Donor, Lisa Lekumberry, Ex'r & Tr. v. Comm'r (In re Estate of Giovacchini), T.C. Memo. 2013-27

• Court: United States Tax Court
• Writing for the Court: WHERRY
• Parties: ESTATE OF SHIRLEY C. GIOVACCHINI, DECEASED, DONOR, LISA LEKUMBERRY, EXECUTOR AND TRUSTEE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Decision Date: 24 January 2013
• Docket Number: T.C. Memo. 2013-27,Docket No. 20122-05

ESTATE OF SHIRLEY C. GIOVACCHINI, DECEASED, DONOR,
LISA LEKUMBERRY, EXECUTOR AND TRUSTEE, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2013-27
Docket No. 20122-05

UNITED STATES TAX COURT

Filed January 24, 2013

R determined a deficiency in E's Federal estate tax. In a separate notice of deficiency, R determined a Federal gift tax deficiency for D's 2000 tax year. Both deficiencies inter alia were determined on the basis of a determined understatement of the value of High Meadows, parcels of real property covering approximately 2,500 acres near Lake Tahoe, California. R also determined accuracy-related penalties pursuant to I.R.C. sec. 6662 with respect to both deficiencies. After concessions, the issues before the Court are the values for estate and gift tax purposes of D's interest in High Meadows and the applicability of the I.R.C. sec. 6662 penalty.

Held: The values of the High Meadows parcels of real property were higher, on the applicable gift tax and estate tax valuation dates, than those reported on the respective filed gift and estate tax returns. The values were at the same time lower than those determined in the notices of deficiency.

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Held, further, the undervaluations were due to reasonable cause within the meaning of I.R.C. sec. 6664(c) and, therefore, the I.R.C. sec. 6662 penalties do not apply.

Daniel M. White, Steven G. Amundson, James L. Kelly, and Linda J. Sinclair, for petitioner.

David W. Sorensen, S. Mark Barnes, and Derek W. Kaczmarek, for respondent.

CONTENTS

FINDINGS OF FACT ............................................ 6

A. Brief Family History ............................................ 6

B. The Trimmer High Meadows Ranch and the Williamson Act .................... 6

C. High Meadows: Background of Events Leading Up to an October 4, 2001, Purchase Agreement .................................... 9

1. Early Appraisals and Prospective Buyer's Interest ........................................ 9
2. Creation of Family Trust and Sale of 50% of High Meadows to High Meadows Six, LLC ......................................... 10

D. October 4, 2001, Purchase Agreement ......................................... 12

E. Events Leading Up to Closing on the Sale of High Meadows ................................. 15

F. Continuing Efforts To Expedite the High Meadows Sale ...................................... 17

G. Amendments to the High Meadows Sales Contract ........................................ 23

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H. Closing on the Sale of High Meadows ........................................ 25

I. 2000 Gift Tax Return ............................................ 25

J. 2001 Estate Tax Return ............................................ 26

K. Notices of Deficiency ............................................ 27

L. Application of the Definition of Fair Market Value ....................................... 28

OPINION ................................................................. 29

I. Burden of Proof ............................................ 29

II. Gift Tax: General Rules ............................................ 30

III. Estate Tax: General Rules ............................................ 31

IV. Value Generally ............................................ 31

A. Mr. Harrison's December 11, 2002, Appraisal Report .......................... 33
B. Expert Opinion ............................................ 36

1. Respondent's Expert Lee B. Smith ............................................ 37
2. The Estate's Experts ............................................ 40

a. Dr. Thomas F. Cargill ............................................ 40
b. Gary D. Midkiff ............................................ 42
c. Steven J. Herzog ............................................ 43
d. Steven R. Johnson ............................................ 45
e. William G. Kimmel ............................................ 47

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f. Thomas W. Clark, Jr. ............................................ 49

V. Values of High Meadows for Estate and Gift Tax Purposes ....................................... 49

A. The January 31, 2003, Sale of High Meadows as Some Evidence of High Meadows' Value for Estate and Gift Tax Purposes ................... 51

1. Evidence of the Sale Is Admissible ............................................ 51
2. The January 2003 Sale Is the Best Evidence of Value ............................................ 58

B. Other Significant Factors Affecting High Meadows Valuation ...................................... 63

1. Highest and Best Use ............................................ 63
2. Access Issues and Changing USFS Policies ............................................ 65

a. McFarland's Case: Snow Shoes, Dog Sled, and Cross Country Skis ............................................ 67
b. Mackie's Case: Hiking, Canoe With Portage and Horseback ............................................ 71
c. Fitzgerald's Case: Revokable Permit and a Kick Me Annual Fee ............................................ 73
d. Lessons Learned ............................................ 76

3. Principal Issues Negatively Affecting High Meadows' Value as of Both Relevant Valuation Dates ............................................ 78

C. Need for Valuation Adjustments ............................................ 86
D. Court's High Meadows Sale Price Adjustments ............................................ 88

1. Rising Prices Valuation Correction Date Adjustments ............................................ 88

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2. Adjustment for Uncertainty of Access ............................................ 92
3. Parcel Size Adjustment ............................................ 95
4. Application of the Adjustments ............................................ 103

E. Valuation Determinations ............................................ 105

VI. Section 6662 Penalties ............................................ 106

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition for redetermination of two separate deficiencies. Respondent determined that the estate is liable for (1) a $9,818,040 estate tax deficiency and a $2,817,294 section 6662 penalty and (2) a $3,784,333 gift tax deficiency and a $722,573 section 6662 penalty for the 2000 tax year.¹

The parties have resolved a number of issues and have filed two stipulations of settled issues. The remaining issues for decision are (1) the values for gift and estate tax purposes on June 27, 2000, and October 8, 2001, respectively, of an interest in real property located near and southeast of Lake Tahoe, California,

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which the parties refer to as High Meadows, and (2) whether the estate is liable for the section 6662 penalties.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulation of settled issues, the stipulated facts, and the accompanying exhibits, although not necessarily their contents and conclusions, are hereby incorporated by reference into our findings.

Mrs. Shirley C. Giovacchini (Shirley) was diagnosed with multiple myeloma in 1999 and passed away on October 8, 2001. Her daughter, Ms. Lisa Lekumberry, was appointed executor of the estate. Ms. Lekumberry resided in Nevada when she filed the petition in this case.

A. Brief Family History

Shirley and her husband Mr. Roy Giovacchini (Roy) were members of pioneer Nevada families who settled near Genoa, Nevada, in the mid-19th century. Shirley was born to Mr. and Mrs. Arnold and Annie Trimmer (Trimmers) in 1939. She married Roy in 1959. Roy and Shirley had three daughters. Roy died on May 28, 1997.

B. The Trimmer High Meadows Ranch and the Williamson Act

In 1929 Shirley's father and grandfather purchased High Meadows. High Meadows consists of contiguous parcels of real property, ranging from an

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elevation of 6,600 feet to over 9,200 feet, well over one mile and rising to nearly two miles, above sea level. High Meadows is about two miles south of the Heavenly Valley Ski Resort on the southwest shoulder of the ski resort's 10,067-foot high Monument Peak summit. Portions of High Meadows are quite mountainous and difficult to accurately survey or measure. It covers approximately 2,350 to 2,500 acres near Lake Tahoe, California.² On or about March 15, 1968, a deed was executed conveying High Meadows from the Trimmers to Roy and Shirley Giovacchini.³ Roy and Shirley's children spent every summer riding horseback at High Meadows. The family took its cattle there during the summer and cut firewood and Christmas trees in the fall.

On January 26, 1971, the Trimmers entered into a contract with the County of El Dorado in which they agreed to limit the use and development of High Meadows in accordance with the California Land Conservation Act of 1965 (Williamson Act). Cal. Gov't Code secs. 51200-51297.4 (West 1983 & Supp. 2000). Landowners benefit from Williamson Act contracts by receiving favorable

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property tax treatment in exchange for limiting the use of their lands. See Estate of Luton v. Commissioner, T.C. Memo. 1994-539.

Under the heading "LAND USE", the Williamson Act contract stated that the use of High Meadows was to be limited "to agricultural and compatible uses" and that "Structures may be...