Estate of Love v. Commissioner

Decision Date30 August 1989
Docket NumberDocket No. 5648-87.
Citation1989 TC Memo 470,57 TCM(CCH) 1479
PartiesEstate of Margaret D. Love, Deceased, Anne Love Hall and Stanard T. Klinefelter, Co-Executors v. Commissioner.
CourtU.S. Tax Court

Stanard T. Klinefelter, 36 S. Charles St., Baltimore, Md., for the petitioner. Kim A. Palmerino and John F. Dean, for the respondent.

Memorandum Findings of Fact and Opinion

WELLS, Judge:

Respondent determined a deficiency in petitioner's Federal estate tax of $136,193.32. After concessions, the following issues remain for decision: (1) the value of two thoroughbred horses to be included in petitioner's gross estate, (2) whether $147,000 paid by petitioner pursuant to a "foal-sharing agreement" may be deducted as an administration expense, and (3) whether petitioner may deduct as administration expenses or claims against the estate stud fees in the amount of $13,558.87 that were previously deducted on petitioner's Federal income tax return.

Findings of Fact

Certain facts are stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Margaret D. Love ("Mrs. Love") died on March 22, 1983. She was a resident of Maryland. Her will was probated in the Orphans' Court of Baltimore County, Maryland. The co-executors of her estate are Anne Love Hall, who is her daughter, and Stanard T. Klinefelter.

At the time of her death, Mrs. Love was in the business of breeding and racing thoroughbred horses. Mrs. Love boarded a number of horses in Normandy, France. Among the issues in the instant case are the values of two of those horses on the applicable valuation date. The first horse, named Praise, is a broodmare (a female horse held for breeding). Praise was born in 1975 and experienced moderate success in racing. Eleven days prior to Mrs. Love's death, Praise was mated with a highly regarded stallion named Persepolis. On the date of Mrs. Love's death, it was not feasibly possible to ascertain whether Praise had become pregnant as a result of the mating. Praise had, however, conceived a foal in each of three previous years. On April 23, 1983, one month after Mrs. Love's death, a veterinary examination disclosed that Praise was pregnant ("in foal").

Horse breeding begins in mid-February and continues into June of each year. Thus, thoroughbred sales infrequently occur during that period. In Europe, approximately 90 percent of thoroughbred sales occur at public auctions held late in the year, from the first of November to mid-December. During that time, the most important public auctions in Europe take place at Deauville, France and Newmarket, England.

Mrs. Love's will directed that her operations in France be liquidated. In December 1983, petitioner sold Praise at the Deauville auction for $328,000 (net of sales commission). That sale took place at the highest price for which a broodmare had been sold at public auction in France from 1979 to 1983. At the time of its sale, Praise had been in foal for nine months. A horse's gestation period is 11 months. The average price of the horses sold at the December 1983 auction at Deauville was 43 percent higher than the average price of the horses sold at the December 1982 auction at Deauville. The average price of the ten most expensive broodmares sold at the December 1983 Deauville auction was 78 percent higher than the average price of the ten most expensive broodmares sold a year earlier.

The second horse we must value is one of Praise's offspring, a foal whose sire was Shergar. Shergar's foal (the "Shergar foal") was three weeks old on the date of Mrs. Love's death. Shergar had been an exceptional racehorse, and the racing community had high expectations for Shergar as a stud. In February 1983, however, Shergar was stolen in Ireland. By July 1983, hope of recovering Shergar was lost.

At the date of Mrs. Love's death, the Shergar foal had weak front legs. The Shergar foal was therefore confined to a stall for the first six weeks of her life. Such confinement is, however, unusual. The Shergar foal's condition improved after Mrs. Love's death, and in July 1983, petitioner sold the horse in a private sale for $285,000 (net of sales commission). That price surpassed the previous record price in Europe for a horse of similar age (a weanling).

Focusing upon the administration expense issue, Mrs. Love owned another broodmare named Dunette. On January 6, 1983, Mrs. Love entered into a written agreement to have Dunette mated with Golden Fleece, a stallion with an impressive race record. Under the terms of the agreement, Coolmore Stud, the owner of Golden Fleece, was entitled to no stud fee, but would acquire a one-half ownership interest in any foal produced by the mating (the "shared foal"). Agreements containing such provisions are known as "foal-sharing" contracts or agreements. Mrs. Love and Coolmore Stud agreed to sell the shared foal at public sale once it became a yearling (one-year old). The agreement also allocated responsibility for certain costs such as Dunette's transportation to Coolmore Stud's farm in Ireland, maintenance of Dunette and the shared foal, and costs of selling the shared foal when it became a yearling. Finally, the agreement contained the following clause:

In the case of major difficulties (bankruptcy, death) causing the impregnated mare to be sold, Mrs. H.A. Love is obligated to pay Coolmore the amount of 115,000 Irish pounds (one hundred fifteen thousand).1

Industry standards require that a broodmare sold at public auction be free of any liens or encumbrances.

Prior to Mrs. Love's death, Dunette and Golden Fleece mated several times. Dunette was not successfully "covered" (impregnated), however, until April 6, 1983.

In September 1983, petitioner paid Coolmore Stud 115,000 Irish pounds. The parties have stipulated that the payment equaled $147,000. In late November 1983, petitioner sold Dunette at public auction in Newmarket, England. She was approximately eight months in foal at the time.

Focusing upon the stud fees, on November 24, 1982, Mrs. Love had entered into another type of breeding agreement. That agreement required that Mrs. Love pay the owner of Persepolis 65,000 French francs and an additional 65,000 French francs on October 1, 1983, if Praise were then pregnant.

On December 8, 1982, Mrs. Love entered into a breeding agreement similar to the November 24, 1982, agreement. She agreed to have her broodmare, La Girouette, mate with a stallion named Vayrann. That agreement required that Mrs. Love pay 40,000 French francs on July 1, 1983, and an additional 40,000 French francs on October 1, 1983, if La Girouette were then pregnant. The parties have stipulated that petitioner made the initial payments due under both the Persepolis and Vayrann breeding agreements and that the total value of these payments was $13,558.87.

Value of Praise and the Shergar Foal

We must first decide the value of Praise and the Shergar foal to be included in petitioner's gross estate. Section 2031(a)2 provides as follows:

(a) General.—The value of the gross estate of the decedent shall be determined by including to the extent provided for in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.

Section 2033 brings within the gross estate the value of all property in which the decedent had an interest at the time of death. Mrs. Love owned both Praise and the Shergar foal at the time of her death. Thus, section 2031(a) requires that the values of both horses at the time of Mrs. Love's death3 be included in the gross estate.

The regulations provide additional guidance in valuing property for Federal estate tax purposes. Section 20.2031-1(b), Estate Tax Regs., provides in pertinent part:

(b) Valuation of property in general. The value of every item of property includable in the decedent's gross estate under section 2031 through 2044 is its fair market value at the time of the decedent's death, * * *. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. * * *

Attached to the Federal estate tax return filed by the co-executors is an appraisal by Elie de Brignac which values Praise at $80,000 and the Shergar foal at $150,000 at the time of Mrs. Love's death. Mr. de Brignac died prior to trial, and petitioner obtained the services of another expert. The report of petitioner's expert at trial values Praise at $108,000 at the time of Mrs. Love's death, while the Shergar foal is again valued at $150,000. The report of respondent's expert, on the other hand, values Praise at $224,220 and the Shergar foal at $214,000.

The issue of fair market value is one of fact, and petitioner bears the burden of proving that respondent's determination is incorrect. Rule 142(a); Estate of Gilford Dec. 43,622, 88 T.C. 38, 50-51 (1987).

Although none of the reports appears acceptable in all respects, we find the approach of petitioner's expert at trial more reliable under the facts and circumstances of this case and find that the fair market values of Praise and the Shergar foal on the applicable valuation date were $116,000 and $150,000, respectively.

Respondent's expert valued Praise by taking her sale price in December 1983, i.e., $328,000, and subtracting what he viewed as appreciation occurring after Mrs. Love's death. He first subtracted $25,000 on the theory that Praise's fetus would have increased in value by this amount between the date of Mrs. Love's death and the sale date. He also subtracted $78,780 on the theory that 26 percent of the remainder of the sale price, i.e., $303,000, reflected market inflation occurring after the date of Mrs. Love's death. He arrived at 26 percent by pro rating a 35 percent increase in the average...

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