Estate of Luton v. Commissioner
| Decision Date | 27 October 1994 |
| Docket Number | Docket No. 23339-91. |
| Citation | 68 T.C.M. 1044 |
| Parties | Estate of William F. Luton, Deceased, Nancy L. Jackson, Robert S. Herdman, and William F. Luton, Jr., Co-Executors v. Commissioner. |
| Court | U.S. Tax Court |
Richard J. Sideman and Wendy Abkin, One Embarcadero Center, San Francisco, Calif., for the petitioner. Cynthia K. Hustad and Mary E. Wynne, for the respondent.
Memorandum Findings of Fact and Opinion
Petitioner is the Estate of William F. Luton. Respondent determined a deficiency of $7,212,448 in petitioner's estate tax. Respondent also determined that petitioner was liable for an addition to tax for negligence under section 6653(a)(1)(A) in the amount of $360,622, plus 50 percent of the interest due on the deficiency under section 6653(a)(1)(B), and was liable for an addition to tax of $1,095,102 for a valuation understatement under section 6660.1 By amendment to answer, respondent revised the deficiency to $7,707,179 and additions to tax for negligence and valuation understatement to $385,359 and $1,104,675, respectively.
After stipulations and concessions, the issues for decision are: (1) Whether the value of petitioner's 78-percent interest in the common stock of Rancho San Juan, Inc., on the alternate valuation date2 was $5,336,000 as determined by respondent. We hold that the value was $4,492,800. (2) Whether the value of petitioner's one-third interest in the common stock of Dune Lakes, Ltd., on the alternate valuation date was $1,440,000 as determined by respondent. We hold that the value was $1,040,000. (3) Whether the value of petitioner's 41.9-percent interest in the Miramonte Liquidating Trust on the alternate valuation date was $3,250,000 as determined by respondent. We hold for respondent. (4) Whether petitioner is liable for an addition to tax for undervaluation pursuant to section 6660. We hold that petitioner is not liable for such addition.
Some of the facts have been stipulated and are so found. The stipulation of facts with attached exhibits and stipulation of partial agreement are incorporated herein by this reference. William F. Luton (hereinafter decedent) was a resident of the State of California at the time of his death on April 27, 1987. At the time of the filing of the petition, coexecutor Nancy L. Jackson (decedent's daughter) resided in the State of Idaho, and coexecutors Robert S. Herdman3 and William F. Luton, Jr. (decedent's son), resided in the State of California.
In 1934, decedent acquired by gift a ranch in Santa Barbara County known as Rancho San Juan. In 1936, decedent and his wife, Nancy Luton, established their residence on Rancho San Juan, where they lived until the dates of their respective deaths. In 1941 and 1958, decedent and his wife acquired, as community property, two parcels of land in Santa Barbara County contiguous to Rancho San Juan. Hereafter, unless otherwise stated, the three parcels will be referred to collectively as Rancho San Juan. In 1968, decedent and his wife signed a contract with the County of Santa Barbara concerning limitations on the use and development of Rancho San Juan, pursuant to the California Land Conservation Act of 1965 (). The agreement is effective for 10 years and is automatically extended for 1 year at the end of each year of the contract so that it will always have a term of 10 years, unless notice of termination is given. The quid pro quo for the landowners is favorable property tax treatment.
On August 13, 1982, Rancho San Juan was incorporated under the laws of California as a corporation wholly owned by decedent and his wife. Decedent received 44,760 shares as community property with his wife and 55,240 shares as separate property in exchange for the right, title, and interest in the real property comprising Rancho San Juan. The corporation (RSJ, Inc.) assumed all of the obligations, conditions, and restrictions set forth in the contracts with the county. Effective December 1, 1986, RSJ, Inc., made an election to be treated as an S corporation for Federal tax purposes. Stock in RSJ, Inc., is not publicly traded.
In years 1982-86, decedent transferred some shares of RSJ, Inc. stock (1) into trusts created for the benefit of his grandchildren and (2) into the name of each of his six children. At the time of his death, decedent still held 78-percent (78,000 shares) of the stock of RSJ, Inc., in his own name.4 Decedent paid RSJ, Inc., rent for the right to live on Rancho San Juan.
Dune Lakes, Ltd.
Dune Lakes, Ltd., was formed on June 24, 1931. The principal asset of Dune Lakes, Ltd., is real estate in San Luis Obispo County, California. Most of the corporation's acreage has been operated as a duck-hunting preserve. The remaining sections of the land are either leased for agricultural purposes, zoned for 5-acre lots, or subject to sensitive resource area restrictions. In 1973 and 1974, Dune Lakes, Ltd., entered into a contract with the County of San Luis Obispo concerning limitations on use and development of the property pursuant to the Williamson Act.
In 1983, decedent acquired 1 share of the 3 outstanding shares of Dune Lakes, Ltd., by inheritance from his wife.5 Effective January 1, 1987, the corporation made an election to be treated as a S corporation for Federal tax purposes. Stock in Dune Lakes, Ltd., is not publicly traded.
As of December 1984, the shareholders of Key Television, Inc., consisted of decedent and members of his family. On December 7, 1984, Key Television, Inc., sold substantially all of its assets to Shamrock Holdings, Inc. (hereafter Shamrock), for cash, plus an unsecured promissory note. Key Television, Inc., changed its name to Miramonte Drive Corp., and filed a certificate of election to wind up and dissolve pursuant to section 337. On or about September 30, 1985, the nondistributed assets of Miramonte Drive Corp., were contributed to the Miramonte Liquidating Trust (hereafter the Miramonte Trust). Decedent and William F. Luton, Jr., were the trustees of the Miramonte Trust. The principal asset of the Miramonte Trust is a note receivable dated December 7, 1984, from Shamrock in the amount of $7,700,000 with interest of 10 percent payable semiannually beginning December 31, 1984, through maturity. The principal is payable in 15 semiannual installments of $250,000 beginning December 31, 1988, and a final principal payment of $3,950,000 on June 30, 1996. The note is not listed on a public exchange. The trust agreement provides that a vote of two-thirds of the trust units could force the trustee to liquidate. The terms of the trust also provide a right of first refusal restriction upon the transfer of any unit. The right of first refusal exists for a 35-day period. At the time of his death, decedent owned 41.9 percent of the units of the Miramonte Trust.
Decedent's estate is being administered under the laws of the State of California. The executors engaged an attorney, Mr. Howard M. Simon, to prepare the Federal estate tax return for petitioner. In this regard appraisers were sought to determine the fair market values of the assets included in the gross estate. Mr. Philip Moore, president of Seligman Valuations and an individual with academic and professional experience as an appraiser, was selected to appraise the value of petitioner's interests in the stock of RSJ, Inc., and of Dune Lakes, Ltd., and in the Miramonte Drive Liquidating Trust. Mr. Simon provided Mr. Moore with appraisals of the real estate owned by Dune Lakes, Ltd., and RSJ, Inc., that had previously been prepared by Mr. Harold Miossi and Mr. James Paddock, respectively. Mr. Miossi is a California probate referee for San Luis Obispo County, a position he has held since 1960. Mr. Paddock has over 50 years' experience in appraising real estate in the Santa Barbara area and throughout California. We recognize as experts Mr. Moore, Mr. Miossi, and Mr. Paddock.
In the stipulation of partial agreement, the parties agreed that the value of the underlying real estate would be equal to that amount determined by a Mr. Dunshee, an appraiser since 1952 and recognized as an expert appraiser of agricultural land and cattle ranches. He determined a value of $4,800,000 and $7,200,000 respectively, for the assets of Dune Lakes and Rancho San Juan, without consideration of any discounts. The amount of discounts is still in dispute.
At trial, petitioner presented testimony and submitted a written report from Dr. Shannon P. Pratt as to the value of the stock and the trust units. See Rule 143(f). Dr. Pratt is the managing director of a firm specializing in financial research and analysis, especially the valuation of businesses and business interests. Dr. Pratt holds a doctorate of finance, is a member of the American Society of Appraisers, and is a certified financial planner. Dr. Pratt is also the author of two reference works on business valuation.
Respondent countered with testimony and a written report from her own expert Ms. Margaret N. Singleton. Ms. Singleton is the president of an appraisal firm doing real estate and business appraisals. She has experience as an appraiser for various private companies and the Wisconsin Department of Revenue, where she valued rural properties and farms. Ms. Singleton is a member of professional valuation organizations; she teaches and has published articles relating to valuation. We recognize both Dr. Pratt and Ms. Singleton as experts.
Respondent issued a statutory notice of deficiency to petitioner, asserting deficiencies in and additions to petitioner's Federal estate tax. The greater part of that deficiency, and the only part here in issue, results from respondent's determination that the fair market value of certain shares of corporate stock and of units in a liquidating trust owned by decedent at the date of his death, and valued at the...
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Rethinking the valuation of family limited partnerships holding passive assets.
...fiduciary duty the trustee owes to the beneficiaries to act in their best interests.(22) For example, in Estate of Luton v. Commissioner, 68 T.C.M. 1044 (1994), an issue was the value of the decedent's 41.9 percent minority interest in a liquidating trust holding a nonpublicly traded note. ......