64 T.C. 889">*890 The respondent determined a deficiency in the Federal estate tax due from the Estate of Horace K. Fawcett in the amount of $ 40,760.83. ¹ The issues before the Court1975 U.S. Tax Ct. LEXIS 85">*88 are: (1) Whether the petitioner is entitled to reduce the value of the gross estate of Horace K. Fawcett by the full amount of a note due to the Travelers Insurance Co. secured by 17,538.2 acres of ranch land in Texas though the total gross estate included only the value of Horace K. Fawcett's undivided one-half interest in this land; (2) the value at the time of his death of decedent's undivided one-half interest in the above 17,538.2 acres of ranch land; and (3) whether petitioner is entitled to a deduction for estate tax purposes for attorney and accountant's fees and trial expenses incurred in the administration of decedent's estate and in this proceeding.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

Eika Mae Fawcett (hereinafter1975 U.S. Tax Ct. LEXIS 85">*89 petitioner), the independent executrix of the Estate of Horace K. Fawcett, deceased (hereinafter the estate), was a resident of Del Rio, Tex., at the time of filing her petition herein. The Federal estate tax return was timely filed with the Director of the Internal Revenue Service Center in Austin, Tex.

Horace K. Fawcett (hereinafter the decedent) died on November 29, 1969. Surviving him were his wife (the petitioner) 64 T.C. 889">*891 and his four children, Horace K. Fawcett, Jr., Frances Fawcett Paret, David York Fawcett, and Curtis J. Fawcett (hereinafter the children). At the time of his death decedent was a resident of Del Rio, Tex.

The decedent was born in October 1904 in Val Verde County, Tex., and throughout his life was engaged in the ranching business in Val Verde County. Decedent married the petitioner in January 1931 and such marriage continued without interruption until his death.

Prior to his marriage decedent purchased approximately 6,700 acres of ranch land in Val Verde County. Subsequent to his marriage decedent acquired approximately 10,800 acres of ranch land by gift or inheritance from his father and mother. All of the above acreage was held by decedent under the1975 U.S. Tax Ct. LEXIS 85">*90 laws of the State of Texas as his separate property and estate; and his wife (the petitioner) neither owned, held, nor claimed any interest in said lands as a part of the community estate of decedent or herself or otherwise. The above acquisitions constitute 17,538.2 acres of contiguous land forming what is commonly referred to as the Horace K. Fawcett Ranch (hereinafter the subject ranch or property).

In September 1964 the decedent and petitioner borrowed $ 235,000 from the Travelers Insurance Co. (hereinafter Travelers). The debt was evidenced by a note cosigned by them and secured by a deed of trust on the subject ranch.

In December 1965, the decedent gave a life estate interest in one-half of the surface of the subject ranch in equal proportions to his four children with remainder in trust for their issue. Such undivided one-half interest was conveyed subject to and charged with one-half of the indebtedness in the then principal sum of $ 216,000 together with one-half of the interest accruing from the date of gift owing to Travelers. The balance due on this note payable to Travelers on November 29, 1969, was $ 210,000 plus accrued interest of $ 1,860.83.

In 1968 portions of1975 U.S. Tax Ct. LEXIS 85">*91 the subject ranch were leased to third parties. The decedent collected all of the rentals due under these leases and issued notes bearing interest at 5 percent to his children in payment for their appropriate shares. These notes were outstanding at decedent's death.

During the course of respondent's audit the deed records and the tax assessment rolls were reviewed to determine the total 64 T.C. 889">*892 extent of the real property owned by the decedent. During this inspection no agreement was found between decedent, petitioner, and/or his children in their capacities as individuals or trustees to repay or contribute to any portion of any payment on the note due Travelers.

The subject ranch is located in east central Val Verde County approximately 35 miles north of Del Rio. It is about 8 miles west of U.S. Highway 277 and is connected to this highway by a gravel road through an adjoining neighbor's land. Access to the subject ranch through this route is convenient but not guaranteed. The property does have deeded legal access over a longer northern route, but it is susceptible to flooding, requiring major repair.

The subject ranch's terrain is extremely rough. The ranch is composed1975 U.S. Tax Ct. LEXIS 85">*92 of header canyons, steep hills, slick rock areas, large canyons, and stony soil. Pictures depicting various views of the ranch were made part of the record. The property is cut by the Devil River which provides attractive riverfront property, including Dolan Falls, and good recreational facilities. The property is additionally watered by several windmills providing highly palatable water.

The highest and best use of the subject ranch is raising livestock, primarily cattle, sheep, and goats. The subject ranch does have a bitterweed problem, a toxic weed upon which the livestock will feed. There is also a catclaw bush problem, a bush in which the goats can become entangled causing death by starvation. The subject ranch has approximately 28 miles of perimeter fencing and 32 miles of interior fencing.

The building improvements on the subject ranch include a main dwelling, garage, shop, barn, labor house, shearing barn, horse and sheep pens, and corrals. There is also an airstrip in fair condition near the main dwelling and an emergency airstrip near the river. The main dwelling was built with concrete and stone and has two floors and open porches consisting of approximately 3,2001975 U.S. Tax Ct. LEXIS 85">*93 square feet. It is in good condition and the other structures are in fair to good condition.

Petitioner, on the Federal estate tax return, included in the total gross estate the value of decedent's one-half interest in the subject ranch. Petitioner included in the deductions from the gross estate the full amount of the outstanding balance ($ 210,000) of the note due Travelers.

Respondent disallowed one-half of this deduction as follows:

64 T.C. 889">*893 It is determined that the estate is allowed a deduction in the amount of $ 105,000.00 for note payable to the Travelers Insurance Company for the reason that only one-half of the value of the property securing the note is included in the value of gross estate and only one-half the note secured by the property is allowed as a deduction. Accordingly, the value of taxable estate is increased in the amount of $ 105,000.00.

Petitioner reported the value of decedent's one-half interest in the subject ranch at $ 220,000 or approximately $ 25 per acre. In his deficiency notice respondent determined that the fair market value of decedent's interest in the subject ranch was $ 438,455, or approximately $ 50 per acre and the original deficiency of1975 U.S. Tax Ct. LEXIS 85">*94 $ 31,356.08 ² was in part based on this adjustment. Subsequently respondent engaged an independent appraiser to examine the subject ranch and he concluded that the fair market value of decedent's interest was $ 500,000, or approximately $ 57 per acre. Based on this appraisal respondent filed an amendment to his answer increasing the deficiency to the amount now in issue.

Petitioner also included as deductions from the gross estate administration expenses of $ 7,516.12. ³ Included in this figure are estimated expenses for court costs and attorney's and accountant's fees. Respondent disallowed these expenses claiming it had not been established that these expenses were paid.

1975 U.S. Tax Ct. LEXIS 85">*95 OPINION

The case at bar presents three issues for our determination: (1) Whether petitioner is entitled to reduce the value of decedent's gross estate by the full amount of the note due Travelers that is secured by the subject ranch; (2) the fair market value at the date of decedent's death of his undivided one-half interest in the subject ranch, and (3) whether petitioner is entitled to deduct for estate tax purposes attorney's and accountant's fees and trial expenses incurred in the administration of the estate and in this proceeding.

In 1964 decedent and his wife (the petitioner) borrowed $ 235,000 from Travelers. This loan was evidenced by a note and a deed of trust on the subject ranch both of which were signed by them. In 1965 decedent conveyed an undivided one-half interest 64 T.C. 889">*894 in the subject ranch in equal parts to his children subject to the outstanding indebtedness.

When decedent died in November 1969, the balance due on the note was $ 210,000. After his death those regular payments due on the Travelers note were made. Petitioner included in the decedent's gross estate the fair market value of his undivided one-half interest in the subject ranch and then reduced1975 U.S. Tax Ct. LEXIS 85">*96 the value of the gross estate by the full amount of the balance due Travelers.

Petitioner maintains that she is entitled to a full deduction with respect to the Travelers note under section 2053(a) (3) or 2053(a) (4), ⁴1975 U.S. Tax Ct. LEXIS 85">*97 I.R.C. 1954. ⁵ Alternatively she maintains that under section 2033 ⁶ only the decedent's net equity interest in the subject ranch (fair market value of decedent's interest less the outstanding debt) need be included in the decedent's gross estate.

Respondent maintains that the debt due Travelers does not represent a claim against the estate within the meaning of section 2053(a)(3). Respondent further contends that, since only one-half of the mortgaged property was included in the gross estate, the petitioner is entitled to reduce the gross estate by only one-half of the outstanding debt under the provisions of section 2053(a)(4). Respondent also maintains that since the decedent's estate was personally liable for the indebtedness, petitioner's alternative argument is inappropriate.

In the Estate of Quintard Peters Courtney, 62 T.C. 317">62 T.C. 317 (1974), this issue was presented to this Court on facts very similar to those presented in the instant case. In Courtney the decedent and his wife purchased a residence in Fort Worth, 1975 U.S. Tax Ct. LEXIS 85">*98 Tex. The purchase was financed by them with a note payable to a bank and secured by a deed of trust on the residence in favor of the 64 T.C. 889">*895 bank. Subsequently they gave the property to their son subject to the outstanding note and deed of trust. At decedent's death the balance due on the note was approximately $ 32,000. The residence was not included as an asset in the estate tax return but one-half of the outstanding balance of the note due the bank was deducted as debt owed by the estate. After the decedent's death regular payments were made on the note.

Respondent in Courtney determined that the estate "was not entitled to deduct either as a claim against the estate or as a mortgage debt one-half of the amount" due the bank. 62 T.C. 317">Estate of Quintard Peters Courtney, supra at 319. This Court discussed sections 2053(a)(3) and 2053(a)(4) separately and upheld the respondent's determination.

With respect to section 2053(a)(3) this Court discussed the Texas system for independent administration of estates and determined that it did not bar the deduction. The problem arose from the finding that those "Claims which Congress intended to be deducted1975 U.S. Tax Ct. LEXIS 85">*99 for Federal estate tax purposes were claims presented and allowed or otherwise determined as valid against an estate and actually paid or to be paid." 62 T.C. 317">Estate of Quintard Peters Courtney, supra at 321. Based on a consideration of all the facts, including those which occurred after the decedent's death which the Court determined it could properly consider, we concluded:

In our opinion the events which occurred after Quintard Peters Courtney's death also indicate that no claim has actually been paid by the estate, and there is no evidence showing that any claim will be paid by the Courtney estate in the future, especially if Ethel A. Courtney continues making regular payments on the note. What we have here is simply an unmatured, potential claim without an existing claimant. We think Congress did not have this situation in mind when it provided for the allowance of deductible claims under section 2053(a)(3) from the value of a decedent's gross estate. [62 T.C. 317">62 T.C. 323.]

Petitioner points out that Travelers did present its claim to the estate and that this act illustrates the estate's liability for the note. Travelers did present1975 U.S. Tax Ct. LEXIS 85">*100 its claim to the estate, but it appears that it was done in response to the notice to creditors that the petitioner, as executrix of the estate, was required to publish. It does not appear that Travelers ever demanded full payment, or that it ever would in view of the fact that regular payments were being made. Furthermore it does not appear that Travelers, upon decedent's death, had the right to demand full payment of the note as long as the regular payments were being made.

64 T.C. 889">*896 In Anna Cathcart v. Schwaner, ( S.D. Ill. 1929, 15 AFTR 564), the decedent owned approximately 767 acres of land. The decedent borrowed money on this property giving in return his own notes and a mortgage on the property. The decedent then conveyed this property to his daughter free and clear of all encumbrances. The court allowed the indebtedness as a claim against the estate because it found "that it was the intention of decedent to satisfy the indebtedness evidenced by his promissory notes and secured by the mortgage upon the Ohio farm, out of his own funds, and considered that his warranty was sufficient to save and keep harmless the grantees in his deed from any1975 U.S. Tax Ct. LEXIS 85">*101 possible consequences from the lien." Cathcart v. Schwaner, supra at 565.

In the instant case, although the decedent personally owned the entire subject ranch, the loan from Travelers was evidenced by a note and deed of trust signed by the decedent and his wife. The conveyance to his children was made subject to the outstanding instruments. Travelers then could enforce the loan against either the decedent's estate, the petitioner, or the subject ranch. We cannot find here, as we could not find in Courtney upon similar facts, that the decedent intended to satisfy the indebtedness out of his own funds. Nor can we find that it was in fact so satisfied.

Accordingly we hold that the petitioner is not entitled to deduct the indebtedness due Travelers as a claim against the estate under section 2053(a)(3).

With respect to section 2053(a)(4) it is clear that only the fair market value of decedent's undivided one-half interest in the subject ranch was included as an asset while the full amount of the Travelers note was claimed as a deduction. Respondent contends that a full estate tax deduction is not allowable for a mortgage where the full value of the mortgaged property is not1975 U.S. Tax Ct. LEXIS 85">*102 included in the estate.

Section 805 of the Revenue Act of 1932 amended section 303(a)(1) of the Revenue Act of 1926 as follows:

SEC. 805. DEDUCTIONS.

Section 303(a)(1) of the Revenue Act of 1926, as amended, is amended to read as follows:

"(1) Such amounts --