Van Alen v. Comm'r
| Decision Date | 21 October 2013 |
| Parties | BRETT VAN ALEN AND KIMBERLEE VAN ALEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent BRANDON D. TOMLINSON AND SHANA C. TOMLINSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Jared R. Callister, for petitioners.
Nathan H. Hall, for respondent.
HOLMES, Judge: Shana Tomlinson and Brett Van Alen are siblings who inherited part of a family ranch from their father. Their interest was in a trust, and their stepmother valued that interest at less than $100,000 when she prepared her late husband's estate-tax return. That value was low because the Code gives a break to those who inherit a ranch and promise to keep it in agricultural use. Years later, the trust sold a conservation easement on the ranch for more than $900,000. The sale created a capital gain that passed through to the siblings, and the dispute here is over the proper basis to report for that sale. Shana and Brett argue that through no fault of their own the estate greatly understated the value of their interest in the ranch, which greatly understated their basis, which greatly inflated their taxable capital gains. The Commissioner says this doesn't matter, and that the tax break they got then by using a very low value on their father's estate-tax return has to be matched now by a hefty capital-gains tax burden.
Near the turn of the twentieth century, Joseph "Pop" Preuschoff left Europe for Madera County, California--just north of Fresno--and established a 2345-acre cattle ranch that became known as the Preuschoff Ranch. It was on this ranchthat Pop raised his daughter, Mary Van Alen. Although Mary moved away for a short time after getting married and starting a family, she divorced and returned home to the ranch with her small children. One of those children was Joseph Van Alen. Joseph later inherited a 13/16th interest in the ranch (the Ranch Interest).
Joseph married three times. After his first marriage with four children ended in divorce, Joseph wed Virginia Latimer, a woman twenty years his junior. Within four years, they had two children--Shana and Brett. The siblings were still quite young when Virginia and Joseph divorced, and afterwards they lived with their mom, though they did stay with their dad on the ranch every other weekend as well as half of every summer. Joseph eventually wed again. Shana and Brett, however, didn't get along with this new wife, Bonnie Van Alen. Shana described Bonnie as a "very dominant person" with whom she "had a tumultuous relationship." Despite these difficulties, the siblings loved their time on the ranch. Brett remembered helping his dad with the daily chores--kicking hay out of the backs of trucks and shoveling manure. And, after Joseph's death, Shana moved to the ranch where she tends some cows and works as a stay-at-home mom to her three children. Brett--though he does not live on the ranch--grew up to be acowboy in the vaquero tradition, riding horses and four-wheelers to tend cattle for other ranchers.
Joseph died in May 1994, when Shana was 18 and Brett was only 14. Almost ten years before his death--after his separation from Virginia but before his marriage to Bonnie--Joseph had written his will. It gave $25,000 gifts to his first wife and each of his four children from that marriage, but directed that the remainder of the estate--including his Ranch Interest--would go to a testamentary trust (the Trust) for the benefit of Shana and Brett in equal shares. The will contained no estate-tax apportionment clause.2
Bonnie, as the estate's executor, hired attorney Denslow Green to administer Joseph's estate. Since California probate law requires that a county "probate referee" appraise a decedent's real property subject to probate, see Cal. Prob. Code sec. 13200(c) (West 1991 & Supp. 2013), Green met in November1994 with Richard Grey, a deputy probate referee.3 This was a complicated chore--the ranch alone had nine different tax parcel numbers, and the estate held other real estate apart from the ranch. Grey set to work, and valued the Ranch Interest at $1.963 million. When he was done, he gave his field notes to the probate referee.4
About nine months later, Bonnie (as executor) and Green (as preparer) filed a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, for the Estate of Joseph Van Alen.5 But that return gave the Ranch Interest a much lower value than Grey's field notes did.
The return also showed a taxable estate that was cash-poor. It valued the gross estate at just over $2 million,6 but almost $1.9 million was real estate or miscellaneous property (such as vehicles, farm equipment, household furnishings, and cattle). The estate deducted $260,000 in miscellaneous expenses (such as funeral costs, debts, and mortgages) and $870,000 in bequests to Bonnie as the surviving spouse.7 That left a taxable estate of a little over $900,000, and--after subtracting the unified credit8 and credit for state death taxes9--the estate reported a tax due of about $100,000.
The tax bill would have been significantly higher, however, had the estate valued the Ranch Interest at $1.963 million--the value that Grey said he submitted to the probate referee. Instead, the estate listed that interest's fair market value as only $427,500. Even at that unusually low value for so many acres of California ranchland, the Ranch Interest would have been one of the estate's most valuable assets. But the estate computed its tax not with this number, but with an even lower number--$144,823, which the return reported as the Ranch Interest's value under section 2032A(d)(2).
This section helps those who inherit property by letting them use an asset's value in its actual use at the time of death, rather than in its hypothetical highest and best use. (The paradigmatic case is a family farm that otherwise might have to be sold to a developer.) Not all kinds of property, and not all kinds of heirs, qualify for this deviation from the general rule that death tax is calculated on an estate's fair market value. And the heirs have to promise not to sell the property right away, or shift its use to something more valuable. If an estate wants to use this lower value, it has to make a section 2032A election, and there are forms that have to be filled out and sent in with the return.
There's little doubt that the estate met these conditions. The estate's "qualified heirs"10--Bonnie, Shana, and Brett (who as a minor was represented by his mother, Virginia, both as his guardian ad litem and as trustee of the Trust)11--all executed an agreement to special valuation under Section 2032A, which they included with the estate-tax return.12
The form they used included the required language by which they consented to personal liability for additional estate tax if they stopped using the ranch for agricultural purposes or sold their interest altogether. And no one disputes that this standard-form language is also sufficient proof of each heir's actual or constructive understanding that completing the form is required. The Commissioner nevertheless disputed the estate's valuation of the Ranch Interest because he thought that the correct value should have been $427,500. The estateand the IRS went back and forth, and the estate remarkably and audaciously sent the IRS an amended section 2032A valuation that lowered the value put on the Ranch Interest to only $98,735.13 Even more remarkably, the IRS accepted the revised amount, perhaps because the estate increased the section 2032A value for two of the other properties it had elected for special-use valuation and removed altogether a section 2032A election for another property. The bottom line was that the IRS got an increase in the total taxable value of the estate to about $1 million and an increase in the estate tax of about $20,000 (to nearly $120,000).
Even with the very low special-use valuation of the Ranch Interest, the estate didn't have enough liquid assets to immediately pay that $120,000.14 We also expressly find that Shana and Brett were the biggest winners of the estate'saggressive and successful valuation because they received the lion's share of the taxable estate.15 With those two things in mind--and without an estate-tax apportionment in the will saying otherwise--we also find that a significant increase in the valuation of the Ranch Interest for estate-tax purposes might well have forced the Trust--which was the remainder beneficiary of the estate and whose sole beneficiaries were Shana and Brett--to sell at least parts of the ranch to pay the estate tax.
In May 2007--almost ten years after the estate settled its tax liability--the California Rangeland Trust bought a conservation easement on the Preuschoff Ranch for $1.12 million. Reflecting its 13/16th interest, the Trust received $910,000 from that sale.
The Trust and the siblings reported this deal in so muddled a way that the IRS was bound to notice. In June 2008 the Trust's accountants filed the Trust's 2007 income-tax return, on which it reported the $910,000 sale price for the conservation easement and a basis of about $100,000. After subtracting variousother trust-level deductions, the Trust reported income of almost $720,000 and an income-distribution deduction in the same amount for distributions made to the siblings.16 Shana and Brett's Schedules K-1, Beneficiary's Share of Income, Deductions, Credits, etc., each reported a net long-term capital gain of nearly $360,000.
Almost four months later, though, the Trust filed an amended 2007 return. On this return, the Trust listed the same sale price ($910,000), but reported a new and nearly doubled basis, which reduced the Trust's capital gain. Shana and Brett's...
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