Doherty v. Comm'r of Internal Revenue (In re Estate of Doherty)

• Decision Date: 18 October 1990
• Docket Number: Docket No. 5568-88.
• Citation: 95 T.C. No. 32,95 T.C. 446
• Parties: ESTATE OF LOREN DOHERTY, DECEASED,DAN A. DOHERTY, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

95 T.C. 446

95 T.C. No. 32

ESTATE OF LOREN DOHERTY, DECEASED,DAN A. DOHERTY, PERSONAL REPRESENTATIVE, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5568-88.

United States Tax Court

Filed October 18, 1990.

P attempted to elect special use valuation under 2032A, I.R.C. 1954, on its estate tax return timely filed in January, 1985. The personal representative provided estimated market values on the filed return for the subject real property. P also attempted to elect a marital deduction for ‘qualified terminable interest property‘ under sec. 2056(b)(7), I.R.C. 1954. The decedent's will established a trust by the terms of which the surviving spouse had discretion as trustee to distribute all the income to himself for life or to accumulate part or all of the income for distribution to others upon his death.

HELD, P's failure to obtain a written appraisal prior to filing the return precludes special use valuation. Sec. 20.2032A-8(a)(3)(ix), Estate Tax Regs.; sec. 2032A(d)(3), I.R.C. 1954; sec. 1421, Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2716. HELD FURTHER, P is ineligible for the marital deduction because the surviving spouse was not entitled to all the income from the trust property and did not have a usufruct interest for life. Sec. 2056(b)(7)(B)(ii), I.R.C. 1954. Paul A. Kastler, for the petitioner.

Robert A. Varra, for the respondent.

OPINION

NIMS, CHIEF JUDGE:

Respondent determined a deficiency of $205,884 in petitioner's Federal estate tax. After concessions, the issues for decision are: (1) whether petitioner is entitled to value real property at its special use value pursuant to section 2032A, even though petitioner did not attach a formal written appraisal to the filed estate tax return; and (2) for purposes of the marital deduction, whether the surviving spouse has a ‘qualifying income interest for life‘ within the meaning of section 2056(b)(7). (Unless otherwise indicated, section references are to the Internal Revenue Code as amended and in effect at the date of decedent's death. Rule references are to the Tax Court Rules of Practice and Procedure.)

The parties submitted this case fully stipulated. The stipulation of facts and accompanying exhibits are incorporated herein by this reference.

BACKGROUND

Loren Doherty (decedent), a lifelong resident and domiciliary of New Mexico, died testate on April 17, 1984. In accordance with her will, decedent's surviving spouse, Dan A. Doherty (sometimes referred to herein as Mr. Doherty), was appointed personal representative of the estate. Mr. Doherty resided in New Mexico when the petition was filed in this case.

Petitioner timely filed a Federal estate tax return, Form 706, in January of 1985 with the Internal Revenue Service (IRS) Center at Austin, Texas. On page 2 of Form 706, petitioner checked the ‘yes‘ box in answer to the question, ‘Do you elect the special use valuation?‘ Petitioner also checked the ‘yes‘ box in answer to the question, ‘Do you elect to claim a marital deduction for an otherwise nondeductible interest under section 2056(b)(7)?‘

SPECIAL USE VALUATION

At the time of decedent's death, decedent and Mr. Doherty (the Dohertys) owned as community property 16,601 shares of Ganado, Inc. (Ganado), a New Mexico corporation. Ganado had been incorporated by the Dohertys in 1976 and had a total of 24,000 shares outstanding. Prior to decedent's death, the Dohertys had made gifts of 7,399 shares of Ganado stock to their three children, including 1,333 shares to each child in 1980.

Ganado owned a 50-percent interest in a partnership called Doherty Investment Company. The partnership assets included cash, investments, cattle inventory, State land leases, and ranchland in Las Animas County, Colorado, and Union County, New Mexico. At decedent's death, the fair market value of the partnership's assets (less liabilities) was $5,200,539.

On the estate tax return, petitioner calculated the section 2032A special use value of the Dohertys' indirect interest in the partnership. The parties have stipulated that petitioner's calculated result, $49.83 per Ganado share, is computationally correct if petitioner is entitled to special use valuation. (The parties agree that the indirect nature of the Dohertys' interest in the real property does not disqualify petitioner from special use valuation. See generally Estate of Maddox v. Commissioner, 93 T.C. 228 (1989).) Because decedent had a one-half community property interest in 16,601 Ganado shares, the special use value of decedent's interest in the shares is $411,954 (or $49.63 times 16,601 times 1/2).

Petitioner included a Schedule B-2 as a supplement to the estate tax return. Schedule B-2, roughly in the form of a balance sheet, depicts the partnership's assets and liabilities as of decedent's death at both a ‘market value‘ and a ‘special use value.‘ Petitioner treated four of the partnership assets as eligible for special use valuation and presented their market values as follows: (1) 8,157.87 acres of ‘New Mexico State Leases,‘ with a listed market value of $26.25 per acre, totaling $214,144; (2) 1,120 acres of ‘Colorado State Leases,‘ with a listed market value of $21.25 per acre, totaling $23,800; (3) 18,045 acres of Colorado ‘Real Estate‘ (the Colorado ranchland), with a listed market value of $85 per acre, totaling $1,533,825; and (4) 25,400 acres of New Mexico ‘Real Estate‘ (the New Mexico ranchland), with a listed market value of $105 per acre, totaling $2,667,000. The labeling on Schedule B-2 indicates that the per-acre market values for the leases were computed as one- fourth of the per-acre market value for the corresponding ranchland. Neither Schedule B-2 nor any other part of the filed return reveals the derivation of the ranchland per-acre market values.

Petitioner attached to its return a notice of election and an agreement to special valuation (recapture agreement), as described in section 20.2032A-8(a)(3) and (c), Estate Tax Regs. Item VIII in the notice of election, with a heading of ‘Copies of written appraisals of F.M.V., ‘ reads in its entirety: ‘There are none. Value determined by Personal Representative. See attached for comparable rental value.‘ The only other reference to ‘comparable rental value‘ on the return appears earlier in the notice of election, where petitioner set forth its computations of the special use values for the two ranchland properties. Petitioner there used a $3-per-acre comparable rental value for the Colorado ranchland and a $3.50-per-acre comparable rental value for the New Mexico ranchland. As already noted, respondent does not dispute petitioner's calculation of the applicable special use values. The notice of election also shows the fair market value computations for the Colorado ranchland and the New Mexico ranchland, using the same per-acre multipliers, again without further explanation, that appear in Schedule B-2.

By letter dated February 20, 1987, IRS attorney Pamelya Herndon informed Mr. Doherty that the estate tax return had been assigned to her for audit. The letter made no reference to section 2032A or to the special use valuation election.

Ms. Herndon later sent a letter to petitioner's attorney (the preparer of the return and counsel of record in this case), dated March 6, 1987, devoted primarily to the IRS position on section 2032A. In concluding that special use valuation was not available to petitioner, the letter summarizes:

It is the Government's position that since the estate did not provide a copy of a written appraisal of the decedent's farm property at the time the estate tax return was initially filed, and since there was no written appraisal obtained prior to the time that the return was filed, the estate's special use valuation election is defective. * * *

Sometime after this, petitioner hired David Floyd to appraise the two ranchland properties that were subjects of the attempted section 2032A election, as of the date of decedent's death. Mr. Floyd had trouble completing the appraisals because of his very poor health, of which the IRS was informed at the time. Nonetheless, he submitted completed market-value appraisals dated July 15, 1987, to petitioner's attorney. He valued the New Mexico ranchland at $2,946,000 or $116 per acre ($2,991,000 or $118 per acre including improvements). He valued the Colorado ranchland at $1,227,000 or $68 per acre ($1,232,000 or $68 per acre including improvements). In accordance with the instructions of petitioner's attorney, Mr. Floyd did not appraise the State lease lands or the improvements thereon. By transmittal letter dated July 24, 1987, the appraisals were submitted to the IRS.

IRS attorney Thomas Eagan, to whom examination of the estate tax return had been reassigned, wrote to petitioner's attorney on July 28, 1987. This letter requested, among several other things, ‘A copy of the appraisal which is being made of the ranchland held by Doherty Investment Company partnership.‘ Mr. Eagan essentially repeated the section 2032A analysis appearing in the March 6, 1987, correspondence, but added:

Even if the lack of a written appraisal of fair market value could be perfected, both section 2032A(d)(3) and section 1421(b) of the Tax Reform Act of 1986 require that the defect be perfected within 90 days from the date of receipt of notice from the [Internal Revenue] Service. It has now been more than 90 days since your letter of March 25, 1987 responding to the letter of March 6, 1987 from * * * [Ms. Herndon] concerning the necessity of a written appraisal.

The referenced letter of March 25, 1987, from petitioner's attorney to the IRS is not part of the record.

The notice of deficiency states that petitioner failed to qualify for special use valuation under section 2032A(d)(1) and failed to perfect the election under section 2032A(d)(3).

MARITAL DEDUCTION

Decedent's will, dated June 4, 1981, provides for the distribution of certain tangible personal property and...