T.C. Memo. 2001-258
UNITED STATES TAX COURT
ESTATE OF JOHN L. BAIRD, DECEASED, ELLEN B. KIRKLAND AND J.
SAMUEL BAIRD, CO-EXECUTORS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ESTATE OF SARAH W. BAIRD, DECEASED, ELLEN B. KIRKLAND AND J.
SAMUEL BAIRD, CO-EXECUTORS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 8656-99, 8657-99. Filed September 28, 2001.
William T.F. Dykes, for petitioners.
Wanda M. Cohen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Separate notices of deficiency, containing
determinations of estate tax deficiencies, were issued to the
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above-captioned estates.1 For the Estate of John L. Baird,
respondent determined an estate tax deficiency of $104,765. For
the Estate of Sarah W. Baird, respondent determined an estate tax
deficiency of $240,282. The sole remaining controversy concerns
the value, at their respective dates of death, of each decedent’s
fractional interest in a family trust holding timberland.2
FINDINGS OF FACT
John L. Baird and Sarah W. Baird were married at all
pertinent times. John died on December 18, 1994. Sarah died
less than 1 year later, on November 2, 1995. At all pertinent
times the coexecutors and decedents resided in Louisiana. At
their respective times of death, John held a 14/65 interest and
Sarah a 17/65 interest in a trust owning 16 noncontiguous tracts
of timberland, comprising 2,957 acres in Sabine Parish,
Louisiana. As of December 18, 1994, the undivided fee interest
in the 16 parcels of timberland had a fair market value of
$4,685,333. As of November 2, 1995, the undivided fee interest
1
These cases were consolidated for purposes of trial,
briefing, and opinion.
2
In addition to the valuation issues for each estate, the
parties must also reach agreement on the computation of the
allowable amount of administration expenses and the amount of the
credit, if any, allowable to the Estate of Sarah W. Baird. The
parties have settled several other matters concerning increases
and/or reductions to the gross estate of the Estate of John L.
Baird, and all these matters will be left for the Rule 155 phase
of this case. All Rule references are to the Tax Court Rules of
Practice and Procedure.
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in the 16 parcels of timberland had a fair market value of
$5,091,285.
On August 1, 1977, John, Sarah, and three of Sarah’s
relatives, as settlors, established an inter vivos trust pursuant
to the laws of Louisiana. Before the 1977 creation of the family
trust, Sarah, O.E. Williams, and two of their other siblings
coowned several thousand acres of timberland. With the consent
of his siblings, O.E. Williams initiated a voluntary partition.
The partition was a difficult experience for family members. The
relatives contributed their respective holdings, resulting in a
14/65 (21.54 percent) and a 17/65 (26.15 percent) undivided
interest in the family trust being held by John and Sarah,
respectively. The remainder of the trust interests were
contributed by Sarah’s relatives, including 31/65 (47.69 percent)
by her brother, O.E. Williams, and 1.5/65 (2.31 percent) each by
Sarah’s nephew and niece. The trust was intended to keep the 16
parcels held by family members in undivided ownership. The
family trust provided for the sale of an interest, but only with
the written consent of all of the beneficiaries. The 16 parcels
ranged in size from 32 to 320 acres, and most of it was best
suited to use as timberland. Approximately 140 of the 2,957
acres had some potential for residential development. Less than
one-half of an acre had residential development as its highest
and best use.
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O.E. Williams has continually managed the trust properties
since the 1970s, and it was expected that he would continue to do
so. O.E. Williams generally did not consult with his cotrustees
and/or family members in the management of the trust timberland.
His independent management was not necessarily in accord with the
best management practices.
Reported in John’s estate was his undivided one-half
community property interest in the 14/65 interest in the trust at
a value of $707,972, after applying a 25-percent
fractionalization discount. In an amended return for John’s
estate, a refund was claimed on the basis of an increased
fractionalization discount of 50 percent. Ultimately, a 60-
percent discount was claimed by John’s estate. The 14/65
interest after applying a 50-percent discount was returned at
$550,378. After applying a 60-percent discount the reported
amount would have been reduced to $504,610.37.
Sarah’s 17/65 interest was reported in her estate’s tax
return at a value of $665,686, after applying a 50-percent
fractionalization discount. In an amended return for Sarah’s
estate, a refund was claimed on the basis of a 60-percent
increased fractionalization discount, which resulted in a
reported value of $449,456.27.
Respondent determined that John’s 14/65 interest had a date
of death fair market value of $975,091. Respondent determined
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that Sarah’s 17/65 interest had a date of death fair market value
of $1,290,211.
OPINION
We consider here circumstances where a married couple die
within 1 year of each other. Each decedent, at the time of his
or her death, held a partial interest in a family trust. The
trust, in turn, held 16 parcels of timberland. The parties agree
on the fair market value of the 16 parcels of timberland on the
date of each decedent’s death. The controversy centers on the
amount of discount applied where each decedent held a fractional
interest through the family trust.
Generally, the estates have approached valuation by means of
what they consider to be comparable sales of fractional
interests. On the basis of the relatively limited universe of
the sales of partial interests in timberland, the estates’
experts have opined that discounts should range from 55 percent
to as much as 90 percent. Respondent agrees that some discount
is appropriate, but he contends that the size of the discounts
proposed by the estates is excessive and that the estates’
experts are merely advocates for petitioners’ position.
Valuation of a property interest for Federal estate tax
purposes is a factual question. See Estate of Bonner v. United
States, 84 F.3d 196, 197 (5th Cir. 1996); Sammons v.
Commissioner, 838 F.2d 330, 333 (9th Cir. 1988), affg. on this
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point and revg. in part on another ground T.C. Memo. 1986-318.
The fair market value of a property interest is determined under
the “willing buyer-willing seller standard” set forth in section
20.2031-1(b), Estate Tax Regs., as follows:
The 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 sell and both having reasonable knowledge of
relevant facts. The fair market value of a particular
item of property includible in the decedent’s gross
estate is not to be determined by a forced sale price.
Nor is the fair market value of an item of property to
be determined by the sale price of the item in a market
other than that in which such item is most commonly
sold to the public, taking into account the location of
the item wherever appropriate * * *.
It is implicit that the buyer and seller have knowledge of
all the relevant facts concerning the valuation property. United
States v. Cartwright, 411 U.S. 546, 551 (1973). It is also
implicit that the buyer and seller would aim to maximize profit
and/or minimize cost in the setting of a hypothetical sale. See
Estate of Watts v. Commissioner, 823 F.2d 483, 486 (11th Cir.
1987), affg. T.C. Memo. 1985-595; Estate of Newhouse v.
Commissioner, 94 T.C. 193, 218 (1990). Therefore, we consider
the view of both the hypothetical buyer and seller. Kolom v.
Commissioner, 644 F.2d 1282, 1288 (9th Cir. 1981), affg. 71 T.C.
235 (1978).
The estates offered three expert witnesses, and respondent
offered one. The estates’ experts were found to be qualified,
and their reports were received as their direct testimony in
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accord with this Court’s Rules of Practice and Procedure.
Respondent’s expert, however, was found not to be specifically
qualified to assist the trier of fact (Court) on the question of
the discount to be applied, if any, to a fractional interest in
timberland.
It is noted that the parties stipulated the fair market
value of the undivided fee interest. Further, the parties agree
that there should be some discount because of the nature of the
decedents’ ownership. The only question we consider is the
amount of the discount applicable to the fractional interests
held by the decedents at their dates of death.
Valuation of an interest in property is a highly factual
pursuit, and it is within the Court’s discretion to evaluate the
cogency of the expert witnesses’ conclusions or opinions.
Sammons v. Commissioner, supra. Opinions of experts are
evaluated in light of each expert’s demonstrated qualifications
and the evidence in the record. Estate of Davis v. Commissioner,
110 T.C. 530, 538 (1998) (and cases cited therein). We may
accept or reject all or part of an expert’s opinion. Id.
The Estates’ Expert Witnesses
The estates rely on three expert witnesses to support their
proposed discounts for the partial interests under consideration.
Respondent attempted to expose the weaknesses of the estates’
experts in order to show that estates’ proposed discounts are
excessive.
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A. John A. Young
John A. Young, a real estate appraiser offered by
petitioners, prepared a fractionalization discount study in which
he concluded that fractionalized interest discounts should be at
least 50 percent of the proportionate fee value. Mr. Young’s
conclusion was based on his analysis of what he considered to be
six comparable sales of fractional interests in timberland in
northwest Louisiana. Generally, Mr. Young was able to find hard
evidence of the sale price for a fractional interest.
In order to determine the fair market value of a full fee
interest Mr. Young resorted to secondary information and opinion.
Through conversations with parties to the transactions and other
related information, he predicated a fee fair market value for
each property. In some instances, the fee values were a matter
of conjecture and were not based on actual or comparable sales.
However, using the full fee value as a base, Mr. Young calculated
the percentage discount of known partial sales.
The first property regarded as comparable by Mr. Young was a
160-acre tract of timberland that was owned by Pennzoil
Exploration and several other owners. The buyer was interested
in harvesting the timber and wanted to acquire the 160-acre
tract. Seven different partial interests were purchased during
the period May 1995 through February 1996. These purchases gave
the buyer a cumulative interest of almost 32 percent of the
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undivided 160 acres. These partial interests were acquired for
amounts that were approximately 58 percent to 62 percent less
than their proportionate shares of the fair market value of the
full fee as estimated by Mr. Young. During October 1996 the
buyer acquired the remaining two-thirds of the property from
three sellers for approximately 14 percent less than a
proportionate share (i.e., two-thirds) of Mr. Young’s estimated
fair market value of the full fee.
The second series of partial acquisitions considered by Mr.
Young occurred during September 1994. It involved 37 different
tracts totaling almost 830 acres which were owned by three
different groups of individuals. The purchaser acquired three
approximately equal interests for equal purchase prices. On the
basis of Mr. Young’s estimated fee fair market value, the
fractional purchases were discounted approximately 41 percent.
In the third series of partial acquisitions during 1993,
seven partial interests, collectively representing almost a 50-
percent interest, were purchased from members of the same family
for what appears to be the same price per acre. The discounts
from the estimated full-fee fair market value were all
approximately 82 percent, using Mr. Young’s fee value.
In the fourth series of partial acquisitions, interests in
amounts approximating 35 percent and 7 percent were acquired in
1992, and the remaining 58 percent was acquired in 1995. The
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1992 acquisitions were discounted by approximately 59 percent and
65 percent, respectively, and the 1995 acquisition was discounted
by approximately 36 percent. Again, Mr. Young’s estimate of fee
fair market value was used as the base.
The fifth and sixth series of partial acquisitions each
involved the acquisition of two 50-percent interests. The fifth
consisted of acquisitions in 1995 and 1997 with discounts of
approximately 67 percent and 50 percent, respectively. The sixth
partial acquisition involved two 1997 purchases with fractional
interest discounts of approximately 38 percent and 44 percent,
respectively.
Mr. Young did not conclude that a particular percentage
would be appropriate for the partial interests that we consider
in these cases. Instead, Mr. Young opined that on the basis of
the above-described transactions, a discount of at least 50
percent was appropriate for valuing a partial undivided interest
in Louisiana timberland.
Mr. Young did adjust for differences that might occur where
fractional sales were actually acquisitions by a majority holder.
He showed that substantially smaller fractional discounts
occurred in transactions where the buyer had or achieved control.
Conversely, the discounts were substantially larger where buyers
were purchasing a partial interest and did not have control of
the fee.
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Mr. Young also discussed other factors that might affect the
amount of the discount, such as tract size, lack of management
control, the number of coowners, and the cost of acquiring a fee
interest. He did not, however, provide any guidance as to how
those factors should be taken into account in valuing the 16
parcels of timberland under consideration.
Although the six sales of timber properties cited by Mr.
Young occurred in northwest Louisiana, respondent contends that
there has been no correlation to the 16 parcels of timberland we
consider in these cases. In addition, respondent points out that
Mr. Young, in his discussion of the practicality of partition,
assumed that the partition would result in 65 shares. That
assumption tends to exaggerate the cost of partition.
With respect to Mr. Young’s comparables, respondent provided
some information about each reflecting that the fee value used by
Mr. Young could be too high. Any reduction in the fee value used
would accordingly and proportionately reduce the percentage
discount that could be attributable to a fractional interest.3
3
Mr. Young also provided a report in which he commented on
various assumptions that had been provided by the estates’
counsel. It was not evident how Mr. Young’s comments were
formulated and why he would be qualified to opine on certain of
the assumptions. Accordingly, we do not rely on his commentary
concerning the estates’ assumptions.
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B. Lewis C. Peters
Lewis C. Peters, a forester/real estate appraiser, like Mr.
Young, opined on the relationship of discounts to undivided
fractional interests in timberland on behalf of petitioners. He
relied on transactions in fractional interests in timberland in
Maine and in the East Texas/Louisiana area. Mr. Peters has been
developing information on the sales of fractional interests in
timberland for a number of years, and he has found only two
markets for such property--Maine and East Texas/Louisiana. In
that regard, Maine had a more active and better established
market than the East Texas/Louisiana area.
Mr. Peter’s estimated that the mean discount attributable to
fractional interests in timberland is 55 percent. He relied on
104 transactions that occurred from 1969 through 1997. Unlike
Mr. Young, Mr. Peters did not adjust for differences that may
occur where fractional sales were actually acquisitions by a
majority holder. Instead, Mr. Peters simply used a statistical
mean or average of the sales. Like Mr. Young, Mr. Peters
obtained the full-fee fair market value by talking with owners,
collecting information about subsequent full-fee sales, and
discussing this issue with people in the timberland market.
Respondent contends that Mr. Peters’s conclusions are
unreliable because many of the alleged comparables were too
remote from the year in question. Respondent also contends that
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Mr. Peters’s estimated fair market values were not from reliable
or verifiable sources. Respondent also points out that Mr.
Peters’s study contained discounts for fractional interests that
varied from 29 percent to 83 percent. To the extent that
subsequent sales were used to determine the amount of discount,
respondent indicates that neither Mr. Young nor Mr. Peters
adjusted (reduced) the fair market value to reflect any
intervening inflation.
Finally, respondent points out that Messrs. Young and Peters
both used the Pennzoil sale as a comparable but used differing
data and arrived at differing discounts. Mr. Peters arrived at
an average 36-percent discount using a fair market value of
almost $474,000, whereas Mr. Young had discounts ranging from
14.10 percent to 62.06 percent using a fair market value of
$420,000. These discrepancies, respondent contends, reflect a
lack of credibility in the experts’ reports.
C. James Steele III
The estates’ third expert has engaged for more than 20 years
in the business of buying and selling rural Louisiana farm and
timberland with concentration on undivided interests in
relatively small (1,000 acres or less) parcels. Mr. Steele’s
entity was the purchaser in the Pennzoil transaction relied on by
both Messrs. Young and Peters.
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In the Pennzoil transaction, Mr. Steele’s entity was
attempting to purchase a controlling (at least 80 percent) or
complete interest in the Pennzoil property. Purchases of
Pennzoil fractional interests were initially subjected to
discounts for the fractional interests in amounts generally
around 60 percent. When the buyer had acquired sufficient
partial interests to hold at least 80 percent, the discounts
precipitously dropped to just over 14 percent.
This discount pattern confirms the estates’ argument.
Partial interests that do not constitute or result in a
controlling interest are subject to substantially greater
discounts than partial interests acquired by a controlling
interest holder or which result in control of the fee.
In his report, Mr. Steele concluded that a discount of at
least 55 percent would be appropriate for the purchase of partial
interests in Louisiana timberland. During his trial testimony
Mr. Steele opined that the value of the partial interests should
be discounted 90 percent from the fair market value of the full
fee interest.
The Court found Mr. Steele’s testimony helpful and germane
to the valuation of partial interests in Louisiana timberland.
Although there are sales of fractional interests in timberland in
Louisiana, such activity is relatively infrequent, and only
limited information about such sales is available. Mr. Steele
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was either aware of or involved in most of the known sales of
fractional interests in Louisiana. He also makes his living from
such sales and is well known to lawyers, courts, and others as a
resource in situations where fractional interests and/or
partition is involved.
Mr. Steele evaluates timber and mineral properties on the
basis of the idiosyncracies of the ownership and related
conditions. So, for example, he may seek out disgruntled family
members who own a partial interest and are seeking to sell their
interest. In such situations, Mr. Steele has studied the
potential for and used partition as a means to make a profit from
the partial interest. According to Mr. Steele, those situations
require “staying power” because of the potential for resistance
by the remaining family/coowners who may resist partition, either
in kind or by licitation.4 Mr. Steele had a personal experience
where his acquired partial interest was tied up for as long as 21
years. In general, Mr. Steele’s experience reflects that it is
not unusual for partition to take as long as 5 years.
Mr. Steele’s unique and extensive experience makes him
particularly well qualified to address the amount of discount for
a fractional interest in Louisiana timberland. Although Mr.
Steele and petitioners’ other experts opined, in general, that
4
“Licitation” is a term used to describe the sale of
partitioned realty and the division and distribution of the sale
proceeds as opposed to partition in kind where the property is
divided and distributed to the coowners.
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fractional interests in Louisiana timberland should be discounted
by 55 percent, those opinions were based on means or averages of
the fractional sales information available. We also note that
the full fair market value of the properties used as comparables
may have been questionable, so that the discounts could have been
smaller or larger depending upon whether the actual fair market
value was lower or higher.
Mr. Steele’s personal experiences during more than 20 years
of involvement with fractional interests in Louisiana, reflect
the following.
(1) The fact that the market is severely limited drives
prices down (increasing discounts). Most buyers have no desire
to expend the time and expense to acquire full ownership.
Generally, timber companies are not interested in purchasing
fractional interests and lending institutions are not likely to
lend money to holders of fractional interests.
(2) Problems arise concerning the management of undivided
interest properties. There is a tendency for persons who own
partial interests in property to expend less time and money than
they would have spent on solely owned property, resulting in some
amount of mismanagement.
(3) Louisiana fractional interest holders with less than an
80-percent interest lack control over the use of the timber
without consent of the other owners.
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(4) The choices available to a Louisiana fractional interest
holder with less than 80-percent ownership are to:
(a) Sell the fractional interest but incur the
additional expense of advertising and/or locating a
buyer;
(b) buy out the other interests. This process can
involve expenses and delays related to locating fractional
interest holders, recording expenses, deed preparation,
title opinions, and the possibility of perfecting title with
respect to ancestral predecessors of current owners;
(c) attempt voluntary partition in kind, which is often
“complex, rancorous, and protracted”. It has been Mr.
Steele’s experience that the problems encountered increase
as the number of fractional owners increases. In some
instances it may reach a point where agreement becomes
impossible;
(d) bring suit for partition in kind or by licitation.
This process will result in “significant legal expense” and
delays.
(5) The delay associated with partition is at least 1 year,
but it is more likely to take several years. In the interim
expenses are being incurred and the investment in the fractional
interest is “frozen”.
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(6) It has been Mr. Steele’s experience that unexpected
expenses occur in connection with perfecting sole ownership or
control. It has been his experience that unanticipated legal
problems may arise.
(7) The buyer of an undivided interest must have financial
“staying power” and be able to buy the entire property at any
partition sale because of the possibility of underbidding of
amounts that would be proportionately less than the cost of the
undivided interest.
Mr. Steele considers the following factors in determining
the amount of discount that should be applied in the purchase of
a fractional interest: Fair market value of 100-percent
ownership; percentage available for sale; total number of owners;
“staying power” of existing owners; property location; number of
tracts; number of acres; ability to influence property management
by the buyer of a fractional interest; continuity of the tracts;
access to the property(ies); topography (including wetland
classifications); and mineral value, either in or out of
production.
Using his knowledge and experience, he opined in his written
report that the discount for the fractional interests under
consideration should be at least 55 percent. During his trial
testimony, Mr. Steele concluded that he would discount the
fractional interests in question by 90 percent on the basis of
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the following: (1) The fractional interests are held in a trust
causing an inability to directly access any proceeds of
partition; (2) the beneficial fractional interest holders were
from the same family generally resulting in less agreement on a
course of action;5 (3) partition suits in Louisiana require that
all mineral owners be made parties to the proceeding; (4) the
costs of partition might be assessed against and borne by the
instigating partial interest holder; and (5) a buyer of a 14/65
or 17/65 interest would have no control and the other interests
could limit profitable use or sale of the property. In this
case, the property has been poorly managed by one of the
beneficiaries/family members for years, and the only remedy would
be to wait until other interest holders die or to attempt
partition.
The reasons cited by Mr. Steele do not support his
conclusion for a 90-percent discount. Several of the reasons he
cites were already considered in his written report to arrive at
his “at least 55 percent” discount opinion. We do agree,
however, with his observation that this family has experienced
prior disagreement, which precipitated the creation of the trust.
In addition, one family member has been allowed to independently
5
Because of Mr. Steele’s reputation and willingness to be
involved in partial interests, disgruntled family members seek
him out to purchase their fractional interests. In those
experiences he has found that the likelihood of disagreement is
greater among family members.
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manage the 16 parcels, and it has been shown that his management
was poor. These are facts that were available to and would
certainly influence a knowledgeable buyer and should be factored
into the discount percentage.
The Possibility of Partition--Effect on Value
The estates argue that the use of partition, as a legal
matter, is fraught with uncertainty. Relying on their experts,
petitioners contend that partition of the properties in question
would be protracted, thus increasing the discount on the
fractional interests in issue. Respondent disagrees with
petitioners and contends that the properties could be relatively
easily partitioned in 3 or 4 months if partition were
uncontested.
Generally, the “Potential costs and fees associated with
partition or other legal controversies among owners, along with a
limited market for fractional interests and lack of control, are
all considerations rationally related to the value of an asset.”
Estate of Bonner v. United States, 84 F.3d 196, 197-198 (5th Cir.
1996). Accordingly, the cost of partition does not set some
absolute limit on the amount of discount. Instead, it is a
factor to be considered.
Each party has attempted to either maximize or minimize the
effect that partition may have upon the discount attributable to
a fractional interest in timberland. There is no way to
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accurately predict that partition will be necessary. It is
possible that the remaining family members may be open to
dividing or managing the property in accord with a new owner’s
wishes. Conversely, it is also possible that the remaining
family members will be adverse to a new owner’s wishes.
Here, the estates have shown that, under Louisiana law,
there are uncertainties and disabilities associated with an
undivided minority interest in property. That is especially true
here where the property is held in trust and where the family
members have previously experienced difficulties and have allowed
one family member to manage the properties without holding him to
a high standard. It has also been shown that the family members
placed the property into trust in order to keep the property in
their family. The circumstances that would have been perceived
by a willing buyer indicate that the remaining family members
would be resistant to and make it difficult for an outside buyer.
We reach this conclusion, in part, on the basis of the family’s
propensity to allow poor management of the timberland to their
own financial detriment. Accordingly, some additional discount
is appropriate on the basis of the record in this case.
The evidence, experts’ reports, and other testimony reflect
that the market for partial interests was extremely limited. One
of petitioners’ experts, Mr. Steele, was the buyer of many such
properties. His experiences reflected that partition under the
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facts of these cases would have been difficult, protracted, and
expensive.
The Variations Between the Estates’ Reported Values and Those
Maintained for Trial
Finally, we consider the escalation of the discounts claimed
by the estates. John’s estate initially reported a value for the
fractional interest that was discounted by only 25 percent. By
the time Sarah died, the value of her fractional interest was
reported at a value that was discounted by 50 percent. At that
point, John’s estate amended its return and claimed a 50-percent
discount. As these matters were further developed during the
audit examination and controversy, information was discovered
that caused the estates to further reduce the reported value of
the fractional interests by claiming a 60-percent discount.
Finally, the estates’ litigating position, based on Mr. Steele’s
testimony, was that both fractional interests should be
discounted by 90 percent.
Respondent points to the escalation of the discounts and
contends that it merely reflects the estates’ propensity to take
aggressive and excessive positions. Respondent contends that the
discount initially claimed by John’s estate was closer to the
correct amount and should represent the maximum amount to which
either estate should be entitled. The estates have shown,
however, that the discounts initially claimed did not take into
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account the true marketplace and the price that would be paid by
a willing buyer.
The 25-percent discount used by John’s estate was based on
the return preparers’ analysis of a court opinion in which a
discount for a fractional interest was found.6 When the return
preparer increased the amount to 50 percent, he relied on a
series of court opinions in which discounts for fractional
interests were allowed.7 Although it may be appropriate to
consider the amounts of discounts decided by courts in prior
cases, those discounts are not intended as minimum or maximum
limits for certain types of discounts.8 The amount of discount
6
John’s estate’s tax return preparer relied on Estate of
Bright v. United States, 658 F.2d 999 (5th Cir. 1981).
7
The preparer, in support of a 50-percent discount in the
amended return, relied on a series of cases of which the
following are representative: Propstra v. United States, 680
F.2d 1248 (9th Cir. 1982); Estate of Campanari v. Commissioner, 5
T.C. 488 (1945); Estate of Cervin v. Commissioner, T.C. Memo.
1994-550; LeFrak v. Commissioner, T.C. Memo. 1993-526; and Estate
of Youle v. Commissioner, T.C. Memo. 1989-138. We note that the
cited opinions appear to be relied upon for their general
rationale and not because 50-percent discounts were allowed.
8
The parties in estate tax cases often play a “valuation
game” and advocate high and low values to provide the finder of
facts with limits within which the parties may be satisfied with
the final decision. Because of that phenomenon, we may expect
that estates will report the lowest possible value, and that the
Commissioner will determine the highest possible value. Those
very dynamics may raise suspicion about the parties’ positions on
estate tax valuation issues. In this case, however, the facts
reflect that, initially, John’s estate was not playing the
“game”. Even after the “game” began, both John’s and Sarah’s
estates did not get up to speed until the trial had commenced.
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in each case must be determined ad hoc, and the facts in each
case must provide the basis for the proper amount of discount.
The facts in this case, along with our understanding of the
actual marketplace, reflect that fractional interests in rural
Louisiana timberland sell at substantial discounts and, hence,
the estate’s reporting positions were conservative in their
approach to discounting.
Conclusion
After considering the record and the experts’ reports and
testimony, we hold that the estates have established 55 percent
as a mean and/or average amount by which fractional interests in
Louisiana timberland which do not result in control are
discounted. We are also convinced that the peculiar
circumstances shown to exist with respect to the decedents’
remaining family members support an increased discount.
We have placed reliance in Mr. Steele’s expertise and actual
practical experience. His report and testimony were based on his
personal knowledge and experience in the very marketplace under
consideration. Mr. Steele’s “at least 55-percent discount” in
his written report comported with the other experts’ findings and
conclusions. Mr. Steele’s trial testimony suggesting a 90-
percent discount, however, was unfounded and without support in
the record. We find it hard to accept that a willing seller
would accept 10 cents on the dollar for a partial interest in
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timberland, and no such comparables were shown to exist.9
Although there are no truly comparable sales in this record,
the detail available on the Pennzoil transaction does provide
some measure of a contemporaneous arm’s-length transaction. In
the series of Pennzoil transactions the discounts before
acquisition of a controlling interest hovered around 60 percent.
On the basis of that example and the other factors discussed
above, we hold that John’s and Sarah’s fractional interests
should be discounted 60 percent, as claimed by the estates, from
the fair market values agreed to by the parties.
To reflect the foregoing and considering the parties’
agreements,
Decisions will be entered
under Rule 155.
9
It appears that Mr. Steele’s suggested 90-percent discount
may represent only a buyer’s point of view. Perhaps it would
serve as a low bid to initiate negotiations.