Flanders v. United States, C-71-2032 SW.
| Decision Date | 04 August 1972 |
| Docket Number | No. C-71-2032 SW.,C-71-2032 SW. |
| Citation | 347 F. Supp. 95 |
| Court | U.S. District Court — Northern District of California |
| Parties | Anita M. FLANDERS, Trustee of the Henry B. Ottolini Revocable Inter Vivos Trust, Plaintiff, v. UNITED STATES of America, Defendant. |
J. R. MacMahon, Freitas, Allen, McCarthy, Bettini & MacMahon, San Rafael, Cal., for plaintiff.
Edward O. C. Ord., Asst. U. S. Atty., James L. Browning, Jr., U. S. Atty., San Francisco, Cal., for defendant.
ORDER GRANTING PARTIAL SUMMARY JUDGMENT
This action was brought for the recovery of $66,357.48 in estate taxes and interest. Jurisdiction is conferred on the court by 28 U.S.C. § 1346(a) (1).
Henry B. Ottolini, a resident of Marin County, died on June 30, 1968. His assets, including an undivided one-half interest in a 650-acre cattle ranch, were held in a revocable trust. Plaintiff is trustee of the trust and individually owns the other undivided one-half interest in the ranch.
After the death of the decedent, but before the alternative valuation date, plaintiff, as trustee and in her individual capacity, entered into a Land Conservation Agreement pursuant to the California Land Conservation Act of 1965 "Williamson Act," Cal.Govt.Code § 51200 et seq.
These sections were enacted under specific authority of the Constitution of the State of California.1 The consideration received by the land owner for what is essentially his temporary dedication of an interest in his property to a public purpose, is a reduction in his assessed value with the resultant reduction in his property taxes.2 The form Land Conservation Agreement in the instant case, which restricts the property to agricultural use for a period of 10 years, specifically provides:
5. Owner shall not receive any payment from County in consideration of the obligation imposed hereunder, it being recognized and agreed that the consideration for the exemption of the within agreement is the substantial public benefit to be derived therefrom and the advantage which will accrue to owner as a result of any reduction in the assessed value of said property due to the imposition of the limitations on its use contained herein. Emphasis added.
At the time of the decedent's death, the fair market value of his undivided interest in the ranch was $220,000. After the Conservation Agreement was entered into by plaintiff, the fair market value thereof was reduced by 88% to $60,000, thereby reducing the decedent's interest to $30,000.
The estate elected the alternate valuation date of June 30, 1969, for estate tax purposes and filed the return on September 30, 1969, showing the value of the land as $25,000. This represented one-half of the value of the ranch after the land use restriction was placed upon it and after 2% of the value was deducted for lack of marketability because the decedent owned an undivided interest.
The Commissioner of Internal Revenue Service determined there was a deficiency of $60,671.73 plus interest in the amount of $5,685.75. Plaintiff paid these amounts on April 23, 1971, and brought this action for refund.
Defendant filed a motion for partial summary judgment contending that as a matter of law the land use restriction is ignored for federal estate valuation purposes. The parties have agreed as to the fair market value of the undivided interest if the land use restriction does not apply for estate tax purposes.
Defendant's motion was heard on May 19, 1972, and was granted in open court. At the request of defendant, the court has prepared this short memorandum.
There is no argument against including the decedent's interest in the ranch in his gross estate under 26 U.S.C. §§ 2033, 2038. The only issue is the value which should be used on the alternate valuation date.
The criteria for valuing property included in the gross estate is either the fair market value at the moment of death (26 U.S.C. § 2031) or the fair market value on the alternate valuation date (26 U.S.C. § 2032). Fair market value is defined as 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 to sell, and both having reasonable knowledge of relevant facts, Treas.Reg. § 20.2031-1; United States v. Miller, 317 U.S. 369, 374, 63 S.Ct. 276, 87 L.Ed. 336 (1943).
Plaintiff relies on 26 U.S.C. § 2032(a) which provided at the time in question:
The defendant's position is that the self-imposed, value depressing, land use restriction is ignored for federal estate valuation purposes and that the property is valued as it existed at the date of death, with consideration given to the market conditions on the alternate valuation date.
Plaintiff contends the language of the section must be literally read and since the decedent's interest in the value of the ranch had diminished to $25,000 before the alternate valuation date, that figure must be used for estate tax valuation purposes.
No cases deciding this issue were called to the court's attention and the court was unable to locate any.
The purpose of the federal estate tax is to tax the privilege of transmitting property at death based on its value. The original alternate valuation date legislation was enacted August 30, 1935. Prior to that time the value of property at the date of death was used for federal estate valuation purposes. However, during the depression which began in 1929, property values fell so rapidly that in some cases the estate tax amounted to more than the value of the property when the tax became due. In order to provide relief in such situations Congress enacted 26 U.S.C. § 811(j). The Senate Finance Committee had originally proposed an amendment which would have allowed a deduction of the shrinkage of value occurring between the date of death and a date one year later. The House insisted on the one-year later alternate valuation date rather than the deduction method as suggested by the Senate:
In lieu of this deduction provision, the conference action inserts a provision giving the executor an election with respect to the time as of which the property included in the gross estate is to be valued. Under existing law the valuation is made as of the date of death. If the executor exercises the election given him by the conference agreement, all the property included in the estate on the date of death is to be valued as of the date one year after the decedent's death, except that the value (at the time of distribution, sale, exchange, or other disposition) of property distributed, sold, exchanged, or otherwise disposed of, is taken in lieu of its value as of one year after death. H.R. Rep. No. 1885, 1939-1 Cum.Bull., Pt. 2, pp. 663-64.
The House manager stressed that the...
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