Estate of Wineman v. Commissioner
| Citation | 79 T.C.M. 2189 |
| Decision Date | 28 June 2000 |
| Docket Number | Docket No. 27339-96. |
| Parties | Estate of Rebecca A. Wineman, Deceased, Eleanor Truocchio and Dean Wineman, Co-Executors v. Commissioner. |
| Court | U.S. Tax Court |
John W. Ambrecht, Santa Barbara, Calif., and Gregory Arnold, for the petitioner. Steven M. Roth, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined an estate tax deficiency of $775,626 and an addition to tax under section 6662 of $3,844. After concessions,1 the issues for decision are:
1) Whether Rebecca A. Wineman (decedent) retained a life estate in partial interests in her homestead property transferred to her children. We hold that she did not.
2) Whether decedent rented her ranch properties to a closely held corporation owned by her children at below-market-value rates, thereby making taxable gifts to her children. We hold that she did.
3) Whether the cumulative fair market value of certain real property includable in the gross estate was $2,261,800 as returned by petitioner, $2,785,248 as determined by respondent, or some other figure. We hold that the fair market value was $2,417,491.
4) Whether petitioner's election of special use valuation qualified as a valid election under section 2032A.2 We hold that it did.
Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by this reference.
Rebecca A. Wineman (decedent) died on June 24, 1992 (the valuation date). Petitioner's coexecutors resided in Santa Maria, California, at the time the petition in this case was filed.
The Wineman family has been grazing cattle in the Nipomo, California, area for approximately 115 years. Decedent and her husband, Vernon Wineman (Mr. Wineman), were full-time cattle ranchers from the 1930's until their deaths.3 Until early 1992, decedent performed numerous activities relating to the cattle operation. Her activities included feeding the cattle, deciding which breed to run, helping brand cattle, cooking for the branding crew, deciding when to buy and sell cattle and at what prices, making decisions regarding feed purchases, negotiating purchases of real estate and coordinating all the legal and sales activities for the purchases, arranging for Land Bank lending, painting and assisting in the repair and maintenance of corrals and cattle facilities, and attending bull and cattle sales in San Luis Obispo, Kern, and Santa Barbara Counties. Decedent also belonged to local and national cattle organizations.
Coastal Ranches, a C corporation organized in 1979, continues the cattle operations conducted by decedent and Mr. Wineman. Decedent owned no interest in Coastal Ranches. Decedent and Mr. Wineman's three children, Dean Wineman (Dean), Eleanor Truocchio (Eleanor), and Marian Hanson (Marian), each own 21 percent of Coastal Ranches, and the remaining 37 percent is owned by Mr. Wineman's testamentary trust (the trust), of which the three children are beneficiaries. Dean and Eleanor are full-time cattle ranchers. Marian lives in Montana and occasionally participates in the cattle operation.
The Nipomo properties (parcels 3, 5, 6, 9, and 10) are located within the greater urban area of Santa Maria, a city at the northern end of Santa Barbara County, California. The Santa Maria area has a population of approximately 100,000. Santa Maria is primarily a farming community. Other parts of the coastal zone are more upscale, such as the Santa Ynez and Santa Ynez River Valleys to the south. Arroyo Grande, to the north and west of Santa Maria and along the Pacific coast, is the location of many second homes, attracting people seeking to escape the summer heat of the San Joaquin Valley. Further north along the coast, the coastal towns of Morro Bay and Cambria are also popular with tourists. The area has attracted resort and second home development.
Although Santa Maria is within Santa Barbara County, the town of Nipomo and the Nipomo properties are in San Luis Obispo County. These properties are at the southern entrance to San Luis Obispo County. As of the valuation date, the county government intended to preserve this entrance as a scenic area that extended back almost to the first range of hills. Specifically, the San Luis Obispo County land use element in effect at the valuation date placed the ranches in the South County Planning Area. Permitted uses of properties in this area were limited to certain specified agricultural uses.
As of the valuation date, the Nipomo properties were part of an agricultural preserve and had been continuously since the early 1970's. A property is placed in an agricultural preserve by the land owner by a contract with the county. In exchange for keeping the property as rural, open space agricultural land, the land owner receives a preferential property tax rate. Each property in the agricultural preserve is encumbered by a 20-year evergreen contract, which renews day to day. Under the contract, a landowner has the right to notify the county of an intent to terminate the contract on its anniversary date, and once such notice is provided, the contract will expire 20 years later. The Winemans did not provide notice of intention to terminate the evergreen contracts on the Nipomo properties at any time before their deaths.
Decedent's homestead property (parcel 3) is the site of two residences. One is a larger house with three bedrooms. Decedent occupied one bedroom at the time of her death and had the use of the living room, kitchen, and dining area. Dean used a second bedroom as an office, where he kept his desk and all his bookkeeping papers, although he had moved out of the main house in 1979 or 1980 after his marriage. Decedent used the other bedroom as a guest bedroom, primarily for Marian when she visited from Montana. The main house also had a separate office that was the corporate headquarters for Coastal Ranches.
The second house on the homestead property is a smaller house of approximately 1,500 square feet. Dean has lived there since 1979 or 1980 as a ranch employee. He has never paid rent for his use of the smaller house.
In addition to the residences, parcel 3 has two large barns, a small barn, a granary, cattle scales and corrals, a farm shop, two garages, and a small orchard.
During each of the years 1968, 1969, and 1970, decedent gave each of her three children one-third of an undivided 8-percent interest in her homestead property, for a total gift to all three children after the 3-year period of 24 percent. At the time of her death, decedent owned a 51-percent interest in the homestead property. The trust owned the remaining 25 percent.
Coastal Ranches stored hay in the barns, used the corrals and farm shop, and kept vehicles in a garage and in one of the big barns. Coastal Ranches maintained and paid utilities for the houses. Coastal Ranches also sealed the driveway, installed a sidewalk, and provided decedent with a pickup truck for her use. Workers provided by Coastal Ranches assisted with yard maintenance, including cutting down and pruning trees, repairing water pipes, and removing bushes. Coastal Ranches was also responsible for replacing fences and corrals in the event of a fire.
Some of the soil on parcel 3 was contaminated by the spillage of gasoline in a refueling area near one of the barns. On February 9, 1996, NG Chemical estimated the soil remediation expenses on parcel 3 to be $36,256.
As of the valuation date, the fair market value of decedent's interest in the homestead property, including land, buildings, and site improvements, was $52,000.
The Nipomo pasturelands consisted of Rancho El Suey (parcel 5), Rancho Nipomo (parcel 6), Lot 74 (parcel 9), and the Pit (parcel 10). As of the valuation date, all of these properties were vacant, unimproved lands used only for cattle grazing.
Decedent owned 51 percent of parcel 5, which was an oblong, irregularly shaped property consisting of 1,487 acres located on the north side of Highway 166 between Temettate Ridge and Twitchell Reservoir. On the valuation date, the property carried approximately 50 cows.
Decedent owned 50 percent of parcel 6, which was a squarish, 648-acre property situated immediately west of Temettate Ridge and parcel 5. The easternmost corner of parcel 6 adjoined the westernmost corner of parcel 5, but the properties did not otherwise share a common boundary. On the valuation date, the property carried 20-25 cows.
Decedent owned 100 percent of parcel 9, which was a rectangular parcel of 90 acres, situated directly northwest of parcel 6. The longer side of the rectangle (the southeast boundary) was also the northwest boundary of parcel 6. The record does not reflect parcel 9's carrying capacity as of the valuation date.
Decedent owned 100 percent of parcel 10, a triangular parcel created by the realignment of Highway 166, which severed Parcel 10 from other Wineman properties. Parcel 10 is bisected by two ravines. At 7 acres, it is below the minimum parcel size allowed by local zoning. Thus, it would be valuable only to a neighboring landowner wishing to expand his acreage.
Average annual precipitation on the properties ranged from 14 to 18 inches. With the exception of only a few acres, the soil composition and steep slopes made the properties unsuitable for farming. A variety of factors made these ranch properties unattractive for residential development, including limited water supplies and land use restrictions. As of the valuation date, the highest and best use of these properties was their continued use as grazing land and pastureland.
As of the valuation date, the fair market values of decedent's interests in the Nipomo properties were as follows:
Prcel no. Parcel name Fair market value
5 Rancho El Suey $580,153
6 Nipomo Ranch 247,860
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