Respondent subsequently conceded on brief that whether petitioner
substantially complied with the requirements of sec. 2032A and
related regulations is no longer an issue.
- 50 -
Respondent’s argument rests upon section 2032A(e)(7), which
provides that unless an exception applies, the value of a farm
for farming purposes shall be measured according to the
capitalization of rents formula of that section. See sec.
2032A(e)(7)(A), (C). Only two exceptions are potentially
applicable here: (1) Where there is no comparable land from
which average annual gross cash rental may be determined or (2)
where the executor elects to value the farm property under
section 2032A(e)(8). See sec. 2032A(e)(7)(C).
In this case, petitioner has not proven that there was no
comparable land from which the average annual gross cash rental
may be determined within the meaning of section
2032A(e)(7)(C)(i). In fact, petitioner has acknowledged
implicitly that there was comparable land available. The only
dispute, therefore, is whether petitioner elected to use the
valuation formula of section 2032A(e)(8), as required by section
2032A(e)(7)(C)(ii).
By regulation, the Secretary has determined that “If the
executor does not identify such [actual comparable] property and
cash rentals, all specially valued real property must be valued
under the rules of section 2032A(e)(8)”. Sec. 20.2032A-
4(b)(2)(i), Estate Tax Regs. The regulation provides, in effect,
that where an executor fails to provide sufficient documentation
to use the capitalization of rents method described in section
- 51 -
2032A(e)(7), the executor, by default, has elected to use the
valuation formula of section 2032A(e)(8). See id.; see also
Estate of Strickland v. Commissioner, 92 T.C. at 32. The
regulation, by its terms, makes the election to use section
2032A(e)(8) automatic if the executor elects special use
valuation but fails to identify the comparable properties and
cash rentals necessary to calculate a property’s special use
value under section 2032A(e)(7).
On brief, respondent does not address the plain language of
the regulation. Instead, respondent argues that allowing
petitioner to value the properties under a different method of
election than originally elected should be precluded, as it would
purportedly encourage other taxpayers to play the audit lottery.
Respondent also asserts that the default election is foreclosed
by case law.
We fail to see how allowing an estate to use the special use
method of section 2032A(e)(8) encourages the so-called audit
lottery. Cf. Rev. Rul. 83-115, 1983-2 C.B. 155 (an executor may
change the method of special use valuation after the election has
been made); see also Estate of Rogers v. Commissioner, T.C. Memo.
2000-133. This is particularly true where the Secretary has
promulgated a regulation making the election automatic. The
Secretary chose to craft the regulation in a taxpayer-friendly
fashion. Given the purpose of section 2032A, we cannot say that
- 52 -
the Secretary was wrong in doing so. We are unconvinced by
respondent’s policy-based arguments and do not discuss them
further.
Relying upon Estate of Strickland v. Commissioner, supra at
32, where we commented on the apparent inconsistency between the
statute and the regulation, respondent asserts that this Court
has already decided that if comparable property existed from
which the average gross cash rental values could be determined, a
taxpayer was not entitled to value the property using the method
set forth in section 2032A(e)(8). We do not agree with
respondent’s interpretation of the Estate of Strickland case.
Contrary to respondent’s assertion, we did not decide that
failure to document comparable properties precluded a default
election to value property under section 2032A(e)(8). In Estate
of Strickland, the taxpayer failed to document comparable
property in accordance with the regulations and thus did not
comply with the documentation requirements of section 20.2032A-4,
Estate Tax Regs. Therefore, we held that the estate could not
value its farm real property under section 2032A(e)(7)(A). The
estate’s alternate position, that it was entitled to value its
property under the net share method of section 2032A(e)(7)(B),
failed because we found that comparable properties rented for
cash existed in the locality. The estate did not argue that it
- 53 -
had made a default election to value its property under section
2032A(e)(8).
In Estate of Strickland, we did not need to decide the
meaning of section 20.2032A-4(b)(2)(i), Estate Tax Regs., because
following the regulation would have led to the same result. That
was because, under the facts present in Estate of Strickland, “a
valuation pursuant to section 2032A(e)(8) will equal the fair
market value of the property on the date of decedent’s death.”
Estate of Strickland v. Commissioner, supra at 33.
Section 2032A provides the Secretary with the authority to
determine by regulation how section 2032A elections are to be
made. See sec. 2032A(d)(1); Estate of Gunland v. Commissioner,
88 T.C. 1453, 1455 (1987). By regulation, the Secretary has
determined that an executor elects the application of section
2032A(e)(8) whenever an executor, having elected special use
valuation, fails properly to document comparable property under
the rules of section 2032A(e)(7). See sec. 20.2032A-4(b)(2)(i),
Estate Tax Regs. Respondent has not supplied a cogent reason why
we should disregard the plain meaning of section 20.2032A-
4(b)(2), Estate Tax Regs. We conclude that the apparent
inconsistency between the statute and the regulation noted in
Estate of Strickland evaporates when considered in light of the
Secretary’s legislatively conferred authority to determine the
manner in which section 2032A elections are to be made.
- 54 -
We hold that petitioner’s special use valuation election
encompassed the right to value the property under section
2032A(e)(8) in the event petitioner failed properly to document
comparable properties under section 2032A(e)(7). Because
petitioner failed to identify comparable properties sufficient
for purposes of section 2032A(e)(7), the property must be valued
under the rules of section 2032A(e)(8). See sec. 20.2032A-
4(b)(2)(i), Estate Tax Regs.
b. Special Use Valuation Under Section
2032A(e)(8)
Section 2032A(e)(8) sets forth five factors to be used in
measuring the value of real property used for farming or closely
held business purposes as follows:
(8) Method of valuing closely held business
interests, etc.-–In any case to which paragraph (7)(A)
does not apply, the following factors shall apply in
determining the value of any qualified real property:
(A) The capitalization of income which the
property can be expected to yield for farming or
closely held business purposes over a reasonable
period of time under prudent management using
traditional cropping patterns for the area, taking
into account soil capacity, terrain configuration,
and similar factors,
(B) The capitalization of the fair rental
value of the land for farmland or closely held
business purposes,
(C) Assessed land values in a State which
provides a differential or use value assessment
law for farmland or closely held business,
- 55 -
(D) Comparable sales of other farm or closely
held business land in the same geographical area
far enough removed from a metropolitan or resort
area so that nonagricultural use is not a
significant factor in the sales price, and
(E) Any other factor which fairly values
the farm or closely held business value of
the property.
The statute clearly provides that all factors shall apply,
joining them with the conjunction “and”. See Estate of Hughan v.
Commissioner, T.C. Memo. 1991-275. However, the factors used in
any given circumstance are limited to those which are relevant.
See id. Section 2032A(e)(8) prescribes a subjective method of
valuation, in contrast to the objective method of section
2032A(e)(7). See Estate of Klosterman v. Commissioner, 99 T.C.
313, 317 n.4 (1992), affd. 32 F.3d 402 (9th Cir. 1994). The
legislative history confirms that all relevant facts are taken
into account when the multiple factor method of valuation is
elected. See S. Rept. 94-938 (Part 2), at 15 (1976), 1976-3 C.B.
(Vol. 3) 643, 657; see also Estate of Hughan v. Commissioner,
supra.
In Estate of Hughan, the estate's section 2032A election was
disallowed on audit for failure properly to document comparable
property under the rules of section 2032A(e)(7). In accordance
with section 20.2032A-4(b)(2)(i), Estate Tax Regs., the Service's
examiner increased the value of the farmland pursuant to an
appraisal under the multiple factor method of section
- 56 -
2032A(e)(8). The validity of the estate’s election was
stipulated by the parties. Thus, the only issue in Estate of
Hughan was how the farm's value was to be calculated under the
multiple factor method of section 2032A(e)(8).
In Estate of Hughan, the parties agreed that the valuation
was to be governed by the method of valuation described in
section 2032A(e)(8). In Estate of Strickland v. Commissioner, 92
T.C. at 33 n.12, we stated that “If sec. 2032A(e)(8) is used for
valuation purposes, none of the documentation requirements of
sec. 2032A(e)(7)(A) would be required.”21 Valuation disputes
under section 2032A(e)(8) will be settled or litigated in a
manner similar to that used in valuation disputes under section
2031. See Estate of Hughan v. Commissioner, supra; sec. 20.2031-
1(b), Estate Tax Regs. (“All relevant facts and elements of value
as of the applicable valuation date shall be considered in every
case.”).
In contrast to Estate of Hughan, and as discussed in detail
above, respondent did not apply section 20.2032A-4(b)(2)(i),
Estate Tax Regs., and set the stage for a valuation dispute under
21
In Estate of Hughan v. Commissioner, T.C. Memo. 1991-275,
documentation with respect to the sec. 2032A(e)(8) valuation was
presented and relied upon after the notice of election was filed.
For example, the expert witness reports bearing on the farmland’s
value under sec. 2032A(e)(8) that were introduced into evidence
at trial were dated between 2 and 4 weeks prior to the date of
trial.
- 57 -
section 2032A(e)(8). Respondent ignored the automatic election
provision in section 20.2032A-4(b)(2)(i), Estate Tax Regs., and
never notified petitioner of any defects in its special use
valuation election under section 2032A(e)(8). Respondent’s
determination in the notice of deficiency was that petitioner
failed to make an effective and timely election under the
provisions of section 2032A. That rationale was based on
petitioner’s failure properly to document comparable properties
meeting the requirements of section 2032A(e)(7) and the
regulations thereunder. The failure to document rentals of
comparable properties meeting the requirements of section
20.2032A-4, Estate Tax Regs., precludes valuing the properties
under section 2032A(e)(7). As discussed above, however, that
failure does not make an otherwise valid election under section
2032A(e)(8) ineffective. See sec. 20.2032A-4(b)(2)(i), Estate
Tax Regs.; see also Estate of Hughan v. Commissioner, supra.
Having failed to persuade us that petitioner made no
election under section 2032A(e)(8), respondent now seeks to
invalidate the election by pointing out that petitioner did not
introduce evidence on all the required factors set forth in
section 2032A(e)(8). We do not agree with this criticism of
petitioner’s election.
Respondent’s principal arguments before the submission of
his posttrial briefs were threefold:
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(1) Petitioner failed to satisfy the requirements of section
2032A(e)(7) and section 20.2032A-4, Estate Tax Regs.;
(2) petitioner failed to elect special use valuation under
section 2032A(e)(8); and
(3) even if petitioner is deemed to have elected special use
valuation under section 2032A(e)(8), petitioner failed to comply
substantially with its requirements at the time its election was
made and therefore was not entitled to notice and an opportunity
to cure under section 2032A(d)(3).
In respondent’s posttrial brief, respondent now concedes that
substantial compliance is no longer an issue but asserts a new
argument, that petitioner has not met the requirements of section
2032A(e)(8) because petitioner has not introduced evidence on
each of the five factors.
We reject respondent’s substantive challenge to petitioner’s
section 2032A(e)(8) election because respondent failed to give
petitioner the notice and opportunity to cure its election under
section 2032A(e)(8) as required by section 2032A(d)(3). Section
2032A(d)(3) requires the Commissioner to prescribe procedures to
ensure that (1) an electing estate is given notice of defects in
its special use election and (2) an estate is given the
opportunity to cure a defective election by providing missing
information. Although the Commissioner has not yet prescribed
the procedures required by section 2032A(d)(3), the Commissioner
- 59 -
nevertheless has taken the position administratively that the
required notice and opportunity to cure must be given. The
Commissioner’s position is consistent with our own view of
section 2032A(d)(3). See Estate of McAlpine v. Commissioner, 96
T.C. at 144, in which we stated with respect to section
2032A(d)(3) and section 20.2032A-8, Estate Tax Regs., that “The
fact that the regulation does not contain a provision permitting
perfection within 90 days does not, and cannot, nullify the
provision permitting perfection in section 2032A(d)(3).”22
In this case, respondent gave the required notice and
opportunity to cure to petitioner but only with respect to
petitioner’s election under section 2032A(e)(7). Respondent
provided no notice of any alleged defects with respect to
petitioner’s election under section 2032A(e)(8) and no
opportunity to cure the defects within the intendment of section
2032A(d)(3). The first and only notice of a substantive problem
with petitioner’s election under section 2032A(e)(8) was provided
in respondent’s posttrial brief.
22
In general, when Congress requires the Secretary to
prescribe regulations implementing taxpayer-friendly statutory
provisions and the Secretary has not yet acted, this Court has
held that the statute’s operation is not conditioned upon the
issuance of regulations. See Hillman v. Commissioner, 114 T.C.
103, 111-112 (2000); Estate of Maddox v. Commissioner, 93 T.C.
228, 233-234 (1989); First Chicago Corp. v. Commissioner, 88 T.C.
663, 676-677 (1987), affd. 842 F.2d 180 (7th Cir. 1988);
Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819, 829
(1984).
- 60 -
To satisfy the requirements of section 2032A(d), respondent
must give some meaningful notice of alleged defects and provide
petitioner with the opportunity to cure the defects identified in
the notice before respondent can rely on the defects to
invalidate petitioner’s election. The notice given by respondent
to petitioner before the commencement of this case dealt only
with petitioner’s election under section 2032A(e)(7). While
adequate with respect to petitioner’s election under section
2032A(e)(7), the notice was neither meaningful nor adequate with
respect to petitioner’s election under section 2032A(e)(8) and
section 20.2032A-4(b)(2)(i), Estate Tax Regs.
By amending and broadening the scope of section 2032A(d) on
several occasions,23 Congress has demonstrated its intent to make
the benefits of section 2032A available to deserving estates.
See Estate of Sequeira v. Commissioner, T.C. Memo. 1995-450.
This intent is evidenced by the elimination of the substantial
compliance requirement in section 2032A(d)(3) and by Congress’
continuing direction to the Commissioner to prescribe procedures
by which an estate must be notified of alleged defects in its
special use valuation election and given an opportunity to cure
the defects. See sec. 2032A(d)(3).
23
See Taxpayer Relief Act of 1997, Pub. L. 105-34, sec.
1313(a), 111 Stat. 1045; Deficit Reduction Act of 1984, Pub. L.
98-369, sec. 1025(a), 98 Stat. 1030; Economic Recovery Tax Act of
1981, Pub. L. 97-34, sec. 421(j)(3), 95 Stat. 313.
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In this case, petitioner had no notice that respondent was
challenging the adequacy of petitioner’s election under section
2032A(e)(8) (as opposed to whether petitioner had elected special
use valuation under section 2032A(e)(8)) before the filing of
respondent’s posttrial brief. When respondent’s estate tax
auditor, Ms. Hiles, informed petitioner that its special use
valuation election was being disallowed, she provided information
that was pertinent only to section 2032A(e)(7). She did not
provide information on how petitioner could satisfy the
requirements of section 2032A(e)(8). The notice of deficiency
was equally uninformative with respect to the section 2032A(e)(8)
requirements, merely stating that petitioner had failed to make
an effective and timely election to value the properties in
accordance with the provisions of section 2032A. At no point
before the filing of respondent’s posttrial brief was petitioner
given any notice that respondent intended to raise the
requirements of section 2032A(e)(8) as a bar to petitioner’s
election. Until his posttrial brief was filed, respondent argued
only that petitioner had not made any election under section
2032A(e)(8); respondent did not contend that the election, if
made, was inadequate. Since respondent did not give any notice
to petitioner regarding his challenge to petitioner’s special use
valuation under section 2032A(e)(8) on its merits until
respondent’s posttrial brief was filed, petitioner had no notice
- 62 -
before trial of the alleged defects in its election and should
not now be criticized for its failure to anticipate and deal with
respondent’s concerns at trial.
We conclude that when it enacted and amended section
2032A(d)(3), Congress intended for estates to have a realistic
opportunity to correct defective special use valuation elections.
We hold that respondent’s incomplete notice under section
2032A(d)(3) deprived petitioner of the opportunity to correct its
allegedly defective election under section 2032A(e)(8) and
precludes respondent from raising the requirements of section
2032A(e)(8) as a bar to petitioner’s election. To hold otherwise
would be tantamount to writing section 2032A(d)(3) out of the
statute or making respondent’s obligation to adhere to its
provisions optional.
We uphold petitioner’s section 2032A election and hold that
petitioner is entitled to a reduction in the aggregate fair
market value of the qualified real property in the amount of
$750,000, the maximum reduction in value allowed by section
2032A(a)(2).
V. Conclusion
We have carefully considered the remaining arguments of both
parties for results contrary to those expressed herein, and, to
the extent not discussed above, find those arguments to be
irrelevant, moot, or without merit.
- 63 -
To reflect the foregoing and concessions by both parties,
Decision will be entered
under Rule 155.