Decisions will be entered for respondent.
HOLMES,
Near the turn of the twentieth century, Joseph "Pop" Preuschoff left Europe for Madera County, California—just north of Fresno—and established a 2345-acre cattle ranch that became known as the Preuschoff Ranch. It was on this ranch *237 that Pop raised his daughter, Mary Van Alen. Although Mary moved away for a short time after getting married and starting a family, she divorced and returned home to the ranch with her small children. One of those children was Joseph Van Alen. Joseph later inherited a 13/16th interest in the ranch (the Ranch Interest).
Joseph married three times. After his first marriage with four children ended in divorce, Joseph wed Virginia Latimer, a woman twenty years his junior. Within four years, they had two children—Shana and Brett. The siblings were still quite young when Virginia and Joseph divorced, and afterwards they lived with their mom, though they did stay with their dad on the ranch every other weekend as well as half of every summer. Joseph eventually wed again. Shana and Brett, however, didn't get along with this new wife, Bonnie Van Alen. Shana described Bonnie as a "very dominant person" with whom she "had 2013 Tax Ct. Memo LEXIS 240">*242 a tumultuous relationship." Despite these difficulties, the siblings loved their time on the ranch. Brett remembered helping his dad with the daily chores—kicking hay out of the backs of trucks and shoveling manure. And, after Joseph's death, Shana moved to the ranch where she tends some cows and works as a stay-at-home mom to her three children. Brett—though he does not live on the ranch—grew up to be a *238 cowboy in the vaquero tradition, riding horses and four-wheelers to tend cattle for other ranchers.
Joseph died in May 1994, when Shana was 18 and Brett was only 14. Almost ten years before his death—after his separation from Virginia but before his marriage to Bonnie—Joseph had written his will. It gave $25,000 gifts to his first wife and each of his four children from that marriage, but directed that the remainder of the estate—including his Ranch Interest—would go to a testamentary trust (the Trust) for the benefit of Shana and Brett in equal shares. The will contained no estate-tax apportionment clause. 22013 Tax Ct. Memo LEXIS 240">*243
Bonnie, as the estate's executor, hired attorney Denslow Green to administer Joseph's estate. Since California probate law requires that a county "probate referee" appraise a decedent's real property subject to probate,
About nine months later, Bonnie (as executor) and Green (as preparer) filed a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, for the Estate of Joseph Van Alen. 52013 Tax Ct. Memo LEXIS 240">*245 But that return gave the Ranch Interest a much lower value than Grey's field notes did.
*240 The return also showed a taxable estate that was cash-poor. It valued the gross estate at just over $2 million, 6 but almost $1.9 million was real estate or miscellaneous property (such as vehicles, farm equipment, household furnishings, and cattle). The estate deducted $260,000 in miscellaneous expenses (such as funeral costs, debts, and mortgages) and $870,000 in bequests to Bonnie as the surviving spouse. 72013 Tax Ct. Memo LEXIS 240">*246 That left a taxable estate of a little over $900,000, and—after subtracting the unified credit 8 and credit for state death taxes 9—the estate reported a tax due of about $100,000.
*241 The tax bill would have been significantly higher, however, had the estate valued the Ranch Interest at $1.963 million—the value that Grey said he submitted to the probate referee. Instead, the estate listed that interest's fair market value as only $427,500. Even at that unusually low value for so many acres of California ranchland, 2013 Tax Ct. Memo LEXIS 240">*247 the Ranch Interest would have been one of the estate's most valuable assets. But the estate computed its tax not with this number, but with an even lower number—$144,823, which the return reported as the Ranch Interest's value under
This section helps those who inherit property by letting them use an asset's value in its actual use at the time of death, rather than in its hypothetical highest and best use. (The paradigmatic case is a family farm that otherwise might have to be sold to a developer.) Not all kinds of property, and not all kinds of heirs, qualify for this deviation from the general rule that death tax is calculated on an estate's fair market value. And the heirs have to promise not to sell the property right away, or shift its use to something more valuable. If an estate wants to use this lower value, it has to make a
*242 There's little doubt that the estate met these conditions. The estate's "qualified heirs" 10—Bonnie, Shana, and Brett (who as a minor was represented by his mother, Virginia, both as his guardian
The form they used included the required language by which they consented to personal liability for additional estate tax if they stopped using the ranch for agricultural purposes or sold their interest altogether. And no one disputes that this standard-form language is also sufficient proof of each heir's actual or constructive understanding that completing the form is required. The Commissioner 2013 Tax Ct. Memo LEXIS 240">*249 nevertheless disputed the estate's valuation of the Ranch Interest because he thought that the correct value should have been $427,500. The estate *243 and the IRS went back and forth, and the estate remarkably and audaciously sent the IRS an amended
Even with the very low special-use valuation of the Ranch Interest, the estate didn't have enough liquid assets to immediately pay that $120,000. 142013 Tax Ct. Memo LEXIS 240">*251 We also expressly find that Shana and Brett were the biggest winners of the estate's *244 aggressive and successful valuation because they received the lion's share of the taxable estate. 15 With those two things in mind—and without an estate-tax apportionment in the will saying otherwise—we also find that a significant increase in the valuation of the Ranch Interest for estate-tax purposes might well have forced the Trust—which was the remainder beneficiary of the estate and whose sole beneficiaries were Shana and Brett—to sell at least parts of the ranch to pay the estate tax.
In May 2007—almost ten years after the estate settled its tax liability—the California Rangeland Trust bought a conservation easement on the Preuschoff Ranch for $1.12 million. Reflecting its 13/16th interest, the Trust received $910,000 from that sale.
The Trust and the siblings reported this deal in so muddled a way that the IRS was bound to notice. In June 2008 the Trust's accountants filed the Trust's 2007 income-tax return, on which it reported the $910,000 sale price for the conservation easement and a basis of about $100,000. After subtracting various *245 other trust-level deductions, the Trust reported income of almost $720,000 and an income-distribution deduction in the same amount for distributions 2013 Tax Ct. Memo LEXIS 240">*252 made to the siblings. 16 Shana and Brett's Schedules K-1, Beneficiary's Share of Income, Deductions, Credits, etc., each reported a net long-term capital gain of nearly $360,000.
Almost four months later, though, the Trust filed an amended 2007 return. On this return, the Trust listed the same sale price ($910,000), but reported a new and nearly doubled basis, which reduced the Trust's capital gain. Shana and Brett's amended Schedules K-1 each showed a reduced long-term capital gain of about $310,000.
But the siblings seemed to balk at reporting any gain at all. Brett and his wife filed their 2007 return in June 2008 (before the Trust filed its amended return), and Shana and her husband filed theirs in September 2008 (after the Trust 2013 Tax Ct. Memo LEXIS 240">*253 filed the amended return). Although Brett and Shana each had a K-1 from the Trust showing over $300,000 in net long-term capital gain, neither of them *246 reported any of this gain on their 2007 individual tax returns. 172013 Tax Ct. Memo LEXIS 240">*254 This mismatch spurred the Commissioner to send them each a CP2000 Notice-to Brett and Kimberlee in February 2009, and to Brandon and Shana in August 2009. 18 Each notice listed a proposed balance due, and stated that the amount of income they reported on their respective 2007 Forms 1040 didn't match the amounts reported on documents the IRS received from third-party payors. For Brett, those unreported amounts included not just the large capital gain from the original Trust K-1, but also $924 of unreported interest income (which he has since stipulated that he received); for Shana, those unreported amounts were the large capital gain from the amended Trust K-1, and $15,000 of nonemployee compensation from a Form 1099-MISC issued by Ogle Productions, Inc. Each notice also proposed an *247 accuracy-related penalty. Neither couple paid, and the Commissioner followed up with a notice of deficiency. 19
After receiving his notice of deficiency, Brett visited local CPA Paul Simmons. Brett showed him the notice as well as his father's estate-tax return to ask him whether the Trust properly reported the basis of the Ranch Interest that led to the long-term capital gain on the K-1s. After reviewing those papers, Simmons testified that "it just didn't seem right to me that something 2013 Tax Ct. Memo LEXIS 240">*255 in 1994 was worth nothing hardly." Simmons then made a call to a friend whom he had used to perform appraisals in the past to ask him to look at a piece of property to determine its 1994 value. That friend was Richard Grey.
Grey told Simmons that he had called the right guy—he was the one who performed the 1994 appraisal for the Ranch Interest. Grey then told Simmons that he had appraised the Ranch Interest at $1.963 million and eventually gave him a copy of his field notes.
This prompted Simmons to submit, in November 2009, yet another amended 2007 return for the Trust. This second amended return reported the same sale *248 price, but now reported a basis of slightly less than $900,000, which shrank the gain to less than $25,000. Simmons explained in an attachment that the reduction in capital gain was "due to an error in the computation of basis for the [Ranch Interest]." Trust-level deductions completely wiped out that gain, and Brett and Shana's new K-1s showed no long-term capital gain. 20 In reporting an inherited basis in the Ranch Interest that was much higher than its special-use valuation, Simmons relied on
The Commissioner stuck by his notices of deficiency. He argues that even if the Trust's initial value for the Ranch Interest was too low, perhaps absurdly low, for land in California, it was still the value on which the estate calculated its estate tax and thus the value that the Code and precedent compel the heirs to use in computing their gain when part of that interest is sold.
*249 The Van Alens and the Tomlinsons filed timely petitions, and we consolidated their cases for trial in San Francisco. Both 2013 Tax Ct. Memo LEXIS 240">*257 couples were California residents when they filed their petitions and remain so today.
The dispute here is over basis—the parties agree that the Trust received $910,000 in proceeds from the sale of the easement. They disagree, however, on the amount of passthrough capital gain from those proceeds that the siblings should have reported. To determine that capital gain, we must first decide what effect the Ranch Interest's
We 2013 Tax Ct. Memo LEXIS 240">*258 start with an explanation of the interplay between Congress was obviously troubled that family farms might have to be sold to pay estate taxes upon death of the owner if the value of the real estate were determined at its fair market value which in turn depended upon its "highest and best 2013 Tax Ct. Memo LEXIS 240">*259 use." Since such real estate might well be a tempting target for real estate developers, the "highest and best use" test could result in a valuation based on development purposes substantially in excess of the value of the property for use as a farm, with a concomitant large increase in estate taxes. Continued operation of the family farm might thus be in jeopardy since a sale of *251 the farm might be the only way to meet the increased tax burden. It was to address this problem that
We now look at the rules for figuring out the basis of inherited property. The basis of inherited property is generally equal to its fair market value at the date of the decedent's death. The identity of the two values in the congressional mind is clearly indicated by the fact that the election by the decedent's estate to use the alternate valuation date binds the subsequent income tax payer. *253 This would be often meaningless if the value figure chosen did not bind him also. The success of an estate in getting through IRS audit a low valuation of property may turn into a Pyrrhic victory in the event of subsequent income taxation. This is a matter practitioners in the field are well aware of and it tends to minimize disputes as to the valuation of estates, where assets other than listed securities are involved, and especially with real property. It furthers the concept of self-assessment. * * *
The siblings, however, feel that they can overcome this straightforward application of the Code with For the purpose of determining the basis under
*255 Throwing a lasso around that language, Shana and Brett try to tie up their ample evidence—clear and convincing evidence, they say—that the reported
*256 We think this would be a difficult argument 2013 Tax Ct. Memo LEXIS 240">*267 to win with.
The siblings, however, say it would be wrong to saddle them with the lowball value of the estate-tax return, because it was an executor and guardian
The duty of consistency 2013 Tax Ct. Memo LEXIS 240">*268 "serves to prevent inequitable shifting of positions by taxpayers." "When all is said and done, we are of the opinion that the duty of consistency not only reflects basic fairness, but also shows a proper regard for the administration of justice and the dignity of the law. The law should not be such a[n] idiot that it cannot prevent a taxpayer from changing the historical facts from year to year in order to escape a fair share of the burdens of maintaining our government. Our tax system depends upon self assessment and honesty, rather than upon hiding of the pea or forgetful tergiversation." *258 • A representation or report by the taxpayer; • reliance by the Commissioner; and • an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner.
We address each element.
The big dispute here is over the first requirement—namely whether the taxpayers here made a "representation" on the estate-tax return. Shana and Brett argue that they couldn't have done so because neither of them had any fiduciary powers or control over the estate; they "were merely its beneficiaries."
We're not persuaded.
We consider first whether the siblings could be the "taxpayer" who is making a "representation" on an estate-tax return. If it's the same taxpayer who's making inconsistent statements at different times, it's an easy case. But what about a situation like this one, 2013 Tax Ct. Memo LEXIS 240">*270 where it was an executor and a guardian
We think it makes the most sense to gauge whether the specific economic interests of those making 2013 Tax Ct. Memo LEXIS 240">*271 the earlier and later representations are sufficiently identical. And here we have to find that they are. Both Shana and Brett, and their father's estate, benefited from a reduced estate tax. If the estate had valued the Ranch Interest at $1.375 million under
Shana and Brett argue, however, that even if their economic interests were sufficiently identical, that's still not a close enough relationship to bind them to the valuation reported on the estate tax return. They point out that the Ninth Circuit in
Let's take a closer look.
Since 2013 Tax Ct. Memo LEXIS 240">*272 Ninth Circuit law controls here, 282013 Tax Ct. Memo LEXIS 240">*273 we start with the facts of
The Ninth Circuit agreed, stating that the taxpayer-husband "had overlapping and co-extensive interests as a beneficiary and co-executor of the estate."
That language certainly suggests that the Ninth Circuit believes that the doctrine should not be applied to just any estate beneficiary. But the siblings here *262 weren't merely just beneficiaries of the estate that had nothing to do with filing the estate-tax return. On two occasions, Shana and Brett (through his guardian
One might think Brett has a stronger argument—he didn't sign either version of the special valuation agreement because 2013 Tax Ct. Memo LEXIS 240">*274 he was a minor, and Virginia's signature as his guardian
They contend that they had no involvement in the preparation of the estate-tax return; rather "it was their stepmother, with whom they had a strained relationship, who was conducting all estate administration duties." Thus, they say *263 that they "should not be deemed to somehow have privity of interest in the Estate simply because their stepmother had them sign the special valuation agreement." Even if we were to construe this allegation to imply a claim that Bonnie exerted undue influence or otherwise coerced Shana or 2013 Tax Ct. Memo LEXIS 240">*275 Virginia (in her capacity representing Brett) to sign the agreement, they have not proven any facts supporting such a claim.
In this regard, we find significant the Ninth Circuit's citation of
*264 We applied the duty of consistency to preclude them from denying the validity of the special-use election.
The Tenth Circuit rejected their argument. Although it acknowledged some authority that an heir should not be bound by representations of the estate's executor,
As in
Shana and Brett don't appear to contest the existence of the second and third elements here: Reliance by the Commissioner and, after the limitations period, a change in the taxpayers' position in a way that's harmful to the Commissioner. But just to be sure, we specifically 2013 Tax Ct. Memo LEXIS 240">*279 find that the Commissioner relied on the
We rest our holding on the unequivocal language of
We find that the Commissioner has met his burden of production. Before filing his individual return, Brett received a K-1 generated from the Trust return showing over $350,000 of capital gain. He and his wife were well aware of the conservation-easement sale that created this capital gain, but they failed to report any of it on their return—a decision we find contrary to what a reasonable and ordinarily prudent person would do under the circumstances.
It's a similar story for the Tomlinsons. Before filing their return, they received two K-1s for Shana from the Trust—the original one showing over $350,000 of capital gain, and an amended one showing over $300,000. They too, however, failed to report any of that gain on their individual return. They too knew about the sale of the conservation easement.
Once the Commissioner has met his burden, 2013 Tax Ct. Memo LEXIS 240">*283 taxpayers must come forward with persuasive evidence that the Commissioner's determination is incorrect. *270
Taxpayers can avoid the penalty if they show they acted with reasonable cause and in good faith. • that Simmons was a competent professional 2013 Tax Ct. Memo LEXIS 240">*284 who had sufficient expertise to justify reliance; • that they provided him with necessary and accurate information; and • that they actually relied in good faith on his judgment.
*271
1. We consolidated these cases for trial, briefing, and opinion.↩
2. Wills sometimes contain such a clause to direct where the money to pay taxes will come from, but if they don't state law supplies a default rule.
3. Grey worked under the supervision of Richard Huber, the Madera County probate referee.
4. Because Shana and Brett didn't submit Grey's field notes as an expert report in compliance with
5.
6. The gross estate includes "all property, real or personal, tangible or intangible, wherever situated," to the extent provided in
7. Subject to exceptions not relevant here, property passing from a deceased husband to his widow is deductible from his gross estate.
8. The unified credit exempts a minimum amount of accumulated wealth from estate tax. Since Joseph didn't make any taxable gifts during his life, the unified credit available to his estate was $192,800 (equivalent to a $600,000 exemption).
9. Estates of decedents dying before 2005 generally could credit against the federal estate tax the amount of any state death taxes.
10. A "qualified heir" is, "with respect to any property, a member of the decedent's family who acquired such property (or to whom such property passed) from the decedent."
11. Neither Brett nor Shana dispute that their mother had the power to act as Brett's guardian
12. The estate also elected to value three other properties (not at issue here) under
13. The record did not include an amended agreement to special valuation. We do, however, have a cover letter from Green to an IRS attorney in which he wrote that enclosed with the letter was an "Amended Agreement to Special Valuation executed by Bonnie Van Alen, Shana Charlotte Van Alen and Virginia M. Latimer as Trustee and Guardian Ad Litem for Brett Shannon Van Alen who is still a minor." Because of that cover letter, and because the IRS eventually accepted the values contained on the amended Schedule A-1, Itemized Deductions (which it would not have done absent the amended agreement), we find it more likely than not that Bonnie, Shana, and Brett (by Virginia on Brett's behalf) executed the amended agreement to special valuation, and that this amended agreement satisfied the requirements of
14. The record is a bit unclear, but it seems probable that the estate elected to pay a portion of the estate tax in installments as permitted by
15. We note again that amounts owed to Bonnie as the surviving spouse were already taken into account in computing the taxable estate.
16. A trust is generally allowed to deduct taxable income distributed to its beneficiaries.
17. Brandon and Shana later submitted an amended 2007 individual return to the IRS in November 2009, but as we discuss
18. The IRS sends this notice (called in tax jargon a "CP2000 Notice") to a taxpayer when the income and payment information that the IRS has on file from third parties for that taxpayer doesn't match the entries reported on the taxpayer's return.
19. Note that Brett's CP2000 was based on the Trust's original K-1, but Shana's was based on the Trust's amended K-1. The Commissioner now believes that the basis reported on the Trust's original return was correct. The Commissioner thus asked at trial to seek an increase in the deficiency for Shana based on her original K-1, and we granted his motion.↩
20. Shana submitted an amended 2007 return around the same time that reported the amounts listed on the Trust's from the latest 2007 Trust return and the $15,000 of nonemployee compensation income from Ogle Productions, Inc. It appears the Commissioner didn't accept this amended return, nor did he have any obligation to do so.
21. Indeed, the Commissioner couldn't redetermine the Ranch Interest's 2032A value reported on the Form 706 because the statute of limitations has run.
22.
Subject to that limitation, the benefits of this special use valuation may be combined with other valuation discounts in some circumstances.
23. Here there's another niggling detail: The estate reported a final
24. Taxpayers can rely on published revenue rulings.
25. In the nearly sixty years since its issuance, we have cited this revenue ruling twice—and one of those citations was in a dissent.
26. Here's the math: As mentioned
27. We note that the siblings do not cite, much less rely on,
28. Because these cases are appealable to the Ninth Circuit, we follow that court's precedent.
29. The Van Alens also received two 1099-INT statements from Wells Fargo reporting $924 of interest income, which they failed to report. Shana likewise received a 1099-MISC from Ogle Productions, Inc., for $15,000 that she failed to report. Negligence is "strongly indicated" where a taxpayer fails to report on his income tax return an amount of income shown on an information return such as a 1099.
