Estate of Holl v. C.I.R., 91-9003

• Decision Date: 17 June 1992
• Docket Number: No. 91-9003,91-9003
• Parties: -6191, 92-2 USTC P 60,104 ESTATE OF F.G. HOLL, Deceased and Bank IV Wichita, N.A., Executor, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1437

967 F.2d 1437

70 A.F.T.R.2d 92-6191, 92-2 USTC P 60,104

ESTATE OF F.G. HOLL, Deceased and Bank IV Wichita, N.A.,

Executor, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 91-9003.

United States Court of Appeals, Tenth Circuit.

June 17, 1992.

Jack D. Flesher of Bever, Dye, Mustard & Belin, Wichita, Kan., for petitioner-appellant.

Charles Bricken, Tax Div., Dept. of Justice, Washington, D.C. (Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen, and Ann B. Durney, on the briefs), for respondent-appellee.

Before HOLLOWAY, Circuit Judge, MCWILLIAMS, Circuit Judge, and CAUTHRON, District Judge ¹.

CAUTHRON, District Judge:

F.G. Holl died on December 21, 1985 (Doc. 7, Stip. p 2). At the time of his death, he had substantial oil and gas holdings in producing oil and gas properties. His executor timely filed a federal estate tax return in which the mineral interests were valued at nearly $9,000,000 as of the date of death. Using the alternative valuation date of June 21, 1986, the assets were valued at approximately $3,100,000 (Doc. 7, Stip. p 3; Jt.Exh. 1-A, Sch. F1, item 1). As presented to the trial court, between the date of death and the alternative valuation date, the Estate received $980,698.47 in net income from the sale of oil and gas (Doc. 7, Stip. p 18). The Estate gave an in-place value to this oil and gas of $686,488.93 (Jt.Ex. 1-A at 57, Sch. F1, item 2). The executor elected to value the assets as of the alternative valuation date under § 2032 of the Internal Revenue Code (26 U.S.C. § 2032 (1954)) (Jt.Ex. 1-A, p 2, 1) making the total net estate tax due $4,202,764.84 (Jt.Exh. 1-A at 1, p 19).

The Commissioner of Internal Revenue Service (IRS) proposed additional taxes against the Estate. Following the receipt of the statutory notice of deficiency, in which the Commissioner proposed the assessment of $6,211.86 in additional estate taxes, the Estate filed a petition in the Tax Court seeking a redetermination of the deficiency. The parties agreed to certain adjustments and the remaining dispute was tried on May 14, 1990 (Doc. 1, at 1). From the Tax Court's Order entered February 12, 1991, 95 T.C. 566, in which the value of the oil and gas sold by the Estate between the date of death and the alternative valuation date was found to be $930,839.76, the Estate timely filed this appeal.

Findings of fact made by the United States Tax Court are reviewed by a clearly erroneous standard. Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960); National Collegiate Athletic Ass'n v. Commissioner, 914 F.2d 1417 (10th Cir.1990). Applying this test, a factual finding is said to be clearly erroneous when the reviewing court "on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). If on appeal the court is asked to reconsider a question of law, the applicable standard is a de novo review. Helvering v. Tex-Penn Oil Co., 300 U.S. 481, 57 S.Ct. 569, 81 L.Ed. 755 (1937). The Estate challenges questions of both fact and law.

At a hearing on the value of the assets, Mr. Fair, the Estate's expert, testified that prior to extraction, the oil and gas which was sold had an in-place fair market value of $686,488.93. Through further analysis, this figure was reduced to $683,306. In contrast, the IRS's expert, Mr. Pilcher, determined the in-place value of the minerals sold by the Estate between the date of death and the alternative valuation date to be $930,839.76. The Tax Court rejected the Fair analysis and found the in-place value of the oil and gas between the date of death and the alternative valuation date to be that figure advanced by the IRS's expert.

On appeal, the Estate argued case law applying § 2032 requires property to be valued as it existed at the date of death and changes in its character or condition must be disregarded. Because the Tax Court adopted a value primarily reflecting its sales price, the Estate asks this court to find that factual determination to be clearly erroneous as it does not reflect the willing-buyer/willing-seller standard. In addition, the Estate challenges the Tax Court's finding that "the parties agree that the proceeds derived from oil and gas reserves produced and sold between the date of decedent's death and the alternate valuation date are "included property." Tax Court opinion at 9 (emphasis added). The Estate says that what "the parties did agree to was that 'the value of the oil and gas sold (during that period) should be included in the gross estate under I.R.C. § 2032." Brief of Appellant at 36 (emphasis added). The Estate argues that the Tax Court's treatment does not follow the principles set forth in the case of Herbert H. Maass v. Higgins, 312 U.S. 443, 61 S.Ct. 631, 85 L.Ed. 940 (1921). Characterizing the proceeds as "included property," as that term is used in the Tax Code, the Tax Court subtracted the operating expenses and interest from the proceeds of the sale of oil and gas. The Estate argues this method perpetuates the error which began with the erroneous valuation. As an additional error, the Estate disagreed with the Tax Court's employment of a method which identified some oil and gas as having a greater value rather than recognizing it as indistinguishable.

In Flanders v. U.S., 347 F.Supp. 95 (N.D.Cal.1972), it was held that the value of the asset must recognize its condition as of the date of death or its "pre-change value." Involved in Flanders was the value of an undivided one-half interest in a 650-acre cattle ranch held in a revocable trust. At the date of death, the fair market value of the decedent's interest was $220,000. Before the alternative valuation date, the Trustee entered into a conservation agreement which reduced the asset's fair market value by 88%. Consequently, the decedent's interest had a value of $30,000. An election was made to use the alternative valuation date and a...