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Parties Involved:
Commissioner of Internal Revenue
Appellee
Estate of F.G. Holl
Appellant

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

ESTATE OF F.G. HOLL, Deceased, 

Bank IV Wichita, N.A., 

Executor, 

Petitioner-Appellant, 

v. 

COMMISSIONER OF INTERNAL 

REVENUE, 

Respondent-Appellee. 

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FILED 

United States Court of Appeab Tenth Circu1t 

MAY 0 5 1995 

PATRICK FISHER 

Clerk 

No. 94-9005 

Appeal from the United States Tax Court 

(T.C. No. 6039-89) 

Jack D. Flesher of Bever, Dye, Mustard & Belin, Wichita, Kansas, 

for Plaintiff-Appellant. 

Charles Bricken, Tax Division of the Department of Justice (Loretta 

c. Argrett, Assistant Attorney General, and Ann B. Durney, Tax 

Division, with him on the brief) for Defendant-Appellee. 

Before MOORE and BRORBY, Circuit Judges, and ALSOP, District 

Judge.* 

ALSOP, Senior District Judge. 

The Estate of F. G. Hall ("Hall") appeals from the Tax court's 

determination of the in-place value of oil and gas reserves 

extracted between the date of death and the alternate valuation 

* The Honorable Donald D. Alsop, Senior United states 

District Judge for the District of Minnesota, sitting by 

designation. 

Appellate Case: 94-9005 Document: 01019290515 Date Filed: 05/05/1995 Page: 1 
date for estate tax purposes. We reverse and remand. 

I. 

F. G. Boll ("Boll") died on December 21, 1985, at which time 

he held numerous leasehold and mineral interests in producing oil 

and gas properties in Wichita, Kansas. Boll's Executor filed a 

federal estate tax return on March 26, 1987. The Estate received 

$980,698.47 in net income from the production and sale of oil and 

gas between the date of death and the alternate valuation date. 26 

u.s.c. § 2302. The Estate reported the in-place value of the oil 

and gas sold within that time frame as $686,488.93. 

The Commissioner of the Internal Revenue Service 

("Commissioner"), however, determined in a notice of deficiency 

that the in-place value of the oil and gas sold by the Estate 

between the date of death and the alternate valuation date was 

$930,839.76. The Estate filed a petition in the Tax Court seeking 

a redetermination of the deficiency. The parties agreed to certain 

adjustments and the remaining dispute was tried on May 14, 1990 to 

determine the in-place value of the minerals sold between the date 

of death and the alternate valuation date. 

At the trial, F. Doyle Fair ("Fair"), the Estate's expert, 

testified that prior to extraction, the minerals sold had an inplace fair market value of $686,488.93. This figure was eventually 

reduced to $683,306. The Commissioner's expert, Von B. Pilcher 

("Pilcher"), determined the in-place value of the minerals sold by 

the Estate between the date of death and the alternate valuation 

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date to be $930,839.76. The Tax Court rejected Fair's analysis and 

held that the in-place value of the reserves was $930,839.76, after 

which the Estate appealed. 

This Court reversed and remanded. ~ Holl y. Commissioner, 

967 F.2d 1437 (lOth Cir. 1992). The Tax Court held further 

proceedings on remand, but once again rejected the Estate's 

experts• testimony and instead adopted Pilcher's, holding that the 

in-place value of the reserves sold between the date of death and 

the alternate valuation date was $869,605.53. This appeal 

followed. 

II. 

Findings of fact made by the United States Tax Court are 

reviewed by a clearly erroneous standard. Commissioner y. 

Quberstein, 363 u.s. 278 (1960): National Collegiate Athletic Ass•n 

v. Commissioner, 914 F.2d 1417 (lOth Cir. 1990). Applying this 

test, a factual finding is clearly erroneous when the reviewing 

court "on the entire evidence is left with a definite and firm 

conviction that a mistake has been committed." United States v. 

United states Gypsum co., 333 u.s. 364, 395 (1948). Questions of 

law are subject to a de novo· standard of review. Helverinq y. TexPenn Oil co., 300 u.s. 481 (1937). We review mixed questions under 

the clearly erroneous or de novo standard, depending on whether the 

mixed question involves primarily a factual inquiry or the 

consideration of legal principles. Armstrong y. Commissioner, 15 

F.3d 970, 973 (lOth Cir. 1994). Both questions of law and fact are 

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involved in this case, but we find that it primarily involves a 

factual inquiry. 

appropriate. 

Accordingly, clearly erroneous review is 

It is undisputed that the oil and gas produced during the 

interim period should be included in the gross estate at its inplace value on the date of its severance. ~ HQll, 967 F.2d at 

1439: Jobnston v. United States, 779 F.2d 1123, 1128 (5th Cir.), 

cert. denied, 477 u.s. 904 (1986). The sole disputed issue 

currently before us is whether the Tax Court correctly determined 

the in-place value of the oil and gas produced between Holl's date 

of death and the alternate valuation date for inclusion in Holl's 

estate pursuant to§ 2032(a)(1) of the Internal Revenue Code. 26 

u.s.c. § 2032(a) (1) (1954). 

In Holl y. Commissioner, we determined that the Tax Court had 

erred at the first trial in "accepting an erroneous method of 

valuation by the Commissioner's expert focusing on 'the actual 

sales price as of the date of sale in his valuation[,]'" as opposed 

to the in-place value of the unextracted minerals. II.Qll, 967 F.2d 

at 1439. We reversed and remanded to the Tax Court, relying upon 

Johnston y. United States, ' in which the Fifth Circuit rejected the 

Commissioner's argument that the amount to be included in the 

Estate is "the amount of the proceeds minus an appropriate discount 

factor." Johnston, 779 F.2d at 1128. 

We instructed the Tax Court on remand to "consider evidence 

premised on a method of valuation starting with the pre-change 

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value of the reserves reduced to possession and sold during the 

interim period from the date of death to the alternate valuation 

date." HQll, 967 F.2d at 1439. We indicated that the Estate's 

evidence "generally following such an approach [was] persuasive." 

~- We further indicated that on remand, "the Tax court should 

reconsider the valuation issue concerning the reserves produced and 

sold during the interim period •to determine the in-place value of 

the oil and gas produced as of the dates of severance• and evidence 

showing an 'appropriate discount factor• to be applied." .I,g. 

(quoting Johnston, 779 F.2d at 1129). 

The Tax Court held a second trial on remand. Fair, who 

testified for the Estate, determined the in-place value of the 

minerals sold by the Estate between the date of death and the 

alternate valuation date to be $583,765. Pilcher testified for the 

Commissioner and arrived at an in-place value of $869,605. The Tax 

Court rejected the Estate 1 s evidence and instead adopted the 

valuation method advocated by Pilcher. In adopting Pilcher • s 

method, the Tax Court reasoned that Pilcher was "the only expert in 

the second trial who both (1) considered the time value of the 

money and thus attributed a reasonable amount of the Estate 1 s 

receipts for the extracted minerals to income earned over the 6-

month period and (2) used a reasonable adjustment for uncertainty." 

See Tax Court Order at 10. 

The Estate now contends that the Tax Court failed to follow 

our mandate in Holl v. Commissioner, 967 F.2d at 1437. According 

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to the Estate, in adopting Pilcher's valuation method, the Tax 

Court again employed a valuation method based on "the actual sales 

price as of the date of sale," rather than a method based on the 

in-place value of the oil and gas on the date of severance. lsi· at 

1439. The Estate contends that Fair was the only expert at the 

second trial who determined the in-place value of the minerals as 

of the date of severance and who avoided valuation based on net 

cash flow or actual sales. We agree with the Estate. 

Fair determined the quantity of oil and gas in the reserves 

and apportioned it, on a pro rata basis, to quantities produced 

during the interim period. To assign an in-place value (at the 

time of severance from the ground) to the quantities produced, he 

determined the market value of the reserves on sixteen dates during 

the interim period. In contrast, Pilcher reduced the net income 

derived from the oil and gas during the interim period by a present 

value interest factor and by a risk factor. Pilcher's approach 

improperly focuses on the actual sales price instead of the inplace value of the unextracted minerals. HQll, 967 F.2d at 1439. 

The Tax Court criticized Fair's valuation of the reserves as 

of the date of severance for the same reasons it rejected Fair's 

method after the first trial. According to the Tax Court, in 

valuing reserves as of the date of severance, Fair failed to use a 

reasonable adjustment for the uncertainty of the market price of 

oil and gas. We find the Tax Court's criticism of Fair's failure 

to apply an "appropriate discount factor" to be misplaced. ~ 

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• 

H2ll, 967 F.2d at 1439. 

In li.Qll, we directed the Tax Court "'to determine the in-place 

value of the oil and gas produced as of the dates of severance' and 

evidence showing an 'appropriate discount factor' to be applied." 

,Ig. The discount factors applied by Pilcher, however, focus on the 

value of extracted oil and gas in commercially saleable quantities, 

based on cash-flow during a short-term period. Just as valuation 

based on net sales or cash flow is erroneous because it fails to 

account adequately for the in-place value of unextracted minerals, 

a discount factor based on the value of extracted minerals is 

similarly problematic. Fair's method, on the other hand, focuses 

on the value of the unextracted minerals, minus anticipated income 

to be derived from the reserves. Exclusion of income is mandated 

by Maas y. Higgins, 312 u.s. 443 (1941) and is an appropriate 

discount factor in this case. 

For these reasons, we find that the Tax Court's rejection of 

Fair's valuation method is erroneous, as is its adoption of 

Pilcher's valuation method. On remand, therefore, the Tax Court is 

instructed to adopt Fair's methodology, conduct appropriate 

computations pursuant to Tax court Rule 155, and to enter judgment 

in favor of the Estate. 

Accordingly, the decision of the Tax Court is RBVBRSBD and the 

cause of action is REMAHDBD for further proceedings in accord with 

this opinion. 

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