Fawcett v. Comm'r of Internal Revenue (In re Estate of Fawcett), Docket No. 1517-74.

• Decision Date: 18 August 1975
• Docket Number: Docket No. 1517-74.
• Citation: 64 T.C. 889
• Parties: ESTATE OF HORACE K. FAWCETT, DECEASED, EIKA MAE FAWCETT, INDEPENDENT EXECUTRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

64 T.C. 889

ESTATE OF HORACE K. FAWCETT, DECEASED, EIKA MAE FAWCETT, INDEPENDENT EXECUTRIX, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1517-74.

United States Tax Court

Filed August 18, 1975.

Elwood Cluck and Clyde Johnson III, for the petitioner.

Harold Friedman, William T. Overton, and David Smith, for the respondent.

Decedent owned 17,538.2 acres of ranch land in Texas. In 1964 decedent borrowed $235,000 from the Travelers Insurance Co. This indebtedness was evidenced by a promissory note and secured by a deed of trust on the ranch property which were cosigned by decedent and his wife. In 1965 the decedent conveyed a life interest in one-half of the ranch in equal proportions to his four children with remainder in trust for their issue, leaving the decedent with an undivided one-half interest in the property. The fair market value of decedent's interest in the property was included in his gross estate, but the entire outstanding balance of the note at decedent's death was deducted from the gross estate as a mortgage owed by the estate. Since decedent's death all of the regular installment payments due on the note have been made. The Travelers Insurance Co. has made no claim or demand against the estate for payment of the note. Held, petitioner is not entitled to deduct the entire amount of the outstanding balance of the note either as a claim against the estate under sec. 2053(a)(3), or as a mortgage debt under sec. 2053(a)(4). Held, further, petitioner is not entitled to report only decedent's net equity in the property under sec. 2033. Held, the value of decedent's undivided one-half interest in 17,538.2 acres of ranch land in Val Verde County, Tex., determined. Held, petitioner is entitled to deduct those expenses incurred for attorney and accountant's fees and court costs which can be property substantiated.

STERRETT, Judge:

The respondent determined a deficiency in the Federal estate tax due from the Estate of Horace K. Fawcett in the amount of $40,760.83.¹ The issues before the Court are: (1) Whether the petitioner is entitled to reduce the value of the gross estate of Horace K. Fawcett by the full amount of a note due to the Travelers Insurance Co. secured by 17,538.2 acres of ranch land in Texas though the total gross estate included only the value of Horace K. Fawcett's undivided one-half interest in this land; (2) the value at the time of his death of decedent's undivided one-half interest in the above 17,538.2 acres of ranch land; and (3) whether petitioner is entitled to a deduction for estate tax purposes for attorney and accountant's fees and trial expenses incurred in the administration of decedent's estate and in this proceeding.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

Eika Mae Fawcett (hereinafter petitioner), the independent executrix of the Estate of Horace K. Fawcett, deceased (hereinafter the estate), was a resident of Del Rio, Tex., at the time of filing her petition herein. The Federal estate tax return was timely filed with the Director of the Internal Revenue Service Center in Austin, Tex.

Horace K. Fawcett (hereinafter the decedent) died on November 29, 1969. Surviving him were his wife (the petitioner) and his four children, Horace K. Fawcett, Jr., Frances Fawcett Paret, David York Fawcett, and Curtis J. Fawcett (hereinafter the children). At the time of his death decedent was a resident of Del Rio, Tex.

The decedent was born in October 1904 in Val Verde County, Tex., and throughout his life was engaged in the ranching business in Val Verde County. Decedent married the petitioner in January 1931 and such marriage continued without interruption until his death.

Prior to his marriage decedent purchased approximately 6,700 acres of ranch land in Val Verde County. Subsequent to his marriage decedent acquired approximately 10,800 acres of ranch land by gift or inheritance from his father and mother. All of the above acreage was held by decedent under the laws of the State of Texas as his separate property and estate; and his wife (the petitioner) neither owned, held, nor claimed any interest in said lands as a part of the community estate of decedent or herself or otherwise. The above acquisitions constitute 17,538.2 acres of contiguous land forming what is commonly referred to as the Horace K. Fawcett Ranch (hereinafter the subject ranch or property).

In September 1964 the decedent and petitioner borrowed $235,000 from the Travelers Insurance Co. (hereinafter Travelers). The debt was evidenced by a note cosigned by them and secured by a deed of trust on the subject ranch.

In December 1965, the decedent gave a life estate interest in one-half of the surface of the subject ranch in equal proportions to his four children with remainder in trust for their issue. Such undivided one-half interest was conveyed subject to and charged with one-half of the indebtedness in the then principal sum of $216,000 together with one-half of the interest accruing from the date of gift owing to Travelers. The balance due on this note payable to Travelers on November 29, 1969, was $210,000 plus accrued interest of $1,860.83.

In 1968 portions of the subject ranch were leased to third parties. The decedent collected all of the rentals due under these leases and issued notes bearing interest at 5 percent to his children in payment for their appropriate shares. These notes were outstanding at decedent's death.

During the course of respondent's audit the deed records and the tax assessment rolls were reviewed to determine the total extent of the real property owned by the decedent. During this inspection no agreement was found between decedent, petitioner, and/or his children in their capacities as individuals or trustees to repay or contribute to any portion of any payment on the note due Travelers.

The subject ranch is located in east central Val Verde County approximately 35 miles north of Del Rio. It is about 8 miles west of U.S. Highway 277 and is connected to this highway by a gravel road through an adjoining neighbor's land. Access to the subject ranch through this route is convenient but not guaranteed. The property does have deeded legal access over a longer northern route, but it is susceptible to flooding, requiring major repair.

The subject ranch's terrain is extremely rough. The ranch is composed of header canyons, steep hills, slick rock areas, large canyons, and stony soil. Pictures depicting various views of the ranch were made part of the record. The property is cut by the Devil River which provides attractive riverfront property, including Dolan Falls, and good recreational facilities. The property is additionally watered by several windmills providing highly palatable water.

The highest and best use of the subject ranch is raising livestock, primarily cattle, sheep, and goats. The subject ranch does have a bitterweed problem, a toxic week upon which the livestock will feed. There is also a catclaw bush problem, a bush in which the goats can become entangled causing death by starvation. The subject ranch has approximately 28 miles of perimeter fencing and 32 miles of interior fencing.

The building improvements on the subject ranch include a main dwelling, garage, shop, barn, labor house, shearing barn, horse and sheep pens, and corrals. There is also an airstrip in fair condition near the main dwelling and an emergency airstrip near the river. The main dwelling was built with concrete and stone and has two floors and open porches consisting of approximately 3,200 square feet. It is in good condition and the other structures are in fair to good condition.

Petitioner, on the Federal estate tax return, included in the total gross estate the value of decedent's one-half interest in the subject ranch. Petitioner included in the deductions from the gross estate the full amount of the outstanding balance ($210,000) of the note due Travelers.

Respondent disallowed one-half of this deduction as follows:

It is determined that the estate is allowed a deduction in the amount of $105,000.00 for note payable to the Travelers Insurance Company for the reason that only one-half of the value of the property securing the note is included in the value of gross estate and only one-half the note secured by the property is allowed as a deduction. Accordingly, the value of taxable estate is increased in the amount of $105,000.00.

Petitioner reported the value of decedent's one-half interest in the subject ranch at $220,000 or approximately $25 per acre. In his deficiency notice respondent determined that the fair market value of decedent's interest in the subject ranch was $438,455, or approximately $50 per acre and the original deficiency of $31,356.08² was in part based on this adjustment. Subsequently respondent engaged an independent appraiser to examine the subject ranch and he concluded that the fair market value of decedent's interest was $500,000, or approximately $57 per acre. Based on this appraisal respondent filed an amendment to his answer increasing the deficiency to the amount now in issue.

Petitioner also included as deductions from the gross estate administration expenses of $7,516.12.³ Included in this figure are estimated expenses for court costs and attorney's and accountant's fees. Respondent disallowed these expenses claiming it had not been established that these expenses were paid.

OPINION

The case at bar presents three issues for our determination: (1) Whether petitioner is entitled to reduce the value of decedent's gross estate by the full amount of the note due Travelers that is secured by the subject ranch; (2) the fair market value at the date of decedent's death of his undivided one-half interest in the subject ranch, and (3) whether petitioner is entitled to deduct for estate tax purposes...