Chapman Glen Ltd. v. Commissioner

CHAPMAN GLEN LIMITED, PETITIONER v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 29527–07L, 27479–09. Filed May 28, 2013.

In 1998, P was a foreign insurance company that elected
under I.R.C. sec. 953(d) to be treated as a domestic corpora-
tion for U.S. Federal income tax purposes. G signed the elec-
tion in G’s reported capacity as P’s secretary. P also applied
for and was granted tax-exempt status as an insurance com-
pany effective Jan. 1, 1998. For 2003, P filed a Form 990,
Return of Organization Exempt From Income Tax, that was
not signed by one of P’s officers. In 2009, three years after P
consented to R’s revocation of P’s tax-exempt status effective
Jan. 1, 2002, R determined that (1) P’s election was termi-
nated in 2002 because P was not an insurance company in
that year and (2) P was therefore deemed under I.R.C. secs.
354, 367, and 953(d)(5) to have sold its assets on Jan. 1, 2003,
in a taxable transaction. P’s primary asset on Jan. 1, 2003,
was its investment in a disregarded entity (E) that owned var-
ious pieces of real property. Held: The three-year period of
limitations under I.R.C. sec. 6501(a) remains open as to 2003
because P’s Form 990 was not a valid return in that it was
not signed by one of P’s corporate officers. Held, further, P
properly elected under I.R.C. sec. 953(d) to be treated as a
domestic corporation, and the termination of that election in
2002 resulted in P’s making a taxable exchange under I.R.C.
secs. 354, 367, and 953(d)(5) during a one-day taxable year
commencing and ending on Jan. 1, 2003. Held, further, E’s
real property is included in that taxable exchange, and the
fair market value of the real property is determined. Held,

294

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 295

further, P’s gross income does not include amounts that R
determined were ‘‘insurance premiums’’, and R may not for
the first time in R’s posttrial opening brief recharacterize the
premiums as a different type of taxable income.

Vicken Abajian and Gary Michael Slavett, for petitioner.
Najah J. Shariff, James C. Hughes, and Michael K. Park,
for respondent.
WHERRY, Judge: These cases are consolidated for purposes
of trial, briefing, and opinion. Petitioner petitioned the Court
in docket No. 29527–07L to review the Internal Revenue
Service (IRS) Office of Appeals’ determination sustaining
respondent’s proposed levy on petitioner’s property to collect
$66,539 in additions to tax for 2004. The additions to tax
relate to respondent’s determination that petitioner failed to
timely file Forms 990, Return of Organization Exempt From
Income Tax, and 990–T, Exempt Organization Business
Income Tax Return (and proxy tax under section 6033(e)), for
2004 and failed to timely pay the related tax. 1 The parties’
only dispute remaining from this petition is a computational
adjustment that turns on the amount of the deficiency for
2004.
Petitioner petitioned the Court in docket No. 27479–09 to
redetermine respondent’s determination of the following defi-
ciencies and additions to tax under section 6655:

Addition to tax
Taxable year Deficiency sec. 6655

2002 $43,719 -0-
Jan. 1–Jan. 1, 2003 10,130,454 -0-
Jan. 2–Dec. 31, 2003 113,181 $3,278
2004 111,696 3,191

Respondent alleged in an amendment to answer that the fair
market value of real property underlying the deficiency for
the one-day taxable year was $36,589,000 instead of
$28,943,229 as determined in the notice of deficiency and
that the deficiency for that year is therefore $12,806,452
1 Unless
otherwise indicated, section references are to the Internal Rev-
enue Code of 1986, as amended and in effect for the applicable years
(Code), Rule references are to the Tax Court Rules of Practice and Proce-
dure, and dollar amounts are rounded to the nearest dollar.

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 296 140 UNITED STATES TAX COURT REPORTS (294)

instead of $10,130,454. 2 Respondent asserts in respondent’s
opening brief that recent concessions put the applicable value
of the real property at $34,607,500. Petitioner argues that
the fair market value of the real property is $13,711,775.
Following concessions (including petitioner’s concessions
that it is not an insurance company and that it does not
qualify as a tax-exempt organization under section 501(c)(15)
as of January 1, 2002), we are left to decide the following
issues:
1. whether respondent issued the deficiency notice to peti-
tioner before the three-year period of limitations of section
6501(a) expired as to 2003;
2. whether petitioner properly elected to be treated as a
domestic corporation under section 953(d);
3. whether the subsequent termination of petitioner’s sec-
tion 953(d) election resulted in a taxable exchange under sec-
tions 354, 367, and 953(d)(5) during the one-day taxable year
in 2003;
4. whether the real property that Enniss Family Realty I,
L.L.C. (EFR), owned was included in that taxable exchange;
5. whether the fair market value of the real property at the
time of the exchange on January 1, 2003 (valuation date),
was $34,607,500 as respondent asserts; and
6. whether petitioner’s gross income for the respective tax-
able years includes ‘‘insurance premiums’’ of $128,584, $882,
$299,178, and $298,000.

FINDINGS OF FACT

I. Preliminaries
The parties submitted stipulated facts and exhibits. We
incorporate the stipulated facts and exhibits herein. 3 Peti-
2 Most currently, on the basis of certain concessions that respondent

made after his amendment to answer, respondent alleged in his pretrial
memorandum that the deficiency for the one-day taxable year is
$12,693,052.
3 Petitioner objected on grounds of relevancy to the admission into evi-

dence of Exhibits 45–J, 46–J, and 47–J. The Court reserved ruling on
those objections at trial. We now overrule the objections and admit the ex-
hibits into evidence. See Fed. R. Evid. 401 (stating that evidence is rel-
evant if it tends to make the existence of any fact or consequence more
or less probable).

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 297

tioner’s principal office was in Lakeside, California, when its
petitions were filed.
Petitioner was formed in the British Virgin Islands as a
private international business company on August 29, 1996.
It filed Forms 990 for 2002, 2003, and 2004 (as well as for
earlier years). Later, in April 2006, petitioner submitted
Forms 1120–F, U.S. Income Tax Return of a Foreign Cor-
poration, for 2002 and 2003 to the IRS. The IRS did not
accept those Forms 1120–F.
II. Petitioner
A. Background
Petitioner was formed primarily to operate as an insurance
(including captive insurance and reinsurance) company and
to own, develop, and deal in real property, securities, and
personal property. On January 8, 1998, its initial director
resolved that all of petitioner’s stock be issued to Caesar
Cavaricci and that Adam Devone and Bruce Molnar be
appointed as petitioner’s directors. The initial director also
resolved that its contemporaneously tendered resignation as
petitioner’s initial director was accepted.
B. Section 953(d) Election
On or about November 16, 1998, petitioner delivered to the
IRS a ‘‘Foreign Insurance Company Election Under Section
953(d)’’ (section 953(d) election), stating that petitioner was
electing under section 953(d) to be treated as a domestic cor-
poration for U.S. tax purposes effective the first day of peti-
tioner’s taxable year commencing December 27, 1997.
Deanna S. Gilpin signed the election on November 16, 1998,
in her reported capacity as petitioner’s secretary and under
penalty of perjury that the statements therein were true and
complete to the best of her knowledge and belief. On or about
March 20, 2000, petitioner submitted to the IRS a Form
2848, Power of Attorney and Declaration of Representative,
designating Mr. Molnar, Mr. Cavaricci, and David B. Liptz
(an associate of Mr. Molnar’s) as petitioner’s authorized rep-
resentatives regarding the section 953(d) election and other
stated matters, as each applied to petitioner’s Federal income
tax for 1996 through 2000.

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 298 140 UNITED STATES TAX COURT REPORTS (294)

III. Enniss Family
A. Family Members
The Enniss family (as relevant here) has eight members.
Arnold Reid Enniss (Reid Enniss) and his wife (now
deceased), Delpha Enniss, are two of the members. Their
children are the other six members. The children’s names are
Chad Enniss, Wade Enniss, Blake Enniss, Carolyn Sandoval,
Kelly Kufa, and Eric Enniss.
B. Enniss Family Business
The Enniss family has owned and operated a sand mine or
quarry through various entities for over five decades. The
related business mines or dredges sand, topsoil, and other
dirt products (collectively, sand) mainly (if not solely) from
riverbeds and markets and sells the mined sand. The Enniss
family also for many years has through various entities
owned and operated a general engineering and general
building contracting business and a steel fabrication and
erection, construction trucking, demolition, and grading busi-
ness. Each member of the Enniss family is involved in the
family businesses.
The Enniss family began operating the sand mine in the
early 1970s through their controlled corporation, Enniss
Enterprises, Inc. In 1987, Enniss Enterprises, Inc., applied
for a major use permit (MUP) with respect to the sand mine.
The sand mine was in Lakeside, and a significant portion of
the property was on the San Vicente Creek riverplain. On
April 5, 1990, the San Diego County Planning and Environ-
mental Review Board approved the MUP, allowing Enniss
Enterprises, Inc., for a 15-year period, to conduct a mining
operation that excavated and removed 2.2 million cubic yards
of sand and gravel and conducted related screening. 4
Eventually, from January 2002 through 2004, the sand mine
business was owned and operated by Enniss, Inc. (another
entity that the Enniss family controlled as discussed below).
The Enniss family, through their various entities, excavated
approximately 1,708,960 tons of sand (approximately

4 One cubic yard of sand generally weighs 11⁄2 tons.

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1,139,307 cubic yards) from the sand mine from 1990 to
2001. 5
IV. Lawsuit
In February 1998, an employee of the Enniss family busi-
ness was seriously injured while at work, and he sued some
or all of the Enniss family members both personally and
through their business. The Enniss family retained various
attorneys to defend them in the lawsuit and to structure the
family’s finances to protect their assets. The Enniss family
asked Earl Husted, an attorney, for advice on asset protec-
tion and estate planning. Mr. Husted recommended that the
Enniss family contact another attorney, Fred Turner, and
Mr. Molnar, a certified public accountant (C.P.A.). Mr.
Turner and Mr. Molnar coowned a business in Orange
County, California, named Global Advisors.
V. Petitioner’s Application for Tax Exemption
On June 17, 1999, petitioner filed with the IRS a Form
1024, Application for Recognition of Exemption Under Sec-
tion 501(a), seeking tax-exempt status under section
501(c)(15) as a tax-exempt insurance company. The applica-
tion stated that petitioner was a licensed property and cas-
ualty insurance company which had entered into reinsurance
contracts and anticipated continuing that line of business.
5 The parties stipulated that Exhibit 74–J contains the Mining Operation

Annual Reports for Enniss Enterprises, Inc., Enniss, Inc., and Commercial
Conservancy Number One (another Enniss family controlled entity d.b.a.
Enniss Enterprises) for 1991 through 2001 and 2003 through 2009. Re-
spondent in his opening brief cited this exhibit and proposed that the
Court find that approximately 1,708,960 tons of sand were excavated be-
tween 1991 and 2001. Petitioner in its answering brief admitted this pro-
posed finding. We find in Exhibit 74–J, however, that the first annual re-
port, while signed in 1991, actually reports sand that was excavated in
1990 and this sand is included in the 1,708,960 tons. We therefore find
contrary to the stipulation that the sand was excavated between 1990 and
2001. See Gerdau MacSteel, Inc. v. Commissioner, 139 T.C. 67, 144 n.55
(2012) (stating that, where justice requires, the Court may disregard a
stipulation which is clearly contrary to the record). We also note that the
annual report for 1995 lists a number that appears to be 140,000 but could
be 190,000. Respondent in his proposed finding of fact has reflected that
number as 190,000, and we do the same given petitioner’s agreement with
respondent’s proposed finding.

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 300 140 UNITED STATES TAX COURT REPORTS (294)

The application stated that petitioner did not insure related
parties or reinsure any related-party insurance. The applica-
tion listed Mr. Cavaricci as petitioner’s president and
director and Vince Ambrose as petitioner’s secretary and
director. On or about September 15, 1999, petitioner sub-
mitted to the IRS a Form 2848 authorizing Mr. Molnar (as
a C.P.A.), Mr. Cavaricci (as an officer of petitioner), and Ms.
Gilpin (as a full-time employee of petitioner) to represent
petitioner as to the application and to petitioner’s Forms 990,
as each related to petitioner’s Federal income tax for 1996
through 1999.
On November 24, 1999, the IRS (through the Chief of
Exempt Organizations Technical Branch 3) notified peti-
tioner by letter that the IRS had considered the application
and determined solely on the basis of the information fur-
nished therewith that petitioner was tax exempt as an
organization described in section 501(c)(15), effective January
1, 1998. The IRS noted in the letter that petitioner had filed
its section 953(d) election. Petitioner subsequently filed its
Forms 990 for 2002, 2003, and 2004 consistent with the
status of a domestic tax-exempt entity for Federal tax pur-
poses.
VI. Enniss Family’s Asset Protection and Estate Planning
Strategies
During or before 2001, Mr. Turner and Mr. Molnar met
with the Enniss family at the family’s office in Lakeside. The
attendees discussed the previously mentioned lawsuit (which
was then pending), the Enniss family’s business operations,
and the possible benefits of a captive insurance company. 6
Mr. Turner and Mr. Molnar suggested that the Enniss family
consider using a captive insurance arrangement to protect
6 As the Court explained in Hosp. Corp. of Am. v. Commissioner, T.C.

Memo. 1997–482:
The insurance laws of some States provide for a category of limited
purpose insurance companies, popularly called captive insurance compa-
nies or captive insurers. Captive insurance company statutes generally
apply to companies that insure on a direct basis only the risks of compa-
nies related by ownership to the insurer. Because pure captive insurance
companies typically are formed for the purpose of insuring the risks of
related companies, the function of risk selection, in essence, is attained
at the onset.

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their assets. Later that year, the Enniss family decided to
avail themselves of the proffered benefits of a captive insur-
ance company. Global Advisors recommended that the Enniss
family purchase petitioner, an already-existing captive insur-
ance company that the then owner wanted to sell, in order
to avoid the costs of forming a new entity and to save money
on the venture. Petitioner’s stock was then wholly owned by
Mr. Cavaricci.
VII. Enniss Family Purchases Petitioner Through BC Invest-
ments, L.L.C.
From August through December 2001, the Enniss family
caused a series of transactions to be consummated to effect
the family’s purchase of all petitioner stock from Mr.
Cavaricci. Through the transactions, petitioner first relin-
quished all of its assets and liabilities and then Mr. Cavaricci
sold his petitioner stock to BC Investments, L.L.C., for
$10,000. 7 At that time, each member of the Enniss family
owned a 12.5% interest in BC Investments, L.L.C., and the
IRS had issued the Enniss family a Federal identification
number for the company.
BC Investments, L.L.C., continued to be petitioner’s sole
owner through 2004. BC Investments, L.L.C., did not file a
Form 1065, U.S. Return of Partnership Income, or a Form
1120, U.S. Corporation Income Tax Return, for any of the
years 2001 through 2004.

7 The
parties have stipulated that Exhibit 21–J is a stock purchase
agreement between Mr. Cavaricci and BC Investments, L.L.C., dated De-
cember 11, 2001, and that Exhibit 23–J is a copy of the Form 990 that pe-
titioner filed for 2002. The former exhibit states that BC Investments,
L.L.C., is a Nevis limited liability company, and the latter exhibit states
that BC Investments, L.L.C., is a California general partnership. The par-
ties also have stipulated that petitioner has not stipulated that BC Invest-
ments, L.L.C., is either a Nevis limited liability company or a California
general partnership. The record fails to indicate whether BC Investments,
L.L.C., is a Nevis limited liability company, a California general partner-
ship, or something else, and we need not and do not make a finding as
to that matter.

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 302 140 UNITED STATES TAX COURT REPORTS (294)

VIII. Enniss, Inc., and EFR
A. Overview
Mr. Turner and Mr. Molnar wanted to establish an entity
(eventually, Enniss, Inc.) to operate the Enniss family’s gen-
eral engineering and general building contracting business
and another entity (eventually, EFR) to hold the Enniss fam-
ily’s real property. Mr. Turner and Mr. Molnar wanted peti-
tioner to provide insurance coverage for Enniss, Inc., and for
EFR.
B. EFR
1. Background
Effective December 31, 2001, the Enniss family formed
EFR as a California limited liability company to hold and to
manage their real property. Incident to this formation, each
Enniss family member contributed $125 to EFR in exchange
for a 12.5% interest in EFR. Each Enniss family member
later transferred his or her real property to EFR. From 2002
through 2004, EFR owned various pieces of real property and
operated primarily as a real property management company.
Reid Enniss was EFR’s general manager, and members of
the Enniss family performed in the United States activities
related to the management of EFR’s real properties. EFR did
not file a Form 1065 (or a Form 1120) for any of the years
2001 through 2004.
2. Transfers
On or about January 1, 2002, the Enniss family contrib-
uted their membership interests in EFR to BC Investments,
L.L.C. 8 BC Investments, L.L.C., then contributed those
interests to petitioner. As of January 1, 2002, petitioner
owned EFR as a ‘‘Disregarded Entity’’ for Federal tax pur-
poses. 9 Petitioner has treated EFR as its wholly owned dis-
regarded entity since January 1, 2002.
8 While Ms. Sandoval testified that she never transferred her member-

ship interest in EFR to BC Investments, L.L.C., that testimony is dis-
proved by the credible evidence in the record.
9 See secs. 301.7701–1(a)(4) (providing that ‘‘certain organizations that

have a single owner can choose to be recognized or disregarded as entities
separate from their owners’’), 301.7701–3(b)(1) (providing that a domestic

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3. Specific Real Property Holdings
During 2002 and 2003, EFR owned the following nine
groups of property, as identified by Eichel, Inc., real estate
analysis and appraisers, with the following corresponding
parcels: 10

Approximate
Property group Parcel Parcel No. acreage Zoning
1—Sand mine
A: Lot 210 375–040–01–00 18.38 A70
B: Lot 209 375–040–18–00 14.50 A70
C: Lot 206 375–040–15–00 9.90 A70
D: Lot 203 375–040–14–00 10.15 A70
E: Lot 215 375–040–33–00 17.70 M58

70.63
2—Rock quarry
F: Highway 326–050–11–00 7.53 M58
67
3—Vacant in-
dustrial land
G: Lot 212 375–041–41–00 2.86 M58
H: 375–041–44–00 4.70 M58
I: Lot 1 375–190–01–00 0.88 M58

8.44
4—Vacant in-
dustrial land
J: Lot 2 375–190–02–00 1.05 M58/
A70
K: Lot 4 375–190–04–00 2.37 M58/
A70
L: Lot 10 375–190–10–00 1.14 M58
M: Lot 11 375–190–11–00 1.29 M58
N: Lot 12 375–190–12–00 3.93 M58

9.78
5—Vacant mul-
tifamily site
O: Graves 384–120–63–00 22.23 HL
P: 378–120–62–00 6.25 HL
Q: 378–120–31–00 2.99 HL

31.47

entity is ‘‘Disregarded as an entity separate from its owner if it has a sin-
gle owner’’ and does not elect otherwise), Proced. & Admin. Regs.
10 For part of this time, EFR also owned lot 8, parcel No. 375–190–08–

00, in addition to the listed parcels. That 1.08-acre parcel was sold on Oc-
tober 8, 2002, for $635,000.

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 304 140 UNITED STATES TAX COURT REPORTS (294)

Approximate
Property group Parcel Parcel No. acreage Zoning
6—Single-fam-
ily dwelling
R: Lot 17 379–060–21–00 2.76 A70
7—Single-fam-
ily dwelling
S: Via Viejas 404–300–03–00 2.5 A70
8—Vacant sin-
gle-family lots
T: Utah 27–02–426–002 0.13 R
U: Utah 27–02–426–005 0.16 R

0.29
9—Vacant resi-
dential site
V: Ramona 287–031–26–00 39.24 A72

A70 zoning allows limited agricultural and commercial
uses related to agricultural or civic uses. M58 zoning reflects
high-impact industrial use (e.g., steel fabrication and contrac-
tors’ yards), and vacant land with M58 zoning provides an
additional advantage to certain businesses in that it allows
for unenclosed commercial and industrial uses having poten-
tial nuisance characteristics. HL zoning allows for limited
residential development.
4. Description of Properties
a. Property Group 1
Property group 1 is the Enniss family’s sand mine plant at
the corner of Vigilante Road and Moreno Avenue. As of the
valuation date, parcels A through D were used to mine sand
and topsoil, and parcel E, which had a few small buildings
on it, was used primarily as the sand mine’s business office
and for storage. The highest and best use of property group
1 as of the valuation date was continued mining of the prop-
erty’s mineral resources. The highest and best use for the
property after the mineral resources are depleted is indus-
trial development or outdoor storage.
b. Property Group 2
Property group 2 is vacant land north of Vigilante Road,
on State Highway 67. This property’s use is limited to source
material for a rock quarry operation. The parties agree that

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 305

the fair market value of property group 2 as of the valuation
date was $500,000.
c. Property Groups 3 and 4
Property groups 3 and 4 (which the parties refer to as the
Vigilante Industrial Lots) are vacant industrial lots across
the street from each other on Vigilante Road between prop-
erty group 1 and State Highway 67. The eight underlying
parcels are irregular in shape, they are accessible by way of
Vigilante Road, and they have available water, sewer, and
electricity service.
As of the valuation date, property groups 3 and 4 were
used for open surface and minor office buildings. The highest
and best use for these property groups was industrial usage,
open storage, or outdoor manufacturing.
d. Property Group 5
Property group 5 (which the parties refer to as the Graves
Avenue Properties) is undeveloped Rattlesnake Mountain
hillside land in Santee, California, approximately five miles
south of property groups 3 and 4. Property group 5 is located
at the terminus of Graves Avenue.
The Enniss family bought property group 5 for $300,000 in
1998. The previous owner had mined granite on the property,
leaving a decomposed granite pit with several hundred thou-
sand tons of large boulders weighing from 1 to 30 tons each.
The Enniss family purchased property group 5 to resell the
boulders for rip rap along the coast of California. Rip rap is
the rock revetment that goes along the beach to dissipate the
energy from the ocean so that it does not erode the cliffs.
The Enniss family started marketing the boulders as rip
rap during the spring of 1999, but a local sheriff ordered
them in 2001 to stop their activities on property group 5. The
property remained idle until 2002, when a lawyer for a devel-
oper, Joel Faucetta, approached the Enniss family to buy the
property as part of Mr. Faucetta’s efforts to redevelop a sur-
rounding area to the west. Graves Avenue was the proposed
development’s only access road, and Mr. Faucetta wanted
property group 5 to access his proposed development. Santee
was backing and spearheading a development of the sur-
rounding area for residential use.

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 306 140 UNITED STATES TAX COURT REPORTS (294)

On August 12, 2002, EFR, as optionor, and Faucetta
Development Co. (FDC), as optionee, entered into an option
agreement that provided FDC, for a term of up to 24 months
(or, if earlier, five days after the recordation of the first final
subdivision map for the development), with the right to pur-
chase property group 5 for $5 million. 11 FDC paid EFR $1
for the option. If FDC failed to exercise the option, EFR had
11 The option agreement provided in part:
A. Optionor has offered to grant Optionee an option to purchase its fee
title interest in approximately 30 acres (plus or minus) of real property
located in the City of Santee, County of San Diego, California * * * on
the terms and conditions hereinafter set forth.
B. Optionee desires to acquire an option to purchase the Property
under the terms and conditions hereinafter set forth.
C. Optionee understands and agrees that the Property will be proc-
essed for development entitlements with other adjacent property con-
sisting of approximately 275 acres under a joint application for one Mas-
ter Project.
NOW THEREFORE, in consideration of the payment of $1.00 and the
mutual promises contained herein, the parties agree as follows:
1. Grant of Option. Optionor hereby grants to Optionee, or its As-
signee, the exclusive right and option to purchase the Property upon the
terms and conditions and for the purchase price hereinafter set forth.
* * * * * * *
6. Exercise of Option. In the event that Optionee, or its Assignee, exer-
cises this Option, such exercise shall be effected by Optionee, or its As-
signee, sending written notice to Optionor of the intent to exercise the
option. Thereafter, Optionee shall within three (3) business days of the
date of the written notice open an escrow to purchase the Property in
accordance with the terms provided herein.
In the event that Optionee does not exercise the Option provided for
herein, Optionor shall sell to Optionee an easement for ingress and
egress over the road across the Property shown on the approved ten-
tative map for the Master Project. In addition, Optionor shall grant
Optionee an easement over the land at the entrance of the Master
Project, not to exceed one-half acre, in order to erect appropriate entry
monumentation for the Master Project. In exchange for the purchase of
the easement for the road and the easement for entry monumentation
of the Master Project, Optionee shall improve the access road, the entry
monumentation area and provide stubbed underground utilities, includ-
ing sewer, water, electricity and cable to all the approved lots on the
Property and pay the sum of Two Million and No/Dollars ($2,000,000)
within five (5) business days after the approval of the first final subdivi-
sion map for the Master Project.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 307

to sell FDC two easements over property group 5 at a total
cost of $2 million and FDC had to make certain improve-
ments to the property. When the option agreement was
entered into, Reid Enniss knew that Mr. Faucetta was trying
to acquire several surrounding parcels for a larger develop-
ment. On the valuation date, property group 5 was zoned
Hillside Limited, which allowed residential development of
approximately seven to nine homes.
On August 8, 2004, FDC notified EFR that FDC was exer-
cising the option to purchase property group 5 on or before
September 12, 2004. FDC and EFR eventually agreed on
September 20, 2004, to extend the close of the sale and the
escrow until April 15, 2005, in exchange for FDC’s agreeing
to pay EFR an additional $500,000. The option was ulti-
mately assigned to Lennar Homes, a national home builder,
which purchased property group 5 on April 15, 2005, for its
Sky Ranch development project.
e. Property Group 6
Property group 6 is an older single-family dwelling in
Lakeside. The parties agree that the fair market value of
property group 6 was $367,500 as of the valuation date.
f. Property Group 7
Property group 7 is a high-end single-family dwelling in
Alpine, California. The parties agree that the fair market
value of property group 7 was $918,000 as of the valuation
date.
g. Property Group 8
Property group 8 is two adjacent single-family lots in
Sandy, Utah. The parties agree that the fair market value of
property group 8 was $126,000 as of the valuation date.
h. Property Group 9
Property Group 9 is vacant land in a remote rural area of
northeast San Diego County. The parties agree that the fair
market value of property group 9 was $145,000 as of the
valuation date.
5. Leases
From 2002 through 2004, EFR entered into leasing agree-
ments with various third parties for rental of its properties.

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 308 140 UNITED STATES TAX COURT REPORTS (294)

On January 1, 2002, EFR leased parcels A through D of
property group 1 to Enniss, Inc., in exchange for a royalty
payment of $2 per ton of material processed and sold from
those parcels.
C. Enniss, Inc.
Mr. Husted incorporated Enniss, Inc., in the State of Cali-
fornia on or about December 19, 2001. Enniss, Inc., is
involved in general engineering, general building contracting,
steel fabrication and erection, construction trucking, demoli-
tion, and grading and operates the Enniss family’s sand
mine. Enniss, Inc., is controlled by the Enniss family.
Since January 1, 2002 (including on the valuation date),
Enniss, Inc., has operated the sand mine on parcels A
through D pursuant to its lease agreement with EFR. The
agreement provided that Enniss, Inc., could use the property
as its sand mining operation, materials division office, and
maintenance facilities. The parties to that lease also entered
into a second lease agreement on the same date under which
Enniss, Inc., used one acre and 4,800 feet of office space on
parcel E. As of the valuation date, Enniss, Inc., used parcel
E as the site for its offices and storage and maintenance
sheds, as well as a yard area for the stacking and processing
of materials. 12
IX. Reclamation Plan
A. Background
The Surface Mining and Reclamation Act of 1975
(SMARA), Cal. Pub. Res. secs. 2710 through 2796 (West 2001
& Supp. 2013), required that the sand mine have an
approved reclamation plan that details how the mine would
be reclaimed to a usable condition in a manner that pre-
vented or minimized adverse environmental impacts and
eliminated residual hazard to the public health and safety.
The reclamation plan for property group 1, as in effect on the
valuation date, generally required that the operator of the
sand mine reclaim the sand mine after the mining was com-
plete. Specifically, as of that time, fill had to be transported
to the pits on the property to construct various stable and
12 Minimal mining also occurred on parcel E.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 309

compacted pads. The reclamation plan also required that a
drainage channel be constructed through the two southern
parcels of the site to carry water from the lake to the existing
San Vicente Creek south of the site.
The SMARA also required a financial assurance mecha-
nism (e.g., a bond or a letter of credit) to guarantee that the
costs associated with reclaiming the land in accordance with
the approved reclamation plan would be paid if the mine
operator became financially insolvent. Regardless of the mine
operator’s financial condition, the land owner is ultimately
responsible for the cost of reclamation. As of the valuation
date, no financial assurance was in place to guarantee that
reclamation of property group 1 would occur. Property group
1, once in the 1990s, had a $40,000 bond but the bond
expired before the valuation date.

B. Fill
The primary reclamation activity is obtaining fill to refill
the mined pits. 13 Sand mine owners and operators in San
Diego County sometimes purchase fill, especially when the
fill is of a specialized material. Other times, the owners and
operators receive free fill from construction debris and other
off-site sources, or charge a $2 to $6 per ton tipping fee to
allow companies desiring to dispose of their fill to dump the
fill in the mined pits at the sand mines.
As of the valuation date, multiple mining enterprises in
the San Diego area used fill for reclamation purposes. Many
of these enterprises charged tipping fees for accepting the
fill. Development projects in downtown San Diego provided a
major source of the fill in San Diego County, and other sites
outside of the downtown area did as well. Additional fill
sources in the Lakeside area at or around that time included
concrete rubble, asphalt rubble, construction overburden, and
sand and gravel that was not suitable for processing. During
2002 and 2003, the amount of fill that these areas around
the sand mine were capable of generating was projected over
five years to comprise between 475,000 and 2 million cubic
yards.
13 Other reclamation activities included removing equipment and struc-

tures, revegetation, and certain indirect items. The costs of these other ac-
tivities were relatively minimal in relation to the cost of the fill.

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 310 140 UNITED STATES TAX COURT REPORTS (294)

Enniss, Inc.’s nearby neighbor, Hanson Materials (Han-
son), had about two million cubic yards of fill dirt at that
time sitting in a large pile on the property. The Hanson site
was near property group 1 but, inter alia, a 5,700-foot con-
veyor system would have had to be constructed to transport
the fill to property group 1. Baxter owned a parcel of real
property between property group 1 and the Hanson site. The
owner of property group 1 would need Baxter’s consent to
build the conveyor on or over Baxter’s property. Baxter was
a blasting contractor and stored explosives on its land. Other
parcels of land also were between the Hanson site and prop-
erty group 1, and the owner of property group 1 also needed
the consent of those property owners to build the conveyor on
or over their properties. The Enniss family had no permis-
sion from Baxter or from any of the other property owners
to run a conveyor over their properties. The Enniss family,
however, may have then owned the other properties. 14
Beginning in 2002, Enniss, Inc., charged companies tipping
fees to dump their fill at its sand mine. The relevant data
underlying the tipping fees that Enniss, Inc., received in
2002 and 2003 is as follows:

Fill received Tipping fees Average tipping
Year (tons) collected fee per ton

2002 2,769.52 $84,128 $30.38

2003 10,483.37 144,450 13.78

C. Lakes
Property group 1 included a northerly lake. As of the valu-
ation date, no sand remained for permissible excavation in
that lake. The approved mining depth was generally 35 feet,
and the northerly lake had been overexcavated to a depth of
at least 40 feet and perhaps as deep as 75 feet. The approved
reclamation plan and the MUP called for the area to remain
a lake.
14 Although
the record is ambiguous, Chad Enniss testified that to con-
struct and to operate the proposed conveyor system Enniss, Inc., would
have needed ‘‘permission [i.e., an easement or license] from Hanson, Bax-
ter, [and] possibly a couple of the others there on Vigilante Road, but at
that time, I think that we owned all of those’’ other parcels of property.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 311

Property group 1 also included a southerly lake. As of the
valuation date, no sand remained for permissible excavation
in the southerly lake. The southerly lake had to be filled as
part of the reclamation of property group 1.
D. Condition of Mine on the Valuation Date
On the valuation date, property group 1 was in the worst
condition it had been in since the Enniss family started
mining the property. Few if any conditions of the MUP had
been met; little reclamation had taken place; and the prop-
erty had been mined out of phase, over depth, and too close
to the road. In addition, no financial assurance was in place;
existing roads were not widened; new roads were not built;
and the mines were approximately 60 to 80 feet deep from
the surface elevation.
X. Ms. Sandoval
Ms. Sandoval was petitioner’s secretary during the subject
years. She was in charge of filing and signing petitioner’s tax
returns.

XI. Petitioner’s Forms 990 and 990–T

A. Form 990 for 2002
Petitioner filed its Form 990 for 2002 on or about January
15, 2004. The return lists Chad Enniss as petitioner’s presi-
dent and Ms. Sandoval as petitioner’s secretary. The return
is signed and dated by Ms. Sandoval, and she also printed
her name and title (‘‘Secretary’’) next to her signature on the
line for those items. The return was prepared and also
signed by a representative of Molnar and Associates on
behalf of that entity in his or her capacity as the return’s
preparer. The representative’s signature is illegible.
The Form 990 for 2002 reports that EFR is a limited
liability company that petitioner wholly owned. The return
also reports that EFR is a disregarded entity. In addition,
the return reports that petitioner received tax-exempt insur-
ance premium revenue of $128,584 during 2002.

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 312 140 UNITED STATES TAX COURT REPORTS (294)

B. Form 990 for 2003
Petitioner filed its Form 990 for 2003 on or about
November 19, 2004. The return lists Chad Enniss as peti-
tioner’s president and Ms. Sandoval as petitioner’s secretary.
The return was prepared and signed by a representative of
Molnar and Associates on behalf of that entity in his or her
capacity as the return’s preparer. The representative’s signa-
ture is illegible, but it appears to be that of the same indi-
vidual who signed the Form 990 for 2002 as its preparer. 15
The return was not signed by anyone other than the pre-
parer.
The Form 990 for 2003 reports that EFR is a limited
liability company that petitioner wholly owns. The return
also reports that EFR is a disregarded entity. The return
also reports that petitioner received tax-exempt insurance
premiums revenue of $300,000 during 2003.
C. Form 990 for 2004
Petitioner filed its Form 990 for 2004 on or about
November 21, 2005. The return lists Chad Enniss as peti-
tioner’s president and Ms. Sandoval as petitioner’s secretary.
The return was prepared by J. Douglass Jennings, Jr., on
behalf of his professional corporation, and was signed by him
in that capacity. The return also was signed and dated by
Ms. Sandoval in her capacity as petitioner’s secretary, and
she also printed her name and title (‘‘Secretary’’) under her
signature on the line for those items.
The Form 990 for 2004 reports that petitioner received tax-
exempt insurance premiums revenue of $298,000 during
2004.
D. Form 990–T for 2004
Petitioner filed its Form 990–T for 2004 on or about
November 15, 2005.

15 While petitioner asks the Court to find that the signature is that of

Mr. Molnar, the signature is most likely that of Mr. Liptz.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 313

XII. Respondent’s Examination

A. Tax-Exempt Status
During or about June 2005, the IRS (through its Tax-
Exempt and Government Entities Division) began an exam-
ination for petitioner’s 2002 and 2003 taxable years and most
specifically petitioner’s tax-exempt status under section
501(c)(15). The IRS ultimately determined that petitioner
was not an insurance company and did not qualify as a tax-
exempt organization described in section 501(c)(15) as of
January 1, 2002. Petitioner eventually agreed with this
determination. On April 12, 2006, Ms. Sandoval, as peti-
tioner’s secretary and treasurer, signed Form 6018–A, Con-
sent to Proposed Action, consenting to the IRS’s revocation of
petitioner’s tax exemption as of January 1, 2002.
B. Income Tax
During or around November 2005, the IRS (through its
Large and Mid-Size Business Division) began an examination
for petitioner’s income tax liabilities for 2002 and 2003. The
examination was later expanded to include 2004.
Respondent used substitute for return procedures to deter-
mine petitioner’s income tax liability for each subject year.
Respondent determined that the termination of petitioner’s
section 953(d) election caused petitioner to be a taxable cor-
poration which sold its assets to a controlled foreign corpora-
tion on January 1, 2003 (which, respondent determined, was
a one-day taxable year in and of itself). Respondent
bifurcated petitioner’s 2003 taxable year into the one-day
taxable year beginning and ended on January 1, 2003, and
a second taxable year consisting of the remainder of 2003.
For the one-day taxable year, respondent determined peti-
tioner’s income tax liability in part on the basis of the
deemed sale.

XIII. Notice of Deficiency

On August 5, 2009, respondent issued petitioner the notice
of deficiency underlying these cases.

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 314 140 UNITED STATES TAX COURT REPORTS (294)

OPINION

I. Burden of Proof
With one exception, petitioner bears the burden of proving
that respondent’s determination of the deficiencies set forth
in the deficiency notice is incorrect. See Rule 142(a)(1); Welch
v. Helvering, 290 U.S. 111, 115 (1933); Baxter v. Commis-
sioner, 816 F.2d 493, 495 (9th Cir. 1987), aff ’g in part, rev’g
in part on an issue not relevant here T.C. Memo. 1985–378.
Section 7491(a) sometimes shifts to the Commissioner part or
all of the burden of proof where the taxpayer introduces cred-
ible evidence of a factual matter, but that section does not
apply where a taxpayer fails to satisfy the related require-
ments. See, e.g., sec. 7491(a)(2)(A), (B), and (C). Petitioner
has failed to establish that it meets all of those require-
ments.
The single exception is that respondent bears the burden
of proof as to the fair market value of the real property
underlying the deficiency for the one-day taxable year. These
cases are appealable to the Court of Appeals for the Ninth
Circuit (absent the parties’ stipulation to the contrary), and
this Court will follow a decision of that court which is
‘‘squarely in point’’. See Golsen v. Commissioner, 54 T.C. 742,
757 (1970), aff ’d, 445 F.2d 985 (10th Cir. 1971). The Court
of Appeals for the Ninth Circuit has indicated, on at least
three occasions, that the presumption of correctness that
attaches to a notice of deficiency is forfeited where the
Commissioner adopts a litigating position different from the
valuation stated in a deficiency notice. See Estate of Mitchell
v. Commissioner, 250 F.3d 696, 701–702 (9th Cir. 2001), aff ’g
in part, vacating in part and remanding 103 T.C. 520 (1994)
and T.C. Memo. 1997–461; Estate of Simplot v. Commis-
sioner, 249 F.3d 1191, 1193–1194 (9th Cir. 2001), rev’g and
remanding 112 T.C. 130 (1999); Morrissey v. Commissioner,
243 F.3d 1145, 1148–1149 (9th Cir. 2001), rev’g and
remanding Estate of Kaufman v. Commissioner, T.C. Memo.
1999–119. 16 Respondent’s litigating position as to the fair
16 In
each of these cases, the Commissioner determined an estate tax de-
ficiency on the basis of an increase in the fair market value over that re-
ported on the estate tax return and later submitted expert reports sup-
porting the Commissioner’s concessions that the fair market value was less
than that determined in the statutory notice. See Estate of Mitchell v.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 315

market value of the real property underlying the deficiency
in the one-day taxable year differs from the value stated in
the deficiency notice.
II. Period of Limitations
Petitioner argues that the three-year period of limitations
of section 6501(a) precludes respondent from assessing any
tax for the one-day taxable year. To that end, petitioner
asserts, it filed a Form 990 for 2003 that commenced the
period of limitations for the one-day taxable year.
Respondent argues that the period of limitations for the one-
day taxable year never began because, respondent asserts
(among other reasons), petitioner did not file a valid Form
990 for any part of 2003. We agree with respondent.
Section 6501(a) generally provides that the Commissioner
must assess any income tax for a taxable year within three
years after the return was filed. For this purpose, section
6501(g)(2) provides that ‘‘[i]f a taxpayer determines in good
faith that it is an exempt organization and files a return as
such under section 6033, and if such taxpayer is thereafter
held to be a taxable organization for the taxable year for
which the return is filed, such return shall be deemed the
return of the organization’’. Section 6033(a)(1) requires, with
limited exceptions not applicable here, that every organiza-
tion exempt from tax under section 501(a) file an annual
return listing certain information, and section 1.6033–
2(a)(2)(i), Income Tax Regs., generally states that the return
shall be filed on Form 990. Section 6062 requires that a cor-
poration’s ‘‘president, vice-president, treasurer, assistant
treasurer, chief accounting officer or any other officer duly
authorized so to act’’ sign the corporation’s income tax
return. Filing an unsigned form is not the filing of a valid
return for purposes of commencing the running of the period
of limitations. See Lucas v. Pilliod Lumber Co., 281 U.S. 245
(1930); Elliott v. Commissioner, 113 T.C. 125 (1999); see also
Richardson v. Commissioner, 72 T.C. 818, 823–824 (1979)
Commissioner, 250 F.3d 696, 698–699 (9th Cir. 2001), aff ’g in part,
vacating in part and remanding 103 T.C. 520 (1994) and T.C. Memo.
1997–461; Estate of Simplot v. Commissioner, 249 F.3d 1191, 1193–1194
(9th Cir. 2001), rev’g and remanding 112 T.C. 130 (1999); Morrissey v.
Commissioner, 243 F.3d 1145, 1149 (9th Cir. 2001), rev’g and remanding
Estate of Kaufman v. Commissioner, T.C. Memo. 1999–119.

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 316 140 UNITED STATES TAX COURT REPORTS (294)

(and the cases cited thereat). This is true even where the IRS
accepts and processes the unsigned return. See Pilliod
Lumber Co., 281 U.S. at 249; Plunkett v. Commissioner, 118
F.2d 644, 650 (1st Cir. 1941), aff ’g 41 B.T.A. 700 (1940).
The parties dispute whether petitioner’s Form 990 for 2003
that was submitted to the IRS was signed by one of peti-
tioner’s officers. Petitioner asserts in its brief that the form
was signed by Ms. Sandoval but that neither petitioner nor
respondent has been able to produce a copy of the signed
form. Petitioner asserts alternatively that the return was
signed by Mr. Molnar as a director who was duly authorized
to sign the return on petitioner’s behalf. We disagree with
petitioner on both points. 17
Exhibit 24–J is a joint exhibit that was entered into evi-
dence through a stipulation that the exhibit ‘‘is a true and
correct copy of the Form 990 Return of Organization Exempt
from Income Tax filed by CGL [petitioner] for tax year 2003.’’
The form bears no signature on the line for the ‘‘signature of
officer’’. Nor does it list any date on the corresponding line
for the date, or any information on the corresponding line for
‘‘Type or print name and title’’. In the section that is labeled
‘‘Paid Preparer’s Use Only’’, a signature was reportedly
entered on November 4, 2004, by a preparer who worked for
Molnar and Associates. The preparer’s signature is illegible,
however, and the return does not otherwise identify the pre-
parer. The signature does not appear to be that of either
Chad Enniss or Ms. Sandoval, who the return reports are
petitioner’s only officers. Nor does the return contain any
other signatures.
Petitioner asks the Court to find as a fact that Ms.
Sandoval signed petitioner’s Form 990 for 2003 notwith-
standing the fact that Exhibit 24–J contains no such signa-
ture and that the parties have stipulated that the exhibit is
a true copy of petitioner’s Form 990 for 2003. To that end,
petitioner invites the Court to minimize the significance of
the stipulation by observing that Ms. Sandoval testified at
trial that ‘‘I think I signed the [2002 through 2004] returns.’’
Ms. Sandoval also testified that ‘‘I believe I did’’ sign peti-
17 Petitioner argues that the term ‘‘officer’’ in sec. 6062 naturally in-

cludes a corporation’s director even if the director is not also a corporate
officer. We need not and do not decide that issue.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 317

tioner’s returns for 2002 through 2004. We decline peti-
tioner’s invitation to make its desired finding. A stipulation
that only one of the parties thereto challenges is generally
treated as a conclusive admission to the extent of its terms,
and the party is not allowed to qualify, change, or contradict
any or all parts of a stipulation unless justice requires. 18 See
Rule 91(e); Spencer v. Commissioner, 110 T.C. 62, 81 (1998);
Modern Am. Life Ins. Co. v. Commissioner, 92 T.C. 1230,
1249 (1989); see also Bail Bonds by Marvin Nelson, Inc. v.
Commissioner, 820 F.2d 1543, 1547–1548 (9th Cir. 1987),
aff ’g T.C. Memo. 1986–23. We are not persuaded that Ms.
Sandoval’s equivocal testimony supports a conclusion that
justice requires that we disregard any part of the parties’
stipulation that Exhibit 24–J ‘‘is a true and correct copy of
the Form 990 Return of Organization Exempt from Income
Tax filed by CGL [petitioner] for tax year 2003’’.
Nor are we persuaded that the Form 990 which petitioner
submitted to respondent for 2003 was appropriately signed
by one of petitioner’s officers through the preparer’s signing
of his or her name as the return preparer. The preparer’s sig-
nature is illegible, as stated above, and the record does not
otherwise allow us to definitively find the preparer’s identity.
Even if we were to assume that the preparer’s signature on
the Form 990 for 2003 was Mr. Molnar’s, an assumption
which we do not find as a fact notwithstanding petitioner’s
request that we do so, our view would stay the same. The
preparer’s signature on that form is explicitly that of an indi-
vidual in his or her capacity as the preparer of the return;
it is not explicitly that of an officer of petitioner in his or her
capacity as such. Contrary to petitioner’s suggestion, the fact
that the preparer signed his or her name under penalties of
perjury, as was required for the corporate officer’s signature
as well, is not enough to carry the day. We conclude that
petitioner did not file a Form 990 for 2003 which commenced
18 We note that the parties’ Joint Stipulation of Facts further states

‘‘that either party may introduce other and further evidence not incon-
sistent with the facts herein stipulated unless otherwise stated as re-
served.’’ (Emphasis added.) Stipulation 27, referencing Exhibit 24–J, does
not reserve the issue as to its accuracy but does state: ‘‘The truth of asser-
tions within stipulated exhibits may be rebutted or corroborated with addi-
tional evidence.’’

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 318 140 UNITED STATES TAX COURT REPORTS (294)

the period of limitations for that year and that the period
remains open. 19 See sec. 6501(c)(3).
III. Section 953(d) Election
A. Validity of Election
A foreign corporation may elect to be taxed as a domestic
entity if the corporation would qualify under the Code as an
‘‘insurance company’’ (if it were a domestic entity) and it
meets the other requirements set forth in section 953(d). The
parties dispute one of the other requirements, which the IRS
included in Notice 89–79, 1989–2 C.B. 392, as guidance for
a foreign corporation’s making a section 953(d) election. 20
See also sec. 953(d)(1)(C) and (D) (authorizing the Secretary
to prescribe rules to ensure that taxes imposed on the cor-
poration are paid and stating that the foreign corporation
must make the requisite election). The disputed requirement
is that a ‘‘responsible corporate officer’’ sign a corporation’s
election statement.
Ms. Gilpin signed petitioner’s section 953(d) election state-
ment under penalty of perjury in her stated capacity as peti-
tioner’s secretary, and she was a ‘‘responsible corporate
officer’’ if she was petitioner’s ‘‘president, vice-president,
treasurer, assistant treasurer, chief accounting officer, or any
other officer duly authorized so to act.’’ See sec. 6062; see also
Notice 89–79, supra. Ms. Gilpin’s signing of her name on the
election statement is prima facie evidence that petitioner
authorized her to make the election on its behalf. See sec.
6062.
Petitioner argues that its section 953(d) election was
invalid because, petitioner states, Ms. Gilpin was not an
officer authorized to sign the election statement. We are
unpersuaded that Ms. Gilpin lacked the requisite authority
to sign the statement. The fact that Ms. Gilpin signed the
election under penalty of perjury in her stated capacity as
petitioner’s officer and that petitioner then filed the election
19 Petitioner also argues that the period of limitations began to run in

April 2006 when it gave a Form 1120–F for 2003 to the IRS. We disagree.
The IRS never accepted that return, and the return was never filed.
20 Notice 89–79, 1989–2 C.B. 392, was modified and superseded by Rev.

Proc. 2003–47, 2003–2 C.B. 55, but that action is not effective as to the
election here.

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with the IRS speaks loudly as to petitioner’s and Ms. Gilpin’s
understanding that Ms. Gilpin was then an officer authorized
to make the election. The same is true as to petitioner’s later
reliance on the elected status in applying for tax-exempt
status under section 501(c)(15) and the fact that petitioner
during this proceeding has not come forward with any cred-
ible documentary or testimonial evidence directly refuting
that Ms. Gilpin was an officer who was properly authorized
on November 16, 1998, to make the election. We also bear in
mind that petitioner, after it filed the election statement
with the IRS, confirmed its understanding that the election
was valid by submitting on or about March 20, 2000, a power
of attorney that referenced the election without any dispute
as to its validity and that petitioner has repeatedly filed Fed-
eral returns consistent with its election. The mere fact that
some or all of the Forms 990 that petitioner filed with the
IRS may have failed to include a copy of petitioner’s election
statement and that Notice 89–79, supra, instructs a taxpayer
to attach its election statement to its ‘‘annual income tax
return, Form 1120PC or Form 1120L,’’ does not mean, as
petitioner concludes, that petitioner’s election is rendered
invalid ab initio. Nor do we agree with petitioner’s assertion
that respondent was on notice as to the identity of peti-
tioner’s officers so as to know, as petitioner now claims, that
Ms. Gilpin was not petitioner’s officer at the time of the elec-
tion. We conclude that petitioner’s section 953(d) election was
valid. While respondent argues alternatively that the doc-
trine of estoppel precludes petitioner from contesting the
validity of its section 953(d) election, we need not and do not
address this alternative argument. 21
21 We also need not decide respondent’s request to amend the answer to

allege an affirmative defense of equitable estoppel to petitioner’s claim that
the election was invalid for lack of signature by a corporate officer. We
note, however, that any such amendment appears unnecessary because the
petition does not allege that the election was invalid. Rule 34(b)(4) and (5)
requires that the petition contain ‘‘[c]lear and concise assignments of each
and every error which the petitioner alleges to have been committed’’ and
‘‘[c]lear and concise lettered statements of the facts on which petitioner
bases the assignments of error’’, respectively. The petition states simply
that respondent erred in determining that the election was revoked during
the subject years, thus indicating that petitioner’s view as set forth in the
petition is that the election is still in place (which, of course, is contrary
Continued

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 320 140 UNITED STATES TAX COURT REPORTS (294)

B. Termination of Election
A foreign corporation’s election under section 953(d) to be
taxed as a domestic corporation applies for the year in which
the election is made and to all subsequent years, unless
terminated or revoked with the Secretary’s consent. See sec.
953(d)(2). Such an election is terminated when the corpora-
tion fails to meet the election requirements prescribed under
section 953(d)(1). See sec. 953(d)(2)(B). The termination
applies for all taxable years beginning after the year in
which the corporation failed to meet the election require-
ments prescribed under section 953(d)(1). See sec.
953(d)(2)(B).
Petitioner concedes it was not operating as an insurance
company during 2002. Petitioner therefore failed to satisfy
that requirement for maintaining the section 953(d) election
throughout 2002, see sec. 953(d)(1)(B), and its election was
thereby terminated. The termination applied to all of peti-
tioner’s taxable years after 2002. See id.
IV. Consequences of Termination
Respondent determined that the termination of petitioner’s
section 953(d) election caused petitioner to be treated as a
taxable corporation which is deemed to have sold its assets
to a controlled foreign corporation on January 1, 2003
(which, respondent determined, was a one-day taxable year
in and of itself). We agree with this determination.
Upon termination of a corporation’s election under section
953(d), the corporation is treated for purposes of section 367
as a domestic corporation which transfers all of its assets to
a foreign corporation in an exchange to which section 354
applies. See sec. 953(d)(5). The transfer is deemed to occur on
the first day of the taxable year following the revocation of
the election. See id. The ‘‘first day’’ here is January 1, 2003.
Under section 367(a)(1), a foreign corporation receiving
property in an exchange to which section 354 applies is gen-
to its claim now that the election was invalid from the beginning). We also
note that a pleading need not be amended when issues not raised by the
pleadings are tried by express or implied consent. See Rule 41(b)(1). It ap-
pears that the parties have tried the issue by express or implied consent
and that respondent’s amendment simply formalizes respondent’s position
as to petitioner’s invalid election claim raised outside of the pleadings. We
will deny respondent’s request as moot.

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erally not considered a corporation for purposes of deter-
mining the extent to which gain is recognized by the trans-
feror. Thus, absent an exception, the termination of a cor-
poration’s election under section 953(d) results in a deemed
transfer of the domestic corporation’s assets to a foreign cor-
poration in an exchange that is taxable to the domestic cor-
poration. After the deemed transfer on the ‘‘first day’’, the
taxpayer’s taxable year as a domestic corporation naturally
terminates as of the end of that day, given that it is no
longer taxed as a domestic corporation, and the taxable year
of the deemed transferee foreign corporation then begins and
naturally runs through the end of the transferor’s taxable
year as ascertained as if the transfer had not occurred.
Petitioner’s primary activity during 2002 was managing
the real property that its disregarded entity, EFR, owned. All
of the real property was in the United States, and the activi-
ties related to the management of these properties were per-
formed within the United States by members of the Enniss
family. As no exception was applicable at the time of the
deemed exchange on January 1, 2003, petitioner’s deemed
transfer of property is a taxable exchange for which peti-
tioner must recognize gain under section 367. Because peti-
tioner failed to file a Federal income tax return for its tax-
able year beginning and ending on January 1, 2003,
respondent determined petitioner’s income tax liability for
that one-day taxable year taking into account, inter alia, the
deemed sale.
Petitioner argues that section 367 was not intended to
apply in the setting at hand. We disagree. By its terms, sec-
tion 953(d)(5) provides that the termination of petitioner’s
section 953(d) election requires that petitioner, ‘‘[f]or pur-
poses of section 367’’, be ‘‘treated as a domestic corporation
transferring (as of the 1st day of such subsequent taxable
year) all of its property to a foreign corporation in connection
with an exchange to which section 354 applies.’’ We read
nothing in section 953, or in section 367, or in the regula-
tions under either provision, that would trump the quoted
rule of section 953(d)(5). While petitioner looks to strands of
legislative history to support its argument of a contrary legis-
lative intent, the best source of legislative intent is found in
the text of the statute. See Bedroc Ltd., L.L.C. v. United
States, 541 U.S. 176, 177 (2004); United States v. Lanier, 520

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 322 140 UNITED STATES TAX COURT REPORTS (294)

U.S. 259, 267 n.6 (1997); Conn. Nat’l Bank v. Germain, 503
U.S. 249, 253–254 (1992). Absent absurd, unreasonable, or
futile results, there is ‘‘no more persuasive evidence of the
purpose of a statute than the words by which the legislature
undertook to give expression to its wishes.’’ United States v.
Am. Trucking Ass’ns, Inc., 310 U.S. 534, 543 (1940); cf.
Albertson’s, Inc. v. Commissioner, 42 F.3d 537, 545 (9th Cir.
1994), aff ’g 95 T.C. 415 (1990). Congress has specifically and
unambiguously provided in section 953(d)(5) that a termi-
nation of a section 953(d) election results in a transfer of
property within the rules of section 367, and there is nothing
that is absurd, unreasonable, or futile in applying that text
as written. We are not unmindful that unequivocal evidence
of a clear legislative intent may sometimes override the
words of a statute and lead to a different result, but that
unequivocal bar is a high one to clear. See Consumer Prod.
Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 108
(1980); Landreth v. Commissioner, 859 F.2d 643, 646 n.6 (9th
Cir. 1988), aff ’g T.C. Memo. 1986–242; Halpern v. Commis-
sioner, 96 T.C. 895, 899 (1991). The legislative history here
provides scant and unpersuasive support for a holding con-
trary to that which we reach. 22
Petitioner also argues from a factual point of view that
petitioner was not EFR’s owner. As petitioner sees it, EFR
was a limited liability company that the Enniss family owned
directly. Moreover, petitioner asserts, even if the facts for-
mally establish that petitioner was EFR’s owner, the sub-
stance of the facts trumps their form and requires a contrary
finding that the Enniss family directly owned EFR. We dis-
agree in both regards. The record establishes, and we have
so found, that petitioner owned EFR. We note in support of
this finding, but not as the sole reason for the finding, that
petitioner’s statements in its returns are admissions that
may be overcome only through cogent evidence, see Waring
v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), aff ’g per
curiam T.C. Memo. 1968–126; Estate of Hall v. Commis-
sioner, 92 T.C. 312, 337–338 (1989), and that petitioner filed
22 Petitioner argues from an equitable point of view that sec. 367 should

not apply because, petitioner states, it will be taxed on the unrealized gain
when it eventually sells the properties. We disagree that equity plays any
part in our interpretation and implementation of secs. 367 and 953(d)(5)
in the setting at hand.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 323

a Form 990 for 2002 and 2003, each of which listed petitioner
as the sole owner of EFR. 23 We also note that EFR has
never filed a partnership (or corporate) tax return with
regard to any of the subject years. 24
Nor do we believe that the substance of the facts supports
petitioner’s proposed finding. The U.S. Supreme Court ‘‘has
observed repeatedly that, while a taxpayer is free to organize
his affairs as he chooses, nevertheless, once having done so,
he must accept the tax consequences of his choice, whether
contemplated or not, * * * and may not enjoy the benefit of
some other route he might have chosen to follow but did not.’’
Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co.,
417 U.S. 134, 149 (1974) (citations omitted); see also Wilkin
v. United States, 809 F.2d 1400, 1402 (9th Cir. 1987); Lomas
Santa Fe, Inc. v. Commissioner, 693 F.2d 71, 73 (9th Cir.
1982), aff ’g 74 T.C. 662 (1980). 25 Thus, petitioner and the
Enniss family, while they were entitled at the start to struc-
ture their affairs so that the Enniss family members owned
EFR as of the relevant time, must now accept the con-
sequences of instead causing petitioner to be EFR’s sole
owner (although their actions on this point probably resulted
from questionable legal advice). EFR’s ownership as struc-
tured by its controlling owners must ‘‘be given its tax effect
in accord with what actually occurred and not in accord with
what might have occurred.’’ Commissioner v. Nat’l Alfalfa
Dehydrating & Milling Co., 417 U.S. at 148. We note in
passing, however, that we disagree with petitioner’s primary
premise for finding that the members of the Enniss family
were in substance EFR’s owners. The mere fact that peti-
tioner and the Enniss family may have treated EFR as an
23 Whilepetitioner’s Form 990 for 2003 failed to be a valid return be-
cause it was not signed by one of petitioner’s officers, petitioner’s prepara-
tion and filing of the document with the IRS expressed petitioner’s under-
standing that petitioner was the sole owner of EFR.
24 Ms. Sandoval and Reid Enniss each testified in a conclusory manner

(and without further elaboration) that they were members of EFR. We do
not accept this testimony as the credible evidence in the record disproves
it.
25 Of course, where the issue is one of law as to the proper substantive

characterization of facts, the label used by the taxpayer may not always
be determinative if it is incorrect. See Selfe v. United States, 778 F.2d 769,
774 (11th Cir. 1985); Pinson v. Commissioner, T.C. Memo. 2000–208; LDS,
Inc. v. Commissioner, T.C. Memo. 1986–293.

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 324 140 UNITED STATES TAX COURT REPORTS (294)

independent entity for purposes of management and oper-
ations, as petitioner asserts, does not necessarily mean that
EFR was owned by the Enniss family rather than by peti-
tioner.
V. Subject of Exchange
Petitioner asserts that it never owned the real property
and that it may not be taxed as to any property that EFR
owned. We disagree. For Federal income tax purposes,
although petitioner may not have actually owned the real
property that EFR owned, petitioner is deemed to own EFR’s
real property because EFR’s owners chose to characterize
EFR as an entity that is disregarded as separate from its
owners. See secs. 301.7701–1(a)(4), 301.7701–3(b)(1), Proced.
& Admin. Regs.; cf. Samueli v. Commissioner, 132 T.C. 37,
39 n.3 (2009) (where a grantor trust was a disregarded entity
that owned an interest in a limited liability company, the
Court treated the grantor as the owner of that interest), aff ’d
and remanded on another issue, 661 F.3d 399 (9th Cir. 2011).
Our disregard of the entity EFR essentially means that we
view the facts as if EFR did not exist for Federal income tax
purposes and as if EFR’s sole owner, petitioner, was the sole
owner of EFR’s assets. Cf. Samueli v. Commissioner, 132
T.C. at 39 n.3.

VI. Fair Market Value of Disputed Property
A. Overview
The parties dispute the applicable fair market value of four
of the property groups. These groups are property groups 1,
3, 4, and 5. We proceed to determine those values.
A determination of fair market value is a factual inquiry
in which the trier of fact must weigh all relevant evidence of
value and draw appropriate inferences. See Commissioner v.
Scottish Am. Inv. Co., 323 U.S. 119, 123–125 (1944);
Helvering v. Nat’l Grocery Co., 304 U.S. 282, 294 (1938);
Zmuda v. Commissioner, 79 T.C. 714, 726 (1982), aff ’d, 731
F.2d 1417 (9th Cir. 1984). Fair market value is measured as
of the applicable valuation date, which in this case is
January 1, 2003. See Estate of Proios v. Commissioner, T.C.
Memo. 1994–442; Thornton v. Commissioner, T.C. Memo.
1988–479, aff ’d without published opinion, 908 F.2d 977 (9th

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 325

Cir. 1990). The willing buyer and the willing seller are hypo-
thetical persons, instead of specific individuals or entities,
and the characteristics of these hypothetical persons are not
always the same as the personal characteristics of the actual
seller or a particular buyer. See Propstra v. United States,
680 F.2d 1248, 1251–1252 (9th Cir. 1982); Estate of Bright v.
United States, 658 F.2d 999, 1005–1006 (5th Cir. 1981);
Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990).
The views of both hypothetical persons are taken into
account, and focusing too much on the view of one of these
persons, to the neglect of the view of the other, is contrary
to a determination of fair market value. See Estate of
Scanlan v. Commissioner, T.C. Memo. 1996–331, 72 T.C.M.
(CCH) 160 (1996), aff ’d without published opinion, 116 F.3d
1476 (5th Cir. 1997); Estate of Cloutier v. Commissioner, T.C.
Memo. 1996–49. Fair market value reflects the highest and
best use of the property on the valuation date, and it takes
into account special uses that are realistically available
because of the property’s adaptability to a particular busi-
ness. See Mitchell v. United States, 267 U.S. 341, 344–345
(1925); United States v. Meadow Brook Club, 259 F.2d 41, 45
(2d Cir. 1958); Stanley Works & Subs. v. Commissioner, 87
T.C. 389, 400 (1986). Property is generally valued without
regard to events occurring after the valuation date to the
extent that those subsequent events were not reasonably
foreseeable on the date of valuation. See Ithaca Trust Co. v.
United States, 279 U.S. 151 (1929); Trust Servs. of Am., Inc.
v. United States, 885 F.2d 561, 569 (9th Cir. 1989); Bergquist
v. Commissioner, 131 T.C. 8, 17 (2008); Estate of Giovacchini
v. Commissioner, T.C. Memo. 2013–27.
B. Approaches Used To Determine Fair Market Value
1. Overview
Generally, three approaches are used to determine the fair
market value of property. See United States v. 99.66 Acres of
Land, 970 F.2d 651, 655 (9th Cir. 1992). These approaches
are: (1) the market approach, (2) the income approach, and
(3) the asset-based approach. See Bank One Corp. v. Commis-
sioner, 120 T.C. 174, 306 (2003), aff ’d in part, vacated in part
and remanded on another issue sub nom. JP Morgan Chase
& Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006); Cohan

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 326 140 UNITED STATES TAX COURT REPORTS (294)

v. Commissioner, T.C. Memo. 2012–8. The question of which
approach to apply in a case is a question of law. Powers v.
Commissioner, 312 U.S. 259, 260 (1941). Because neither
party relies upon the asset-based approach, and we agree
that it is not applicable in these cases, we limit our discus-
sion of that approach to a brief explanation of it.
2. Three Approaches
a. Market Approach
The market approach requires a comparison of the subject
property with similar property sold in an arm’s-length trans-
action in the same timeframe. The market approach values
the subject property by taking into account the sale prices of
the comparable property and the differences between the
comparable property and the subject property. See Estate of
Spruill v. Commissioner, 88 T.C. 1197, 1229 n.24 (1987);
Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19–
20 (1979). The market approach measures value properly
only when the comparable property has qualities substan-
tially similar to those of the subject property. See Wolfsen
Land & Cattle Co. v. Commissioner, 72 T.C. at 19–20. Where
comparable properties are present, the market approach is
generally the best determinant of value. See Whitehouse
Hotel Ltd. P’ship v. Commissioner, 131 T.C. 112, 156 (2008),
vacated and remanded on another issue, 615 F.3d 321 (5th
Cir. 2010); Van Zelst v. Commissioner, T.C. Memo. 1995–396,
aff ’d, 100 F.3d 1259 (7th Cir. 1996). Moreover, while
unforeseeable events occurring after the valuation date are
generally not taken into account in determining a property’s
fair market value, a sale of other property within a reason-
able time after the valuation date may be a proper starting
point for the measure of the property’s fair market value. See
Estate of Scanlan v. Commissioner, 72 T.C.M. (CCH), at 162–
163 (adjustments made to redemption price to account for
passage of time and the change in the setting from the date
of the decedent’s death to the date of the later redemption);
see also Estate of Trompeter v. Commissioner, T.C. Memo.
1998–35, 75 T.C.M. (CCH) 1653, 1660–1661 (1998), vacated
and remanded on other grounds, 279 F.3d 767 (9th Cir.
2002).

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 327

b. Income Approach
The income approach relates to capitalization of income
and discounted cashflow. This approach values property by
computing the present value of the estimated future cashflow
as to that property. The estimated cashflow is ascertained by
taking the sum of the present value of the available cashflow
and the present value of the asset’s residual value.
c. Asset-Based Approach
The asset-based approach generally values property by
determining the cost to reproduce it less applicable deprecia-
tion or amortization.
C. Expert Witnesses
1. Background
Each party retained experts to value the properties at
issue. Petitioner retained and called Harry B. Holzhauer as
a real estate expert and Warren R. Coalson as a mining
expert. Respondent retained and called Norman Eichel as a
real estate expert and John A. Hecht as a mining expert.
Respondent also called Steve C. Cortner to testify in rebuttal
to a portion of Mr. Coalson’s testimony and recalled Mr.
Eichel and Mr. Hecht to testify in rebuttal to the respective
testimony of Mr. Holzhauer and Mr. Coalson. Petitioner
recalled Mr. Holzhauer and Mr. Coalson to testify in rebuttal
to the respective testimony of Mr. Eichel and Mr. Hecht.
2. Qualifications of Experts
a. Mr. Holzhauer
Petitioner retained Mr. Holzhauer to ascertain the fair
market value of the subject nine property groups. Mr.
Holzhauer has appraised real estate for over three decades,
and he holds the Appraisal Institute designation of MAI,
SRA, and SRPA. 26 He has previously testified in Federal and
State courts as an expert witness. He has taught classes on
appraisal at colleges and for professional organizations for
26 The designation of MAI is awarded to qualifying members of the

American Institute of Real Estate Appraisers, and it is the most highly
recognized appraisal designation within the appraisal community. The des-
ignations SRA (senior residential appraiser) and SRPA (senior real estate
property appraiser) are awarded to qualifying members of the Society of
Real Estate Appraisers.

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 328 140 UNITED STATES TAX COURT REPORTS (294)

approximately two decades. He has developed a course for
the IRS on the uniform standards of professional appraisal
practice, and he has taught that course for the IRS to IRS
agents nationwide.
The Court recognized Mr. Holzhauer as an expert in the
field of real estate appraisals, with no objection by
respondent.
b. Mr. Coalson
Petitioner retained Mr. Coalson to ascertain the cost of
reclaiming the mined property, to help determine the value
for the mineral resources that remained on the property, and
to estimate the amount of potentially developable land that
would be created by site reclamation. Mr. Coalson is a
mining consultant with over 30 years of experience in the
mining industry, inclusive of 23 years of consulting on
mining. He has a bachelor of arts degree, with a double
major in geography and environmental reclamation, and he
has previously testified as an expert on (among other mat-
ters) property and mineral resource valuation. For approxi-
mately the last 20 years, he has been the president of a com-
pany that he founded, which provides environmental and
mine permitting services.
The Court recognized Mr. Coalson as an expert in the field
of mining, with no objection by respondent.
c. Mr. Eichel
Respondent retained Eichel, Inc., to ascertain the fair
market value of the subject nine property groups. Eichel,
Inc., is a real estate research and appraisal firm which
specializes in the valuation of real estate in the Los Angeles,
California, and surrounding areas, and in litigation con-
sulting with respect to real estate valuation matters. Eichel,
Inc.’s president is Mr. Eichel. Mr. Eichel has a bachelor of
science degree from the University of Southern California
with a major in finance, and he performed graduate work in
the field of real estate research. Mr. Eichel holds the
Appraisal Institute designation of MAI.
The Court recognized Mr. Eichel as an expert in the field
of real estate appraisals, with no objection by petitioner.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 329

d. Mr. Hecht
Respondent retained Sespe Consulting, Inc. (Sespe), and its
president Mr. Hecht, to estimate the cost to reclaim property
group 1 as of the valuation date, among other things. Mr.
Hecht holds a bachelor of science degree in electrical
engineering from Valparaiso University and a professional
degree in geophysics from Colorado School of Mines. He has
worked professionally in the mining industry for almost
three decades, and he is a certified registered professional
engineer in the State of California and a registered environ-
mental assessor. He currently is the president of Sespe, an
environmental and engineering consulting firm, where he
devotes approximately 65% of his work to mining and
construction material projects (mainly reclamation planning,
preparing reclamation plans, and financial cost estimates) in
California.
The Court recognized Mr. Hecht as an expert in the field
of mining, with no objection by petitioner.
e. Mr. Cortner
Mr. Hecht (through his firm) retained Mr. Cortner to
determine some costs of product and materials and to assist
Mr. Hecht with the applicable reclamation standards. Mr.
Cortner has worked in the mining industry in southern Cali-
fornia, mostly in and around San Diego County, for over 35
years. The Court did not specifically recognize Mr. Cortner as
an expert but allowed him to testify as a fact witness in
rebuttal to a portion of Mr. Coalson’s testimony.
D. Applicable Standards
Each expert testified on direct examination primarily
through his expert report, see Rule 143(g)(1), which the Court
accepted into evidence. Each expert then generally testified
on cross-examination, redirect examination, and recross-
examination, through the typical question and answer
process.
We may accept or reject the findings and conclusions of the
experts, according to our own judgment. See Helvering v.
Nat’l Grocery Co., 304 U.S. at 294–295; Parker v. Commis-
sioner, 86 T.C. 547, 561–562 (1986). In addition, we may be
selective in deciding what parts (if any) of their opinions to
accept. See Parker v. Commissioner, 86 T.C. at 561–562. We

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 330 140 UNITED STATES TAX COURT REPORTS (294)

also may reach a determination of value based on our own
examination of the evidence in the record. Silverman v.
Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff ’g T.C.
Memo. 1974–285.
E. Analysis
1. Nine Property Groups
Mr. Holzhauer and Mr. Eichel each valued the nine prop-
erty groups discussed herein. As part of his analysis, Mr.
Holzhauer reduced his total value of the nine property
groups by 15% to apply a ‘‘bulk discount’’ and then rounded
that number to reach his final total value. Mr. Eichel did not
apply a similar discount to his total value.
The parties later agreed on the applicable fair market
values of property groups 2, 6, 7, 8, and 9. The fair market
values that Mr. Holzhauer and Mr. Eichel ascertained and
the agreed amounts are as follows:
Property group Mr. Holzhauer Mr. Eichel Agreed value
1 $5,000,000 1 $15,876,000 ---
2 300,000 2,100,000 $500,000
3 3,625,000 5,425,000 ---
4 5,000,000 6,250,000 ---
5 450,000 5,000,000 ---
6 310,000 425,000 367,500
7 962,000 918,000 918,000
8 126,000 126,000 126,000
9 210,000 145,000 145,000

Total 15,983,000 36,265,000 ---
Discount 2,397,450 -0- ---

Net 13,585,550 36,265,000 ---
Rounded 13,600,000 36,265,000 ---
1 Mr. Eichel in his original written expert witness report valued this
property at $16,200,000 but revised this number in his rebuttal report to
$15,876,000 to correct for a computational error of $324,000 that he dis-
covered in his original written expert witness report and direct testimony.

We are therefore left to decide the fair market values of
the remaining property groups as well as the appropriateness
of a ‘‘bulk discount’’. In rendering our decisions, we are aided
by the testimony of each of the four experts, all of whom we
consider to be qualified in their areas of expertise. Each
expert testified in favor of the party who called him, and we
have weighed the experts’ testimony with due regard to their

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 331

qualifications, the credible evidence in the record, and our
judgment. See Estate of Christ v. Commissioner, 480 F.2d
171, 174 (9th Cir. 1973), aff ’g 54 T.C. 493 (1970); Chiu v.
Commissioner, 84 T.C. 722, 734 (1985). On some matters, we
were persuaded more by petitioner’s experts than by
respondent’s experts, while on other matters we were per-
suaded more by respondent’s experts than by petitioner’s
experts.
2. Property Group 1
a. Overview
We summarize each expert’s valuation of property group 1
as follows:
2003 2004 2005

Mr. Mr. Mr. Mr. Mr. Mr.
Holzhauer Eichel Holzhauer Eichel Holzhauer Eichel

Tonnage 188,000 148,164 188,000 193,455 188,000 122,037

Royalty rate (per
ton) $4 --- $4.14 --- $4.28 ---
Sale price --- $14.50 --- $15 --- $15.50

Sales revenue --- $2,148,378 --- $2,901,825 --- $1,891,574
Fill material fees --- $70,000 --- $130,000 --- $400,000

Gross income1 $752,000 $2,218,378 $778,320 $3,031,825 $805,561 $2,291,574

Reclamation costs --- --- --- --- --- ---
Selling costs --- --- --- --- --- ---
Real estate taxes $28,500 $53,500 $29,070 $54,570 $29,651 $55,661

Production cost --- $592,656 --- $773,820 --- $549,167
Fill material
processing --- $5,000 --- $5,000 --- $200,000
SG&A --- $200,000 --- $200,000 --- $200,000

Net operating
income $723,500 $1,367,222 $749,250 $1,998,435 $775,910 $1,286,746

Reclamation costs --- --- --- --- --- ---
Zoning action --- --- --- --- --- ---
Land sale --- --- --- --- --- ---
Permit compliance --- $250,000 --- --- --- ---

Total --- $1,117,222 --- $1,998,435 --- $1,286,746
Discount
factor2 .8811 .7763 .6839

PV NOI $637,445 $604,180 $550,948

2006 2007 2008

Mr. Mr. Mr. Mr. Mr. Mr.
Holzhauer Eichel Holzhauer Eichel Holzhauer Eichel

Tonnage 188,000 148,623 188,000 66,377 --- 26,568
Royalty rate (per
ton) $4.43 --- $4.59 --- --- ---
Sale price --- $16 --- $16 --- $14.50

Sales revenue --- $2,377,968 --- $1,062,032 --- $385,497

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 332 140 UNITED STATES TAX COURT REPORTS (294)

2006 2007 2008

Mr. Mr. Mr. Mr. Mr. Mr.
Holzhauer Eichel Holzhauer Eichel Holzhauer Eichel

Fill material fees --- $1,200,000 --- $375,000 --- $250,000

Gross income1 $833,756 $3,577,968 $862,937 $1,437,032 --- $635,497

Reclamation costs --- --- --- --- $24,600,000 ---
Selling costs --- --- --- --- --- ---
Real estate taxes $30,244 $56,775 $30,849 $57,910 $31,466 $59,068
Production cost --- $743,115 --- $356,074 --- $150,211
Fill material
processing --- $600,000 --- $125,000 --- $25,000
SG&A --- $200,000 --- $200,000 --- $200,000

Net operating
income $803,511 $1,978,078 $832,088 $689,048 ($24,631,466) $201,218

Reclamation costs --- --- --- --- --- ---
Zoning action --- --- --- $34,000 --- $33,000
Land sale --- --- --- --- --- ---
Permit compliance --- --- --- --- --- ---

Total --- $1,978,078 --- $655,048 $168,218

Discount
factor2 .6026 .5309 .4678

PV NOI $502,407 $458,142 ($11,522,600)

2009 2010 Total

Mr. Mr. Mr. Mr.
Holzhauer Eichel Eichel Holzhauer

Tonnage --- 29,126 --- ---
Royalty rate (per ton) --- --- --- ---
Sale price --- $14 --- ---

Sales revenue --- $407,764 --- ---
Fill material fees --- $250,000 $125,000 ---

Gross income $34,505,673 $657,764 $125,000 ---
Reclamation costs --- --- --- ---
Selling costs $1,035,170 --- --- ---
Real estate taxes $32,096 $60,250 $61,455 ---
Production cost --- $164,562 --- ---
Fill material processing --- $25,000 --- ---
SG&A --- $200,000 $25,000 ---

Net operating income $33,438,407 $207,952 $38,545 ---
Reclamation costs --- --- $2,547,529 ---
Zoning action --- $33,000 --- ---
Land sale
Parcel A–D --- --- $18,220,000 ---
Parcel E --- --- $15,188,500 ---

Total --- $174,952 $30,899,516 ---
Discount factor2 .4121 --- ---

PV NOI $13,779,967 --- $5,040,211
NPV @14% $15,876,320 ---
Rounded $15,876,000 $5,000,000
1 For each year 2005 through 2007, the gross income shown in Mr. Holzhauer’s columns is slightly dif-
ferent from the product of his royalty rate shown for the year, and 188,000. Mr. Holzhauer first calculated
the gross income for 2003 and then calculated the gross income for each year 2004 through 2007 by in-
creasing the previous year’s gross income by 3.5%. Mr. Holzhauer then backed into his royalty rates by di-
viding the income for the year by 188,000, and rounding the quotient to the nearest cent.
2 For each year 2003 through 2007, the PV NOI shown in this chart is slightly different from the product
of the net operating income shown for the year and the discount factor shown for the year. Mr. Holzhauer
rounded his discount factors shown in this chart to the nearest ten-thousandths, but he apparently did not
round the factors when performing his calculations. For 2003, Mr. Holzhauer multiplied his discount factor
by net operating income to arrive at his PV NOI. For each of the other years 2004 through 2007, Mr.
Holzhauer multiplied his discount factor by gross income to arrive at his PV NOI.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 333

With a single exception, we find that Mr. Holzhauer’s anal-
ysis underlying his $5 million value is a better measure of
property group 1’s fair market value than Mr. Eichel’s anal-
ysis underlying his $15,876,000 value, notwithstanding that
Mr. Holzhauer’s analysis sometimes appears to be outcome
driven. While both Mr. Holzhauer and Mr. Eichel generally
ascertained their values as the sum of the present value of
the remaining mineable sand on the property plus the
present value of the residuary interest in the property, only
Mr. Holzhauer adequately recognized as of the valuation date
that the property was primarily in poor condition, out of
compliance with the MUP, and zoned primarily for agricul-
tural use; that the property’s value stemmed mainly from the
underlying real property; and that the mining operation was
conducted by Enniss, Inc., not petitioner. Mr. Holzhauer also
opined most persuasively that the highest and best use of
property group 1 was to extract the remaining sand, then
perform reclamation, and then to redevelop or to sell the
land; and that the value of the remaining sand was best
derived on the basis of the net income from royalties that a
third party would pay for extracting the sand, see, e.g.,
Terrene Invs., Ltd. v. Commissioner, T.C. Memo. 2007–218
(the Court used a royalty-based income capitalization method
to value a tract of land with sand and gravel deposits), as
opposed to, as Mr. Eichel concluded, an extraction of the
sand by the land owner. 27 The single exception is that Mr.
Holzhauer, in contrast to Mr. Eichel, improperly minimized
the value that inhered in the tipping fees that the owner of
property group 1 would receive as to the property. We turn
to discuss some specifics of Mr. Holzhauer’s valuation and
our discussion of the tipping fees.
b. Value of Remaining Mineable Sand
i. Background
Mr. Holzhauer ascertained his value of the remaining
mineable sand by relying upon Mr. Coalson’s opinion of the
27 Mr. Eichel also considered various sales of property that occurred in

2007 to ascertain the fair market value of property group 1 (and property
groups 3 and 4). We disagree with his use of those sales which occurred
too far after the valuation date.

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 334 140 UNITED STATES TAX COURT REPORTS (294)

volume of the remaining sand, the rate of extraction, and the
per-ton value for the remaining material.
ii. Mineable Sand
Mr. Coalson calculated the volume of extractable sand on
the basis of a review of the site of and MUP conditions of
parcels A through D as of the valuation date. He concluded
that no material remained for excavation in the lake portions
of property group 1 and estimated the recoverable material
as the product of: (1) the undisturbed acreage on parcels B,
C, and D (taking into account certain setbacks as required
under the MUP); (2) an assumed excavation depth in con-
formity with the MUP; and (3) a conversion factor for cubic
yards per acre/foot. He arrived at an estimated volume of
625,000 cubic yards of remaining sand and applied the
appropriate conversion factor of 1.5 tons per cubic yard to
reasonably calculate that 940,000 tons of recoverable salable
sand remained on the premises. The then-current market
price for washed sand was $14.50 per ton in 2003, a total
value in place at 2003 prices of $13,640,000. 28 He likewise
reasonably assumed that the remaining sand would be mined
at the same approximate rate that it was previously mined
(plus or minus 200,000 tons a year) and reasonably con-
cluded that the mine life was five years given that the mine
was five years from depletion as of the valuation date. He
conservatively ascertained that the remaining sand would be
extracted at an even rate over the five-year period (in other
words, at 188,000 tons (940,000/5) per year). 29
Mr. Coalson opined credibly that as of the valuation date
there was a high demand in San Diego County for 940,000
tons of sand. He valued the remaining sand under two sce-
narios: (1) the property owner mines the sand and (2) a third
party mines the sand and pays the property owner a royalty
for the sand. As to the first scenario, i.e., the owner mines
28 There
appears to be a rounding or math error of $10,000 (i.e., 940,000
× 9.50 = $13,630,000).
29 Mr. Eichel, on the other hand, estimated that the remaining sand was

734,368 tons and that this sand would be extracted over a seven-year pe-
riod at rates that he improperly ascertained through his consideration of
data that was not reasonably foreseeable as of the valuation date. In line
with this estimate, Mr. Eichel also unpersuasively concluded that property
group 1 would be sold in 2010.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 335

the sand, Mr. Coalson explained that the owner would first
have to acquire a permit to mine the sand and that the
permit process had previously taken 18 years in the case of
one site in San Diego County. As to the second scenario, i.e.,
a third party mines the sand and pays a royalty for the sand,
Mr. Coalson explained that royalty arrangements were
common in circumstances where the owner did not want to
develop a mining plan, hire consultants, and get the requisite
permit. He opined that an owner of a sand mine in San
Diego County would likely enter into a royalty agreement
with a mining company rather than mine the property itself.
He estimated a ‘‘very generous royalty rate’’ of $4 per ton for
sand mined by the third party, explaining that his estimate
was derived from two royalty agreements that his company
aggressively negotiated in Lakeside during 2002, and opined
reasonably that the owner would expect a 3.5% annual
increase in that rate to take into account inflation. Mr.
Holzhauer concluded that the real property owner would pay
the real estate taxes and the reclamation costs.
Mr. Holzhauer projected that $24.6 million of reclamation
costs would be owed in 2008, the year after the sand was
excavated. Mr. Coalson had estimated that the reclamation
costs would total $24,913,003, using unadjusted 2003 price
data to estimate that amount, and Mr. Holzhauer first
rounded that amount to $25 million and then ultimately con-
cluded that reclamation costs would total $24.6 million. Mr.
Holzhauer did not explain why he ultimately reduced the $25
million to $24.6 million.
As Mr. Coalson saw it, as of the valuation date, the volume
of fill required to reclaim the mining pits in the sand mine
was 1,982,500 cubic yards determined as follows: 30
30 Mr. Hecht opined that no fill need be added to the northerly lake or

to a portion of the southerly excavation area. We disagree. Mr. Coalson
testified persuasively that the northerly lake had to be filled, noting among
other things that the sand in the lake was very permeable, as contrasted
with the compacted sand found in the pits, and that fill had to be added
to the lake to raise the bottom of the lake to its required depth. As to the
southerly extracted area, Mr. Hecht opined that this area need not be
filled because nothing was extracted from that area during 2003. Mr.
Coalson opined, however, that the sand on property group 1 would be ex-
tracted over a five-year period. Mr. Hecht acknowledged in his testimony
that the 625,000 cubic yards of fill would appropriately be taken into ac-
Continued

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 336 140 UNITED STATES TAX COURT REPORTS (294)

Fill area Cubic yards

Northerly lake 372,500
Southerly lake 985,000
Remaining southerly extraction area 625,000

Total volume backfill required 1,982,500

Mr. Coalson logically determined these amounts by multi-
plying the area that was required to be filled by the depth
of the area. Mr. Coalson determined on the basis of his
review of the market that the fill would cost $9.50 per cubic
yard, or $18,833,750 in total (1,982,500 × $9.50), which takes
into account both the price to purchase specialized fill and to
transport the fill to the site. Mr. Coalson also took into
account various other secondary costs relating to the prop-
erty’s reclamation and arrived at a total reclamation cost of
$24,913,003 (which, as previously mentioned, Mr. Holzhauer
rounded down to $24.6 million).
Mr. Holzhauer concluded that the owner of the sand mine
would receive no income from the acceptance of fill because,
Mr. Holzhauer stated, this income does not relate to the real
property value. Mr. Holzhauer rationalized that income gen-
erated from tipping fees had ‘‘nothing to do’’ with the owner
of the land into which the fill was deposited. Mr. Coalson
(and thus Mr. Holzhauer) did not consider whether the
owner of property group 1 could receive free fill from the
Hanson site because he believed that Hanson desired a buyer
for its fill and would not give its fill to a competitor for free.
Mr. Coalson also opined that Hanson’s excess fill was dedi-
cated to fill one of its own projects and was unavailable to
fill property group 1. Mr. Coalson also asserted, without fur-
ther elaboration, that accepting free fill was contrary to
‘‘state policy’’ because its availability at the time of need
could not be foreseen with any certainty.

count if the amount of sand was extracted in 2003 but that applicable fi-
nancial standards do not take this amount into account because the extrac-
tion is after one year. We do not believe that the referenced one-year rule
is an appropriate guide to ascertaining the fair market value of property
group 1. Instead, we believe that the hypothetical willing buyer and the
hypothetical willing seller would take into account all costs associated with
the property, whether the anticipated costs are to be incurred before one
year or afterwards.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 337

We disagree with Mr. Holzhauer that the ability to receive
tipping fees with respect to property group 1 has nothing to
do with the owner of the property or, more importantly, with
a determination of the fair market value of property group
1. Mr. Eichel persuasively opined that these fees belong to
the owner of the property, and he took the fees into account
in his analysis. Moreover, as we see it, a hypothetical willing
buyer and a hypothetical willing seller would both take into
account the ability to receive tipping fees from property
group 1 when agreeing on the purchase price of that prop-
erty. The ability to receive income as to property is an impor-
tant attribute of the property and factors into its value. To
say the least, net-income-producing property is certainly
worth more than the exact same property that does not
produce net income.
That said, we believe that a hypothetical purchaser would
not assume, as of the valuation date, that it could receive the
relevant industry minimum $2 per ton tipping fee or benefit
from free fill over the next five years of the sand mine oper-
ation plus any additional time required to complete the land
reclamation project. Tipping fees and free fill are factually
speculative, depending on time-sensitive nearby demand and
nearby supply, and could be achieved only as long as San
Diego County and the California Department of Conservation
permitted the sand mine operation and/or reclamation activi-
ties to continue. Any such continuation was speculative, as
of the valuation date, in view of the uncontradicted testi-
mony that SMARA, Cal. Pub. Rec. secs. 2710 and 2773,
required an appropriate financial assurance mechanism to
ensure that adequate funds to complete all required reclama-
tion work are available when mining ends. 31 The sand mine
was out of compliance with that provision given that an
appropriate reclamation financial assurance plan was not
then in place. The original 1990s financial plan was obsolete

31 See
generally People ex rel. Dept. of Conservation v. El Dorado County,
116 P.3d 567 (Cal. 2005), as to procedural enforcement matters and People
ex rel. Connell v. Ferreira, 2003 WL 22022032 (Cal. Ct. App. 2003), and
McCain v. County of Lassen, 2003 WL 123065 (Cal. Ct. App. 2003), as to
fines and penalties.

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 338 140 UNITED STATES TAX COURT REPORTS (294)

because significant mining had occurred since then and the
posted $40,000 bond for that plan had expired. 32
Other serious major problems with the MUP and with the
reclamation plan were present as of the valuation date. The
MUP set numerous requirements that were not met. The
MUP required the construction of certain roads, but those
roads were not then built. Sand had been mined too close to
the roadways to allow an acceptable slope on the sides of the
pits. Sand was mined in large quantities far below the per-
mitted maximum mining depth. Reclamation and channel
work were far behind schedule. The approved mining plan
regulating which areas were to be mined first and in which
order, known as the mining phases, had been ignored on
account of flooding and the lack of channel work. Con-
sequently, the sand mine’s entire operation was at significant
risk that the underlying business could, and would, be fined
and/or shut down by San Diego County and/or by the Cali-
fornia Department of Conservation and the required reclama-
tion work demanded immediately.
Should that have occurred, there would be no further rev-
enue from sand sales or tipping fees until, if ever, govern-
ment authorities approved a new MUP and reclamation plan.
Even worse, a shutdown would force use of the Hanson fill
if still available and permission for the conveyor system
could be obtained, or if not, suitable fill material would have
to be purchased on the open market to reclaim the land at
great cost. These facts would be of great concern to a hypo-
thetical purchaser and would significantly temper its
32 In 2005, San Diego County pursued the matter further and Enniss,

Inc., after several meetings, persuaded the county to accept a $2.9 million
letter of credit coupled with Hanson’s representation that Enniss, Inc.,
could use fill available on the Hanson site to reclaim Enniss, Inc.’s sand
mine. Whether Enniss, Inc., could have actually used the Hanson fill, how-
ever, was questionable because Hanson also was considering using some
or all of that fill for other projects. Moreover, even if Hanson allowed
Enniss, Inc., to use the fill, there was no certainty that the required con-
veyor system which would require at least an easement over the nearby
properties could be constructed to transport the fill between the two sites.
Absent the Hanson fill, the necessary but then-absent bond or letter of
credit to keep the sand mine open would have had to be in the amount
of approximately $20 million as the county had indicated that the bond or
letter of credit would have to reflect the cost of two million cubic yards of
fill at $9.50 per cubic yard.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 339

thinking regarding the purchase price and any offsetting
consideration of potential tipping fees and free fill.
Still, sand mine owners and operators in San Diego County
routinely received tipping fees in exchange for allowing
others to dump debris in the pits at their mines. We fail to
see why a hypothetical owner of property group 1, to the
extent that it could, would not charge a tipping fee to do the
same at that site. 33 While Mr. Coalson testified that special-
ized fill had to be used to reclaim property group 1, we are
unpersuaded that this is the case as to all of the property.
In fact, as Mr. Hecht pointed out, environmental documents
for property group 1 state specifically that construction
debris can be used to fill the pits.
Fill for dumping was available as of the valuation date, yet
Mr. Coalson improperly minimized the receipt of the tipping
fees when ascertaining his value of property group 1. 34 The
record does not allow us to find with precision the portion of
the 1,982,500 cubic yards of fill that the hypothetical owner
of property group 1 would have to pay $9.50 for vis-a-vis the
portion that the owner would pay nothing for but instead
would receive tipping fees. We believe it reasonable to reduce
Mr. Holzhauer’s calculation that the owner would pay $9.50
for each of the 1,982,500 cubic yards of fill by a stated
amount in tipping fees and then apply the net amount to the
1,982,500.
To the extent that Mr. Coalson asserted that State policy
for determining an appropriate financial assurance plan pro-
hibits the receipt of fill for free would also apply to receiving
fill and a tipping fee, we are unpersuaded that any such
policy is as cut and dried as Mr. Coalson stated. Mr. Coalson
did not explain or otherwise elaborate on his asserted policy,
and the record establishes apart from the determination and
33 Tipping
fees are inversely related to hauling costs.
34 The
record does not allow us to find as of the valuation date the exact
amount of fill that could be received either for free or with a tipping fee.
We note, however, that on November 9, 2004, Chad Enniss informed the
Department of Planning and Land Use that five nearby named ‘‘truckers
and dirt brokers’’ had 3,721,000 cubic yards of fill available for dumping
within a one-year period and that these truckers and brokers had ex-
pressed a desire to dump their product at the sand mine. He also named
20 other dirt and rubble producers in the county and stated that the 25
total producers were ‘‘just a small list of company’s that haul, dump, or
produce dirt or rubble’’.

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 340 140 UNITED STATES TAX COURT REPORTS (294)

approval of financial assurance plans that in the real oper-
ating world sand mines regularly received tipping fees during
the relevant period. At the same time, we are unpersuaded
that the hypothetical buyer and the hypothetical seller would
have concluded, as of the valuation date, that fill for property
group 1 could be obtained and economically transported from
the Hanson site.
Valuation is an inexact science which does not call for sci-
entific precision, see, e.g., Frazee v. Commissioner, 98 T.C.
554, 577 (1992), and we believe that simply reducing the
$9.50 cost by three-fourths of the minimal but customary $2
per ton in tipping fees (i.e., by $1.50 per ton) is the best
measure for the overall cost of the fill related to property
group 1 to adequately consider the risk of a government
shutdown and to blend the amount of fill that would be pur-
chased vis-a-vis the amount of fill that would be accepted for
a fee. The parties should factor these tipping fees into Mr.
Holzhauer’s calculation in their Rule 155 computation(s). 35
c. Residuary Interest in Property
Mr. Holzhauer calculated a value for the reclaimed sand
mine on the basis of his valuation of the underlying indi-
vidual parcels. His calculation assumed a highest and best
use of each lot primarily as storage. He reviewed 12 real
property sales as part of his analysis. The sites of the prop-
erties underlying these sales were as follows:
Sale 1 12566 Vigilante Rd., Lakeside CA
Sale 2 9120 Jamacha Rd., Spring Valley CA
Sale 3 Woodside Ave. and Wheatlands Rd., Santee CA
Sale 4 ES Rockville St., Santee CA
Sale 5 SWC Jamacha Blvd. and Folex Way, Spring Valley CA
Sale 6 1596 North Johnson Ave., El Cajon CA
Sale 7 10007 Riverford Rd., Lakeside CA
Sale 8 Woodside Ave., North of Marilla Dr., Lakeside CA
Sale 9 Woodside Ave. and Hartley Rd., Santee CA
Sale 10 11322 North Woodside Ave., Santee CA
Sale 11 SEC Riverford Rd. & Riverside Dr., Lakeside CA
Sale 12 NWC Mapleview St. & Channel Rd., Lakeside, CA

35 As a point of clarification, Mr. Holzhauer’s $24.6 million of reclama-

tion costs in 2008 should be reduced by $4,460,625 in tipping fees (i.e.,
$1.50 per ton × the 1.5 tons per cubic yard conversion rate × 1,982,500
cubic yards). We recognize that each cubic yard of fill received with a tip-
ping fee will likewise produce a savings of $9.50 per cubic yard and have
blended that savings into our $1.50-per-ton calculation.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 341

The pertinent information underlying the sales (as adjusted
to reflect additional costs to the buyers for items such as
required fill or grading and adjustments for size to reflect
actual usable land) is as follows: 36
Square
Sale # Sale date Sale price Acreage feet1 Price/SF Zoning Use

1 Oct. 02 $635,094 1.08 47,045 $13.50 M58 Industrial development;
outdoor storage
2 May 02 650,000 1.09 47,480 13.69 M54 Industrial development;
outdoor storage
3 May 02 681,507 1.39 60,548 11.26 IL Industrial development
4 Apr. 01 750,000 1.50 65,340 11.48 IL Church parking
5 Apr. 03 1,310,000 2.36 102,802 12.74 M58 To build ministorage
6 Mar. 04 1,277,000 3.81 165,964 7.69 M Industrial development;
outdoor storage2
7 Apr. 02 1,335,000 3.86 168,142 7.94 S88 Industrial development
8 Aug. 03 1,218,500 4.78 208,217 5.85 S88 Industrial development
9 July 03 2,251,177 5.44 236,966 9.50 IL Industrial development
10 Sept. 04 2,200,000 7.29 317,552 6.93 IG Industrial development;
outdoor storage2
11 Feb. 00 2,711,500 8.00 348.480 7.78 S88 Industrial development
12 June 04 2,140,000 20.06 873,814 2.45 S88 Preservation
1 One acre equals 43,560 square feet.
2 The use for outdoor storage depends on a conditional permit.

Mr. Eichel’s comparable sales, by contrast, involved many
properties which were sold in 2007 and other properties
which were not actually comparable to the properties under-
lying property group 1.
Mr. Holzhauer considered sales 1, 2, 6, and 10 to be the
most relevant to his analysis because they each were actually
used or going to be used for outdoor storage. He reasonably
concluded that sale 1 was the most relevant sale because the
underlying parcel was on Vigilante Road and had been pur-
chased primarily for outdoor storage. He also reasonably
considered sales 2, 6, and 10 to ascertain the square-foot
value of the reclaimed land because the reclaimed land was
much larger than the property underlying sale 1. He con-
cluded from these four comparable sales that the sand mine
parcels, when fully reclaimed, had an average value as of the
valuation date of $8 per square foot (or approximately $24.5
million in total). He then applied a real estate appreciation
factor of 5% per year to arrive at a future residuary value of
$34,505,673 in 2009 for the fully reclaimed properties and
reduced that value by selling expenses of approximately 3%
($1,035,170) to be incurred when the reclaimed property was
sold in 2009. Costs included annual real estate taxes of 1.5%
36 M54 and IG zoning is general industrial use. IL zoning is light indus-

trial use. S88 zoning is limited industrial use.

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 342 140 UNITED STATES TAX COURT REPORTS (294)

of the market value of the property, with a 2% annual
increase ($32,096 per year by 2009).
d. Applicable Discount Rate
Mr. Holzhauer applied a 13.5% discount rate to capitalize
cashflows arising from property group 1 to arrive at a final
present value for the property of $5,040,211 before consider-
ation of the cost to comply with certain MUPs and the value
of real property improvements (e.g., a 4,300-square-foot office
building on parcel E). After considering these items, $330,000
and $400,000, respectively, he arrived at a value of
$4,995,000, which he rounded to $5 million. He opined that
this rate was appropriate because an investment in royalties
from a sand mine carried a high risk, given the regulatory
risk, reclamation risks, and the risk of demand and pricing
for sand. He reviewed the yield rates listed in a reliable
survey of real property economic indicators and chose 13.5%
as a rate that was slightly less than the mean rate for higher
risk properties.
We agree that Mr. Holzhauer’s 13.5% rate is a reasonable
rate to apply in the setting at hand and in conjunction with
our resolution of the fill dirt costs. Discount rates are gen-
erally set at the rates of return that property buyers in the
marketplace will demand to invest in property, see, e.g.,
Terrene Invs., Ltd. v. Commissioner, T.C. Memo. 2007–218,
and the rate to apply in a given case must reflect an ade-
quate return on investment with due respect to the attend-
ant risks in the investment. As of the valuation date, an
investment in property group 1 was a high risk, given among
other things that the property was in poor condition and
many of the MUP and reclamation plan conditions were not
met. The 13.5% rate, which falls within the lower half of the
high risk rates included in the referenced survey, is reason-
able in that it reflects a sensible return on investment as of
January 1, 2003, when considering the attendant risks in
investing in property group 1.
3. Property Groups 3 and 4
These property groups include eight parcels on either side
of Vigilante Road. Mr. Holzhauer opined that the applicable
fair market values of property groups 3 and 4 were

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 343

$3,625,000 and $5 million, respectively. 37 He arrived at
those values by applying a sales comparison approach and by
comparing the attributes of the parcels underlying property
groups 3 and 4 and the comparable properties. Mr. Eichel
ascertained that the rounded respective values were
$5,425,000 and $6,250,000 using a comparative sales anal-
ysis that reviewed the same properties he reviewed to value
the residuary interest in property group 1. As was similarly
true in the case of property group 1, the properties under-
lying Mr. Eichel’s comparable sales were for the most part
not comparable to the parcels in property groups 3 and 4 or
the sales were too far removed from the valuation date.
We find Mr. Holzhauer’s analysis underlying his values to
be more persuasive than Mr. Eichel’s analysis underlying his
values. Mr. Holzhauer determined the highest and best use
for property groups 3 and 4 to be continued use for open stor-
age or outdoor manufacturing. He valued property groups 3
and 4 using 11 of the 12 comparable sales he analyzed in val-
uing the reclaimed land in property group 1 (he concluded
that the remaining sale was not pertinent to this valuation).
He ascertained that the mean of the 11 sales was $9.77 per
square foot and noted that the sale price per square foot
tended to decrease for those sales as the size of the property
increased.
Mr. Holzhauer reasonably concluded that sale 1, the
underlying parcel of which was the smallest parcel in the 11
sales, was a good benchmark in valuing the smallest parcels
in property groups 3 and 4 because the property underlying
37 He broke down these amounts as follows:
Property Acres Value/SF Value
G 2.86 $10 $1,245,816
H 4.70 9 1,842,588
I .88 14 536,659
Total 3,625,063
Total (as rounded) 3,625,000
J 1.05 13 594,594
K 2.37 12 1,238,846
L 1.14 14 695,218
M 1.29 13.50 758,597
N 3.93 10 31,711,908
Total 4,999,163
Total (as rounded) 5,000,000

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 344 140 UNITED STATES TAX COURT REPORTS (294)

sale 1 was on the same block as the properties underlying
property groups 3 and 4. He also reasonably concluded that
sales 7, 8, and 9 provided guidance on the impact of size on
value. He acknowledged that group 3 property was sold in
2007, but here where the sale was more than four years later
he properly minimized or disregarded that sale either
because the value of industrial properties had surged since
2004 or the sale date was too far removed from the valuation
date. 38
4. Property Group 5
Mr. Holzhauer opined that the applicable fair market value
of property group 5 was $450,000. Mr. Eichel ascertained
that the applicable value was $5 million. We find that the
value was $3,975,000 (or, as explained below, $5 million as
adjusted to reflect an average 1% per month appreciation in
the property from the valuation date to the original option
exercise date of August 12, 2004).
Mr. Eichel noted that property group 5 was under option
as of the valuation date for purchase at a price of $5 million.
He noted that the property was later sold to a national
builder of homes and opined that a key element of the value
of property group 5 was the option purchase price. He ana-
lyzed other sales of similar residential development land in
the surrounding area and concluded that the $5 million
option price for property group 5 was significantly lower than
the other sale prices but that a reasonable purchaser would
pay no more than $5 million for property group 5.
Mr. Holzhauer minimized the fact that Santee was driving
a development of the property surrounding property group 5
and determined that the highest and best use for property
group 5 was mining with a remote possibility of future resi-
dential development. He ascertained his $450,000 fair
market value for property group 5 by first determining a
trended value for the property on the basis of the price that
38 Actual sales of the same property within a reasonable period after the

valuation date are relevant and admissible. See Estate of Giovacchini v.
Commissioner, T.C. Memo. 2013–27, at *50-*58 (and cases cited thereat).
That said, where relevant events materially affecting value were not rea-
sonably foreseeable on the valuation date, the price effect of those events
should be discounted or adjusted in determining value as of the valuation
date, or the entire subsequent sale should be disregarded.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 345

petitioner paid for the property approximately 54 months
before the valuation date. He then applied an appreciation
rate of approximately 1% per month to reflect the apprecia-
tion of industrial land. He concluded that the option agree-
ment was irrelevant to his valuation of property group 5
because, he stated, the rules of valuation require that the
property be valued as if it were for sale ‘‘free and clear’’ of
the option.
We disagree with Mr. Holzhauer’s analysis as to property
group 5. Contrary to his belief, the option agreement was not
irrelevant in valuing property group 5. In addition, contrary
to petitioner’s statements in its brief, we do not ignore the
option agreement in valuing property group 5 or otherwise
value that property as if it were for sale free and clear of the
option. The fact that property group 5 was subject to the
option agreement on the valuation date and that our hypo-
thetical buyer and hypothetical seller are considered to know
the same are important facts that must be taken into
account when valuing that property. In other words, the
hypothetical buyer and the hypothetical seller in buying and
selling the property would know that the option agreement,
as it existed on the valuation date, had to be consummated
by August 12, 2004 (201⁄2 months after the valuation date).
This agreement further provided that the owner of the prop-
erty immediately before consummation of the option would
either sell property group 5 to the optionee for $5 million, or
if it did not, the owner, petitioner, would sell the optionee the
referenced easements for $2 million, in which case the
optionee at its cost would improve the access road and stub
utilities at the access road to all other approved property
lots. 39 While the initial optionee may have been a strategic
39 Petitioner
invites the Court to find as a fact that the optionee had
both an option to purchase property group 5 for $5 million and an option
to purchase the easements for $2 million. We decline to do so. As we read
the option agreement, and as we ultimately find in consideration of the
record as a whole, the option applies only to the purchase of property
group 5 for $5 million. To be sure, the option agreement explicitly distin-
guishes the option from the mandatory sale of the easements. The option
agreement states in part:
In the event that Optionee does not exercise the Option provided for
herein, Optionor shall sell to Optionee an easement for ingress and
Continued

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 346 140 UNITED STATES TAX COURT REPORTS (294)

buyer as Mr. Holzhauer opined, this does not mean, as Mr.
Holzhauer concluded, that a hypothetical willing buyer and
a hypothetical willing seller would ignore the fact that the
optionee was contemplating buying the property at a future
date for $5 million. Nor would the hypothetical willing buyer
and the hypothetical willing seller ignore the fact that the
optionee was obligated to pay $2 million to the owner of the
property for easements on the property, make road improve-
ments, and stub utilities if the optionee did not exercise the
option.
As we see it, forgetting for the moment any appreciation
in property group 5 between the valuation date and the date
that the option is consummated, that property was worth at
least approximately $2 million on the valuation date given
that the optionee, at a minimum, was going to pay $2 million
for easements on the property approximately 201⁄2 months
later. 40 The question, therefore, is how much more than $2
million was it worth? Petitioner argues that the exercise of
the option was ‘‘very speculative’’ as of the valuation date
and should be given no weight. We disagree.
The optionee was committed to pay $2 million for the ease-
ments alone (exclusive of the additional cost of the improve-
ments), and we do not consider it unreasonable to conclude
that the optionee would pay the extra $3 million (or less,
when taking into account the improvement cost) to acquire
the full bundle of the property rights included in the 31.47
acres of property group 5. This is especially true given that
Santee was spearheading the development of the nearby
property as a residential development, and the record leads
to the conclusion that a hypothetical buyer and a hypo-
thetical seller would both anticipate that the option was
going to be exercised at the $5 million strike price. 41 To be
egress over the road across the Property shown on the approved ten-
tative map for the Master Project * * * [and that] Optionor shall grant
Optionee an easement over the land at the entrance of the Master
Project, not to exceed one-half acre, in order to erect appropriate entry
monumentation for the Master Project.
40 We say ‘‘approximately’’ because the optionee also had to make certain

improvements to the property in return for the easements.
41 The fact that the parties to the option agreement expected the devel-

opment to go through is also seen in part by observing that the option
agreement provided that FDC would pay EFR $2 million for the easements
after the first final subdivision map for the master project was approved.

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 347

sure, we doubt that sophisticated longtime businessmen such
as the members of the Enniss family would encumber their
property with the two-year option in return for a single
dollar and the permanent easement sale for $2 million were
they not confident that the option was likely to be exercised.
Mr. Eichel analyzed various similar properties and con-
cluded that the fair market value of property group 5 was at
least $5 million. Respondent invites the Court to set the
applicable value at $5 million. We decline to do so. We
believe that the $5 million option price is a reliable guide to
the fair market value of property group 5 as of the exercise
date but that the price must be adjusted to take into account
the time value of money (also appreciation in property group
5) between August 12, 2004, and the valuation date. See
Estate of Trompeter v. Commissioner, T.C. Memo. 1998–35;
Estate of Scanlan v. Commissioner, T.C. Memo. 1996–331.
Similar property in the area was appreciating at the rate of
1% per month, and we believe it appropriate to discount the
$5 million option price by 20.5% to reflect (primarily but
among other things) the passage of time from the valuation
date to August 12, 2004.
While, theoretically speaking, the fair market value of
property group 5 should also take into account the risk that
the optionee would not have the funds to pay $5 million to
exercise the option, the fact that Santee was pushing the
development of the nearby property and that we apply the
1% rate for each of the 201⁄2 months persuades us that this
calculation best establishes the fair market value of property
group 5 as of the valuation date. We hold that the applicable
fair market value of property group 5 was $3,975,000 (i.e., $5
million × (1 - .205)).
5. Bulk Sale Discount
Mr. Holzhauer applied a bulk sale discount of 15% to the
total value of the nine property groups. Petitioner argues
that the discount is appropriate to reflect the fact that the
nine groups of property are valued as if they were sold as of
the same time. While petitioner calls this discount a ‘‘bulk
discount’’, we understand petitioner to refer to a ‘‘market
absorption’’ or ‘‘blockage’’ discount. See Estate of Auker v.
Commissioner, T.C. Memo. 1998–185.

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 348 140 UNITED STATES TAX COURT REPORTS (294)

We agree with petitioner that a 15% discount is reasonable
under the facts herein. Relevant evidence of value may
include consideration of a market absorption discount in that
such a discount reflects the fact that the sale of a large block
of property in the same general location over a reasonable
period of time usually depresses the price for that property.
See id.; see also Estate of Sturgis v. Commissioner, T.C.
Memo. 1987–415 (20% market absorption discount applied to
11,298.86 acres of undeveloped land); Carr v. Commissioner,
T.C. Memo. 1985–19 (30% market absorption discount
applied to 175 developed lots; no discount applied to 437.5
undeveloped lots); Estate of Folks v. Commissioner, T.C.
Memo. 1982–43 (20% market absorption discount applied to
five leased lumberyards with the same tenant and in the
same geographical area); Estate of Grootemaat v. Commis-
sioner, T.C. Memo. 1979–49 (15% market absorption discount
applied to undeveloped lots totaling 302 acres). We believe
that the sale of the nine property groups on or about the
valuation date would depress the price for that property and,
under the facts at hand, conclude that the 15% discount that
petitioner requests is a reasonable measure of that depres-
sion.
VII. Insurance Premiums
Respondent determined that petitioner failed to recognize
insurance premium income of $128,584, $882, $299,178, and
$298,000 received respectively in 2002, the one-day taxable
year in 2003, the remaining taxable year in 2003, and 2004.
Respondent determined these amounts on the basis of insur-
ance revenues that petitioner reported on its Forms 990 for
2002 through 2004. Respondent continued to argue that
these amounts were taxable as insurance premiums up until
respondent’s opening brief was filed. In that brief,
respondent abandoned the characterization of the amounts
as insurance premiums income, arguing instead that the
amounts are rental income. Respondent asserts that the
amounts petitioner reportedly received as insurance pre-
miums were actually received as rent because the royalty
rate set forth in the lease between EFR and Enniss, Inc., was
not at fair market value. Respondent asserts that EFR could
extract whatever amount of rent it deemed appropriate from

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 (294) CHAPMAN GLEN LTD. v. COMMISSIONER 349

Enniss, Inc., during the subject years because EFR could
change lease terms at its discretion and terminate at will the
leasehold of Enniss, Inc.
Petitioner argues in its pretrial memorandum (and in its
opening brief) that the disputed amounts do not reflect insur-
ance premiums income because petitioner failed to provide
insurance. Instead, petitioner argues, the amounts are non-
taxable contributions to capital pursuant to Carnation Co. v.
Commissioner, 640 F.2d 1010 (9th Cir. 1981) (holding that
funds that a corporation received as insurance premiums
were recharacterized as nontaxable contributions to capital
because the corporation did not provide insurance), aff ’g 71
T.C. 400 (1978). Petitioner argues in its answering brief that
it is prejudiced by respondent’s attempted recharacterization
of the disputed amounts at this late stage of this proceeding
because it never knew that it had to prove that the funds
were not rent. Petitioner asserts that it would have devel-
oped and presented evidence at trial showing that the lease
terms were at arm’s length had it known that respondent
was going to make the arguments that respondent now
advances.
We agree with petitioner that respondent’s new position is
untimely. A party may not raise an issue for the first time
on brief if the Court’s consideration of the issue would sur-
prise and prejudice the opposing party. See Smalley v.
Commissioner, 116 T.C. 450, 456 (2001); Seligman v.
Commissioner, 84 T.C. 191, 198–199 (1985), aff ’d, 796 F.2d
116 (5th Cir. 1986). In deciding whether the opposing party
will suffer prejudice, we consider the degree to which the
opposing party is surprised by the new issue and the
opposing party’s need for additional evidence to respond to
the new issue. See Pagel, Inc. v. Commissioner, 91 T.C. 200,
212 (1988), aff ’d, 905 F.2d 1190 (8th Cir. 1990). In addition,
a party may not rely upon a new theory unless the opposing
party has been provided with fair warning of the intention
to base an argument upon that theory. See id. at 211–212.
‘‘Fair warning’’ means that a party’s ability to prepare its
case was not prejudiced by the other party’s failure to give
notice, in the notice of deficiency or in the pleadings, of the
intention to rely on a particular theory. See id.
We conclude that respondent’s raising of the rental income
issue in respondent’s opening brief precluded or limited peti-

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 350 140 UNITED STATES TAX COURT REPORTS (294)

tioner’s opportunity to present pertinent evidence and that
petitioner would be significantly prejudiced if we decided
that issue on the basis of the record at hand. Respondent had
numerous opportunities to raise the new theory, and the
failure to raise this issue when respondent could have done
so waives the argument. See Aero Rental v. Commissioner, 64
T.C. 331, 338 (1975). We decline to consider it. Because peti-
tioner did not provide insurance during the subject years, we
conclude that the funds that it received as insurance pre-
miums could not have been received as such but were
instead received as contributions to its capital. See Carnation
Co. v. Commissioner, 640 F.2d at 1013–1014.
The Court has considered all contentions, arguments,
requests, and statements that the parties made and has
rejected those not discussed here because they were without
merit, moot, or irrelevant.
To reflect the foregoing,
Decisions will be entered under Rule 155.

f

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