PUBLISH
UNITED STATES COURT OF APPEALS
Filed 11/13/96
TENTH CIRCUIT
WILLIAM LEFEVER, Qualified Heir- )
Transferee of the Assets of the Estate of )
Blanche Knollenberg, BETTY LOU )
LEFEVER, Qualified Heir-Transferee of )
the Assets of the Estate of Blanche )
Knollenberg, )
)
Petitioners-Appellants, )
)
v. ) No. 95-9022
)
COMMISSIONER OF )
INTERNAL REVENUE, )
)
Respondent-Appellee. )
Appeal from the United States Tax Court
(T.C. No. 19915-92)
Submitted on the briefs:
Patrick J. Regan of Regan & McGannon, Wichita, Kansas, and
Juandell D. Glass, Norman, Oklahoma, for Petitioners-Appellants.
Gilbert S. Rothenberg and Andrea R. Tebbets, Attorneys, Tax Division, Department of
Justice, Washington, D.C., for Respondent-Appellee.
Before BALDOCK, McWILLIAMS, and RONEY* Circuit Judges.
*
The Honorable Paul H. Roney, Senior Circuit Judge, United States Court of
Appeals for the Eleventh Circuit, sitting by designation.
BALDOCK, Circuit Judge.
In a federal estate tax return, Petitioners valued several parcels of inherited
farmland under the special use valuation election, 26 U.S.C. § 2032A, which reduced the
valuation of the land from its fair market value. Seven years after they filed the election,
Respondent determined that they were not putting the land to a qualifying use as required
to maintain the benefits of the election, and assessed additional taxes against Petitioners.
Petitioners filed a challenge in Tax Court, contending that they were never actually
entitled to the special use valuation election and that a three-year statute of limitations
barred the assessments. The Tax Court ruled that the assessments were timely under a
provision of the Code extending the limitations period for three years after Respondent
has notice that the property is no longer being put to a qualifying use. Most significantly,
the Tax Court ruled that Petitioners were precluded under the doctrine of the duty of
consistency from denying the initial validity of the special use valuation election.
Petitioners appeal, challenging the Tax Court’s rulings as to the liability issues and
the calculation of the additional tax. We exercise jurisdiction under 26 U.S.C. § 7482
and, finding no reversible error, affirm.
I. Background
A. Section 2032A
The Tax Code imposes a general estate tax on the transfer of the taxable estate of
every decedent who is a resident or citizen of the United States. 26 U.S.C. § 2001. The
2
estate’s executor is responsible for paying this tax. Id. § 2002. The estate tax under
§ 2001 is generally based on the fair market value of the taxable property, valued at its
highest and best use. See Brockman v. Commissioner, 903 F.2d 518, 519 (7th Cir. 1990).
Section 2032A permits certain property used in family farming and closely-held
businesses to be valued on the basis of its actual use at the time of the decedent’s death
rather than on the basis of its highest and best use. Whalen v. United States, 826 F.2d
668, 669 (7th Cir. 1987). With § 2032A, Congress intended to protect the heirs of family
farms and small family businesses from being forced to sell the farms or businesses to pay
federal estate taxes. Id. To take the election, the property must be qualified real property;
the decedent must have been a citizen or resident of the United States; the executor of the
estate must file the election under § 2032A; and each person having an interest in the
property must sign and file a personal liability agreement under § 2032A(d)(2). 26 U.S.C.
§ 2032A(a)(1).
Qualified real property is real property located in the United States and is property
which passes from the decedent to a qualified heir. As of the date of death, the decedent
or a qualified member of the decedent’s family must have been putting the property to a
qualifying use. Id. § 2032A(b)(1). To qualify for the special use valuation election, the
property must constitute statutory percentages of the value of the decedent’s gross and
adjusted estate. See id. § 2032A(b)(1) (describing the 50 percent test and the 25 percent
test). Also, the decedent or member of the decedent’s family must materially participate
3
in putting the property to a qualifying use for five of eight years before the date of death.
Id. § 2032A(b)(1)(C)(ii); Estate of Sherrod v. Commissioner, 774 F.2d 1057, 1062-63
(11th Cir. 1985) (discussing material participation), cert. denied, 479 U.S. 814 (1986).
A qualifying use includes the decedent or a qualified member of the decedent’s
family using the property as a farm or in a trade or business. 26 U.S.C. § 2032A(b)(2);
Brockman, 903 F.2d at 521-22. Under either use, the family must use the property in an
active trade or business. Brockman, 903 F.2d at 522; Martin v. Commissioner, 84 T.C.
620, 627 (1985), aff’d, 783 F.2d 81 (7th Cir. 1986). Cash rental of the property to a
nonfamily member is not a qualifying use. Brockman, 903 F.2d at 522; Williamson v.
Commissioner, 974 F.2d 1525, 1532-33 (9th Cir. 1992); H.R. Rep. No. 1380, 94th Cong,
2d Sess. 23, reprinted in 1976 U.S.C.C.A.N. 3356, 3377 (“The mere passive rental of
property will not qualify.”).
To maintain the benefits of the special use valuation election, qualified heirs must,
for 10 years following the date of death, continue to put the property to the same qualify-
ing use to which it was put at the date of the decedent’s death. 26 U.S.C.
§ 2032A(c)(1)(B); Williamson, 974 F.2d at 1530. If a qualified heir sells the property or
ceases to use it for the same qualifying use during that period, the heir becomes person-
ally liable for the imposition of an additional estate tax, designed to recapture an amount
proportional to the tax saving gained by taking the special use valuation election. 26
U.S.C. § 2032A(c); Martin v. Commissioner, 783 F.2d 81, 82 (7th Cir. 1986). Impor-
4
tantly, this additional estate tax under § 2032A(c) is distinct from the general estate tax
imposed on the transfer of a decedent’s estate under § 2001.
B. Procedural History
Petitioners William and Betty Lou LeFever, together with their son Joe LeFever,
inherited six parcels of farmland in Butler County, Kansas, from Decedent Blanche
Knollenberg, who died in July 1983. Petitioners’ accountant prepared the corresponding
federal estate tax return based on information provided by Petitioners. Petitioners filed
the estate tax return on April 24, 1984. Upon the accountant’s advice, Petitioners filed a
special use valuation election under § 2032A, which reduced by $585,078 the taxable
value, normally based on the fair market value, of five of the six parcels of farmland
owned by Decedent. 26 U.S.C. § 2032A. The sixth parcel clearly did not qualify for the
special use election and is not part of this appeal. As attachments to the estate tax return
filed on Decedent’s behalf, Petitioners filed appraisals of parcels 1 through 6, the
§ 2032A notice of election, a statement of material participation, and agreements to the
application of the special use valuation election signed by Petitioners and Joe LeFever. In
the agreements, Petitioners and Joe LeFever consented to personal liability for any
additional taxes imposed as a result of a sale of the inherited property or the cessation of a
qualifying use. See id. § 2032A(c)(5). Also they expressly recognized that the agree-
ments were a condition precedent to gaining the benefits of the election. See id.
§ 2032A(d)(2).
5
In July 1990, the Internal Revenue Service sent Petitioners a questionnaire as part
of a program to evaluate whether taxpayers were properly using special use valuation
elections. Petitioners returned the questionnaire to the IRS in early August 1990. Based
on Petitioners’ answers, an IRS estate tax attorney mailed Petitioners a second letter, in
October 1990, requesting additional information, including information on whether
portions of the property subject to the special use valuation election were being cash
rented to nonfamily members. Petitioners responded to the letter in February 1991. They
reported that portions of parcels 2 through 5 were being cash rented.
In separate notices of deficiency, dated July 22, 1992, Respondent determined that
Petitioners were liable for a deficiency in additional estate tax under § 2032A because
certain acres of parcels 2 through 5 were being cash rented to nonfamily members.
Respondent issued the notices some seven years after Petitioners filed the estate tax
return.
In September 1992, Petitioners filed this challenge to the assessments in Tax
Court. Before the Tax Court, Petitioners argued that the special use valuation election
was invalid at the date of its filing because parcels 2 through 5 had never been put to a
qualifying use. In fact, parcels 2 through 5 had been cash rented to nonfamily members at
the time of Decedent’s death and continued to be cash rented after her death. Petitioners
argued that the estate tax return should have notified Respondent that the election was
invalid, and, thus, that the tax assessments under § 2032A(c) were barred by the Code’s
6
three-year statute of limitations. Petitioners also argued that Respondent had not pleaded
an affirmative defense, such as estoppel, in response to their position that the limitations
period had expired.
In contrast, Respondent argued that the assessments were timely under a provision
of the Code extending the limitations period for assessing additional taxes under § 2032A
for three years after Respondent has notice that a taxpayer has ceased putting specially-
valued property to a qualifying use. 26 U.S.C. § 2032A(f). Respondent contended that
she first received notice that parcels 2 through 5 were not being put to a qualifying use
after receiving Petitioners’ responses to the first questionnaire on August 13, 1990, and,
thus, that the assessments were timely as they were issued on July 22, 1992.
Four months after trial, Respondent moved in the Tax Court for leave to amend her
answer to conform to the evidence presented at trial. Specifically, Respondent sought to
raise for the first time the affirmative defense of quasi-estoppel or the duty of
consistency.1 The Tax Court found that the parties had tried the matter of the duty of
consistency by consent and granted the motion for leave. The Tax Court subsequently
denied Petitioners’ motion for reconsideration.
After receiving the parties’ post-trial briefs, the Tax Court ruled that the assess-
ments were timely under § 2032A(f). The Tax Court found that Petitioners’ estate tax
1
The doctrine is known either as quasi-estoppel or the duty of consistency.
Eagan v. United States, 80 F.3d 13, 17 (1st Cir. 1996). We will refer to it as the duty of
consistency.
7
return, special use valuation election, and supporting documents, were insufficient to put
Respondent on notice that the election was invalid. The Tax Court further found that
Respondent first had notice when she received Petitioners’ answers to the initial question-
naire on August 13, 1990. The Tax Court ruled that Petitioners were precluded under the
duty of consistency from denying the validity of the special use valuation election or that
the property had been put to a qualifying use at the date of Decedent’s death. Thus, the
Tax Court ruled that Petitioners were liable for the additional taxes. It also disallowed
Petitioners’ request for a deduction from the value of the gross estate in the amount of the
attorneys fees incurred in the suit.
II. Discussion
On this appeal, Petitioners challenge: (1) the Tax Court’s granting of leave to
amend to conform to the evidence, (2) its application of the doctrine of the duty of
consistency, (3) its application of the statute of limitations, (4) its rulings and findings
regarding the calculation of the additional estate taxes, and (5) its ruling that Petitioners
were not entitled to deduct the attorneys fees incurred in defending against the tax
assessments.
A. Leave to Amend
Petitioners contend that the Tax Court erred in affording Respondent leave to
amend her answer to conform to the evidence four months after the close of trial. The
Tax Court permitted Respondent to amend her answer to raise for the first time the issue
8
of the duty of consistency. Under the duty, Petitioners were precluded from denying the
validity of the special use valuation election or that the property subject to the election
was initially put to a qualifying use.
When issues not raised by the pleadings are tried by the implied consent of the
parties, the issues must be treated as if they had been raised by the pleadings. Tax Ct.
R. 41(b). At any time, the Tax Court may allow amendment of the pleadings to cause
them to conform to the evidence and to raise these issues. Id. An amendment to conform
to the pleadings may be permitted when it clearly appears from the record that an issue
not raised in the pleadings has been tried with the express or implied consent of the
parties. Hardin v. Manitowoc-Forsythe Corp., 691 F.2d 449, 456 (10th Cir. 1982)
(discussing Rule 15(b)); Radio Corp. of America v. Radio Station KYFM, Inc., 424 F.2d
14, 17 & n.3 (10th Cir. 1970) (same).2
2
Because the portion of Tax Court Rule 41(b) applicable in this case closely
parallels Rule 15(b) of the Federal Rules of Civil Procedure, see Church of Scientology of
California v. Commissioner, 83 T.C. 381, 469 (1984), aff’d, 823 F.2d 1310 (9th Cir.
1987), cert. denied, 486 U.S. 1015 (1988), we will look to precedent under Rule 15(b) in
considering the Tax Court’s granting of leave to amend. Cf. Commissioner v. Finley, 265
F.2d 885, 888 (10th Cir. 1959) (interpreting predecessor of Tax Court Rule 41(b) in a
manner consistent with Rule 15(b)), cert. denied, 361 U.S. 834 (1959). Compare Tax Ct.
R. 41(b)(1) (“When issues not raised by the pleadings are tried by express or implied
consent of the parties, they shall be treated in all respects as if they had been raised in the
pleadings. The Court, upon motion of any party at any time, may allow such amendment
of the pleadings as may be necessary to cause them to conform to the evidence and to
raise these issues. . . .”) with Fed. R. Civ. P. 15(b) (“When issues not raised by the
pleadings are tried by express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment of the pleadings as
may be necessary to cause them to conform to the evidence may be made upon motion of
9
The parties provide implied consent when they recognized that the issue entered
the case at trial and acquiesced to the introduction of evidence on that issue without
objection. Hardin, 691 F.2d at 457. Even when a party does not consent and objects at
trial that evidence is outside the scope of the pleadings, amendment may still be allowed
unless the objecting party satisfies the court that he or she will be prejudiced by the
amendment. Id. The party opposing the amendment will be found to have consented to
the trial of an issue when that party presents evidence on the issue at trial. Id. But when
evidence claimed to show trial by consent is relevant to a separate issue already in the
case, and there is no indication that the party presenting the evidence intended to raise a
new issue by its introduction, the Tax Court has the discretion to deny the amendment,
id., and the moving party cannot raise a new theory of relief after the close of trial. Cook
v. City of Price, Carbon County, Utah, 566 F.2d 699, 702 (10th Cir. 1977). The determi-
nation of whether an issue was tried with the consent of the parties is within the discretion
of the trial court, whose decision is reviewed for an abuse of discretion. Hardin, 691 F.2d
at 457; Ellis v. Arkansas Louisiana Gas Co., 609 F.2d 436, 439 (10th Cir. 1979), cert.
denied, 445 U.S. 964 (1980).
We hold that the Tax Court did not abuse its discretion in finding that the issue of
the duty of consistency was tried by consent. The duty of consistency applies where a
taxpayer makes a representation or report, on which the Commissioner has relied, and
any party at any time, even after judgment.”).
10
with respect to which the taxpayer attempts to change his or her position after the running
of the statute of limitations. See Continental Oil Co. v. Jones, 177 F.2d 508, 512 (10th
Cir. 1949), cert. denied, 339 U.S. 931 (1950); Eagan v. United States, 80 F.3d 13, 17 (1st
Cir. 1996). In her opening argument at trial, Respondent argued that Petitioners had
affirmatively applied for favorable treatment under the special use valuation election in
the estate tax return and made certain representations in support of the election, that the
IRS had accepted the return and afforded Petitioners the advantageous treatment, and that
Petitioners now wished to be released from the conditions attending the special use
valuation election. Petitioners understood the opening statement as raising the issue of
estoppel and objected. In spite of the objection, however, evidence was subsequently
introduced on the issue. For example, both parties explored the circumstances surround-
ing Petitioners’ filing of the estate tax return and the special use valuation election and
how Respondent interpreted them. Both parties and the Tax Court itself questioned
Petitioner William LeFever about the special use valuation election, his knowledge of the
consequences of the election, and his intentions in taking it. Moreover, no one disputes
that Petitioners made the election in filing the estate tax return or that Respondent
accepted the election as valid until it received Petitioners’ answers to the questionnaires
in 1990. In contrast to their position at the time of the filing of the estate tax return,
Petitioners now contend that the special use valuation election was invalid because the
property was not put to a qualifying use at or after the time of death.
11
Petitioners emphasize that they argued in a separate motion to the Tax Court, made
on the morning of trial, that Respondent had not pleaded any affirmative defenses,
including estoppel. Petitioners thus argue that they did not consent to the trial of the duty
of consistency. Again, however, even when a party does not consent and objects at trial
that evidence is outside the scope of the pleadings, amendment may still be allowed
unless the objecting party satisfies the court that he or she will be prejudiced by the
amendment. Tax Ct. R. 41(b)(2); Hardin, 691 F.2d at 456. Petitioners have not shown
that they were prejudiced within the meaning of Hardin. Petitioners merely contend that
“[T]here is no doubt the case would have been tried differently” and that they would have
moved for a continuance had they known that the issue of the duty of consistency was to
be tried. Petitioners do not articulate how the case would have been tried differently or
what a continuance would have accomplished. Petitioners argued in their motion to
reconsider leave to amend filed in the Tax Court that they would have called the IRS
examining officer and group manager who reviewed the special use valuation election at
the time it was filed to show that Respondent should have realized that the election was
invalid at the time of filing. However, such testimony would have been relevant to the
issue of when Respondent first received notice that the election was invalid. The issue of
such notice was first raised by paragraph 6 of Respondent’s answer, which alleges that
12
the additional assessments were timely under the extension provision of § 2032A(f).3
Thus, Petitioners had sufficient opportunity to prepare for and litigate the issue of the
Respondent’s notice regarding the validity of the election.
Admittedly, Respondent delayed until four months after trial to seek leave to
amend its answer to add an affirmative defense it should have raised in the pleadings
before trial. See Sundstrand Corp. v. Commissioners, 96 T.C. 226, 349 (1991). Respon-
dent offered no explanation for the delay. Moreover, it should have been apparent that
the issue of the duty of consistency was important when, in their pretrial brief, Petitioners
contended the special use valuation election was invalid from the date of its filing and
attempted to disavow the election. We, however, will not substitute our judgment for that
of the Tax Court’s under the abuse of discretion standard, see United States v. Wright,
826 F.2d 938, 943 (10th Cir. 1987), and the record in this case does not show that the Tax
Court abused its discretion in affording Respondent leave to amend under Tax
Rule 41(b).
B. The Duty of Consistency
Petitioners also contend that the Tax Court misapplied the doctrine of the duty of
consistency to preclude them from denying the validity of the special use valuation
3
Section 2032A(f) provides that an assessment for an increase in estate taxes
under § 2032A(c) triggered by a disposition of the property or a cessation of a qualified
use may be made within three years “from the date the Secretary is notified” of such
disposition or cessation.
13
election or that parcels 2 through 5 had been put to a qualifying use at the time of Dece-
dent’s death. Petitioners argue that the Tax Court did not apply the proper elements of the
duty of consistency, that a taxpayer cannot be bound by a representation that is a mistake
of law, and that they cannot be bound by representations made in the estate tax return
because they are not the same taxpayer as the one on whose behalf the estate tax return
was filed.
1.
The duty of consistency has developed along two lines. One line has treated the
duty as strictly analogous to traditional equitable estoppel and has required a showing that
the taxpayer made an intentional misrepresentation or a wrongful misleading silence in
obtaining favorable tax treatment. See, e.g., Lignos v. United States, 439 F.2d 1365,
1368 (2d Cir. 1971); Crosley Corp. v. United States, 229 F.2d 376, 380-81 (6th Cir.
1956); Piarulle v. Commissioner, 80 T.C. 1035, 1044 (1983). The other line has liberated
the application of the doctrine from the traditional requirements of equitable estoppel and
has only required a showing of a representation made by a taxpayer in obtaining favorable
tax treatment, and not an intentional falsehood or wrongful misleading silence. See, e.g.,
Eagan v. United States, 80 F.3d 13, 17 (1st Cir. 1996); Herrington v. Commissioner, 854
F.2d 755, 758 (5th Cir. 1988), cert. denied, 490 U.S. 1065 (1989); Arkansas Best Corp. v.
Commissioner, 83 T.C. 640, 659 (1984), aff’d in part and rev’d in part on other issues,
800 F.2d 215 (8th Cir. 1986), aff’d, 485 U.S. 212 (1988).
14
Petitioners rely on Uinta Livestock Corp. v. United States, 355 F.2d 761 (10th Cir.
1966), to support their position that only a strict application, akin to traditional estoppel,
of the duty of consistency is proper in this circuit. In Uinta, we addressed the two lines of
the doctrine’s development and expressly selected the strict interpretation. Id. at 766-67
(“[W]e believe after weighing the matter carefully that we must subscribe to the ordinary
rules of equitable estoppel.”). Petitioners contend that the Tax Court misapplied the
doctrine because it did not make a factual finding that Petitioners had made an intentional
misrepresentation or a wrongful misleading silence in making the special use valuation
election.
Although neither party brought it to our attention and we apparently overlooked it
in Uinta, we believe the issue of the proper elements the duty of consistency is controlled
by our earlier decision in Continental Oil Co. v. Jones, 177 F.2d 508, 512 (10th Cir.
1949), cert. denied, 339 U.S. 931 (1950). In Continental Oil, the corporate taxpayer
reported receiving a number of shares of common stock, items of taxable income, and
valued them at $1 per share in its 1927 tax return. In 1928, the IRS audited affiliated
companies who had reported receiving identical shares in 1927 and determined that the
proper cost basis for the shares was $244.31 per share instead of $1 per share. In 1941,
the corporate taxpayer sold its shares and reported a loss based on a cost basis of $244.31
per share. We affirmed the IRS’s disallowance of the loss, holding that the taxpayer was
precluded from shifting its position to the higher cost basis on the ground that it had
15
avoided income tax in 1927 by reporting the shares at $1 per share. We held that a
taxpayer is bound by the cost basis which it reported in receiving a tax benefit and could
not later take advantage of a loss on the sale of the shares by reporting the true cost basis
of the shares, “even though all the technical elements of estoppel [were] not present.”
Continental Oil, 177 F.2d at 512. We precluded the taxpayer from contradicting its
previous representation without finding that it had made an intentional misrepresentation
or a wrongful misleading silence in the 1927 tax return. We noted that the valuation error
in 1927 could have been a simple mistake of fact. Id.
Because one panel of this court is bound by the precedent of an earlier panel
absent en banc reconsideration or a superseding contrary decision of the U.S. Supreme
Court, In re Smith, 10 F.3d 723, 724 (10th Cir. 1993), cert. denied, 115 S. Ct. 53 (1994),
the Continental Oil decision takes precedence over the Uinta decision, at least to the
extent Uinta may be read to require a showing of an intentional misrepresentation or a
wrongful misleading silence by a taxpayer in obtaining favorable tax treatment. See
Haynes v. Williams, 88 F.3d 898, 900 & n.4 (10th Cir. 1996) (“[W]hen faced with an
intra-circuit conflict, a panel should follow earlier, settled precedent over a subsequent
deviation therefrom.”). Moreover, dispensing with this culpability factor fosters better
tax administration and reduces unpredictability otherwise produced by the decisions
attempting to assess relative blame between the taxpayer and the IRS. See Steve R.
Johnson, The Taxpayer’s Duty of Consistency, 46 Tax. L.Rev. 537, 556-59 (1991)
16
(canvassing numerous cases in criticizing the incorporation of culpability factors into the
duty of consistency). It is a better rule to preclude a taxpayer from changing his or her
position based on the taxpayer’s having received a tax benefit on the basis of a specific
representation made to the IRS in an earlier year than to require a showing of an inten-
tional misrepresentation or wrongful misleading silence by the taxpayer. See Elbo Coals,
Inc. v. United States, 763 F.2d 818, 821 (6th Cir. 1985) (disagreeing with Uinta rule
requiring an intentional misrepresentation); cf. United States v. Matheson, 532 F.2d 809,
819 (2d Cir.) (“Courts routinely hold that one gaining governmental benefits on the basis
of a representation or asserted position is thereafter estopped from taking a contrary
position in an effort to escape taxes.”), cert. denied, 429 U.S. 823 (1976); Union Pacific
R.R. Co. V. United States, 847 F.2d 1567, 1570 (Fed. Cir. 1988) (“When a party with
knowledge . . . of the material facts does what amounts to a recognition of the transaction
as existing . . . or abstains for a considerable length of time from impeaching it, so that the
other is reasonably induced to suppose that it is recognized, there is acquiescence, and the
transaction, though it be originally impeachable, becomes unimpeachable.”); R.H. Stearns
Co. v. United States, 291 U.S. 54, 61-62 (1934). The relative fault of the parties is less
17
important in a case in which the public, and not just the two parties, has an interest.4 See
Johnson, supra, at 557.
2.
Petitioners point out the general rule that a taxpayer will not be precluded from
changing his or her position with respect to a representation that is a mistake of law as
opposed to a mistake of fact. See Eagan, 80 F.3d at 17; Herrington, 854 F.2d at 758; cf.
Continental Oil, 177 F.2d at 512. Petitioners contend that the representations made in
taking the special use valuation election that the properties qualified for the election under
§ 2032A are conclusions of law to which the duty of consistency cannot be applied.
While the determination of whether particular property qualifies for the special use
valuation election involves issues of law, the validity of Petitioners’ election with regard
to parcels 2 through 5 turns on the facts regarding the actual use of the parcels. The
relevant rule of law is undisputed. Cash rental of farmland to a nonfamily member does
not constitute a qualified use. Brockman, 903 F.2d at 522. As the Tax Court noted, the
facts regarding the actual use of the parcels were peculiarly within the knowledge of
Petitioners. At best, Petitioners’ representations involve a mixed question of law and fact
4
The taxpayer’s intentions in making a given representation may, however,
be relevant in other contexts, such as in assessing the propriety of penalties. See
26 U.S.C. § 6651(a)(1) (imposing penalties for an improper report on a tax return unless
the misreport is due to “reasonable cause and not due to willful neglect”). In this case,
Respondent stipulated that Petitioners were not liable for the penalties under § 6651(a)(1).
18
to which the duty of consistency may be applied. Eagan, 80 F.3d at 17; Herrington, 854
F.2d at 758.
3.
Next, Petitioners argue that the duty of consistency does not apply because
Petitioners are not the taxpayers who made the representations underlying the special use
valuation election. Estate tax is imposed on the transferred estate of a decedent.
26 U.S.C. § 2001(a). The tax under § 2001(a) must be paid by the executor of the estate.
Id. § 2002. In contrast, the additional tax imposed in the event of a disposition of a piece
of qualified real property or the cessation of a qualifying use is imposed on the qualified
heirs. Id. § 2032A(c)(5).
Some authority exists for Petitioners’ position that an heir should not be bound by
representations of the estate’s executor. See Ford v. United States, 276 F.2d 17 (Cl. Ct.
1960) (refusing to require heirs to use as the basis in inherited stock the valuation selected
by the executor where the heirs were minors who resided in Brazil and had no relevant
knowledge); but see Hess v. United States, 537 F.2d 457 (Cl. Ct. 1976) (requiring under
the duty of consistency the heirs to use as the basis for inherited stock the value reported
by the executor even though the heirs were minors and were not personally involved in
reporting the value), cert. denied, 430 U.S. 931 (1977). However, the duty of consistency
is usually understood to encompass both the taxpayer and parties with sufficiently
identical economic interests. See Johnson, supra, at 549-50 & n.73. In this case,
19
Petitioner William LeFever was the executor of Decedent’s estate. He filed the special
use valuation election. 26 U.S.C. § 2032A(d)(1). He and Petitioner Betty Lou LeFever
provided the information on which their accountant based the election. They both signed
a consent form to the taking of the election. Lastly, as the qualified heirs of parcels 2
through 5, Petitioners had an economic interest in reducing the value of the taxable estate
in 1984. Petitioners had sufficient privity of interest with the estate’s executor for the
application of the duty of consistency.
In sum, the Tax Court properly applied the duty of consistency. The doctrine
applies where a taxpayer makes a representation or report, on which the Commissioner
has relied, and with respect to which the taxpayer attempts to change his or her position
after the running of the statute of limitations. See Continental Oil, 177 F.2d at 512;
Eagan, 80 F.3d at 17; Herrington, 854 F.2d at 758. In this case, Petitioners represented
that parcels 2 through 5 qualified for the special use valuation election in the estate tax
return and supporting documents. Herrington, 854 F.2d at 758. At trial, William LeFever
testified that he made the election to gain favorable tax treatment. Respondent relied on
the representation and afforded Petitioners the benefits of the election and allowed the
statute of limitations to run. Id. Lastly, Petitioners seek now to disavow the election after
the running of the limitations period in order to avoid paying the additional estate taxes.
Id.
20
4.
Finally, Petitioners argue that the Tax Court erred in not ruling that Respondent
was also bound under the duty of consistency. They contend that Respondent made a
representation that the use to which parcels 2 through 5 were being put before Decedent’s
death was a qualifying use by accepting the special use valuation election without protest
or audit at the time of its filing in April 1984. Because Petitioners continued to use the
parcels in the same way after Decedent’s death, Petitioners argue that Respondent is
bound by her “representation” and cannot now claim that the use is not a qualifying use.
Aside from the general problems associated with applying a doctrine like estoppel
against the government, see, e.g., Penny v. Giuffrida, 897 F.2d 1543, 1546 (10th Cir.
1990), Respondent’s acquiescence to Petitioners’ election under the facts of this case does
not constitute the sort of representation to which Respondent may be bound. As dis-
cussed below, Respondent did not have notice of the invalidity of the special use valua-
tion election until it received the answers to the questionnaires provided by Petitioners in
August 1990 and February 1991.
C. Statute of Limitations
Petitioners contend that the Tax Court erred in failing to rule that the assessments
for additional estate tax under § 2032A(c) were untimely under the Code’s general three-
year statute of limitations set forth in 26 U.S.C. § 6501(a). Petitioners point out that
Decedent’s estate tax return was filed April 24, 1984, and that the assessments at issue
21
were dated July 22, 1992. Again, the Tax Court ruled that the assessments were timely
under § 2032A(f). This section provides that the period for the assessment of any
additional tax under § 2032A(c) is extended for three years from the date Respondent is
notified that qualified real property is disposed of or ceases to be used for a qualifying
use.5
Petitioners first contend that § 2032A(f) does not take precedence over the general
limitations period of § 6501(a) as it applies to “any tax imposed by this title.” 26 U.S.C.
§ 6501(a). Petitioners point out that the additional taxes under § 2032A(c) are not listed
in the exceptions to § 6501(a), see id. § 6501(c) (listing exceptions), and that Respondent
conceded at trial that the additional assessments at issue would be barred but for
§ 2032A(f). However, this contention is meritless as § 2032A(f)(2) specifically states,
“such additional tax may be assessed before the expiration of such 3-year period notwith-
standing the provisions of any other law or rule of law which would otherwise prevent
such assessment.” Id. § 2032A(f)(2) (emphasis added).
5
The subsection provides:
(f) Statute of Limitations.--If qualified real property is disposed of or ceases to be
used for a qualified use, then--
(1) the statutory period for the assessment of any additional tax under
subsection (c) attributable to such disposition or cessation shall not expire
before the expiration of 3 years from the date the Secretary is notified . . . of
such disposition or cessation . . . .
26 U.S.C. § 2032A(f).
22
Second, Petitioners contend that § 2032A(f) does not apply under the facts of this
case because the section applies by its terms only to additional assessments imposed in
the case of the disposition of qualified real property or the cessation of a qualifying use.
Petitioners again point out that parcels 2 through 5 were never put to a qualifying use and
were never qualified real property. Thus, they contend that the extension under
§ 2032A(f) was never triggered. This argument, however, is simply a variation on
Petitioners’ attempt to disavow the validity of the special use valuation election and to
deny that parcels 2 through 5 were put to a qualifying use at the date of Decedent’s death.
Again, Petitioners are precluded from making this argument under the duty of consis-
tency.
Third, Petitioners contend that the three-year extension provided under § 2032A(f)
expired on April 24, 1987, because the estate tax return, the special use valuation election,
and the supporting documents, were sufficient to put Respondent on notice that the
special use valuation election was invalid on the day the estate tax return was filed. The
Tax Court specifically found that these documents would not have put Respondent on
notice that the special use valuation election was invalid. We accept this factual finding
regarding notice unless it is clearly erroneous and will not reverse unless after a review of
the record we are left with a definite and firm conviction that a mistake has been made.
See Riley v. Commissioner, 649 F.2d 768, 773 (10th Cir. 1981).
23
Petitioners chiefly contend that the statement of material participation filed with
the estate tax return should have put Respondent on notice that the special use valuation
election was invalid at the date of its filing. See 26 U.S.C. § 2032A(b)(1)(C). Petition-
ers argue that James Kaufman, an IRS estate tax attorney, testified that the statement of
material participation was sufficient to raise questions about the validity of the special
use valuation election and that he would have probably selected it for audit had he been
the one reviewing it at the time it was filed. Characterizing Kaufman’s testimony as
uncontradicted, Petitioners contend that the Tax Court erred in not finding it conclusive.
Petitioners also contend that the face of the estate tax return shows various facts
fatal to the election. They contend that the return shows facts regarding the nonuse of
parcels 1 and 2 after 1966 and parcels 3 and 4 after 1980, the sparse use of parcel 5 by
Petitioners, the cash rental of certain parcels to nonfamily members, and the failure of
the claimed qualified real property to constitute the required proportions of the gross and
adjusted estate.
In contrast, Respondent points out the inconsistency of the argument that the very
documents by which Petitioners intended to show the IRS that they were entitled to the
special use valuation election are also supposed to constitute notice that the election was
invalid at the time of filing. Both William LeFever and his accountant, who prepared the
estate tax return, testified that they intended the estate tax return to show that the election
was proper. Also, Respondent points out that in the 48-page estate tax return, tenancies
24
are only mentioned four times, and none of these references specifically state that the
specially valued parcels were being cash rented to nonfamily members. Also,
Respondent notes that much of Petitioners’ argument as to the notice provided by the
estate tax return is bolstered by either testimony or documentary evidence which was not
included in the estate tax return.
We have reviewed the estate tax return, the special use valuation, and the
supporting documents, including the statement of material participation. On the whole,
these materials manifest the intent of the executor and qualified heirs, who signed
agreements to the claiming of the election, to represent to Respondent that the special
use valuation election was proper. The references to facts which would suggest that the
election was improper are sparse and ambiguous. For example, none of the references to
tenancies in the return unambiguously report that the parcels were being cash rented to
nonfamily members. Moreover, in spite of Petitioners’ characterization of Kaufman’s
testimony as uncontradicted, the estate tax return and the supporting documentation can
serve as a basis for discounting his testimony that he “probably” would have selected the
return for an audit. A review of the record does not leave us with a definite and firm
conviction that the Tax Court erred in finding that the return and supporting materials
would not have notified Respondent that the election was invalid.
Given that the Tax Court did not clearly err in its finding on the notice issue, it
properly ruled on the limitations issue. The estate tax return was filed in April 1984.
25
Respondent sent Petitioners the first questionnaire regarding the election in July 1990.
Petitioners answered the questionnaire on August 13, 1990. As the Tax Court found, this
response first notified Respondent that parcels 2 through 5 were not being put to a
qualifying use. Respondent then issued the notices of deficiency on July 22, 1992.
Because the notices were issued within the three-year period set forth in § 2032A(f), they
were timely.
26
D. Valuation Issues
First, Petitioners contend that the Tax Court erred in precluding Petitioners from
introducing evidence at trial that Respondent erroneously determined the taxable value
of the portions of parcels 2, 3, and 4 subject to the additional tax under § 2032A(c).
Petitioners argue that they planned to show that Respondent’s calculations were so
erroneous as to be arbitrary and capricious and that Respondent should have had the
burden of proving the proper taxable value.
At trial, Petitioners questioned the IRS’s estate tax attorney about his calculation
of the additional estate taxes. The Tax Court interrupted the questioning, considering the
exact calculation of the amount of the additional taxes to be irrelevant to the issue of
Petitioners’ liability for the additional taxes. The Tax Court stated that Petitioners could
present evidence relevant to the tax calculation in any proceedings under Tax Court
Rule 155.6 The Tax Court subsequently afforded the parties an opportunity to schedule
an evidentiary hearing in connection with the Rule 155 proceedings, and neither party
did so. We see no reversible error in the Tax Court’s actions.
Second, Petitioners contend that the Tax Court erred in finding that no evidence
on the record supported a lesser fair market value for the 110 acres of pasture land in
6
After deciding the issues in a tax case, the Tax Court may conduct separate
proceedings under Tax Court Rule 155 to allow the parties to submit computations
pursuant to the Tax Court’s determination of the issues, showing the correct amount of
the deficiency, liability, or overpayment to be entered. See Tax Ct. R. 155; Bankers
Pocahontas Coal Co. v. Burnet, 287 U.S. 308, 312-13 (1932).
27
parcel 2 which were subject to additional taxes. We accept the Tax Court’s valuation of
the 110 acres unless they are clearly erroneous. Holl v. Commissioner, 54 F.3d 648, 650
(10th Cir. 1995).
Parcel 2 consists of the 110 acres of pasture land and 50 acres of cultivated land.
The Tax Court accepted Respondent’s calculations of the fair market value for the 110
acres. Respondent calculated the fair market value of the 110 acres as $102,437.50.
Most importantly, Respondent used the average per acre market value figure of $931.25
per acre derived from the total number of acres on parcel 2.7
Petitioners contend that the Tax Court erred in accepting Respondent’s calcula-
tion because pasture land is worth less than cultivated land. Petitioners argue that the
fair market value calculation of the pasture land should be reduced to reflect this fact.
The Tax Court properly rejected Petitioners’ contention because the fair market
value of the parcel for the purpose of the additional estate tax under § 2032A(c) reflects
the property’s highest and best use. 26 U.S.C. §§ 2032A(c), 2031(a); Brockman, 903
F.2d at 519. In contrast, the special use valuation reflects the value of the property as
7
Specifically, Respondent used the $149,000 total fair market value of
parcel 2 divided by the parcel’s 160 total acres for an average value of $931.25 per acre.
Respondent then multiplied the average per acre value of $931.25 by the 110 acres of
pasture land for a fair market value of $102,437.50. Respondent used the total fair
market value for parcel 2 reported on the estate tax return and supported by a report from
Petitioners’ appraiser. Petitioners’ appraiser only reported the total fair market value for
parcel 2, based on comparable sales, and did not report any difference in value between
pasture land and cultivated land.
28
farmland. 26 U.S.C. § 2032A(e)(7). The fact that the most feasible farming use for the
110 acres is apparently as pasture land is not relevant to its valuation at its highest and
best use in this case. In the estate tax return, Petitioners’ appraiser stated that the highest
and best use for parcel 2 was its use as a subdivision. Petitioners have not shown that the
Tax Court clearly erred in basing its valuation on the average per acre fair market value
of the total acres in parcel 2.
E. Attorneys Fees
As their last contention, Petitioners argue that the Tax Court erred in not allowing
a deduction from the value of the gross estate for the attorneys fees incurred in contest-
ing the assessments of additional taxes. See 26 U.S.C. § 2053(a)(2) (allowing certain
deductions for administration expenses). The Tax Court disallowed the deduction on the
grounds that the additional taxes assessed by Respondent under § 2032A(c) against
Petitioners are distinct from any taxes assessable against the estate under § 2001, which
imposes the general estate tax against the decedent’s estate, and that Petitioners’
challenge to the additional taxes was not essential to the proper settlement of Decedent’s
estate. See Reilly v. Commissioner, 76 T.C. 369 (1981).
Section 2053(a)(2) allows deductions in the calculation of the value of the taxable
estate for administrative expenses, including attorneys fees, incurred in calculating the
estate tax imposed by § 2001. 26 U.S.C. 2053(a) (“For purposes of the tax imposed by
section 2001 . . . .”). Again, § 2001(a) imposes the general tax on the transfer of a
29
decedent’s estate. In contrast with this estate tax, § 2032A(c) imposes an additional
estate tax on qualified heirs personally. 26 U.S.C. § 2032A(c)(5); H.R. Rep. No. 1380,
94th Cong, 2d Sess. 26-27, reprinted in 1976 U.S.C.C.A.N. 3356, 3380-81. As Respon-
dent points out, the tax imposed by § 2001 on Decedent’s estate is not at issue in this
case. In fact, Respondent acknowledges that the statute of limitations has since run on
any taxes which might have been assessed against the estate. The Tax Court did not err
in denying a deduction for attorneys fees.
III. Conclusion
The Tax Court did not abuse its discretion in affording Respondent leave to
amend her answer to conform to the evidence in order to raise the issue of the duty of
consistency based on its finding that the parties had tried the issue by consent. Likewise,
the Tax Court properly applied the duty of consistency to preclude Petitioners from
denying the validity of the special use valuation election or that the property was put to a
qualifying use at the time of Decedent’s death. Also, the Tax Court committed no
reversible error with regard to the calculation of the additional estate taxes. Lastly, the
Tax Court properly denied Petitioners a deduction for the attorneys fees incurred in
defending against the additional estate tax imposed against Petitioners personally.
Accordingly, the judgment of the Tax Court is affirmed.
AFFIRMED.
30