Estate of Proctor v. Commissioner

Decision Date11 May 1994
Docket NumberDocket No. 10462-92.
PartiesEstate of Foy Proctor, Deceased, First National Bank of Amarillo, Independent Executor, Petitioner, Beth Hays, Clynice Baker, and Texas Tech University, Intervenors v. Commissioner.
CourtU.S. Tax Court

Thomas H. Cantrill, 1445 Ross Ave., Dallas, Tex., and Andrius Kontrimas, for the petitioner. Donald P. Lan, Jr., Jack M. Kinnebrew, Rowland Foster, 901 Main St., Dallas, Tex., and Thomas L. Burdett, for intervenors Beth Hays and Clynice Baker. William R. Cousins III, Robert Don Collier, and Robert M. Bolton, 901 Main St., Dallas, Tex., for intervenor Texas Tech University. Henry C. Griego, for the respondent.

Memorandum Findings of Fact and Opinion

WELLS, Judge:

Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $4,323,330. Petitioner is the Estate of Foy Proctor (decedent). After concessions by the parties,1 the primary issue for decision is whether petitioner is entitled to a charitable deduction for the Channing Ranch and, if so, the amount of such deduction. In deciding that issue, we must resolve other questions such as (1) the fair market value of the Channing Ranch to be included in decedent's gross estate for purposes of section 2031(a);2 (2) whether an option to lease the surface rights of the Channing Ranch for grazing purposes, granted to Mrs. Hays for the duration of her life, diminishes the fair market value of the Channing Ranch, and, if so, the amount of such diminution; and (3) whether such option causes the devise of the Channing Ranch to Texas Tech University (Texas Tech) to lapse under the terms of decedent's will.

Findings of Fact

Some of the facts and certain documents have been stipulated for trial pursuant to Rule 91. The stipulated facts are incorporated in our findings of fact by this reference. On May 28, 1988, decedent died testate a resident of Midland, Texas. At the time of his death, decedent was 92 years old. Decedent's wife, Hahl E. Proctor, predeceased decedent, having died testate on December 5, 1971. Decedent and his late wife had no children. The independent executor of decedent's estate is the First National Bank of Amarillo. Decedent's will is being probated in the County Court, Midland County, Texas. At the time the petition was filed in the instant case, the First National Bank of Amarillo's principal place of business was located in Amarillo, Texas.

1. Background

During his lifetime, decedent operated two major ranching operations in Texas: the C Ranch3 and the Channing Ranch. On the date of his death, decedent owned the surface rights in the Channing Ranch, a 60,570-acre tract of land located in Oldham and Hartley Counties, Texas. In addition, decedent also owned the mineral rights to the Channing Ranch.

The Channing Ranch was managed for decedent by intervenor Beth Hays and her late husband J.D. (Junior) Hays. Junior and Beth Hays began working for decedent at the Channing Ranch during 1953, and Junior Hays remained in decedent's employ until his untimely death on March 13, 1987. Mrs. Hays remained employed by decedent until his death in May 1988. Mrs. Hays still resides on the Channing Ranch.

Junior and Beth Hays were more than mere employees to decedent. Decedent valued their judgment and their friendship and entrusted them to run his personal and business affairs. For example, both Junior and Beth were authorized signatories on decedent's bank accounts and were entrusted with paying the expenses incurred in operating and maintaining the Channing Ranch. Decedent also entrusted Junior Hays with the management of other financial assets valued between $3 and $4 million.

During 1964, intervenor Clynice Baker began working for decedent as his secretary in Midland, Texas. Except for 2 years when she resided in Denver, Colorado, Ms. Baker worked continuously for decedent until his death on May 28, 1988. Ms. Baker also had authority to sign checks drawn on decedent's bank accounts so that she could pay his personal and medical expenses as they came due. In addition to her secretarial duties, Ms. Baker also performed a number of personal services for decedent, such as driving him to and from doctors' offices and meetings with his friends and acquaintances. Ms. Baker also stayed with decedent when private duty nurses failed to arrive.

On January 22, 1987, decedent granted Junior and Beth Hays, along with Clynice Baker, a joint medical power of attorney regarding decisions concerning his medical treatment and hospitalization.

2. Decedent's Inter Vivos Gifts

During his lifetime decedent made gifts to both Junior and Beth Hays and to Clynice Baker. During 1985, decedent made the following cash gifts:

                Value Of Gift     Gift1
                Clynic Baker ...........     $1,010,000    $737,098
                Scott Baker2 ...........         10,000      10,000
                Junior Hays ............        500,000     366,278
                Beth Hays ..............        500,000     366,278
                1 Decedent required each donee to pay the applicable
                Federal gift tax
                2 Scott Baker is Clynice Baker's son
                

During 1986, decedent made the following cash gifts:

                Value1
                Clynice Baker ..................   $47,500
                Junior Hays ....................    28,750
                Beth Hays ......................    28,750
                1 The record does not indicate the nature of the
                gifts or whether decedent required each donee to
                pay the applicable Federal gift tax
                

During 1987, decedent made the following cash gifts:

                Value Of Gift     Gift1
                Clynice Baker ...........     $1,000,000    $687,858
                Beth Hays ...............      1,000,000     687,858
                1 Decedent required each donee to pay the applicable gift
                tax
                

Also during 1987, decedent gave Ms. Baker an automobile but required her to pay the applicable Federal gift tax. The net value of the gift of the automobile to Ms. Baker was $7,084.

3. Decedent's Pre-1986 Testamentary Planning

During his lifetime, decedent had several drafts of his last will and testament prepared, but only executed three of them. All of the wills decedent executed, including the will, the terms of which are in issue in the instant case, were drafted by Richard S. Brooks, an attorney who practiced in Midland, Texas. Mr. Brooks, who is now deceased, represented decedent and his late wife, Hahl E. Proctor, for many years in connection with their estate planning.

On October 1, 1975, decedent executed a last will and testament in which he devised a one-half interest in the Channing Ranch to Junior and Beth Hays, as tenants in common. Decedent's remaining one-half interest in the Channing Ranch was devised to Melvin and Carol Cotton, as tenants in common.

During 1980, decedent requested Mr. Brooks to draft another last will and testament which provided Junior Hays with a life estate in the surface rights of the Channing Ranch, with the remainder interest therein to be transferred to the trust created under the will of decedent's late wife.4 Decedent never executed the last will and testament drafted by Mr. Brooks during 1980.

On November 4, 1983, decedent executed a last will and testament which devised his interest in the Channing Ranch, along with all of the livestock and equipment owned by the Ranch, to Junior Hays for a term of years ending on the earlier of the date of Mr. Hays' death or upon Mr. Hays' attaining the age of 78. At the end of the term of years, the executor of decedent's estate was instructed to sell the Channing Ranch, along with the livestock and equipment thereon, and distribute one-half of the proceeds from the sale to Junior and Beth Hays, or to the survivor of them. The remaining proceeds were to be distributed to various other individuals.

4. Decedent's 1986 Will

On October 3, 1986, decedent executed the will which would become his final Last Will and Testament.5 The will, in pertinent part, provides for the following bequests and devises of decedent's property:

3. J.D. HAYS (JUNIOR) AND WIFE BETH HAYS

I give and bequeath to J.D. (Junior) Hays and wife, Beth Hays, or the survivor of them, all livestock, ranch equipment, ranch vehicles, and other personal property situated on or used in connection with the operation of my Channing Ranch, situated in Oldham and Hartley Counties, Texas. This Section 3 hereof does not include any interest in real estate nor any interest in tangible property situated at, or used in connection with, my residential homestead in Midland, Midland County, Texas.

4. CLYNICE BAKER

I give and devise to Clynice Baker my residential homestead situated in Midland, Midland County, Texas. This Section 4 hereof is restricted to real estate and is exclusive of tangible personal property situated at, or used in connection with, said residential homestead.

5. TEXAS TECH UNIVERSITY

5.1 SPECIAL DEVISE

I give and devise to Texas Tech University, an instrumentality of the State of Texas, for exclusively public purposes, my Channing Ranch situated in Oldham and Hartley Counties, Texas, in fee simple, including, but not by way of exclusion, all improvements and fixtures thereon and all of my record interest in and to the oil, gas and other minerals in and under and that may be produced therefrom.

5.2 OPTIONAL GRAZING LEASE

The special devise contained in Section 5.1 hereof shall be subject to a continuing option in favor of J.D. (Junior) Hays and wife, Beth Hays, or the survivor of them to lease said Channing Ranch for grazing purposes, for a term or terms not to exceed the duration of the life of the survivor of them, plus six months. Such lease shall be negotiated and renegotiated from time to time between J.D. (Junior) Hays and wife, Beth Hays, or the survivor of them, and Texas Tech University to provide for lease terms conforming to the fair market value of the use of said land for grazing purposes, and for such terms and restrictions as are appropriate to the maintenance and preservation of the market value of said land for grazing purposes. * * * It is the intent hereof that Texas Tech...

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