Bidegain v. Comm'r of Internal Revenue (In re Estate of Hoover), 18464–92.
| Decision Date | 21 June 1994 |
| Docket Number | No. 18464–92.,18464–92. |
| Citation | 102 T.C. 777,102 T.C. No. 36 |
| Parties | ESTATE OF Clara K. HOOVER, Deceased, Yetta Hoover Bidegain, Personal Representative, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John S. Campbell, Albuquerque, NM, for petitioner.
Pamelya P. Herndon, for respondent.
Petitioner is the Estate of Clara K. Hoover (Mrs. Hoover), who died on March 7, 1988. The Commissioner determined a gift tax deficiency of $13,960 for the tax year ended December 31, 1987, which has been conceded in full by the Commissioner on brief, and an estate tax deficiency of $994,498, together with a section 6660 1 addition to estate tax in the amount of $52,391. 2 The decedent had a 26–percent interest in a limited partnership that was engaged in the operation of a cattle ranch. After concessions by the parties, the only issue remaining for decision is whether petitioner was entitled to a 30–percent minority interest discount in conjunction with an election to value the real estate used in the ranching business under section 2032A. The facts have been stipulated.
On the date of her death, Mrs. Hoover was a resident of Tucumcari, New Mexico. Her last will and testament, dated October 20, 1980, was filed in the District Court for Quay County, New Mexico, but there was no probate of the estate. In the will, Mrs. Hoover's daughter and only child, Yetta Hoover Bidegain, was designated the personal representative of the estate.
After the death of her husband in 1985, Mrs. Hoover was the sole beneficiary of a revocable living trust named “Hoover Trust A”. As of the date of her death, substantially all of the assets in which Mrs. Hoover had an interest had been transferred to Hoover Trust A. After her death, the sole trustee of Hoover Trust A was Yetta Hoover Bidegain. Under the terms of Hoover Trust A, as in effect at the date of Mrs. Hoover's death, the trust beneficiaries included each of her three great grandchildren, Donald P. Bidegain, Scott P. Bidegain, and Louis B. Carman.
Among the assets owned by Hoover Trust A, as of the date of Mrs. Hoover's death, was a 26–percent limited partnership interest in a New Mexico limited partnership named “T–4 Cattle Company Limited” (T–4). T–4 was formed on October 20, 1980, and was engaged in the business of operating a 196,438 acre cattle ranch located in Guadalupe, Quay, and San Miguel counties in New Mexico.3 For convenience the ranch will sometimes be referred to as a farm.
As of Mrs. Hoover's date of death, the partners of T–4 and their respective interests in partnership profits, losses, and capital were as follows:
The respective fair market values of the T–4 assets, as of the date of decedent's death, were as follows:
+----------------------------------+
¦Cash ¦$278,887 ¦
+-----------------------+----------¦
¦Certificates of deposit¦700,000 ¦
+-----------------------+----------¦
¦Short term investments ¦844,661 ¦
+-----------------------+----------¦
¦Stocks ¦122,302 ¦
+-----------------------+----------¦
¦State municipal bonds ¦1,060,222 ¦
+-----------------------+----------¦
¦Livestock ¦2,138,313 ¦
+-----------------------+----------¦
¦Ranch equipment ¦131,001 ¦
+-----------------------+----------¦
¦Real estate ¦10,500,000¦
+-----------------------+----------¦
¦Other assets ¦93,279 ¦
+-----------------------+----------¦
¦Total assets ¦15,868,665¦
+----------------------------------+
There is no indication in the record that the fair market value of the entire partnership was different from the fair market value of its total assets, i.e., without taking into account such items as its history of earnings, etc., and the parties have appeared to treat it as such.4 Accordingly, petitioner's proportionate share of the aggregate value of the T–4 partnership assets and the partnership itself was $4,125,853 (26 percent of $15,868,665). Its proportionate share of the real estate component of those assets was $2,730,000 (26 percent of $10,500,000). None of the foregoing figures reflects any minority interest discount or section 2032A special use valuation.
Petitioner elected to value the decedent's T–4 partnership interest on the basis of the partnership's qualified use of the real estate as a farm, pursuant to section 2032A. On or about November 8, 1988, petitioner obtained a special use valuation appraisal from an organization known as Price and Company (Price). Price determined that the “special use value (alternate valuation method) of the T–4 Ranch property,” without regard to any minority discount, was $2,052,107. The parties have stipulated that the $2,052,107 figure accurately reflects the property's special use value under section 2032A. 5
Petitioner's proportionate (26 percent) share of the section 2032A special use value of the partnership real estate was $533,548 (26 percent of $2,052,107). Thus, petitioner's 26–percent proportionate share of the fair market value of the real estate ($2,730,000) exceeded its 26–percent proportionate share of the section 2032A special use value ($533,548) by $2,196,452. But section 2032A(a)(2) 6 places a $750,000 limit upon the aggregate reduction in value with respect to any decedent. And thus the maximum reduction in value that petitioner was entitled to claim was $750,000.
However, prior to subtracting the $750,000 from the taxable value of its gross estate, petitioner discounted the 26–percent share of the fair market value of the T–4 land by 30 percent to reflect decedent's minority interest in the partnership. The calculation of petitioner's taxable interest in real property held through T–4 appeared as follows on an attachment to the estate tax return:
+-----------------------------------------------------------------------------+
¦Value of decedent's interest in qualifying real property owned by T–4 Cattle ¦
¦Company, Ltd.: ¦
+-----------------------------------------------------------------------------¦
¦Appraised value of real estate ¦$10,500,000 ¦
+-------------------------------------------------------------+---------------¦
¦Decedent's interest in partnership ¦x 26% ¦
+-------------------------------------------------------------+---------------¦
¦ ¦2,730,000 ¦
+-------------------------------------------------------------+---------------¦
¦Less discount for lack of control and marketability ¦30% ¦
+-------------------------------------------------------------+---------------¦
¦ ¦819,000 ¦
+-------------------------------------------------------------+---------------¦
¦Full Value ¦1,911,000 1 ¦
+-------------------------------------------------------------+---------------¦
¦Section 2032A reduction ¦- 750,000 ¦
+-------------------------------------------------------------+---------------¦
¦Value based on qualified use ¦1,161,000 ¦
+-----------------------------------------------------------------------------+
The estate tax value of petitioner's T–4 partnership interest was determined by adding the qualified use value of its proportionate interest in the T–4 real estate, reflected above, to its proportionate share of the other T–4 assets' fair market values. In computing its share of the value of the T–4 assets other than real estate, petitioner appears to have taken a similar 30–percent discount for its minority interest in the partnership.
The Commissioner's deficiency notice disallowed petitioner's alternative use valuation and restored the amounts to petitioner's taxable estate.7 The Commissioner has since conceded that petitioner was entitled to claim special use valuation, pursuant to section 2032A. However, the Commissioner maintains that petitioner may not also subtract the 30–percent minority discount (applicable to decedent's minority interest in the partnership) in determining its share of the property's fair market value prior to reduction for special use valuation. We sustain the Commissioner.
Petitioner's case is for all essential purposes indistinguishable from Estate of Maddox v. Commissioner, 93 T.C. 228 (1989), where the decedent owned a 35.5–percent stock interest in an incorporated family farm. In that case, we held that the estate was not entitled to a 30–percent minority discount in the valuation of the decedent's stock in conjunction with the use of a section 2032A reduction in value of the farm real estate held by the corporation. Here, the decedent owned a 26–percent interest in a partnership that had extensive holdings in real estate that was eligible for reduction in value under section 2032A. The factual underpinnings of both cases are identical.
The difficulty encountered in both cases is that the decedent did not own an interest in the real estate outright, but instead owned an interest in an organization which in turn owned the real estate: stock in Maddox and a fractional interest in a partnership here. The only provision in section 2032A that deals with such a situation is subsection (g), which provides:
SEC. 2032A (g). Application of This Section and Section 6324B to Interests in Partnerships, Corporations, and Trusts.—The Secretary shall prescribe regulations setting forth the application of this section and section 6324B in...
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