T.C. Mem o. 2 01 3- 23 5

UNITED STAT ES TAX COURT

BRETT VAN AL EN AND KIMBER LEE VA N ALEN, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt BRANDON D. TOMLINSON AND SHANA C. TOMLINSON, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 2 23 28 -0 9, 4 07 5- 10
. File d Oct ob er 2 1, 2 01 3. 1

Ja redR. Cal li st er, fo r pe ti ti on ers . Nath anH. Hall , forres po nd en t.

W e co ns ol id at edth es e cas es fortri al , bri efi ng , andop in io n. 1- 2 -

[* 2] MEMORANDUM FINDINGS OF FACT AND OPINION HOLMES, Ju dg e: Sha naTom li ns on an d B ret t Van Alen are s ib li ng s wh o in he rit edpa rt o f a fam il y ran chfro m

th ei r fat he r. Thei r in te res t was ina trus t, an d th ei r st ep m ot he r va lu edth atin te res t atles s tha n $ 10 0,0 00 when sh e p rep aredhe r la te hu sb an d’s es ta te -ta x re turn . Thatva lu e was lo w bec au se th e Co de gi ve s a br eakto th os e who in he rita ran chan d p ro m is e to ke ep itinag ric ul tu ral us e. Years lat er, the tru stso lda co ns erv at io n e as em en t o n t he ran chfor m or e th an $9 00 ,00 0. Th e sa le crea te d acap it al ga in th atpa ss edth ro ug h t o the si bl in gs , and th e d is pu te he re i s o ve r th e p ro pe r ba si s t o re po rt f or th atsal e. Sh an a an d B ret t arg ue th atth ro ug h n o faul t o f th ei r own th e es ta te gre at ly und ers ta te d t he va lu e o f th ei r in te res t i n t he ran ch , whi chgre at ly und ers ta te d the ir b as is , whi chgre at ly in fla te d t he ir t ax ab le cap it al ga in s. Th e Co m m is si on er s ay s thi s d oe sn ’t m at te r, an d t ha t the tax bre ak

th ey go t the n b y

us in g ave ry

lo w val ue on th ei r fat he r’s
es ta te -ta x re turnha s t o b e m at ch edno w by a h efty cap it al -g ai ns tax bu rd en . FINDINGS OF FACT I. The Fam il y

Ran ch Near the tu rnof t he twen ti eth c en tu ry , Jo se ph“ Po p” Preu sc ho ff l eftEuro pe fo r Mad era C ou nt y , Cal ifo rn ia --jus t n orthof F res no --an d e st ab li sh eda 23 45 -acr e cat tl e ran chth atbe cam e kno wn as th e Pre us ch of f Ran ch . It was on th is ran ch- 3 -

[* 3] th atPo p ra is edhi s d au gh te r, Mary Van Al en . Alth ou gh Mary mov edaway fo r a s ho rt t im e aft er g etti ng m arri edan d s ta rti ng a fam il y , sh e d iv or cedan d returne d h om e to th e ran chwith h er s m al l ch il dr en . One o f th os e ch il dr enwas Jo se ph Van Al en . Jo se ph lat er i nh eri te d a13 /1 6t h i nt eres t i n the ran ch(th e Ran ch In te res t). Jo se phm arri edth ree t im es . After h is fir stm arri ag e wit h fo urch il dr en en de d i n d iv or ce, J os ep h wedVirg in iaLati m er, a wo m antwen ty y ears hi s juni or . W it hi n fo ury ears , th ey

ha d t wo ch il dr en --Sh an a an d B ret t. The si bl in gs were s ti ll qu it e y ou ng when Virg in iaan d J os ep h d iv or ced , andaft erwar ds th ey li ve d wi th th ei r m om , th ou gh th ey

di d s tay with t he ir d adonth e ran chev ery othe r week en d
as well as h al f of

ev ery su m

m er. Jo se ph ev en tu al ly w edag ai n. Sh an a an d B ret t, ho wev er, d idn’t g etalo ng with t hi s n ew wife , Bon ni e VanAlen . Sha nade sc rib ed Bo nn ie as a“ ve ry

do m in an t p ers on ” wit h wh om sh e “ ha d atu m

ul tu ou s rel at io ns hi p.” Desp it e th es e d iff ic ul ti es , th e si bl in gs lo ve d t he ir t im e o n t he ran ch
. Bret t re m em

be redhe lp in g h is da d wi th th e d ai ly cho res --k ic ki ng ha y ou t o f th e ba ck s o f truc ks an d s ho ve li ng m anur e. And , aft er J os ep h’s d eath, Sh an a m ov edto th e ran chwher e sh e te nd s s om e co ws an d wo rk s as a st ay -at -h om e m om to he r th ree c hi ldren . Bret t-- th ou gh he do es no t l iv e o n t he ran ch --g rew up t o b e a- 4 -

[* 4] co wbo y

inth e v aque ro tra di ti on , rid in g h or se s an d fo ur -wh eel ers to ten d cat tl e fo r ot he r ran ch ers . II. The W il l, Pro ba te , andEst at e Tax Return Jo se phdi edinMay 199 4, wh enSh an a was 18 an d B ret t was on ly 14. Alm os t t eny ears be fo re h is de ath- -aft er h is sep arat io n fr om Virg in iabu t b efo re h is
m arri ag e to Bo nn ie --J os ep h h adwrit te n h is wil l. Itga ve $2 5,0 00 gi fts to hi s fi rs t wife an d e ach of h is fou r ch il dr enfro m th atm arri ag e, bu t d ire ct edth atth e rem ai nd er o f th e es ta te --i nc lu di ng hi s R an chInt eres t-- wou ldgo to a te st am en ta ry tru st(th e Tru st ) fo r th e b en efi t o f Sh an a an d B ret t i n e qu al sh ares . The wi ll
co nt ai ne d n o e st at e-t ax ap po rti on m en t cl au se . 2 Bo nn ie , as the est at e’s ex ecu to r, hi redatt orne y Dens lo w Greento adm in is te r Jo se ph ’s est at e. Sin ce Ca li fo rn iapro ba te law re qu ire s tha t a c ou nt y

“pr ob at e ref

eree ” ap pr ai se a de ced en t’s re al pro pe rty subjec t t o p ro ba te , see Cal
. Pro b. Co de sec . 13 20 0( c) (West19 91 & Supp . 20 13 ), Green m etinNov em be r
W il ls so m et im es co nt ai n s uc h aclaus e to di rectwher e th e m on ey to pa y 2 ta xe s wi ll co m e fro m , bu t i f th ey do n’t s ta te law s up pl ie s a d efau ltrul e. See R ig gs v. Del Drag o, 3 17 U.S. 95 , 97 -9 8 (1 94 2) ; Es ta te of Lea chv. Co m m is si on er, 8 2 T.C. 95 2, 9 62 -6 4 (1 98 4) , aff’d wit ho utpubl is he d o pi ni on , 78 2 F .2d17 9 (1 1t h C ir. 19 86 ). Cal ifo rn ia ’s def

au ltrul e p ro vi de s tha t an y est at e ta x m

us t b e equi tabl y pr or at edam on g t he pe rs on s i nt eres te d i n t he est at e. See C al . Pro b. Co de sec . 20 11 0( a) (West20 11 ). It s pl it s the est at e-t ax bi ll am on g the be ne fic ia rie s i n t he sa m e p ro po rti on th atth e v al ue s o f th ei r in he rit an ce b ears to th e to ta l v al ue of the es ta te . Id. s ec. 2 01 11
.- 5 -

[* 5] 19 94 with R ic ha rdGrey , a de pu ty pro ba te refe ree. Thi s was a co m pl ic at ed 3 ch or e--t he ran chalo ne ha d n in e d iff eren t t ax pa rcel nu m

be rs , andth e es ta te he ld ot he r rea l es ta te ap artfro m th e ran ch . Grey

setto work , andva lu edth e Ran ch In te res t at$1 .96 3 m il li on . Whe n h e was do ne , he g av e h is fie ldno te s t o t he pr ob at e ref

eree . 4 Abo utni ne m on th s l at er, Bo nn ie (as ex ecu to r) an d Gre en(as pre pa rer) fil ed a Fo rm 70 6, Un it edSta te s Es ta te (an d Gen erat io n- Sk ip pi ng Tran sf er) Tax Return, fo r th e Est at e o f Jo se ph Van Al en . Butth atreturn g av e th e Ran chInt eres t a m uc h 5 lo wer v al ue th anGrey ’s fie ldno te s d id
. Grey work edun de r th e supe rv is io n o f Ri ch ardHub er, the Mad era C ou nt y 3 pr ob at e ref

eree . Becaus e Sh an a an d B ret t d idn’t s ub m itGrey ’s fie ldno te s as anex pe rt 4 rep ort i n c om

pl ia nc e wit h R

ul e 1 43 (g ), we di dn ’t all ow Gre y to tes ti fy as a n e xp ert witne ss as t o h is op in io n o f th e Ran chInt eres t’s fa ir m ark etva lu e whe n J os ep h di ed . W e d idall ow h im

to tes ti fy as a n e y ewitne ss to whathe subm it te d a s v al ue s to th e p ro ba te refe ree. (Un le ss we sa y ot he rwis e, al l re fere nc es to Ru le s ar e to th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. All ba re re fere nc es to sec ti on s ar e to th e In te rn al Rev enue Co de ineffe ctforth e rel ev an t t im e.) Sect io n 2 00 1 i m

po se s a t ax on “ th e tr an sf er o f th e ta xabl e es ta te of e ve ry 5 de ced en t wh o i s a c it iz enor r es id en t o f th e Uni te d S ta te s.” Se ct io n 2 05 1 d efi ne s th e ta xabl e es ta te as “ th e v al ue of t he gro ss est at e” l es s an y ap pl ic ab le de du ct io ns . A ten ta ti ve est at e ta x i s the n c om pu te d o n t he su m

of t he tax ab le est at e p lu s ad jus te d t ax ab le gi fts , reduc edby gifttax pa y ab le on po st -1 97 6 g ift s. See sec . 20 01 (b ). Thatam ou ntis furth er re du cedby the un ifi edcred it , see in fra n ot e 8 , and by oth er av ai labl e cre di ts su chas s ta te de ath- ta x c red it s, s ee i nf ra n ot e 9 . The res ul ti ng am ou ntis th e n etest at e ta x due .- 6 -

[* 6] The re tu rnals o s ho weda ta xabl e es ta te th atwas c as h- po or . It v al ue d t he gr os s es ta te at ju stov er $ 2 m il li on , bu t al m os t $ 1.9 m il li on was re al est at e o r 6
m is cel la ne ou s p ro pe rty (su chas v eh ic le s, fa rm equi pm en t, h ou se ho ldfurni sh in gs , an d c attl e). The est at e d educ te d $ 26 0,0 00 inmis cel lane ou s ex pe ns es (su chas fu ne ral co st s, d eb ts , andm ortg ag es ) an d $ 87 0,0 00 inbe qu es ts to Bo nn ie as the
su rv iv in g s po us e. Thatlef t a t ax ab le est at e o f a l it tl e o ve r $9 00 ,00 0, an d- -aft er 7
subt ract in g t he un ifi edcred it an d c red itforst at e d eath t ax es --the est at e rep orte d 8 9 a ta x due of abo ut$1 00 ,00 0.
The g ro ss est at e in cl ud es “ al l p ro pe rty, real o r pe rs on al , tan gi bl e o r 6 in ta ng ib le , wher ev er s itua te d,” to th e ex te ntpro vi de d i n s ect io ns 20 33 th ro ug h 20 45 . Sec. 2 03 1( a); Est at e o f Gio va cch in i v . Commis si on er, T.C. Mem o. 2 01 3- 27 , at * 31
. Subjec t t o e xc ep ti on s n otrel ev an t h ere, p ro pe rty pas si ng fro m a de ceas ed 7 hu sb an d t o h is wid ow i s d educ ti bl e fro m hi s g ro ss est at e. See s ec. 2 05 6( a). Altho ug h J os ep h d idn’t n am e Bo nn ie inhi s wi ll be cau se he ha d e xe cu te d i t b efo re th ei r m arri ag e, Cal ifo rn ialaw treat s h er as anom it te d s po us e. See C al . Pro b. Co de se c. 65 60 (W es t 1 99 4) . As a res ul t, s he was e nt it le d t o re cei ve --an d t he Fo rm 70 6 rep orte d t ha t s he di d re cei ve --h is on e-h al f of co m m un it y pro pe rty andon e-thi rdof hi s s ep arat e p ro pe rty. See Cal . Pro b. Co de sec s. 6 40 1, 6 56 0 (West19 94 ). The u ni fie d c red itex em

pt s a m in im

um am ou ntof a ccu m

ul at edweal th 8 fro m est at e ta x. Si nc e Jo se phdi dn ’t m ak e an y tax ab le gi fts du rin g h is li fe, the un ifi edcred itav ai labl e to hi s es ta te was $ 19 2,8 00 (equi va le ntto a $6 00 ,00 0 ex em pt io n) . See s ec. 2 01 0( a). Est at es of d eced en ts dying be fo re 2 00 5 g en eral ly cou ldcred itag ai ns t the 9 fed eral est at e ta x t he am ou ntof a ny sta te de ath t ax es . See s ec. 2 01 1( f).- 7 -

[* 7] The tax bi ll wou ldhave be ensi gn ifi can tl y hi gh er, h owe ve r, ha d t he est at e va lu edth e Ran chInt eres t at$1 .96 3 m il li on --the va lu e th atGrey sai d h e subm it te d to th e p ro ba te refe ree. In st ead , th e es ta te li st edth atin te res t’s fa ir m ark etva lu e as on ly $42 7,5 00 . Evenat t ha t u nu su al ly low v al ue forso m an y acre s o f Cal ifo rn ia
ran ch la nd , th e Ran chInt eres t wo ul d h av e b een on e o f th e es ta te ’s m os t v al uabl e as se ts . Butth e es ta te co m pu te d i ts tax no t wi th th is nu m be r, bu t wi thanev en lo wer num

be r--$ 14 4,8 23 , whi chth e return re po rte d a s the Ran chInt eres t’s v al ue un de r se ct io n 2 03 2A( d) (2 ). Thi s s ect io n h el ps th os e who in he ritpro pe rty by let ti ng th em

us e anass et ’s
va lu e in it s ac tu al us e atth e ti m e o f de ath, ra th er than i n i ts hypo th et ic al hi gh es t
an d b es t u se . (The p arad ig m at ic cas e is a fam il y farm th atothe rwis e m ig htha ve to be so ldto a de ve lo pe r.) Notall ki nd s o f pr op erty , andno t al l k in ds of h ei rs , qu al ify for thi s d ev ia ti on fro m th e g en eral rul e th atde ath t ax is cal cu la te d o n a n es ta te ’s fai r m ark etva lu e. Andth e h ei rs ha ve to pro m is e n otto sel l the pro pe rty rig htaway , or s hi ft i ts us e to so m ethi ng m or e v al uabl e. If anest at e wan ts to us e th is lo wer v al ue , itha s t o m ak e a s ect io n 2 03 2A el ect io n, an d t he re ar e fo rm s t ha t ha ve to be fil le d o utan d s en t i n wi th th e return.- 8 -

[* 8] The re’s l it tl e d oubtth atth e es ta te m etth es e co nd it io ns . The es ta te ’s

“ qu al ifi edhe irs ” --Bo nn ie , Sha na , andBret t (wh o a s a m in orwas re pr es en te d b y 1 0 hi s m ot he r, Virg in ia , bo th as h is gu ard ia n ad li te m an d a s tru st ee o f th e Tru st )
-- 1 1 al l ex ecu te d a n a gr eem en t t o s pe ci al va lu at io n u nd er Se ct io n 2 03 2A, wh ic h the y in cl ud edwith t he est at e-t ax return. 1 2 The form th ey us edin cl ud edth e requi redlan gu ag e b y whi chth ey

co ns en te d to pe rs on al li ab il it y

for ad di ti on al est at e ta x i f th ey st op pe d u si ng th e ran chfor ag ric ul tu ral pu rp os es or s ol d t he ir i nt eres t al to ge th er. Andno on e d is pu te s tha t th is st an da rd -fo rm

lan gu ag e is als o s uf

fic ie ntpro of

of e ach he ir’s a ctua l o r co ns tru ct iv e und ers ta nd in g t ha t co m pl et in g t he form

is requi red . The Co m m is si on er n ev erthe le ss di sp ut edth e es ta te ’s val ua ti on of t he Ran chInt eres t be cau se he th ou gh t tha t the co rrec t v al ue sh ou ldha ve be en$4 27 ,50 0. Th e es ta te
A “ qu al ifi edhe ir” is , “with re sp ectto any pro pe rty, a m em

be r of th e 1 0 de ced en t’s fa m il y

who acqui redsu chpro pe rty (or t o wh om su chpro pe rty pas se d) fro m th e d eced en t.” Se c. 20 32 A(e)(1 ). Neit he r Bre ttno r Sh an a d is pu te th atth ei r m ot he r ha d the po wer t o a ctas 1 1 Bret t’s g uard ia n ad

li te m , andth ey

do no t cl ai m

th atsh e b reac he d any fiduc ia ry du ty acti ng inth atcap aci ty. The e st at e al so ele ct edto va lu e th ree o th er p ro pe rti es (no t atis su e h ere) 1 2 un de r se ct io n 2 03 2A. Sec ti on 20 32 A sav edth em a lo t o f m on ey --i t s hr an k t he va lu e o f ta xabl e p ro pe rti es fro m anag gr eg at e fai r m ark etva lu e (o r, to be m or e pr eci se , an a gg reg at e st at ed fai r m ark etva lu e) o f jus t o ve r $1 m il li onto on ly $2 60 ,00 0.- 9 -

[* 9] an d t he IRS wen t b ackan d fo rth , andth e es ta te rem ark ab ly andau da ci ou sl y se ntth e IRS anam en de d s ect io n 2 03 2A v al ua ti on th at lo wer ed th e v al ue pu t o n th e Ran chInt eres t t o o nl y $9 8,7 35
. Even m or e rem ark ab ly, th e IRS acce pt edth e

1 3
rev is edam ou nt , perhaps be cau se th e es ta te in crea se d the sec ti on 20 32 A val ue for two of the ot he r pr op ert ie s i t h adele ct edforsp eci al -u se va lu at io n andrem ov ed al to ge th er a s ect io n 2 03 2A el ect io n fo r an ot he r pr op erty . The b ot to m li ne was t ha t th e IRS go t anin crea se inth e to ta l t ax ab le va lu e o f th e es ta te to ab ou t $ 1 m il li on an d a n i nc reas e in th e es ta te tax of abo ut$2 0,0 00 (to ne arl y $1 20 ,00 0)
. Eve n wi th th e v ery lo w sp eci al -u se va lu at io n o f th e Ran chInt eres t, the
es ta te di dn ’t hav e en ou gh li qu idass et s t o i m m ed ia te ly pay

th at$1 20 ,00 0. W e 1 4 al so ex pr es sl y

fin d t ha t Sh an a an d B ret t wer e th e b ig ge stwin ne rs of t he est at e’s The re co rddi d n otin cl ud e anam en de d a gr eem en t t o s pe ci al va lu at io n. 1 3 W e d o, h owe ve r, ha ve a co ve r le tt er fro m Greento anIRS at to rn ey inwhi chhe wro te th aten cl os edwith t he let te r was an“ Am en de d Ag reem en t t o S pe ci al Valu at io n e xe cu te d b y

Bo nn ie Van Al en , Sha naCh arl ot te Van Al enan d Vi rg in ia M. Lat im er as Trus te e an d Gu ard ia n AdLit em forBret t Sh an no n Van Alenwho is st il l a m in or .” Becaus e o f th atco ve r le tt er, an d b ecau se th e IRS ev en tu al ly acce pt edth e v al ue s co nt ai ne d o n t he am en de d S ch edul e A-1 , Ite m iz edDedu ct io ns (wh ic h i t wo ul d n otha ve do ne ab se ntth e am en de d a gr eem en t), we fi nditm or e li ke ly tha n n otth atBo nn ie , Sha na , andBret t (b y Virg in iaon Bret t’s b eh al f) ex ecu te d t he am en de d a gr eem en t t o s pe ci al va lu at io n, an d t ha t thi s amend ed ag reem en t s at is fie d t he requi rem en ts of s ect io n 2 03 2A( d) (2 ) jus t as th e o rig in al ag reem en t h ad
. The re co rdis a bi t u nc le ar, b utitsee m s p ro babl e th atth e es ta te ele ct edto 1 4 pa y a po rti on of t he est at e ta x i n i ns ta ll m en ts as p erm it te d b y sec ti on 61 66 (a).- 10 -

[* 10 ] ag gr es si ve an d s uc ces sf ul va lu at io n b ecau se th ey rece iv edth e li on ’s sh are o f th e ta xabl e es ta te . W it h t ho se two th in gs inm in d- -an d wi th ou t an est at e-t ax 1 5 ap po rti on m en t i n t he wil l s ay in g o th erwi se --we al so fin d t ha t a s ig ni fic an t i nc reas e in th e v al ua ti onof t he Ran chInt eres t fo r es ta te -ta x p ur po se s m ig htwell ha ve fo rcedth e Tru st --wh ic h was th e rem ai nd er b en efi ci ary of th e es ta te an d wh os e so le be ne fic iarie s wer e Sh an a an d B ret t-- to sel l atlea stpa rts of t he ran chto pa y th e es ta te tax . III. Rep orti ng th e Sal e o f th e Co ns erv at io n Eas em en t InMay 200 7- -al m os t t eny ears aft er the est at e se tt le d i ts tax li ab il ity --the Cal ifo rn iaRan ge la ndTrus t b ou gh t a c on se rv at io n e as em en t o n t he Preu sc ho ff Ran chfor$1 .12 m il li on . Refl ect in g i ts 13 /1 6t h i nt eres t, the Trus t re cei ve d $9 10 ,00 0 fr om

th atsal e. The Trus t an d t he si bl in gs rep orte d t hi s d eal inso m ud dl eda way

th atth e IRS was bo un d t o n ot ic e. InJu ne 20 08 th e Tru st ’s acco un ta nt s fi le d the Trus t’s 20 07 in co m e-t ax return, o n wh ic h i t re po rte d t he $9 10 ,00 0 s al e p ric e fo r th e co ns erv at io n e as em en t an d aba si s o f ab ou t $ 10 0,0 00 . After s ub tra ct in g v ari ou s
W e n ot e ag ai n t ha t am ou nt s o wedto Bo nn ie as the surv iv in g s po us e were 1 5 al read y tak enin to acco un t i n c om pu ti ng th e ta xabl e es ta te . See s up ra n ot e 7 an d acco m panyin g t ex t. The on ly oth er b en efi ci ari es un de r Jo se ph ’s wil l wer e h is fir st wife an d t he ir f

ou r ch il dr en , who were ea chto rece iv e $ 25 ,00 0 c as h.- 11 -

[* 11 ] ot he r trus t-l ev el de du ct io ns , th e Tru strep orte d i nc om e o f al m os t $ 72 0,0 00
an d a n i nc om e-d is tri bu ti on de du ct io n i n t he same am ou ntfordi st rib ut io ns m ad e to th e si bl in gs . Shanaan d B ret t’s Sc he du le s K-1 , Ben efi ci ary’ s Sh are o f In co m e,

1 6 Deduc ti on s, Cr ed it s, et c., each rep orte d ane t l on g- te rm cap it al ga inof n earl y $3 60 ,00 0. Alm os t fo urm on th s l at er, tho ug h, the Trus t fi le d a n a m en de d 2 00 7 re tu rn . On thi s re tu rn , th e Tru stli st edth e sa m e sa le pri ce ($ 91 0,0 00 ), bu t re po rte d ane w an d n earl y

do ub le d b as is , whi chreduc edth e Tru st ’s cap it al ga in . Sha naan d Bret t’s am en de d S ch edul es K-1 e achsh owe d areduc edlo ng -te rm cap it al ga in of ab ou t $ 31 0,0 00
. Bu t the si bl in gs see m edto ba lkat r ep orti ng an y ga in at a ll . Bret t an d h is wife fil edth ei r 20 07 return i n J un e 2 00 8 (b efo re the Trus t fi le d i ts am en de d return) , andSh an a an d h er h us ba ndfil edth ei rs inSep te m be r 20 08 (aft er the Trus t fil edth e am en de d re tu rn ). Altho ug h B ret t an d S ha naeach ha d aK-1 fr om th e Trus t s ho win g o ve r $3 00 ,00 0 i n n etlo ng -te rm cap it al ga in , nei th er o f th em
A tru stis ge ne ral ly allo wedto de du cttax ab le in co m e d is tri bu te d t o i ts 1 6 be ne fic ia rie s. See sec s. 6 51 , 66 1. Th e in co m e-d is tri bu ti on de du ct io n “ ‘im pl em en ts th e h e-wh o- ge ts -th e-i nc om e-p ay s- th e-t ax pri nc ip le . If a trus t k eep s in co m e, th e trus t i s s up po se d t o p ay tax on it . Butif atru stdi strib ut es in co m e, th e be ne fic ia ry

is supp os edto pa y

th e ta x.’” Dani el s v . Comm is si on er, T.C. Mem o. 20 12 -3 55 , at * 3 n .1 (quo ti ng Tarp o v . Comm is si on er, T.C. Mem o. 2 00 9- 22 2)
.- 12 -

[* 12 ] rep orte d a ny of th is ga in on th ei r 20 07 in di vi du al tax returns . Thi s 1 7
m is m at chsp urredth e Co m m is si on er t o s en d t he m

each a CP2 00 0 No ti ce-- to Bret t
an d Ki m be rle e inFeb ru ary 20 09 , andto Bran do n a ndSh an a in Aug us t 2 00 9. 1 8 Each no ti ce l is te d apro po se d b al an ce due , andst at edth atth e am ou ntof i nc om e th ey rep orte d o n t he ir r es pe ct iv e 2 00 7 F orm s 1 04 0 d idn’t m at chth e am ou nt s rep orte d o n d oc um en ts th e IRS rece iv edfro m th ird -p arty

pa y or s. Fo r Bre tt , th os e un rep orte d a m ou nt s i nc lu de d n otjus t the lar ge cap it al ga in fro m th e o rig in al Trus t K-1 , bu t al so $9 24 of u nr ep orte d i nt eres t i nc om e (wh ic h h e h as si nc e st ip ul at ed th athe rece iv ed ); f

or Sh an a, th os e unr ep orte d a m ou nt s wer e th e la rg e cap it al ga in fro m th e am en de d Tru stK-1, an d $ 15 ,00 0 o f no ne m pl oyee co m

pe ns at io n fr om

a Fo rm 10 99 -MI SC i ss ue d b y

Ogl e Pro du ct io ns , Inc . Each n ot ic e al so pro po se d a n

Bran do n a ndSh an a la te r subm it te d a n am en de d 2 00 7 i nd iv idua l re tu rnto 1 7 th e IRS inNov em

be r 20 09 , bu t as we di sc us s i nf ra n ot e 2 0, tha t re tu rnis no t at is su e h ere. The IR S se nd s t hi s n ot ic e (ca ll edintax jargo n a“ CP2 00 0 No ti ce”) to a 1 8 ta xp ay er wh enth e in co m e an d p aym en t i nf orm at io n t ha t the IRS h as on fil e fro m th irdparti es forth attax pa y er d oe sn ’t m at chth e en tri es rep orte d o n t he tax pay er’s return. Se e IRS , Und ers ta nd in g Yo urCP2 00 0 No ti ce, ht tp ://www.ir s.g ov /In di vi du al s/Und ers ta nd in g- You r-CP 20 00 -No ti ce (l as t v is it ed Ju ly 31, 2 01 3)
.- 13 -

[* 13 ] accu racy-rela te d p en al ty. Neit he r co up le pa id , andth e Co m m is si on er fo ll owe d up wi th a no ti ce o f de fic ie nc y . 1 9 Afte r rec ei vi ng hi s n ot ic e o f de fic ie nc y , Bret t v is it edlo cal CPA Pau l Si m m on s. Bre ttsh owe d h im th e n ot ic e as well as h is fathe r’s es ta te -ta x re turnto
as k h im whethe r th e Tru stpro pe rly repo rte d t he ba si s o f th e Ran chInt eres t tha t l ed to th e lo ng -te rm

cap it al ga in on th e K-1 s. Aft er re vi ewin g t ho se pape rs , Simm on s te st ifi edth at“ itjus t d idn’t s eem rig htto m e th atso m ethi ng in19 94 was wo rth
no th in g h ard ly.” Sim

m on s t he n m ad e a ca ll to a fri en d wh om he ha d u se d t o pe rfo rm ap pr ai sa ls inth e p as t t o a skhi m to lo okat api ece o f pr op erty to de te rm in e it s 1 99 4 v al ue . Thatfri en d was Ric ha rdGrey
. Grey to ldSimm on s t ha t h e h adcal le d t he rig htgu y --h e was th e o ne who pe rfo rm edth e 1 99 4 app rai sa l fo r th e Ran chInt eres t. Grey the n t ol d S imm on s tha t he ha d app rai se d t he Ran chInt eres t at$1 .96 3 m il li on an d e ve ntua ll y ga ve hi m a co py of h is fie ldno te s. Thi s p ro m

pt edSimm on s t o s ub m it , inNov em be r 20 09 , y etan ot he r am en de d 20 07 return fo r th e Tru st . This sec on d a m en de d re tu rnrep orte d t he same sal e Not e th atBret t’s CP 20 00 was b as edon th e Tru st ’s ori gi na l K-1 , bu t 1 9 Sh an a’s was ba se d o n t he Trus t’s am en de d K-1 . The Co m m is si on er n ow b el ie ve s th atth e b as is rep orte d o n t he Trus t’s o rig in al return was co rrec t. The Co m m is si on er thu s as ke d a t tria l t o s eekanin crea se inth e d efi ci en cy forSh an a ba se d o n h er o rig in al K-1, an d we g ran te d h is m ot io n.- 14 -

[* 14 ] pr ic e, bu t n ow re po rte d aba si s o f sl ig ht ly less th an$9 00 ,00 0, wh ic h s hr an k th e g ai n t o l es s than $ 25 ,00 0. Si m m on s ex pl ai ne d i n a n a tt ach m en t tha t the reduc ti on incap it al ga in was “ du e to anerro r in th e co m pu ta ti on of b as is forth e [Ran chInt eres t].” Trus t-l ev el de du ct io ns co m pl et el y wip edou t tha t g ai n, an d Bret t an d S ha na ’s new K-1 s s ho wedno lo ng -te rm cap it al ga in
. In re po rti ng an

2 0 in he rit edba si s i n the Ran chInt eres t tha t was m uc h h ig he r th anit s s pe ci al -u se va lu at io n, Si m

m on s re li edon Rev enue Ru li ng 54 -9 7, 1 95 4- 1 C .B. 11 3. He de sc rib edth atrev enue rul in g a s s ay in g t ha t “ if the re was a m is take m ad e an d you
co ul d p ro ve th atth e m is ta ke was m ad e an d youha d e vi de nc e th atth e v al ue was wro ng , th eny ouco ul d u se [th e n ew] val ue .” The Co m m is si on er s tu ckby his no ti ces of d efi ci en cy . He arg ue s tha t ev en if t he Trus t’s i ni ti al va lu e fo r th e Ran chInt eres t was to o l ow, p erh ap s ab surd ly lo w, for l an d i n C al ifo rn ia , itwas s ti ll th e v al ue on whi chth e es ta te cal cu la te d i ts
es ta te tax an d t hu s t he va lu e th atth e Co de an d p rece de ntco m pe l the he irs to us e in
co m pu ti ng th ei r ga in when pa rt o f th atin te res t i s s ol d. Sh an a subm it te d an am en de d 2 00 7 re tu rnaro un d the same tim e th at 2 0 rep orte d t he am ou nt s l is te d o n t he Trus t’s fro m th e la te st20 07 Trus t re tu rnan d t he $1 5,0 00 of n on em

pl oyee co m

pe ns at io n i nc om e fro m

Ogl e Pro du ct io ns , Inc . It ap pe ars th e Co m

m is si on er d idn’t ac cep t thi s amend edreturn, n ordi d h e h av e an y ob li ga ti on to do so . See Fayegh i v . Comm is si on er, 2 11 F.3d50 4, 5 07 (9th C ir. 20 00 ), aff’g T.C. Me m o. 1 99 8- 29 7. Th e p art ie s h av e si nc e st ip ul at edth atSh an a ha d $ 15 ,00 0 i n “ un rep orte d i nc om e” fro m Ogl e Pro du ct io ns , Inc
.- 15 -

[* 15 ] The Van Al en s an d t he Tom li ns on s fi le d t im el y pe ti ti on s, an d we
co ns ol id at edth ei r cas es fortri al inSanFran ci sc o. Bo th co up le s wer e Cal ifo rn ia
res id en ts when th ey

fil edth ei r pe ti ti on s an d re m ai n s o t od ay .

OPINION The di sp ut e h ere i s o ve r ba si s- -th e p art ie s ag ree t ha t the Trus t re cei ve d $9 10 ,00 0 i n p ro ceed s fr om th e sa le of t he eas em en t. The y di sa gr ee, h owe ve r, on th e am ou ntof p as st hr ou gh cap it al ga in fro m th os e p ro ceed s tha t the si bl in gs sh ou ldha ve rep orte d. To de te rm in e th atcap it al ga in , we m us t fi rs t d eci de what effe ctth e Ran chInt eres t’s s ect io n 2 03 2A v al ua ti on ha s o n c al cu la ti ng th e Tru st ’s ba si s fo r th e sa le . Sha naan d B ret t ar gu e th atth e 2 03 2A v al ue do es n’t b in d t he Trus t. The y

say tha t Gre y ’s app rai se d v al ue of t he Ran chInt eres t p ro vi de s cl ear an d c on vi nc in g e vi de nc e th atso m eo ne ot he r th anth ey m ad e a m is ta ke when rep orti ng th e 2 03 2A v al ue . They al so arg ue th atwe sh ou ldlo okto Grey ’s ap pr ai se d v al ue as ast art in g p oi ntto red et erm in e wha t s ho ul d h av e b een th e 20 32 A val ue --n otto in crea se th ei r fat he r’s ta xabl e es ta te , bu t ra th er o nl y to
reca lc ul at e th e Tru st ’s bas is inth e Ran chInt eres t. 2 1

Ind eed , th e Co m

m is si on er co ul dn ’t red et erm in e th e Ran chInt eres t’s 2 1 20 32 A val ue rep orte d o n t he Fo rm 70 6 b ecau se th e st atut e o f li m it at io ns ha s ru n. See s ec. 6 50 1.- 16 -

[* 16 ] I. Sect io n 2 03 2A Al te rn at e Use Valu at io n W e st artwith a n e xp la na ti on of t he in te rp la y be twee n s ect io n 2 03 2A an d ge ne ral pri nc ip le s o f es ta te -ta x l aw. One o f th os e g en eral pri nc ip le s i s tha t the
va lu e o f pr op erty

forest at e-t ax pu rp os es is it s fa ir m ark etva lu e. See s ec. 2 03 1; Est at e o f Elk in s v . Comm is si on er, 1 40 T.C. __ _, _

__(sl ip op . at 3 7) (Mar . 11 , 20 13 ); s ec. 2 0.2 03 1- 1( b) , Est at e Tax Reg s. An d fa ir m ark etva lu e is th e h ig he st
an d b es t u se of t he pro pe rty onth e v al ua ti on da te . See Est at e o f Kah n v . Co m m is si on er, 1 25 T.C. 22 7, 2 40 (20 05 ); Es ta te of M it ch el l v . Commis si on er, T.C. Mem o. 2 01 1- 94 , 20 11 W L 15 98 62 3, at*5 . Sect io n 2 03 2A i s anex cep ti on to th is ge ne ral rul e an d e m

bo di es a co ng res si on al jud gm en t tha t the he irs of s m al l bu si ne ss es an d fa rm s s ho ul d n otbe for cedby death t o s el l the ir f am il y ’s leg acy to pa y th e ta xm an . See LeFe ve r v. C omm is si on er, 1 00 F.3d77 8, 7 82 (10 th Cir
. 19 96 ), aff’g 1 03 T.C. 52 5 (1 99 4) . As we sa idinEst at e o f Mad do x v . Co m m is si on er, 9 3 T.C. 2 28 , 23 2 (1 98 9) : Co ng res s was ob vi ou sl y

tro ub le d tha t fa m il y

farm s m ig htha ve to be so ldto pa y

est at e ta xe s upo n d eath o f th e o wne r if th e v al ue of th e rea l es ta te were d et erm in edat i ts fai r m ark etva lu e whi chintu rn de pe nd edup on it s “ hi gh es t an d b es t u se .” Sin ce s uc h re al est at e m ig htwell be a te m

pt in g t arg etfor

real est at e d ev el op ers , th e “ hi gh es t an d b es t u se ” te stco ul d re su ltina va lu at io n b as edon de ve lo pm en t pu rp os es subs ta nt ia ll y

inex ces s o f th e v al ue of t he pro pe rty for u se as a farm , with aco nc om it an t l arg e in crea se inest at e ta xe s. Co nt in ue d op erat io n o f th e fam il y

farm m ig htth us be injeop ardy si nc e a s al e o f- 17 -

[* 17 ] th e farm

mig htbe th e o nl y

way to m eetth e in crea se d t ax bu rd en . It was to ad dr es s thi s p ro bl em th atsec ti on 20 32 A was en act ed
. Sect io n 2 03 2A’s cu re fo r th is pro bl em is to crea te anex cep ti on to th e ge ne ral pri nc ip le th atanest at e’s pr op erty is va lu edat i ts fai r m ark etva lu e, an d in st eadall ow i t t o c ho os e to va lu e so m e p ro pe rty onit s ac tu al us e atth e ti m e o f th e d eced en t’s d eath. LeFev er, 1 00 F.3dat 7 82 . To el ectth e sp eci al -u se 2 2
va lu at io n, s ect io n 2 03 2A re qu ire s tha t the de ced en t m us t h av e b een a ci ti zen or res id en t o f th e Uni te d S ta te s; th e p ro pe rty m us t b e qua li fie d re al pro pe rty; th e
Sect io n 2 03 2A al lo ws fo r rea l p ro pe rty us edinfarm in g t o b e v al ue d o n 2 2 th e b as is of i nc om e cap it al iz at io n. Se e LeFev er v . Comm is si on er, 1 03 T.C. 52 5, 53 2 (1 99 4) , aff’d, 1 00 F.3d77 8, 7 82 (10 th Cir . 19 96 ). The C od e, ho wev er, l im it s th e sp eci al us e v al ua ti on : “ The ag gr eg at e d ecre as e in th e v al ue of qua li fie d re al pr op erty * * * wh ic h re su lt s fr om th e * * * [el ect io n] * * * s ha ll no t ex ceed $7 50 ,00 0.” Sec. 2 03 2A( a)(2 ). (Fo r es ta te s o f de ced en ts dying ina cal en da r y ear aft er 1 99 8, the $7 50 ,00 0 c ei li ng on th e ag gr eg at e v al ua ti on de crea se is ad jus te d fo r in fla ti on . See s ec. 2 03 2A( a)(3 ) (ad de d b y th e Tax pa y er Re li ef Actof 1 99 7, Pub. L. No. 1 05 -3 4, s ec. 5 01 (b ), 11 1 S ta t. at84 5- 46 )). The Co urt h as alr eady no te d t he ag gr es si ve pre di sc ou nt edva lu at io ns of t he Est at e’s real pro pe rty. T hi s se em s t o h av e en ab le d t he est at e to us e n earl y th e en ti re $ 75 0,0 00 . See s up ra no te s 1 2 a nd13 an d a cco m pa nyin g t ex t. Subjec t t o t ha t l im it at io n, the be ne fit s o f th is sp eci al us e v al ua ti onm ay be co m bi ne d wi thot he r va lu at io n d is co un ts inso m e ci rcu m st an ces . Com pare Es ta te of Mad do x v . Comm is si on er, 9 3 T.C. 2 28 , 22 9- 31 (19 89 ) (d is al lo win g m in or it y in te res t d is co un t), wi thEst at e o f Hoo ve r v. C omm is si on er, 6 9 F .3d10 44 (10 th Ci r. 19 95 ) (d is ti ng ui sh in g Es ta te of M ad do x a ndall owi ng a m in or ity in te res t di sc ou nt ), rev ’g 10 2 T.C. 7 77 (19 94 ). Thes e co m pl ex va ria ti on s o f se ct io n 2 03 2A va lu at io n a re n oton th e p ro gr am inth es e cas es , andwe’ll d is cu ss th em no furth er.- 18 -

[* 18 ] ex ecu to r m

us t el ectto ap pl y

sec ti on 20 32 A; an d- -p ay att en ti on he re-- each pe rs on who ha s an in te res t i n t he pro pe rty m us t s ig n a ndfil e a p ers on al li ab il it y ag reem en t. Sec . 20 32 A(a), (b ), (d ). The p art ie s ag ree t ha t J os ep h’s es ta te m etall th e requi rem en ts to ele ctth e sp eci al -u se va lu at io n fo r th e Ran chInt eres t. The ir di sp ut e is ab ou t the effe ctth atth e es ta te ’s val ua ti on ha s o n t he Trus t’s b as is inth e Ran chInt eres t. II. Bas is of I nh eri te d P ro pe rty W e n ow l oo k a t the rul es forfig ur in g o utth e b as is of i nh eri te d p ro pe rty. The ba si s o f in he rit edpro pe rty is g en eral ly equ al to it s fa ir m ark etva lu e atth e da te of t he de ced en t’s d eath. Se c. 10 14 (a)( 1) . Howev er, “ in th e cas e o f an el ect io n u nd er s ect io n 2 03 2A,” t he ba si s o f pr op erty acqui redfro m

a de ced en t i s

“ it s v al ue [as ] de te rm in edun de r su chsec ti on ”--n otit s fa ir m ark etva lu e. Sec. 10 14 (a)( 3) ; s ee al so sec . 1.1 01 4- 3( a), In co m e Tax Reg s (“ [T]he v al ue of p ro pe rty
as of t he da te of d eced en t’s d eath a s ap pr ai se d fo r th e p ur po se of the Fed eral est at e ta x o r th e al te rn at e v al ue as app rai se d fo r su chpurp os e, whi ch ev er i s ap pl ic ab le , sh al l b e d eem edto be it s fa ir m ark etva lu e”). Th is m ak es sen se , as t he U.S. Cou rt of Cla im s ap tl y

ex pl ai ne d: The id en ti ty of th e two va lu es inth e co ng res si on al m in d i s cl earl y in di cat edby the factth atth e el ect io n b y th e d eced en t’s es ta te to us e th e al te rn at e v al ua ti on da te bi nd s the subs eque ntin co m e ta x p ay er.- 19 -

[* 19 ] Thi s wo ul d b e o fte n m ean in gl es s i f th e v al ue fig ur e ch os endi d no t b in d h im

als o. The su cces s o f anest at e in ge tt in g t hr ou gh IRS au di t a l ow va lu at io n o f pr op erty

m ay tu rnin to a Pyrrh ic vi ct ory inth e ev en t o f subs eque ntin co m e ta xa ti on . This is a m at te r pr act it io ne rs inth e fi el d are wel l awa re o f an d i t t en ds to min im iz e d is pu te s as to th e v al ua ti on of est at es , wher e as se ts ot he r th anli st edsec ur it ie s ar e in vo lv ed , and es pe ci al ly w ith re al pro pe rty. It furth ers th e co nc ep t o f se lfas se ss m en t. * * * Hes s v . Uni te d S ta te s, 5 37 F.2d45 7, 4 62 -6 3 (C t. Cl . 19 76 ). Thi s m ean s tha t the Trus t’s i nh eri te d b as is inth e Ran chInt eres t s ho ul d b e it s s ect io n 2 03 2A v al ue . 2 3 Afte r acc ou nt in g fo r trus t-l ev el de du ct io ns an d t he di st rib ut io ns m ad e b y th e Tru st to it s b en efi ci ari es , th atba si s wo ul d re su ltinlo ng -te rm cap it al ga in s o f ne arl y $3 60 ,00 0 t o b ot h S hanaan d B ret t. III. Rev enue Ru li ng 54 -9 7 The si bl in gs , ho wev er, fee l tha t the y canov erco m e th is strai gh tfo rward ap pl ic at io n o f th e Co de with R ev enue Ru li ng 54 -9 7, wh ic h t he y arg ue let s the

Here the re’s an ot he r ni gg li ng de ta il : Th e es ta te rep orte d afin al sec ti on 2 3 20 32 A val ue of $ 98 ,73 5, b utth e Co m m is si on er co nc ed edon bri ef tha t $ 10 2,2 26 is th e co rrec t v al ue . (Thi s m ay refl ect , forex am

pl e, th e co stof i m

pr ov em en ts to th e Ran ch , whi chwou ldin crea se th e Tru st ’s bas is .)- 20 -

[* 20 ] Trus t re po rt aba si s i n t he Ran chInt eres t d iff eren t fr om

it s 2 03 2A v al ue . 2 4 Tha t re ve nu e ru li ng says:

Fo r th e p ur

po se of d et erm in in g t he ba si s und er s ect io n 11 3( a)(5 ) of

th e In te rn al Rev enue Co de of p ro pe rty tran sm it te d a t de ath (f orde te rm in in g g ai n o r lo ss onth e sa le th ereo f orth e de du ct io n fo r de pr eci at io n) , th e v al ue of t he pro pe rty as d et erm in ed fo r th e p ur

po se of t he Fed eral est at e ta x s ha ll be de em edto be it s fa ir m ark etva lu e atth e ti m e o f acqui si ti on . Excep t wh ere t he tax pay er i s es to pp edby his pre vi ou s ac ti on s o r st at em en ts , su chva lu e is no t co nc lu si ve bu t i s a p res um pt iv e v al ue whi chm ay

be reb ut te d b y

cle ar an d c on vi nc in g e vi de nc e. Rev . Rul . 54 -9 7, s up ra. 2 5 Taxp ay ers canrel y

on publ is he d re ve nu e ru li ng s. See sec . 2 4 60 1.6 01 (d )(2 )(v )(d), Sta te m en t o f Pro cedur al Ru le s (“ Rev enue Ru li ng s * * * do no t h av e th e fo rce a ndeffe ctof Tre as ury Depa rtment R eg ul at io ns * * *, b utare publ is he d t o p ro vi de pre ced en ts to be us edinth e d is po si ti on of o th er ca se s, an d m ay be cit edan d re li edup on forth atpu rp os e”). Th ey are n otho wev er b in di ng on us ; s in ce we re vi ew th em on ly as “ th e o pi ni on of alawyer inth e ag en cy .” N. Ind
. Pub. Se rv . Co. v . Comm is si on er, 1 05 T.C. 34 1, 3 50 (19 95 ) (ci ta ti onan d i nt ern al qu ot at io n m ark s o m it te d) , aff’d, 1 15 F.3d50 6 (7 thCir . 19 97 ); s ee al so Tapr oo t Adm in . Serv s., In c. v. Co m m is si on er, 1 33 T.C. 20 2 (2 00 9) , aff’d, 6 79 F.3d11 09 (9 th Cir . 20 12 ). W e d o, h owe ve r, tre atrev enue rul in gs as c on ces si on s b y th e Co m m is si on er wh ere t ho se rul in gs are re le va ntto ou r di sp os it io n o f th e cas e. Rau enho rs t v . Commis si on er, 1 19 T.C. 15 7, 1 71 (20 02 ) (l is ti ng cas es ). In t he ne arl y

si xt y y ears si nc e it s i ss ua nc e, we ha ve cit edth is rev enue 2 5 ru li ng twi ce-- an d o ne of t ho se cit at io ns was i n adi ss en t. See Fel dm anv. Co m m is si on er, T.C. Mem o. 1 96 8- 19 , 19 68 Tax C t. Me m o LEXIS 2 75 , at * 13 (“ It is well set tl edth atth e v al ue at wh ic h p ro pe rty is re tu rn edforest at e ta x p ur po se s i s pr im a fac ie th e v al ue forth e p ur po se of c om

pu ti ng de pr eci at io n a ndga in or l os s on subs eque ntsal e. Su chva lu e is no t co nc lu si ve bu t i s a p res um pt iv e v al ue whi ch m ay be reb ut te d b y

cle ar an d c on vi nc in g e vi de nc e. The v al ue at wh ic h p ro pe rty is (co nt in ue d...)- 21 -

[* 21 ] Thro win g alas so aro un d t ha t l an gu ag e, Sh an a an d B ret t try to ti e up t he ir
am pl e ev id en ce-- cl ear a ndco nv in ci ng ev id en ce, the y say--th atth e rep orte d s ect io n 20 32 A val ue was wro ng . They rel y on Grey ’s “ ap pr ai sa l an d c on cl us io n o f va lu e” of $1 .96 3 m il li on , whi chth ey say “ is ex tre m el y

cred ib le as i t was pre pa redne ar th e d eced en t’s d eath, i n h is cap aci ty as a d ep uty pro ba te refe ree, fo r th e p ur po se s of pro ba ti ng th e p ro pe rty andno t p rep aredinres po ns e to li ti ga ti on .” Usi ng a fai r m ark etva lu e o f $1 .96 3 m il li on , th ey askth at --af

te r ap pl y in g the “ reduc ti on infai r m ark etva lu e li m it at io n” un de r se ct io n 2 03 2A( a)(2 )--we i nc reas e th e 2 03 2A v al ue to ab ou t $ 1.3 75 m il li on forpu rp os es of d et erm in in g t he Trus t’s i nh eri te d b as is in th e Ran chInt eres t. 2 6 (...co nt in ue d) 2 5 returne d fo r es ta te tax pu rp os es is , ho wev er, en ti tl edto gre atweig ht ”); Est at e o f Mu el le r v. C ommis si on er, 1 07 T.C. 18 9, 2 26 -2 7 n .23 (19 96 ) (Be gh e, J., di ss en ti ng ) (n ot in g C omm is si on er’s i nc on si st en t treat m en t o f sh ares at i ss ue ) (“ It wou ldbe in co ns is te ntto ho ld* * * s ha res to ha ve ha d o ne va lu e fo r es ta te tax pu rp os es an d ano th er fo r in co m e ta x p ur po se s. Th ere i s a p res um pt io n t ha t the es ta te tax va lu e o f anass etis co rrec t an d app li es als o t o d et erm in e in co m e ta x ba si s.”) , aff’d, 1 53 F.3d30 2 (6 th Cir . 19 98 ). Here’s the m ath: As m en ti on edsupr a n ot e 2 2, the ag gr eg at e reduc ti on 2 6 fro m th e fai r m ark etva lu e o f al l p ro pe rti es th atha ve ele ct eda 20 32 A sp eci al us e va lu at io n c an ’t exc eed$7 50 ,00 0. Se e se c. 20 32 A(a)(2 ). Sha naan d B rett ar gu e th atsi nc e th e Ran chInt eres t co ns ti tu te d 7 8.3 2% o f th e fai r m ark etva lu e o f th e qu al ifi edpro pe rti es (on th e b as is of a$1 .96 3 m il li onfai r m ark etva lu e), the Ran ch In te res t s ho ul d b e al lo cat edjus t o ve r 78 % of t he all owabl e $ 75 0,0 00 de du ct io n. See B or is I. Bit tk er & Lawre nc e Lokke n, Fe de ral Taxa ti on of I nc om es , Est at es (co nt in ue d...)- 22 -

[* 22 ] W e th in k t hi s wo ul d b e a d iff ic ul t ar gu m en t t o wi n wi th . Sect io n 1 13 (a)( 5) of th e In te rn al Rev enue Co de of 1 93 9 i s s ub st an ti al ly ide nt ic al to curren t s ect io n 10 14 (a)( 1) , anditmig htbe reas on ab le fortax pay ers to rel y on th is rev enue rul in g if t he y were ca lc ul at in g t he ir b as is un de r se ct io n 1 01 4( a)(1 ). But the Van Al en s an d t he Tom li ns on s ar e arg ui ng ab ou t b as is th atth e Co de tel ls us to cal cu la te
un de r se ct io n 1 01 4( a)(3 ), whi chsays th atin he rit edba si s s ho ul d e qu al it s 2 03 2A
va lu e. The si bl in gs , ho wev er, s ay itwou ldbe wron g t o s ad dl e th em with t he lo wba ll va lu e o f th e es ta te -ta x re tu rn , bec au se itwas an e xe cu to r an d g ua rd ia n ad li te m who si gn edoff

onth atva lu e, no t the two he irs th em se lv es . W e d on ’t th in k
we ne edto set tl e th e arg um en t ab ou t the ol d re ve nu e ru li ng ’s app li cab il it y he re, be cau se th e Co m

m is si on er p oi nt s u s t o adi ffer en t, an d p os si bl y cle arerdo ctrin e th atm ig htso lv e th is cas e--t he du ty of co ns is te nc y . He says th atth is du ty of

(...co nt in ue d) 2 6 an d Gi fts , par a. 13 5.6 .7, at13 5- 11 0 (2 d e d. 1 99 3) (whe n t he ele ct io n c ov ers two or m or e qua li fie d p ro pe rti es an d the reduc ti on inva lu e ex ceed s the $7 50 ,00 0 l im it , th e reduc ti on sh ou ldbe ap pl ie d pr o r at a am on g t he pro pe rti es .) Bas edonth at pe rcen ta ge , Shanaan d B ret t ac kn owl ed ge , th e Ran chInt eres t co ul d o nl y be reduc edfro m

$1 .96 3 m il li on to ab ou t $ 1.3 75 m il li on un de r se ct io n 2 03 2A.- 23 -

[* 23 ] co ns is te nc y , as d ev el op edinou r cas el aw, tru m ps th e si bl in gs ’ in vo cat io n o f th e o ldRev enue Ru li ng . 2 7 IV. Dut y

of C on si st en cy The du ty of co ns is te nc y

“ se rv es to pre ve ntin equi tabl e sh ift in g o f po si ti on s by tax pa y ers .” Ja ni s v . Comm is si on er, 4 61 F.3d10 80 , 10 85 (9t h C ir. 2 00 6) , aff’g T.C. Mem o. 2 00 4- 11 7. Anequi tabl e d oc tri ne als o kno wn as qu as i-e st op pe l, the du ty of co ns is te nc y

“ is ba se d o n t he th eo ry

th atth e ta xp ay er o wes th e Co m m is si on er the du ty to b e co ns is te ntwith h is tax tre atm en t o f it em s an d wi ll
no t b e p erm it te d t o b en efi t fr om hi s o wn p rio r erro r orom is si on .” LeFev er, 1 03 T.C. at 5 41 . The Ni nt h C irc ui t h as op in ed :

“ Whe n a ll is sai d anddo ne , we are o f th e o pi ni on th atth e dut y of co ns is te nc y

no t o nl y refl ect s b as ic fai rn es s, b utals o s ho ws a p ro pe r reg ardforth e ad m in is tra ti on of ju st ic e an d t he di gn it y of t he law. The law s ho ul d n otbe su cha[n ] id io t tha t i t ca nn otpre ve nta ta xp ay er fro m ch an gi ng th e h is to ric al fact s fr om y ear t o year in ord er t o e sc ap e a fai r sh are o f th e b ur de ns of m ai nt ai ni ng ou r go ve rn m en t. Our ta x syste m de pe nd s upo n s el f as se ss m en t an d h on es ty, rathe r th anup on hi di ng of t he pe a o r fo rg et fu l t erg iv ers at io n.” Ja ni s, 4 61 F.3dat 1 08 5 (quo ti ng Est at e o f Ash m anv. Co m mis si on er, 2 31 F.3d 54 1, 5 44 (9t h C ir. 2 00 0) , aff’g T.C. Mem o. 1 99 8- 14 5) . The Ni nt h C irc ui t h as li st edth ree c on di ti on s t ha t we h av e to fin d b efo re we ca n i nv ok e th is du ty: W e n ot e th atth e si bl in gs do no t ci te , m uc h l es s re ly on, s ect io n 1 .10 14 -3 , 2 7 In co m e Tax Reg s., an d we t he refo re d o n otad dr es s i t.- 24 -

[* 24 ] • A rep res en ta ti on or r ep ort b y th e ta xp ay er;
• rel ia nc e b y

th e Co m m is si on er; an d
• anatt em

ptby the tax pa y er aft er the st atut e o f li m it at io ns ha s ru n t o ch an ge th e p rev io us rep res en ta ti on or t o re ch arac te riz e th e si tu at io n in su cha way

as t o h arm

th e Co m m is si on er. See i d.; Est at e o f Ash m an , 23 1 F .3dat 5 45 . If all th os e el em en ts are p res en t, the Co m m is si on er m ay

actas i f th e p rev io us rep res en ta ti on --o n wh ic h h e rel ie d-
- co nt in ue d t o b e true , eve n i f itis no t. An d t he tax pa y er i s es to pp edto ass ertth e co nt rary. W e ad dr es s ea chele m en t. A. Rep res en ta ti on by the Taxp ay ers The bi g d is pu te he re i s o ve r th e fi rs t re qu ire m en t-- na m el y whethe r th e ta xp ay ers he re m ad e a “ rep res en ta ti on ” o n the est at e-t ax return. Sh an a an d B ret t arg ue th atth ey

co ul dn ’t hav e d on e so be cau se ne it he r of th em ha d a ny fiduc ia ry po wers or c on tro l o ve r th e es ta te ; the y “ were m erel y

it s b en efi ci ari es .” W e’re no t p ers ua de d. W e co ns id er fi rs t wh ethe r th e si bl in gs co ul d b e th e “ ta xp ay er” wh o i s m ak in g a“ rep res en ta ti on ” o n a n e st at e-t ax return. If i t’s the same tax pa y er wh o’s
m ak in g i nc on si st en t s ta te m en ts at d iff eren t t im es , it ’s an e as y

cas e. Bu t wh at ab ou t a s itua ti on li ke th is on e, whe re i t was anex ecu to r an d agu ard ia n ad li te m- 25 -

[* 25 ] who m ad e th e fi rs t re pr es en ta ti on an d t wo h ei rs (no w adu lt s) who m ak e th e se co nd ? The ca se la w tel ls us th atth e dut y of c on si st en cy

“ ‘is u su al ly und ers to od to en co m pa ss bo th th e ta xp ay er an d p art ie s wi thsu ffi ci en tl y id en ti cal eco no m ic in te res ts .”’ Ja ni s, 4 61 F.3dat 1 08 5 (quo ti ng LeFev er, 1 00 F.3dat 7 88 ). Ther e are lo ts of c as es th atho ldth atth e dut y of c on si st en cy

bi nd s anest at e’s be ne fic ia ry to a rep res en ta ti on m ad e o n a n e st at e-t ax return i f th atbe ne fic ia ry was afiduc ia ry

of th e es ta te . See, e.g ., Esta te of Let ts v. Co m m is si on er, 1 09 T.C. 29 0, 2 98 (19 97 ); Cl uc k v . Comm is si on er, 1 05 T.C. 32 4, 3 33 (19 95 ); J an is v. Co m m is si on er, T.C. Mem o. 2 00 4- 11 7, 2 00 4 WL 10 59 51 6, at*1 1 (l is ti ng cas es ). Bu t the cas es do n’t li mitus to th atsi tu at io n a ndin st eadsay tha t the qu es ti on of wh ethe r th ere i s su ffi ci en t i de nt it y

of i nt eres ts be twee n t he pa rti es m ak in g t he fir stan d s eco nd rep res en ta ti on de pe nd s o n t he fact s an d c irc um st an ces of e achcas e. See, e.g ., Est at e o f Lett s, 1 09 T.C. at 2 98 ; Cl uc k, 1 05 T.C. at 3 35 ; J an is , 20 04 W L 10 59 51 6, at*1 1. W e th in k i t m ak es th e m os t s en se to gaug e whe th er the sp eci fic eco no m ic in te res ts of t ho se m ak in g the earl ie r an d l at er re pr es en ta ti on s ar e su ffi ci en tl y id en ti cal . Andhe re we h av e to fin d t ha t the y are. Bo thSh an a an d B ret t, an d t he ir fathe r’s es ta te , ben efi te d fr om a reduc edest at e ta x. If t he est at e h adva lu edth e Ran chInt eres t at$1 .37 5 m il li on un de r se ct io n 2 03 2A (t he am ou ntno w ass ert ed- 26 -

[* 26 ] by the si bl in gs ), th e ta x l iabi li ty of th e es ta te wou ldpro babl y ha ve go ne up by ov er h al f a m il li on do ll ars . See fo rm er s ec. 2 00 1( c)(1 ). Und er Ca li fo rn ia pr ob at e la w, th e Tru st --wh ic h wo ul d h av e rec ei ve d m or e th anha lf o f th e v al ue of Jo se ph ’s est at e as it s re si du al be ne fic ia ry --wo ul d h av e b een res po ns ib le forpa y in g ov er h al f of

th atad di ti on al li ab il it y . AndSh an a an d B ret t wer e th e Tru st ’s so le be ne fic ia rie s. Sh an a an d B ret t ar gu e, ho wev er, tha t ev enif t he ir e co no m ic in te res ts were su ffi ci en tl y

id en ti cal , th at ’s st il l n ota cl os e en ou gh rel at io ns hi p t o b in d t he m to th e v al ua ti on rep orte d o n the est at e ta x re tu rn . They po in t o utth atth e Nin th Ci rcu itinJan is als o re qu ire d a“ su ffi ci en t p riv ity of i nt eres t b etweenth e p art ie s.” And , bec au se th ey

weren ’t th e es ta te ’s fiduc ia rie s, the y arg ue “ itis in di sp ut ab le th atth ey di d n otha ve su ffi ci en t p riv it y of i nt eres t.” Let’s t ak e a cl os er l oo k. Si nc e Nin th Cir cu itlaw co nt ro ls he re, we st artwith t he fact s o f Ja ni s. 2 8 Ja ni s d idno t i nv ol ve anin di vi du al tax pa y er try in g t o d is av ow anest at e’s se ct io n 20 32 A sp eci al -u se va lu at io n. In st ead , th e ta xp ay er-h us ba ndinJan is , inhi s cap aci ty as th e co ex ecu to r of hi s fa th er’s es ta te , val ue d h is fathe r’s artco ll ect io n a t Becaus e th es e cas es are ap pe al ab le to th e Nin th Cir cu it , we fol lo w th at 2 8 co urt’s p rece de nt . See, e.g ., Gol se n v . Comm is si on er, 5 4 T.C. 7 42 , 75 7 (1 97 0) , aff’d, 4 45 F.2d98 5 (1 0t h C ir. 1 97 1)
.- 27 -

[* 27 ] ab ou t $ 12 .4 m il li ononth e es ta te -ta x re tu rn . Jan is , 46 1 F .3dat 1 08 2. Aft er ne go ti at io ns with t he IRS, h e ag reedto a va lu e o f ab ou t $ 14 .5 m il li on an d s ig ne d a Fo rm 89 0, Waiv er o f Res tri ct io ns on Ass es sm en t an d C ol le ct io n o f Defi ci en cy an d Accep ta nc e o f Ove ras se ss m en t. Id . As a b en efi ci ary of th e es ta te , he i nh eri te d a po rti onof t ha t co ll ect io n. Id . at 1 08 4. Aft er the st atut e o f li m it at io ns ha d p as se d fo r th e IRS to m ak e fu rth er as se ss m en ts of e st at e ta x, h e cl ai m eda hi gh er m ark et
va lu e as hi s b as is . Id. at10 82 -8 3. We si de d wi th th e Co m m is si on er, h ol di ng th at th e dut y of c on si st en cy

requi redth atth e ta xp ay ers us e as th ei r ba si s the
co ll ect io n’s v al ue rep orte d o n t he est at e ta x re tu rn . See J an is , 20 04 W L 10 59 51 6, at*1 1. The Nin th Cir cu itag reed , st at in g t ha t the tax pay er-h us ba nd“ ha d
ov erl ap pi ng an d c o- ex te ns iv e in te res ts as abe ne fic ia ry an d c o- ex ecu to r of

th e es ta te .” Ja ni s, 4 61 F.3dat 1 08 5. Itth ende te rm in edth atth e ta xp ay er-h us ba nd

“ [a]s anhe ir, * * * ha d a n e co no m ic in te res t i n re du ci ng th e v al ue of t he tax ab le
es ta te , andas aco -ex ecu to r, he ha d p riv it y of i nt eres t wi th th e es ta te , th us m ak in g th e dut y of c on si st en cy

ap pr op ria te un de r th es e ci rcu m st an ces .” Id . (ci ti ng LeFev er, 1 00 F.3dat 7 89 ). Tha t l an gu ag e certa in ly sug ge st s tha t the Nin th Cir cu itbe li ev es th atth e do ctrin e sh ou ldno t b e ap pl ie d t o ju stan y est at e b en efi ci ary. Butth e si bl in gs he re- 28 -

[* 28 ] weren ’t m erel y

jus t b en efi ci ari es of t he est at e th atha d n ot hi ng to do with fil in g t he est at e-t ax return. Ontwo oc cas io ns , Sha naan d B ret t (t hr ou gh hi s gu ard ia n ad

li te m ) ex ecu te d a gr eem en ts forth e es ta te tax return c on se nt in g t o t he el ect io n t o v al ue th e Ran chInt eres t u nd er s ect io n 2 03 2A- -anag reem en t sp eci fic al ly ackn owl ed gi ng th atitwas aco nd it io n p rece de ntto m ak in g t he el ect io n. One m ig htth in k B ret t h as a st ro ng er ar gu m en t-- he di dn ’t si gn eit he r ve rs io n of th e sp eci al va lu at io n a gr eem en t b ecau se he was am in or , andVirg in ia ’s si gn atur e as hi s g uard ia n ad li te m was n othi s re pr es en ta ti on . Cit in g F or d v
. Uni te d S ta te s, 2 76 F.2d17 (Ct . Cl. 1 96 0) , Bret t s ay s tha t “ co urts di sf av orth e ap pl ic at io n o f th e dut y

of c on si st en cy

be cau se of t he in equi ty im po se d upo n a m in or .” Bu t h ere, unl ik e th e ta xp ay ers inFo rd , th e m in or --Br et t-- was rep res en te d by a gu ard ia n ad

li te m , andth atgu ard ia n was requi redto m ak e a rep res en ta ti on on th e es ta te -ta x re turnforth e se ct io n 2 03 2A el ect io n t o b e eff ect iv e. Andas n ot ed earl ie r, ne it he r Bre ttno r Sh an a h av e al le ge d t ha t Vi rg in ialac ke d t he po wer t o a ct
as hi s g ua rd ia n ad

li te m or t ha t h er re pr es en ta ti on bre ach edan y fiduc ia ry du ti es . The y co nt en d tha t the y

ha d n o i nv ol ve m en t i n t he pre pa rat io n o f th e es ta te ta x re turn ; ra th er “ itwas t he ir s te pm ot he r, with wh om th ey ha d astrai ne d rel at io ns hi p, wh o was co nduc ti ng all est at e ad m in is tra ti on du ti es .” Thu s, the y say- 29 -

[* 29 ] th atth ey

“ sh ou ldno t b e d eem edto so m eh ow h av e p riv it y of i nt eres t i n t he Est at e si m

pl y be cau se th ei r st ep m ot he r ha d t he m si gn th e sp eci al va lu at io n ag reem en t.” Ev enif we wer e to co ns tru e th is all eg at io n t o i m pl y a cl ai m th at Bo nn ie ex ert edun du e in flu en ce o r ot he rwis e co erce d S ha naor Vi rg in ia(in he r cap aci ty repre se nt in g B ret t) t o s ig n the ag reem en t, the y ha ve no t p ro ve n a ny facts
supp orti ng su cha cl ai m . Inth is reg ard , we fin d s ig ni fic an t the Nin th Cir cu it ’s cit at io n o f LeFev er with app ro va l wh enm en ti on in g t he term “pr iv ity of i nt eres t.” Se e Jani s, 4 61 F.3d at10 85 . LeFev er al so in vo lv edtax pa y ers trying to di sa vo w a se ct io n 2 03 2A el ect io n. Th e ta xp ay ers , on e o f who m was a n e xe cu to r of

th e es ta te th atele ct ed th e 2 03 2A v al ua ti on , were b oth qua li fie d h ei rs to th e 2 03 2A p ro pe rty. L eFev er, 10 0 F .3dat 7 83 . As requi redby sect io n 2 03 2A, the y bo th si gn edag reem en ts
co ns en ti ng to pe rs on al li ab il ity foran y ad di ti on al tax es im

po se d a s a r es ul t o f th e sa le of t he qu al ifi edpro pe rty or ces sa ti on of aqu al ifyin g u se . Sev eny ears aft er th ey fil edth e el ect io n, the Co m m is si on er d et erm in edth atth ey ha d s to pp edus in g th e p ro pe rty for a qua li fie d u se . The t ax pa y ers arg ue d t ha t the y were n ev er actua ll y en ti tl edto th e sp eci al -u se va lu at io n a ndth atth e th ree- y ear s ta tu te of li mit at io ns barredad di ti on al ass es sm en ts ag ai ns t the est at e. Id
.- 30 -

[* 30 ] W e ap pl ie d t he du ty of co ns is te nc y to pre cl ud e th em

fro m de nyin g t he
va li di ty of th e sp eci al -u se ele ct io n. Se e LeFev er, 1 03 T.C. at 5 25 . In d oi ng so , we to okgre atpa in s t o e m

ph as iz e th e rep res en ta ti on s tha t the tax pa y ers ha d m ad e as qu al ifi edhe irs on th e d eced en t’s es ta te -ta x re tu rn . See i d. at54 4. Onap pe al , th ey co nt en de d t ha t the y

sh ou ldn’t b e b ou ndby repre se nt at io ns m ad e in th e es ta te -ta x return b ecau se th ey

weren ’t th e sa m e ta xp ay er as th e o ne on who se be ha lf t he
es ta te -ta x re turnwas fi le d. Se e LeFev er, 1 00 F.3dat 7 86
. The Tent h C irc ui t re

jecte d t he ir a rg um en t. Alt ho ug h i t ac kn owl ed ge d s om e au th or it y th atanhe ir s ho ul d n otbe bo un d b y rep res en ta ti on s o f th e es ta te ’s
ex ecu to r, id . at 7 88 (ci ti ng Fo rd , 27 6 F .2dat 1 7) , itsai d tha t the “ th e dut y of
co ns is te nc y

is us ua ll y

un de rs to odto en co m

pa ss bo thth e ta xp ay er an d p art ie s wi th
su ffi ci en tl y

id en ti cal eco no m ic in te res ts .” Id . The Ten thCir cu ithe ldth atth e ta xp ay ers --as qu al ifi edhe irs --d idha ve aneco no m ic in te res t i n re du ci ng th e v al ue of th e ta xabl e es ta te . Id. at78 9. Itals o h el d t ha t the tax pa y ers “ ha d s uf fic ie nt pr iv it y of i nt eres t wi th th e es ta te ’s exe cu to r fo r th e ap pl ic at io n o f th e dut y of
co ns is te nc y .” Id . Alth ou gh m en ti on in g t ha t o ne of t he tax pa y ers was a ls o t he
es ta te ’s exe cu to r, th e Ten th Cir cu itpl acedm or e em ph as is onth e fac t tha t b ot h ta xp ay ers m ad e a rep res en ta ti on on th e es ta te -ta x re tu rninth ei r cap aci ti es as qu al ifi edhe irs : Th ey

bo th si gn edth e ag reem en t co ns en ti ng to th e el ect io n, a- 31 -

[* 31 ] pre requi si te to ob ta in in g t he sp eci al -u se va lu at io n. Se e id . at 7 88 -8 9 (“ [B]oth [t axpa y ers ] si gn eda co ns en t fo rm to th e ta ki ng of the ele ct io n” ); i d. at 78 9 (“ Peti ti on er

s rep res en te d t ha t [t he pro pe rti es ] qu al ifi edforth e sp eci al us e va lu at io n e le ct io n i n the est at e ta x re tu rnan d s up po rti ng do cu m en ts .”’ (Em ph as is ad de d) . The Co urt the refo re h el d t ha t the tax pa y ers were b ou ndby the du ty of
co ns is te nc y

to rep res en ta ti on s m ad e o n t he est at e-t ax return. Id . Becau se th e Co m m is si on er re li edon th os e rep res en ta ti on s, an d t he tax pa y ers att em pt edto ch an ge th ei r po si ti on aft er the run ni ng of t he st atut e o f li m it at io ns , th e Ten th Ci rcu itco nc lu de d t ha t we h adpro pe rly app li edth e d oc tri ne . Id. As i n LeF ev er, Sh an a an d B ret t’s af firm at iv e co ns en t t o e le ctth e se ct io n 20 32 A sp eci al us e v al ua ti on as qua li fie d h ei rs di st in gu is he s the m fro m be ne fic ia rie s t ha t h av e n ot hi ng at a ll to do with t he fil in g o f th e es ta te -ta x re tu rn . Cf. Sh oo k v . Uni te d S ta te s, 7 13 F.2d66 2, 6 68 (11 thCir . 19 83 ) (“Non e o f th e * * *
es to pp el cas es ex te ndth e [dut y of c on si st en cy ] do ctrin e to anest at e b en efi ci ary fo r m erel y in di cat in g app ro va l o f th e ex ecu to rs ’ ha nd li ng ov er wh ic h t he y ha ve to ta l
co nt ro l an d t he be ne fic ia ry no ne ”); Fo rd , 27 6 F .2dat 2 2 (r efu si ng to bi ndtax pa y er be ne fic ia rie s o f es ta te to anest at e v al ua ti on of s to ckbe cau se bo th tax pa y ers were m in or s wi th ou t kno wled ge of wh atwas re po rte d o n t he ir f athe r’s es ta te tax return) . The IR S co ul d n othave acce pt edth e sp eci al va lu at io n wi th ou t the- 32 -

[* 32 ] rep res en ta ti on s t he y m ad e o n t he sp eci al va lu at io n a gr eem en ts . See s ec. 20 32 A(a)(1 )(B) , (d) (2 ). Thei r rep res en ta ti on s wer e es se nt ia l t o g et ti ng th atest at eta x re turnfil ed , andso we fin d t ha t the ir e xe cu ti on of t he sp eci al va lu at io n ag reem en ts , to ge th er wi th th ei r sh aredeco no mic in te res ts with t he ir f athe r’s es ta te , bi ndth em

to th e sp eci al -u se va lu at io n re po rte d o n t he est at e-t ax return. B. The Co m

m is si on er’s Rel ia nc e an d Tax pa y ers ’ Ch an ge inPo si ti on Afte r St atut e o f Lim it at io ns Has Ex pi red Sh an a an d B ret t d on ’t app ear t o c on te stth e ex is te nc e o f th e se co ndan d t hi rd el em en ts he re: Rel ianc e b y th e Co m m is si on er an d, af

te r th e li m it at io ns pe rio d, a ch an ge inth e ta xp ay ers ’ po si ti on ina way th at ’s harm fu l t o t he Co m m is si on er. Bu t ju stto be su re, we s pe ci fic al ly findth atth e Co m m is si on er re li edon th e se ct io n 2 03 2A el ect io n. Th e st atut e o f li m it at io ns forass es sm en t o f es ta te tax th en ran . See s ec. 6 50 1( a). And , on ly after i t ra n d idSh an a an d B ret t ar gu e th atth e se ct io n 2 03 2A v al ua ti on was g ro ss ly und ers ta te d. “ The Co m m is si on er was su rel y pr ejud ic edby thi s ch an ge inpo si ti on be cau se th e Co m m is si on er ca n n o l on ge r co ll ectth e ta x d efi ci en cy oc cas io ne d b y

Pet it io ne rs ’ tu rn ab ou t.” J an is , 46 1 F .3dat 10 80 . Accep ti ng Sh an a an d B rett’s i nv it at io n t o re vi se th e se ct io n 2 03 2A el ect io n wou ldall ow the m

to whi ps aw th e Co m

m is si on er. The est at e co ul d e sc ap e th e bu rd enof a n a dd it io na l es ta te tax on $1 .2 m il li on of v al ue whi le at the same tim e- 33 -

[* 33 ] gi vi ng th e Tru st(an d S ha naan d B ret t as it s s ol e b en efi ci ari es ) anex tra$1 .2
m il li on of b as is to off

se t am ou nt s re al iz edfro m th e co ns erv at io n e as em en t s al e as well as f utur e sa le s o f th e Ran chInt eres t. Thi s ca nn otbe rig ht
. W e res t o urho ld in g o n t he un equi vo cal lan gu ag e o f se ct io n 1 01 4( a)(3 ). Tha t s ect io n re qu ire s tha t the Trus t’s i nh eri te d b as is inth e Ran chInt eres t equa l th e se ct io n 2 03 2A s pe ci al -u se va lu at io n. An d we r es t i t as well on a du ty of
co ns is te nc y

th atis by now a b ack gr ou ndpri nc ip le of t ax law. Bu t we al so no te th atth e se ct io n 2 03 2A el ect io n s erv edit s p ur po se he re-- itall owe d a n i ll iqui d
es ta te to pa y

a reduc edest at e ta x, wh ic h l ik el y pre ve nt edth e fo rcedsal e o f rea l pr op erty th atSh an a an d B ret t ev en tu al ly acqu ire d a s the so le be ne fic ia rie s o f th e Trus t. We are no t

sayin g t ha t Sh an a an d B ret t en ga ge d i n a ny sort o f “ ta x ga m es m an sh ip ”, Ja ni s v . Comm is si on er, 4 61 F.3dat 1 08 7, b utwe do reaf firm th e pr in ci pl e th at“ ‘a tax pa y er m ay no t, af te r taki ng a po si ti oninon e y ear t o h is adva nt ag e an d a fte r co rrec ti on for th aty ear i s b arre d, s hi ft t o aco nt rary pos it io n to uc hi ng th e sa m e fac t o r tr an sa ct io n’”, id . at 1 08 6 (quo ti ng Est at e o f Ash m an , 23 1 F .3dat 5 43 ); s ee al so LeFev er, 1 03 T.C. at 5 43 (“ A tax pa y er i n thi s s itua ti on , in no cen t o r ot he rwis e, who ha s al read y ha d t he adva nt ag e o f a p as t al le ge d
m is st at em en t-- su chadvant ag e n ow b ey on d re co up m en t-- m ay no t ch an ge hi s po stur e an d, b y

cla im in g h e sh ou ldhave pro pe rly pai d m or e ta x b efo re, av oi d t he- 34 -

[* 34 ] pre se ntlev y .”). Thu s, ev enif Sh an a an d B ret t co ul d re ly on R ev enue Ru li ng 54 -9 7, s up ra, an d t ha t re ve nu e ru li ng co ul d tru m p t he Co de ’s un am

bi gu ou s la ng ua ge , th e duty

of c on si st en cy

est op s the m

fro m reb ut ti ng ev enby clearan d
co nv in ci ng ev id en ce the sec ti on 20 32 A val ue of t he Ran chInt eres t. V. Pen al ti es Sect io n 6 66 2( a) i m

po se s a 2 0% a ccuracy-rela te d p en al ty on t he po rti on of
an y un de rp aym en t at tri bu tabl e to on e o f fi ve cau se s s pe ci fie d i n s ub se ct io n (b ). The Co m m is si on er ar gu es forim

po si ng th e p en al ty on b ot h o f th e co up le s b as ed
on two of t ho se fiv e cau se s: Negl ig en ce o r in te nt io na l d is reg ardof r ul es or reg ul at io ns , or asubs ta nt ia l u nd ers ta te m en t o f in co m e ta x. Se e se c. 66 62 (b )(1 )
an d (2 ). Negl ig en ce i nc lu de s an y fai lure t o m ak e a rea so nabl e at te m ptto co m pl y with t he pro vi si on s o f th e Co de . Sec. 6 66 2( c). W e h av e sa idth at“ ‘[n]egl ig en ce i s a la ckof due care or t he fai lu re t o d o wh ata reas on ab le an d o rd in ari ly pru de nt pe rs on wou lddo un de r th e ci rcu m st an ces .’ ” Freytag v. Co m m is si on er, 8 9 T.C. 84 9, 8 87 (19 87 ) (quo ti ng Marc el lo v. Co m m is si on er, 3 80 F.2d49 9, 5 06 (5t h C ir. 19 67 ), aff’g o n t hi s i ss ue 43 T.C. 16 8 (1 96 4) an d T.C. Me m o. 1 96 4- 29 9) , aff’d, 90 4 F .2d10 11 (5th C ir. 1 99 0) , aff’d, 5 01 U.S. 86 8 (1 99 1) . A sub st an ti al
un de rs ta te m en t o f in co m e ta x e xi st s i f th e am ou ntof t he un de rs ta te m en t ex ceed s th e g reat er o f 10 % of t he tax requi redto be sh own on th e return o r $5 ,00 0. Se c.- 35 -

[* 35 ] 66 62 (d )(1 )(A). The Co m m is si on er b ears th e b ur de n o f pr oduc ti on , see sec . 74 91 (c), wh ic h re qu ire s h im “ ‘onl y to co m e fo rwardwith e vi de nc e reg ard in g t he ap pr op ria te ne ss of app lying a pa rti cu la r ad di ti on to tax or p en al ty to the ta xp ay er’”, Goo d v . Commis si on er, T.C. Mem o. 2 00 8- 24 5, 2 00 8 WL 47 56 48 3, at*9 (qu ot in g Weir v . Comm is si on er, T.C. Mem o. 2 00 1- 18 4) . W e wil l fo cu s o n ne gl ig en ce. W e fi ndth atth e Co m

m is si on er h as m ethi s b ur de n o f pr oduc ti on . Befo re fil in g h is in di vi du al return, Br et t re cei ve d aK-1 g en erat edfro m th e Tru streturn sh owi ng ov er $ 35 0,0 00 of c ap it al ga in . He andhi s wi fe were well aware o f th e co ns erv at io n- eas em en t s al e th atcrea te d t hi s capi ta l g ai n, b utth ey fai le d t o re po rt
an y of i t o n t he ir r eturn- -a d eci si on we fin d c on tra ry to whata reas on ab le an d
or di na ril y pru de ntpe rs on wou lddo un de r th e ci rcu m st an ces . It’s asi m il ar s to ry

forth e Tom li ns on s. Be fo re fi li ng th ei r return, the y rece iv edtwo K-1s forSh an a fro m th e Tru st --the ori gi na l o ne sh owi ng ov er $3 50 ,00 0 o f cap it al ga in , andanam en de d o ne sh owi ng ov er $ 30 0,0 00 . They to o, ho wev er, fai le d t o re po rt a ny of th atga in on th ei r in di vi du al return. Th ey to o kn ew ab ou t the sal e o f th e co ns erv at io n e as em en t. Onc e th e Co m

m is si on er h as m ethi s b ur de n, t ax pa y ers m us t co m e fo rward with p ers ua si ve ev id en ce tha t the Co m mis si on er’s d et erm in at io n i s i nc orrect .- 36 -

[* 36 ] Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 -4 7 (2 00 1) . Bot h si bl in gs arg ue th atth ey

sh ou ldn’t b e li ab le foran y pe na lty be cau se th atga in st em m edfro m a va lu e th atth ey

ingo odfai th be li ev edto be wron g a fte r th ey co ns ul te d wi th th ei r CPA, Pau l Si m m on s, wh os e ad vi ce was th atth e co stba si s rep orte d fo r th e co ns erv at io n e as em en t s al e was way off
. Tax pa y ers canav oi d t he pe na lt y if t he y sh ow the y

act edwith re as on ab le
cau se an d i n g oo d fa it h. Se e se c. 66 64 (c)( 1) ; s ec. 1 .66 64 -4 (a), In co m e Tax Reg s. W e lo okat a ll rel ev an t fa ct s an d c irc um st an ces --the m os t i m po rta ntof wh ic h i s t he
ex te ntof t he tax pa y ers ’ effo rt t o a ss es s the ir p ro pe r ta x l iabi li ty--to de ci de if t he y di d. Se e se c. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. Us in g s om ewh atcir cu la r reas on in g, the reg ul at io n s ay s tha t re li an ce o n p ro fes si on al advi ce can e st ab li sh
reas on ab le cau se an d g oo d fa it h “ if, u nd er al l the cir cu m st an ces , su chrel ia nc e was reas on ab le an d t he tax pa y er ac te d i n g oo d fa it h.” Id. Ca se law says th atth e si bl in gs m

us t p ro ve th ree t hi ng s t o e st ab li sh reas on ab le rel ia nc e:

• th atSimm on s was a co m pe te ntpro fes si on al who ha d s uf fic ie nt ex pe rti se to jus ti fy

rel ia nc e;

• th atth ey

pro vi de d h im

with n eces sa ry

an d a ccu rat e in fo rm at io n; an d

• th atth ey

actua ll y rel ie d i n g oo d fa it h o n h is jud gm en t.- 37 -

[* 37 ] See Neo na to lo gy Asso cs ., P.A. v. Co m mis si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2) ; s ee al so Ch arl ot te ’s Offic e Bo ut ique , Inc . v. Co m m is si on er, 4 25 F.3d12 03 , 12 12 n.8 (9t h C ir. 2 00 5) (qu ot in g wi th ap pr ov al th e th ree- pr on g t es t), a ff’g 1 21 T.C. 89 (20 03 ). Ass um in g t ha t the y m etth e fi rs t two ele m en ts , bo th th e VanAlen s an d t he Tom li ns on s fa il onth e th ird : Th ey weren ’t relyin g o n S im

m on s’s ad vi ce wh enth ey fil edth ei r returns : Nei th er si bl in g p res en te d a ny evi de nc e th athe or s he so ug htou t-- m uc h l es s re li edon --an y pr of es si on al advi ce o n t he cap it al ga in is su e b efo re fi li ng . Simm on s cr ed ib ly te st ifi edth atth ey

di d n otsee k h im

ou t u nt il Nov em

be r 20 09 , ov er a year aft er the VanAlen s an d t he Tom li ns on s fi le d t he ir r eturns . W e th eref or e su st ai n t he- 38 -

[* 38 ] Co m

m is si on er’s d et erm in at io n t o i m po se th e se ct io n 6 66 2( a) ac cu racyrel at edpe na lty

forfai li ng to rep ort the cap it al ga in
. 2 9

Deci si on s wi ll be en te redfor
res po nd en t.

The Van Alen s al so rece iv edtwo 10 99 -INT st at em en ts fro m W el ls Farg o 2 9 rep orti ng $9 24 of i nt eres t i nc om e, whi chth ey fai le d t o re po rt. Sh an a li ke wis e rece iv eda 10 99 -MI SC fro m Ogl e Pro du ct io ns , Inc ., for $ 15 ,00 0 t ha t s he fai le d t o rep ort. Neg li ge nc e is “ stro ng ly ind ic at ed ” whe re a t ax pa y er fa il s t o re po rt o n h is in co m e ta x re tu rnanam ou ntof i nc om e sh own on anin fo rm at io n re tu rnsu chas a 10 99 . See s ec. 1 .66 62 -3 (b )(1 )(i ), In co m e Tax Reg s. Nei th er co up le pro vi de d a ny ex pl an at io n o f why the y

fai le d t o re po rt t hi s i nc om e. W e th eref or e al so up ho ldth e se ct io n 6 66 2( a) ac cu racy-rela te d p en al ty for p orti on s o f th e und erp aym en ts du e to th es e smalle r omiss io ns .