                      T.C. Memo. 2000-6



                UNITED STATES TAX COURT



        ESTATE OF ETHEL JOSEPHINE SPOWART HINZ,
 DECEASED, LESTER F. HINZ, JR., EXECUTOR, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8194-97.                       Filed January 6, 2000.



     When decedent (D) died on May 4, 1992, she owned
several parcels of real property located in California.
H, the executor of D’s estate, employed C, “the family
attorney”, to “do the federal estate tax return.” H knew
the estate tax return was due Feb. 4, 1993, 9 months from
the date of D’s death. Before the estate tax return was
due, C told H that an extension for the time to file the
estate tax return could be obtained. C timely filed a
request for a 5-month, 27-day extension of the time to file
and a 10-month, 27-day extension of the time to pay the
estate tax. Under sec. 6081, I.R.C. 1986, the maximum
extension available for filing an estate tax return is 6
months and under sec. 6161, I.R.C. 1986, the maximum
extension for paying the estate tax is 1 year. R approved a
6-month extension for the time to file and a 1-year
extension for the time to pay the estate tax. The extended
due date for filing the return was Aug. 4, 1993, and for the
payment of the tax liability was Feb. 4, 1994. After the
extension request was filed, H did not contact C or inquire
                              - 2 -
     into the status of the extension or the tax return. After
     the extended filing due date had passed, C contacted H to
     get the necessary real property appraisals. The estate tax
     return was filed on Feb. 4, 1994, 6 months after the
     extended filing due date.

          On the untimely filed estate tax return, the estate
     elected under sec. 6166, I.R.C. 1986, to pay in installments
     the estate tax related to certain of D’s real estate
     interests. R tentatively allowed the sec. 6166, I.R.C.
     1986, election. Ten months later, R notified H that the
     sec. 6166, I.R.C. 1986, election was denied because it was
     made on an untimely filed tax return.

          1.   Held: Fair market values of the properties
     determined. Sec. 2031, I.R.C. 1986.

          2.   Held, further, P is liable for an addition to tax
     for failure to timely file the estate tax return. Sec.
     6651(a)(1), I.R.C. 1986; United States v. Boyle, 469 U.S.
     241 (1985).

          3.   Held, further, P is not liable for an addition to
     tax for failure to timely pay the estate tax liability shown
     on P’s estate tax return. Sec. 6651(a)(2), I.R.C. 1986.



     Francis Burton Doyle, for petitioner.

     G. Michelle Ferreira, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     CHABOT, Judge: Respondent determined a deficiency in Federal

estate tax and additions to tax under sections 6651(a)(1)1




1
     Unless indicated otherwise, all section references are to
sections of the Internal Revenue Code of 1986 as in effect for
the date of decedent’s death.
                                   - 3 -
(late filing of tax return) and 6651(a)(2)(late payment of

liability shown on tax return) against petitioner in the amounts

of $1,732,348, $530,094, and $297,523,2 respectively.   By

amendment to petition, petitioner claims an overpayment of estate

tax.    After concessions by both sides, the issues for decision

are as follows:

            (1) What the fair market values were of four of

       decedent’s real properties on the date of decedent’s death;

            (2) whether petitioner is liable for an addition to tax

       under section 6651(a)(1); and

            (3) whether petitioner is liable for an addition to tax

       under section 6651(a)(2).

                          FINDINGS OF FACT

In General

       Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.3


2
     In the notice of deficiency, the amount of the addition to
tax under sec. 6651(a)(2) was determined as $297,523 “computed to
the date of this notice” (Feb. 3, 1997), plus 0.5 percent per
month, to a maximum of 25 percent. The proper amount is to be
determined in the computation under Rule 155.

     Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.


3
     At trial, respondent raised certain relevance objections to
petitioner’s Exhibits 5 through 8 and 10 through 18. The Court
                                                   (continued...)
                              - 4 -
     When the petition was filed in the instant case, both the

place for the estate’s administration and the executor’s legal

residence were in Saratoga, California, and the estate’s probate

administration was in the Superior Court for Santa Clara County,

California.

Chronology

     Decedent died on May 4, 1992.    At the time of her death,

decedent owned several real properties located in and around

Santa Clara, California.

     In her holographic will, dated November 29, 1991, decedent

named her son, Lester F. Hinz, Jr. (hereinafter sometimes

referred to as Hinz), as sole heir and executor of her estate.

This was about the time that decendent’s daughter died.    Hinz and

decedent’s daughter were decedent’s only children.    In May 1992,

Hinz engaged William R. Christy (hereinafter sometimes referred

to as Christy) to represent the estate and, as part of that

representation, to “do the federal estate tax return”.    Christy

had been “the family attorney” for about 40 years.    When Hinz




3
 (...continued)
overruled these objections, ruling that these exhibits are
admissible for all purposes and that respondent had a standing
objection as to the expressed relevance concerns. The Court also
gave respondent the right to renew these objections on opening
brief, but only if respondent’s counsel gave appropriate notice
to petitioner’s counsel of an intent to renew the objections on
brief. Respondent has not renewed these relevance objections on
brief.
                                - 5 -
hired Christy, Hinz knew the estate tax return was due 9 months

from the date of decedent’s death.

     Christy had been licensed to practice law in California

since 1949--he had considerable experience handling probate and

estate matters, but had filed only 12 to 15 Federal estate tax

returns.    The record does not indicate whether Christy had done

any work in connection with the estates of decedent’s husband,

who died in 1960, or decedent’s daughter.

     On June 11, 1992, Christy filed with the Superior Court for

Santa Clara County a petition on Hinz’s behalf for the probate of

decedent’s estate.    The petition for probate listed seven real

properties4 and estimated their aggregate value as $1,100,000.

The $1,100,000 amount was based on the Santa Clara County

Assessor’s records.   On July 29, 1992, the Superior Court

appointed Hinz as executor of decedent’s estate.   Before the

estate tax return was due, Christy advised Hinz that the estate

could receive an extension of time in which to file its estate

tax return.   Hinz did not ask Christy what the extended due date

would be.




4
     The parties have stipulated to the fair market values of two
of these seven properties. Two of the remaining five parcels are
dealt with as one property, infra, the Lafayette Property. As a
result, the parties have presented the valuations issue as
dealing with four properties.
                                 - 6 -
     On January 28, 1993, Christy timely filed a Form 4768,

asking that the due date for filing the estate tax return be

extended by 5 months and 27 days to July 31, 1993, and that the

due date for paying the estate tax be extended by 10 months and

27 days to December 31, 1993.

     Christy attached the following statement to the Form 4768:

         STATEMENT RE EXTENSION OF TIME TO FILE FORM 706

     It is impossible to file a reasonably complete return by
     February, 1993, because of difficultly in gathering
     information necessary to identify and appraise decedent’s
     real properties. It is anticipated from work already done
     by counsel, probate appraisers, and title company, that
     appraisals will be done and an accurate return filed by July
     1, 1993.

     The estate’s real properties appear to consist of 7 parcels
     [see supra note 4] in Santa Clara County, California.
     Deferred maintenance and hidden defects affecting market
     value need to be explored.

     On February 11, 1993, respondent approved a 6-month

extension for filing, to August 4, 1993, and a 1-year extension

for paying, to February 4, 1994.    Table 1 shows the original due

dates, the extended due dates requested by Christy, and the

extended due dates approved by respondent.

                                Table 1

                                 Original   Requested   Approved

     Tax return due date         02/04/93    07/31/93   08/04/93
     Payment due date            02/04/93    12/31/93   02/04/94


     On the Form 4768 Christy had caused to be typed in the

“Extension date requested” boxes of part II (extension for
                                 - 7 -
filing) and part III (extension for paying) “7-31-93” and “12-31-

93”, respectively.   On the returned Form 4768 in light red ink

(1) lines were drawn through “7” and “31” in part II and these

numbers were replaced by “8” and “4”, respectively, and (2) lines

were drawn through “12”, “31”, and “93” in part III and these

numbers were replaced by “2”, “4” and “94”, respectively.      Also,

on the returned Form 4768, part V, (1) item 1 (extension for

filing) is shown as approved and there is penciled in “080493”,

and (2) item 2 (extension for paying) is shown as approved and

there is penciled in “020494”.    The heading of part V is printed

in boldface type as follows:   “Notice to Applicant--To be

completed by Internal Revenue Service”.    Finally, on the returned

Form 4768, part V, item 1 (extension for filing), there is

stamped in faint blue ink the following:    THE MAXIMUM EXTENSION

ALLOWED FOR FILING IS 6 MONTHS.    On the Form 4768, part II

(extension for filing), there are not any marks on the “93” that

Christy had typed in as part of the “7-31-93” requested

extension.

     Christy interpreted the returned Form 4768 as having

extended the due date for filing to February 4, 1994.    In late

1993 (after August 4, 1993) or early 1994 Christy told Hinz that

he had received an extension of time until February 4, 1994, to

file the estate tax return, and reminded Hinz that appraisals

were needed for the real estate.    This was the first time that
                                - 8 -
Hinz learned what Christy thought was the extended due date for

the tax return.   Hinz had not asked Christy what the extended due

date was.   By then, Hinz and Christy decided that they had little

choice but to use the probate referee’s figures.   However,

Christy and Hinz thought those amounts were too high, so Christy

reduced the probate referee’s figures by 25 percent.   See infra

table 2, line 1, for the values shown on the estate tax return.

At Christy’s suggestion, Hinz agreed to elect under section 6166

to pay the estate tax in installments.   Christy prepared the

estate tax return and signed it as return preparer.

     Hinz and Christy executed the estate tax return on February

1, 1994.    Neither the returned Form 4768 nor a copy thereof was

attached to the tax return when Hinz signed it.    Hinz first saw

the returned Form 4768 or a copy thereof at sometime after Hinz

executed the tax return.   At the time the estate tax return was

filed, Christy and Hinz believed that this tax return was timely.

     The estate tax return, showing a net estate tax and balance

due of $3,880,270.19, was filed on February 4, 1994, 21 months

after decedent’s death and 6 months after the August 4, 1993,

extended due date.   This tax return includes an election under

section 6166 to pay the estate taxes in nine installments

starting May 4, 1997, with annual interest payments starting May

4, 1994.
                               - 9 -
     By letter dated March 30, 1994, and addressed to Hinz at his

home address, respondent tentatively allowed petitioner’s section

6166 election.   This letter states that there is a balance due of

$507,914.99 ($220,402.67 for nondeferred tax, and the remainder

for interest and penalties), which is to be paid by April 25,

1994.

     By letter dated February 6, 1995, and addressed to Hinz at

his home address, respondent states that petitioner did not meet

the requirements of section 6166 because the estate tax return

was not filed timely.   This letter states that there is a balance

due of $5,297,476.68 ($3,500,270.19 for tax, and the remainder

for interest and penalties), which is to be paid by February 27,

1995.

     By letter dated March 8, 1995, respondent informed Christy

that decedent’s estate tax return was being examined.    This

letter asks Christy to send numerous records of the estate to

respondent.   Sometime after Christy received the March 8, 1995,

letter, the agent who was conducting the examination of

decedent’s estate tax return told Christy that decedent’s estate

tax return was filed late.   Notwithstanding the February 6, 1995,

letter to Hinz, this was the first time that Christy learned that

decedent’s estate tax return may have been filed late.    At the

suggestion of this agent, on November 25, 1996, Christy wrote a

letter to the District Director explaining that because Christy’s
                              - 10 -
“eyesight is not what it used to be”, Christy misread the

extension and inadvertently filed decedent’s estate tax return

late.   Christy later found out that he was suffering from an eye

condition called macular degeneration and suspects that this had

already begun to affect his eyesight by early 1993.

     On February 3, 1997, respondent issued a notice of

deficiency determining a tax liability of $5,612,618, almost 45

percent more than the amount reported on the filed estate tax

return.

     On February 6, 1997, an amended estate tax return was

submitted to respondent.5   This amended tax return shows a tax

liability of $1,771,665, almost 55 percent less than the amount

reported on the filed estate tax return.



     Hinz delegated to Christy the duty of timely filing the tax

return.

5
     On opening brief, respondent asks us to find that this
amended estate tax return was “filed” on Feb. 6, 1997.
Petitioner does not object to this proposed finding. However,
the parties stipulate as follows:

     This Amended Form 706 Federal Estate tax return has been
     submitted to the Internal Revenue Service on February 6,
     1997, but has not been filed pending resolution of the
     issues between the estate and the Internal Revenue Service
     on the original Form 706 Federal estate tax return.

We have not found anything in the record to indicate that the
parties’ stipulation was incorrect. Our findings are in accord
with the parties’ stipulation and not the parties’ proposed
findings of fact.
                              - 11 -
The Properties

     Among the properties included in decedent’s gross estate,

the values of which are reported on decedent’s estate tax return,

are four real properties located in Santa Clara County,

California, as follows:

          (1) 14521 Quito Road, Saratoga, hereinafter sometimes
     referred to as the Quito Property;

          (2) 2201 and 2215 Lafayette Street, Santa Clara,
     hereinafter sometimes referred to as the Lafayette
     Property;6

          (3) 767 Parker Street, Santa Clara, hereinafter
     sometimes referred to as the Parker Property; and

          (4) 1061 Richard Street, Santa Clara, hereinafter
     sometimes referred to as the Richard Property.


The Quito Property, the Lafayette Property, the Parker Property,

and the Richard Property are hereinafter sometimes referred to

collectively as the Subject Properties.

     1. In General

     The Subject Properties are south or southeast of the

southern end of the San Francisco Bay, in Santa Clara County, the

most populous county in the San Francisco Bay region.   Saratoga

(the Quito Property), about 10 miles west of San Jose, is a small

city which is significantly more affluent than the county as a

whole.   Saratoga is largely a “bedroom community”.   Santa Clara

6
     The Lafayette Property consists of two contiguous properties
that the parties treat as one property for valuation purposes in
the instant case. See supra note 4.
                               - 12 -
City is a larger city, between Saratoga and San Jose.    The other

Subject Properties are in one of the older industrial districts

of Santa Clara City.

     2. The Quito Property

     The Quito Property is 11.23 acres, about 489,178 square

feet.    Access to the Quito Property is available from Quito Road

on the east and from Vessing Drive on the south. The Quito

Property is on a slope; its eastern border closely follows a

creek.    The eastern and western sides of the Quito Property are

irregular, the east-west distance varying from about 640 feet at

the north end to about 380 feet at the south end.

     The Quito Property is located in east Saratoga, in a

residential neighborhood about 2-3 miles from downtown Saratoga.

The Quito Property is zoned residential single family with a

minimum size lot requirement of 40,000 square feet.    The Quito

Property’s neighborhood was typified by 1-acre lots, but many

lots were of various sizes up to 2.7 acres.    During 1992, homes

within a 1-mile radius of the Quito Property sold at prices from

$506,000 to $1,175,000.

     The Quito Property is in the Campbell Union School District

and not the Saratoga School District.    Homes located in the

Saratoga School District historically received a location premium

of 10 percent, compared to homes in the Campbell Union School

District.    Public schools and commercial services are within 5
                                - 13 -
minutes of the Quito Property.      The Quito Property is improved by

a wood frame and stucco residence, in which Hinz was living at

decedent’s death.    Hinz planned to continue to use the Quito

Property as his residence.     By the time of decedent’s death, the

roof over one bedroom wing and the patio area had collapsed.

     The highest and best use of the Quito Property is for

residential subdivision development.     Development of the Quito

Property would require the removal of the existing house.

Although the Quito Property is large enough for 11 or 12 minimum-

size lots, because of the slope of the property and lot

limitations on sloped properties, the Quito Property has the

potential to be subdivided into only eight lots.

     3.    The Lafayette Property

     The Lafayette Property is 10.72 acres, about 467,000 square

feet.     The Lafayette Property is on level land; it fronts on

Lafayette Street and on Mathew Street.     It consists of two

adjoining parcels, each of which is oddly shaped.

     In 1992, the Lafayette Property was zoned heavy industrial,

which allowed manufacturing, assembling, research, wholesale, or

storage uses.     Other uses permitted on the Lafayette Property

included light manufacturing, warehouses, laboratories, offices,

and incidental retail sales.

     All utilities were available to the Lafayette Property.       The

Lafayette Street frontage was improved with concrete curbs and
                              - 14 -
gutters, street lights, and sidewalks.   The Mathew Street

frontage was partially improved with concrete curbs and gutters.

     Building improvements on the Lafayette Property included an

industrial metal building on a concrete slab foundation.7    The

building included 11 grade-level metal rollup truck doors and a

23-foot-wide metal canopy over a concrete apron.   The building

was used primarily for vehicle and equipment maintenance, but it

also had office space.8   The building was of an overall low-cost

to average construction quality with low-cost interior office

build-out.   The building was built in 1978 and, at decedent’s

death, was in average condition with no significant problems.

There was also a 450-square-foot concrete block building suitable

only for storage located on the Lafayette Property.   This

concrete building was in a state of substantial disrepair and did

not contribute any net value to the overall value of the

Lafayette Property.

     At decedent’s death, both parcels of the Lafayette Property

were occupied by one tenant, Nelson Brothers Trucking Co.,



7
     We assumed that the parties could agree on such matters as
the size of the building. However, petitioner’s expert shows the
building’s site area variously as 13,200 sq. ft., 12,800 sq. ft.,
and 12,866 sq. ft., while respondent’s expert shows it as 10,800
sq. ft. Neither side has explained the difference.
8
     Petitioner’s expert states that “Office and restroom area”
was 1,638 sq. ft. Respondent’s expert states that “Office build-
out within the structure is estimated at 2,250 square feet”.
Neither side has explained the difference.
                                - 15 -
hereinafter sometimes referred to as Nelson Bros.    The Nelson

Bros. lease was entered into in 1976 for 10 years with two 5-year

renewal options.   At decedent’s death, the lease was in its final

5-year renewal period with 48 months remaining and scheduled

expiration of April 30, 1996.    Under the lease, Nelson Bros. paid

monthly rent of $3,500 and was responsible for all operating

costs of the property, including real property taxes.

     In December 1991, Nelson Bros. had one underground gasoline

storage tank removed from the Lafayette Property.    After removal

of the tank, Nelson Bros. had the soil tested for fuel

contamination.   The test result showed unacceptable levels of

fuel contamination.   On May 4, 1992, a reasonable buyer would

have discovered the ground contamination and adjusted the sales

price of the Lafayette Property downward by about $100,000

because of cleanup concerns.

     At decedent’s death, the highest and best use for the

Lafayette Property was for heavy industrial usage.

     4. The Parker Property

     The Parker Property is 2.93 acres, about 127,631 square

feet.   The Parker Property is on level land; it fronts on Parker

Street, Lafayette Street, and Grant Street, and it adjoins the

Lafayette Property on the south.    It is flag-shaped.

     In 1992, the Parker Property was zoned heavy industrial,

which allowed manufacturing, assembling, research wholesale, or
                              - 16 -
storage uses.   Other permitted uses included light manufacturing,

warehouses, laboratories, offices, and incidental retail sales.

     All utilities were available to the Parker Property.    The

Parker Street frontage was partially improved with curbs,

gutters, and streetlights, and the Lafayette Street frontage was

improved with curbs, gutters, sidewalks, and streetlights.

     The Parker Property was improved with buildings that

provided office space, storage space, and shop space.9

     At decedent’s death, the Parker Property was leased to

Pacific Coast Building Products, Inc. (hereinafter sometimes

referred to as Pacific), a roofing company,10 for $1,500 per

month.   The original lease was for 10 years and expired on May

31, 1990.   At the expiration of the lease’s initial term and at

decedent’s death, Pacific was holding over on a 5-year extension,



9
     Petitioner’s expert witness report discusses an office
building (4,854 sq. ft.), a machine shop (7,200 sq. ft.), and
lumber storage buildings (1,200 sq. ft.), for a total of 13,254
square feet of building improvements. Respondent’s expert
witness report discusses an office building (3,058 sq. ft.) and a
storage shed (5,662 sq. ft.), for a total of 8,720 square feet of
building improvements. Neither side has favored us with a
reconciliation of these widely divergent descriptions or an
attempt to show why that side’s description is more accurate than
the other side’s description.

10
     Petitioner’s expert witness report states that the Parker
Property was “leased to a trucking company.” Our finding that
the Parker Property was leased to a roofing company is contrary
to this statement in the expert witness report and is based on
(1) Hinz’ testimony and (2) a copy of the lease attached to the
same expert witness report.
                              - 17 -
at the same rate.   In 1995, at the end of the first extension,

Hinz and Pacific discussed another 5-year extension.    Hinz’ final

rental offer was $6,000 per month, which Pacific rejected.     The

Parker Property then remained vacant for about 7 months.

     In 1984, groundwater monitoring wells were installed on the

Parker Property to monitor a 1,000-gallon diesel storage tank and

an 8,000-gallon gasoline storage tank.    In 1985, the 1,000-gallon

tank was removed.   Tests of soil at the 1984 installation of the

monitor well near the 1,000-gallon tank, and at the 1985 removal

of the 1,000-gallon tank, did not show substantial contamination.

However, tests of water samples collected in August 1993 from

that monitoring well showed substantial contamination around the

former diesel tank.   Remediation work was performed in the latter

half of 1995.   No significant contamination was found near the

8,000-gallon tank, which was removed in August 1994.    At

decedent’s death, there was soil and groundwater contamination

adjacent to the former location of the 1,000-gallon tank, while

the 8,000-gallon tank remained on the Parker Property with no

known contamination associated with it.    On May 4, 1992, a

reasonable buyer would have discovered the groundwater

contamination and adjusted the sales price of the Parker Property

downward.

     At decedent’s death, the highest and best use for the Parker

Property was for heavy industrial usage.
                               - 18 -
     5. The Richard Property

     The Richard Property is about .459 acres, 20,000 square

feet.   The Richard Property is on level land; it fronts on

Richard Avenue; and it is about one block north and one block

west of the Lafayette Property.    The Richard Property is

rectangular.    The City of Santa Clara had an easement for the

purpose of ingress and egress, and the installation and

maintenance of sanitary and storm sewer mains and appurtenances.

     In 1992, the Richard Property was zoned heavy industrial,

which allowed manufacturing, assembling, research, wholesale, or

storage uses.    Other permitted uses included light manufacturing,

warehouses, laboratories, offices, and incidental retail sales.

     All utilities were available to the Richard Property.     The

frontage was improved with curbs, gutters, and streetlights.

     The Richard Property was improved with a machine shop

building,11 a 300-square-foot office building, and miscellaneous

storage buildings.

     The Richard Property was not subject to a lease at

decedent’s death, and did not produce any income in 1992.     At

some point in 1993 the Richard Property was leased to S.B.



11
     Petitioner’s expert witness report gives the area of this
building as 5,470 square feet at one point and 5,440 square feet
at three other points. Respondent’s expert witness report gives
the area of this building as 4,940 square feet. Neither side
favors us with commentary on this 10-percent discrepancy in
building size.
                              - 19 -
Machine Works and began to be used as a machine shop.    For

several years thereafter, the rental was $1,500 per month.     At

decedent’s death, the highest and best use of the Richard

Property was for heavy industrial usage.

     6. Other Properties

     The estate includes two real properties on Lafayette Street

in Santa Clara, in addition to the Subject Properties.    On the

estate tax return, these additional properties are shown as

having an aggregate date-of-death value of $230,000.    In the

notice of deficiency, respondent determined an aggregate value of

$290,000.   In the amended estate tax return, the aggregate value

is again shown as $230,000.   The parties have stipulated that the

aggregate value of these additional properties is $220,000.

     7.   Valuation Conclusions

     Table 2 shows the positions of the parties, of their expert

witnesses, and of the Court as to the fair market values of the

subject properties on the date of decedent’s death.
                                               Table 2


                                                         Property                     Total value
                                                                                      of Subject
Petitioner:                         Quito      Lafayette        Parker     Richard    Properties

1.   Estate tax return            $2,750,000   $3,720,000     $1,115,000   $300,000   $7,885,000
2.   Amended tax return            1,315,000    2,170,000        500,000    225,000    4,210,000
3.   Petition                      1,315,000    2,170,000        500,000    225,000    4,210,000
4.   Expert--Atkinson              1,750,000    2,850,000        600,000    200,000    5,400,000
5.   Experts--Kidder, Kirby           –         2,800,000        940,000      -
                                                   to               to
                                                3,100,000        955,500                 N/A
                                                                1                     1
6. Briefs                         1,750,000     2,850,000        600,000   200,000    5,400,000
                                                                    or                   or
                                                                 940,000              5,740,000
Respondent:

7.    Notice of deficiency        3,250,000    4,948,000       1,484,000   400,000    10,082,000
8.    Expert--Hulberg             2,300,000    3,417,000       1,240,000   320,000     7,277,000
9.    Expert--Hulberg (revised)   2,300,000    3,960,000       1,460,000   320,000     8,040,000
10.   Briefs                      2,300,000    3,960,000       1,460,000   320,000     8,040,000

Court:

11. Ultimate findings of fact     2,200,000    3,700,000       1,200,000   250,000    7,350,000



1
   At three points in petitioner’s opening brief, petitioner contends that the Parker
Property was worth $940,000. At one of these points, petitioner shows the total for the
Subject Properties as $5,725,000. The latter amount is evidently an arithmetic error, the
sum of the individual amounts contended for at that point in petitioner’s brief being
$5,740,000. However, at one point in petitioner’s opening brief and at two points in
petitioner’s answering brief, petitioner contends that the Parker Property was worth
$600,000. The latter valuation for the Parker Property would bring petitioner’s total for
the Subject Properties down to $5,400,000.
                               - 21 -
                               OPINION

               I. Value of Decedent’s Real Property

     The value of decedent’s gross estate includes the fair

market value of the real property that decedent owned at her

death.   See sec. 2031(a);12 United States v. Cartwright, 411 U.S.

546, 551 (1973); sec. 20.2031-1(b), Estate Tax Regs.

     The parties have not agreed on the fair market value of

decedent’s real property, and so we have to find the fair market

value.   See Buffalo Tool & Die Manufacturing Co. v. Commissioner,

74 T.C. 441, 451-452 (1980).

     Generally, the fair market value of property is the price at

which a willing buyer will purchase the property from a willing

seller, when neither is acting under compulsion and both are

fully informed of the relevant facts and circumstances.    See,

e.g., McShain v. Commissioner, 71 T.C. 998, 1004 (1979); sec.

20.2031-1(b), Estate Tax Regs.   Respondent’s determinations in

the notice of deficiency as to the fair market values of the

subject properties are presumptively correct, and petitioner has

the burden of proving that the fair market values are lower.      See

Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).     However,



12
     SEC. 2031. DEFINITION OF GROSS ESTATE.

          (a) General.--The value of the gross estate of the
     decedent shall be determined by including to the extent
     provided for in this part, the value at the time of his
     death of all property, real or personal, tangible or
     intangible, wherever situated.
                              - 22 -
we note that respondent’s position on brief as to each of the

Subject Properties is that the correct fair market value is less

than the amount respondent determined in the notice of

deficiency.   Indeed, respondent is now calling for values of the

Quito Property and the Lafayette Property that are almost $1

million below the amounts respondent determined in the notice of

deficiency.   See supra table 2.   We regard these reductions from

the notice of deficiency amounts as concessions by respondent.

In the instant case, petitioners have the burden of proof only to

the extent that petitioners contend that the correct fair market

values are less than the amounts that respondent contends for on

brief.

     It is well settled that the valuation of an asset in a tax

return is an admission by the taxpayer when that valuation is

inconsistent with a later position taken by the taxpayer.   See

Waring v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), affg.

T.C. Memo. 1968-126; McShain v. Commissioner, 71 T.C. at 1010.

It is equally well settled that such an admission is not

conclusive and that the trier of fact is entitled to determine,

based on all the evidence, what weight, if any, should be given

to the admission.   McShain v. Commissioner, supra.   That is,

“admission” is not here used in the binding sense of Rule 37(c),

90(f), or 91(e), but rather in the evidentiary sense of rule

801(d)(2) of the Federal Rules of Evidence.   In this connection,
                               - 23 -
it is appropriate to note that on brief respondent contends that

the fair market value of the Quito Property is $450,000 less than

the amount petitioner reported on the estate tax return.     See

supra table 2.

     At trial, both sides presented the testimony of expert

witnesses to establish the fair market values of the Subject

Properties.    It would not serve any useful purpose to make a

detailed analysis of the testimony of these experts to explain

item by item the extent to which we agree or disagree with their

analysis.    Valuation is not a precise science, and the

determination of the fair market value of property as of a given

day is a question of fact (see Kaplan v. Commissioner, 43 T.C.

663, 665 (1965)), to be resolved on the basis of the entire

record (see McShain v. Commissioner, 71 T.C. at 1004), and

without necessarily being bound by the opinions of the expert

witnesses.    See Penn v. Commissioner, 219 F.2d 18, 21 (9th Cir.

1955), affg. a Memorandum Opinion of this Court.    However, we do

note considerations that we have taken into account in our

determination and explain how we reach our conclusions.    See

Estate of Jung v. Commissioner, 101 T.C. 412, 424 (1993).

     Before we proceed to our analyses of the values of the

Subject Properties, it may be appropriate to briefly discuss the

expert witnesses.
                               - 24 -
     Petitioner’s primary expert witness is Noel K. Atkinson,

hereinafter sometimes referred to as Atkinson.   He has been a

real estate appraiser since the early 1950's.    When the instant

case was tried, about half of Atkinson’s work was testifying in

Court.

     Atkinson appropriately used the comparable sales approach as

a major element in valuing the land portion of each of the

Subject Properties.13   Under the comparable sales approach, if a

comparable property has an element of a lesser quality than the

property being appraised, then the comparable property’s sale

price is adjusted upward, and vice versa.   Atkinson appropriately

compared several different elements of the properties and

generally used four to six comparables.   He displayed the

adjustments in a matrix, and also briefly explained why he

adjusted the comparable property’s sale price up or down.


13
     The comparable sales approach involves locating parcels of
land which were as physically similar as possible to the subject
property, and which had been sold within a reasonable time of
decedent’s death. Since no two sales and no two parcels are
identical, the actual sales price in each case is then to be
adjusted up or down to reflect the differences between the
subject property and the comparable property. The estimated
values of the comparable properties as so adjusted provide an
indication of the value of the subject property on the relevant
date. Like most valuation techniques, this method is far from an
exact science. However, it is based upon the common sense
approach of taking the actual sales prices of properties similar
to the subject properties and then relating the prices to the
subject properties. This Court has often used or approved the
use of this valuation method. See Wolfsen Land & Cattle Co. v.
Commissioner, 72 T.C. 1, 18-21 (1979).
                                - 25 -
Unfortunately, in many instances Atkinson stated that an element

of a comparable property was of a lesser quality than the

property being valued and then did not adjust for that lesser

quality or adjusted downward.    In at least one instance, the mere

correction of the directions of the adjustments in Atkinson’s

matrix so that they conformed to Atkinson’s textual descriptions

resulted in increasing the resulting value by about 50 percent.

Also, in some instances, the textual descriptions of properties

in Atkinson’s written report did not match the properties listed

in the accompanying matrix.   It was as though Atkinson had

revised parts of a draft of his report but inadvertently kept

parts of former drafts that no longer fit the revised draft.

     Another matter that gives us concern about how carefully

Atkinson reads the expert witness reports that he issues relates

to the following statement which appears in each of his

valuations of the Subject Properties.    “This appraisal meets the

certification requirements of the California Civil Code Section

1922.14 controlling persons preparing certified appraisals of

real property.”   These valuations are dated from May 10, 1995

(Lafayette Property), to February 11, 1998 (Parker Property).    At

trial, Atkinson was confronted by the fact that the cited

California Code provision had been repealed in 1990, the repeal

taking effect no later than January 1, 1992.   Atkinson

acknowledged the repeal. When asked why his expert witness report
                               - 26 -
relies on a statute that had been repealed years earlier,

Atkinson replied as follows: “A    I think this is boilerplate that

was put in by my secretary over the last--ever since 1992, and I

have never taken it out.”

     As a result of the obvious errors in Atkinson’s expert

witness report, we are hesitant to rely on Atkinson’s judgment

even as to those matters that do not involve obvious errors.

     Respondent’s expert witness in Norman C. Hulberg,

hereinafter sometimes referred to as Hulberg.   He has been a real

estate appraiser since 1975.   He has testified as an expert

witness “on over 50 occasions” in Federal District Courts in the

San Francisco area and in Las Vegas, Nevada.

     Hulberg also used the comparable sales approach on, or in

connection with, his valuations.   (See, e.g., infra B. Lafayette

Property, in which Hulberg used the comparable sales method only

to determine the reversionary value element of the discounted-

cash-flow method).   Hulberg avoided the disconnects between

textual analysis and valuation adjustments that plague Atkinson’s

expert witness report.   He did so by (1) the simple expedient of

abbreviating the textual analysis of the comparable properties,

and (2) the even simpler expedient of omitting altogether the

property-by-property matrix of adjustments to the comparable

property sale prices.    By thus failing to reveal the details of

his analysis, Hulberg protects against the pitfalls that Atkinson
                               - 27 -
fell into, but at the same time he vastly diminished the weight

to be given to his conclusions.    The expert witness helps the

trier of fact primarily by explaining so that the trier of fact

follows and understands.14   The expert who issues pronouncements

without detailing the supporting analysis does not properly

satisfy this obligation and so is generally not a persuasive

expert witness.15   Hulberg’s report, too, evinced failure to

review before issuing.    For example, Hulberg’s report included

more than one final value for the Lafayette Property and the

Parker Property.    Hulberg’s report showed final values for the




14
     Fed. R. Evid. 702, provides as follows:

      Rule 702.   Testimony by Experts

           If scientific, technical, or other specialized
      knowledge will assist the trier of fact to understand the
      evidence or to determine a fact in issue, a witness
      qualified as an expert by knowledge, skill, experience,
      training, or education, may testify thereto in the form of
      an opinion or otherwise. [Emphasis added.]
15
   See 15 Mertens, Law of Federal Income Taxation, sec. 59.08,
at 22 (1999).

           A common fallacy in offering opinion evidence is to
      assume that the opinion is more important than the facts.
      To have any persuasive force, the opinion should be
      expressed by a person qualified in background, experience,
      and intelligence, and having familiarity with the property
      and the valuation problem involved. It should also refer to
      all the underlying facts upon which an intelligent judgment
      of valuation should be based. The facts must corroborate
      the opinion, or the opinion will be discounted. [Fn. ref.
      omitted; emphasis added.]
                             - 28 -
Lafayette Property of $3,417,000, $3,960,000, and $3,618,000, and

for the Parker Property of $1,468,000 and $1,240,000.

     As a result of the foregoing, we have qualms about relying

on Hulberg’s judgments even as to those matters that do not

involve obvious errors.

     Petitioner also presented the testimony of W. Jack Kidder,

hereinafter sometimes referred to as Kidder, and John J. Kirby,

hereinafter sometimes referred to as Kirby.   Kidder and Kirby are

hereinafter sometimes referred to jointly as Kidder/Kirby.

Kidder has 37 years of experience valuing real property, and

Kirby has more than 25 years of experience valuing real property.

Kidder’s and Kirby’s testimony and report were introduced for the

sole purpose of rebutting Hulberg’s report and testimony with

regard to the Lafayette and Parker Properties.

A. Quito Property

     Both Atkinson and Hulberg valued the Quito Property using

both the comparable sales approach and a second approach, which

Hulberg calls the land development approach and Atkinson calls

the cost approach.

     Table 3 shows Atkinson’s and Hulberg’s conclusions as to the

fair market value of the Quito Property under the different

approaches.
                                - 29 -
                                Table 3

                   Comparable     Land Development
Expert               Sales          or Cost             Conclusion

Atkinson (P)       $2,009,855      $1,497,000           $1,750,000
Hulberg (R)         2,365,000       2,210,000            2,300,000

     Atkinson and Hulberg agree that the highest and best use of

the Quito Property is for residential subdivision development,

that the Quito Property should be treated as being potentially

divisible into eight lots, and that any such development would

require removal of the existing house on the Quito Property.

     Hulberg “considered both approaches equally * * * and will

reconcile toward the middle of the indicated range.”      Atkinson

concluded that “The Cost and Sales Comparison Approaches are very

close in final value”; he, too, struck a final valuation midway

between the values of his two approaches.       Hulberg’s comparable

sales approach value was only 7 percent higher than his land

development approach value.     Atkinson’s comparable sales approach

value was 34 percent higher than his cost approach value.      See

supra table 3.   We do not understand the standards of judgment

that prompted Atkinson to conclude that a 34-percent differential

is “very close”.

     Comparable Sales Analysis

     For his comparable sales analysis, Atkinson selected five

sales of other properties, sold between June 1989 and December

1990, and presented a matrix showing sale-by-sale, item-by-item
                              - 30 -
adjustments.   His descriptions of these sales were scattered in

his expert witness report, requiring some search.    These brief

descriptions do not include explanations of the adjustments made

in the matrix.   After adjusting the sale prices on account of

location, topography, etc., Atkinson arrived at an average fair

market value per acre of $178,972.     He multiplied that amount by

11.23 acres and arrived at an indicated value of $2,009,855 for

the Quito Property.

     For his comparable sales analysis, Hulberg selected six

sales of other properties, sold between March 1988 and November

1995.   Although Hulberg stated in his report that in making his

adjustments to the comparable properties’ sale prices, he

“considered access, site influences, school district attendance

areas, site development costs, favorable financing and overall

neighborhood aesthetics”, he did not favor us with information as

to how much of an adjustment he made to any comparable property’s

sale price, and why.   He chose to compute price per lot, rather

than per acre.   Hulberg was “inclined to value the subject at the

lower end of the indicated valuation range” and informed us that

this inclination led him to a value of $300,000 per lot.    Because

the Quito Property could be subdivided into eight lots, Hulberg

came to a valuation of $2.4 million.    From this, he subtracted

$35,000 to demolish the building on the Quito Property, resulting

in a net comparable sales approach value of $2,365,000.
                               - 31 -
       Neither expert used a comparable sale that the other one

did.    Neither expert gave us a cogent reason to conclude that his

selection of comparable properties’ sales was better than the

other’s, that his adjustments were better than the other’s, or

that a per-lot computation, was better than a per-acre

computation, or vice versa.

       Cost or Land Development Analysis

       As best we can tell, what Atkinson describes as the “Cost

Approach” is essentially similar to what Hulberg describes as the

“Land Development Approach”.    Both Atkinson and Hulberg used, in

their cost or land development analysis, sets of comparable

property sales that were different from the comparable property

sales they used in the basic comparable sales analysis.

       Atkinson’s expert witness report states that

       I have selected $400,000 per lot for eight lots [the number
       of residential lots that both sides agree the Quito Property
       would probably be subdivided into] as being a reasonable
       retail lot value due to the location and the 18 to 24 months
       it would take to have the lots ready to sell.

Atkinson’s expert witness report then goes on to state that the

indicated value by this approach is $1,497,000.    Atkinson’s

expert witness report does not explain, or even briefly describe,

the process by which he moved from $3,200,000 ($400,000 per lot

for eight lots) to an indicated value of $1,497,000.

       At trial, on direct examination, Atkinson attacked Hulberg’s

valuation of the Quito Property and contrasted it with his choice
                               - 32 -
of $400,000 per lot.    However, the next morning, on redirect

examination, Atkinson testified that $400,000 per lot was “a

typographical error.”    Prompted by petitioner’s counsel, Atkinson

then testified that the value should have been $300,000 per lot.

The Court then received into evidence Atkinson’s notes that show

how he moved from $2,400,000 ($300,000 per lot for eight lots) to

an indicated value of $1,208,000.    Atkinson’s notes as so

admitted conclude with the following:    “13. I arbitrarily

selected a higher cost figure as I felt lots would sell at a

higher Price.”

     Atkinson’s flip-flops and self-confessed arbitrariness

convince us that we should not give any weight to his conclusion

that the Quito Property’s indicated value under the cost approach

is $1,497,000; they also seriously undermine our willingness to

pay attention to his valuations of any of the Subject Properties.

We also view with some concern petitioner’s counsel’s

presentation of Atkinson’s expert witness report with the

$400,000-per-lot analysis, petitioner’s counsel’s supportive

questioning regarding Atkinson’s direct examination’s defense of

$400,000 per lot, and then Atkinson’s overnight conversion being

prompted by petitioner’s counsel.

     Hulberg’s land development approach has some similarities

to, and some differences from, Atkinson’s cost approach.
                              - 33 -
     Hulberg concluded that the eight lots into which a developer

would subdivide the Quito Property would be sellable by the

developer for $500,000 per lot.

     Both Atkinson and Hulberg concluded that the prospective

developer would expect to make a $50,000 profit per lot, or

$400,000 for the entire Quito Property.

     In his admitted notes, Atkinson lists various costs that the

developer might be expected to incur, in addition to the expected

profit; these costs, which include several items calculated as a

percentage of gross, aggregate 33 percent of the $300,000 per lot

gross.   Hulberg, in his expert report, has a similar but more

sophisticated elaboration of developer costs, which aggregate

34-7/8 percent of the $500,000 per lot gross.   Hulberg’s

elaboration of costs is somewhat greater in amount and in

percentage-of-gross than the list in Atkinson’s notes.

Accordingly, the substantial difference between Atkinson’s

$1,497,000 cost approach amount and Hulberg’s $2,210,000 land

development approach is attributable to their differing estimates

of the price a developer could get for each of the eight lots

into which the Quito Property would be subdivided.

     Hulberg also does not set out the adjustment process;

however, he provides information about the terrains of the

comparable properties.   His comparable properties average

$587,000 per lot.   When we make adjustments based on his terrain
                                - 34 -
descriptions, we arrive at an average of about $500,000 per lot,

the amount that Hulberg used.

     The Quito Property is in the Campbell Union School District

and not the Saratoga School District.    Atkinson and Hulberg agree

that homes in the Saratoga School District command a market

premium compared to homes in the Campbell Union School District.

Accordingly, if any of the comparables are in the Saratoga School

District, then their sale prices should be adjusted downward.

However, we have not found, and petitioner has not directed our

attention to, anything in the record that shows that any of the

Hulberg’s comparables were in the Saratoga School District or in

any other school district where residential property prices were

higher than the Campbell Union School District.    Neither side has

presented to the Court cogent reasons why the Court should

disregard any of the comparable properties presented by Atkinson

or by Hulberg.

     We note that two of the comparable properties appear on both

Atkinson’s and Hulberg’s lists–-the property at 15425 Monte Vista

Dr., which was sold in May 1992 for $675,000, and the 1.16-acre

property at lot 16, Sobey Oaks Court, which was sold in July 1991

for $550,000.    We note further that Atkinson shows the Monte

Vista Dr. property as being 2.9 acres, Hulberg shows this Monte

Vista Dr. property as being 2.0 acres.    Neither side pointed out

the discrepancy at trial or on brief, and neither expert witness’
                              - 35 -
report provides information from which we could come to a

conclusion as to what is the area of this Monte Vista Dr.

property.

     Conclusion

     Doing the best we can on the basis of the record made by the

parties, taking into account our above-expressed reactions to

Atkinson’s cost analysis, we conclude, and we have found, that

the date-of-death fair market value of the Quito Property is $2.2

million.

B. Lafayette Property

     Atkinson valued the Lafayette Property using three

approaches:   (1) The comparable sales approach, (2) the income

approach, and (3) the cost approach.     Under the latter two

approaches, Atkinson valued the land component of the Lafayette

Property using the comparable sales approach.

     Hulberg and Kidder/Kirby valued the Lafayette Property using

the discounted cash-flow approach.     In determining the

reversionary value element of the discounted cash-flow approach,

Hulberg and Kidder/Kirby used the comparable sales approach.

     Table 4 shows Atkinson’s, Hulberg’s, and Kidder/Kirby’s

valuations of the Lafayette Property under their respective

approaches.
                              - 36 -
                              Table 4

Expert                Approach--Amount             Conclusion

Atkinson (P)      Comparable sales   $2,892,000
                  Income              2,822,000
                  Cost                3,023,000

                                                   $2,850,000
                                                   1
Hulberg (R)       Discounted cash-flow              3,960,000

Kidder/Kirby (P) Discounted cash-flow               2,800,000-
                                                    3,100,000
     1
       In his expert witness report, Hulberg states his
conclusion at different places as (1) $3,417,000, (2) $3,960,000,
and (3) $3,618,000. Hulberg’s analysis goes only to the
$3,960,000. It appears that the other numbers are the remains of
earlier drafts, which Hulberg neglected to conform to the results
of his later analyses.

     Atkinson values the Lafayette Property as a fee, ignoring

the then-existing lease.   Hulberg and Kidder/Kirby value the

Lafayette Property subject to the lease, a circumstance that

pushes them toward the discounted cash-flow approach.    Each

expert uses a comparable sales approach at some point in his

analysis.   Atkinson and Hulberg reduce their valuations to take

into account environment contamination considerations.
                                 - 37 -
         In his comparable sales analysis, Atkinson separately valued

(1) “the structure and its minimum site”16 and (2) “the excess

land”.      Table 5 shows his conclusions.

                                 Table 5

         Item                                       Value

Improvements with 67,000 sq. ft.                   $384,000
  site area,1 12,800 sq. ft. bldg.
  area @ $30 per sq. ft.

Excess land 400,000 sq. ft. @ $6.60               2,640,000
  per sq. ft.

Contamination considerations                       (132,000)
                                                  2,892,000
     1
     The value is calculated as the product of the building area
and the price per square foot; it is not affected by the 67,000-
square-foot site area.

         In his analysis of the excess land, Atkinson selected six

sales of other properties, briefly described these other

properties, and presented a matrix showing adjustments up or down

in order to reflect differences between the other properties and

their sales, on the one hand, and the Lafayette Property and its

status on the date of decedent’s death, on the other hand.      He

made adjustments for differences on account of location, size,

accessibility to rail facilities, traffic exposure, street



16
     Atkinson does not explain his concept of “minimum site” and
his choice of 67,000 square feet. However, our examination of
the assessor plat map in his expert witness report suggests that
67,000 square feet may be the approximate area of that part of
the Lafayette Property from the frontage on Mathew Street to the
rear of the building.
                               - 38 -
improvements, and parking and utilities.    Unlike the

corresponding portion of his report as to the Quito Property, see

supra, Atkinson provided a brief explanation of why he made each

of the matrix adjustments to the Lafayette Property comparable

sales.

     Atkinson’s matrix contains 36 entries, of which 25 are other

than zero.   In the case of 14 of these nonzero entries, Atkinson

stated that the comparable property is inferior to the Lafayette

Property but he made a downward adjustment to the comparable

property’s sale price.17   Atkinson used his matrix to conclude

that the 400,000 square feet of “excess land” should be valued at

$6.60 per square foot, leading to a value of $2,640,000 for this

component of the Lafayette Property.    If we were to accept

Atkinson’s choices of comparable sales and Atkinson’s evaluations

of the characteristics of the comparable properties, but correct

the direction of the adjustments, then the 400,000 square feet of

“excess land” should be valued at $9.20 per square foot, leading

to a value of $3,680,000 for this component of the Lafayette

Property.

     Atkinson used the “excess land fair market value” of

$2,640,000 directly in his income approach and the “land value



17
     As explained in the text at supra note 13, if the comparable
property has an element that is inferior to the property being
appraised, then the comparable property’s sale price is to be
adjusted upward.
                               - 39 -
from market analysis” of $3,082,200 ($6.60/sq. ft. x 467,000 sq.

ft.) directly in his cost approach.      Table 6 shows Atkinson’s

three valuation approaches as he reported them (supra table 4),

and as they would be if adjusted to take account of the

directional (i.e., plus versus minus) errors Atkinson makes in

his matrix, without changing the size of each adjustment.

                               Table 6

  Approach            Atkinson’s Report          Amount Corrected

Comparable Sales         $2,892,000                 $3,932,000
Income                    2,822,000                  3,862,000
Cost                      3,023,000                  4,465,200

     A significant defect in all of Atkinson’s approaches is that

he did not give adequate consideration to the fact that the then-

present lease term had 3 years to run.      As a result, the property

should have been valued as a leased fee.      Hulberg and

Kidder/Kirby agreed that leased fee was the proper status of the

Lafayette Property.   They agreed that the discounted cash-flow

approach was the best way to value the Lafayette Property.       With

the then-current lease apparently being at below-market rates,

the discounted cash-flow approach overlay on Atkinson’s work

would lead to a valuation less than the $4 million or more that

might have been supported by the corrections embodied supra in

table 6.

     Hulberg broke the Lafayette Property into its two original

components.   See supra note 4.   He valued the fee interest in one
                              - 40 -
portion, based on comparable sales, at $10.50 per square foot,

and the other portion (the portion with the building) at $11.50

per square foot.   Hulberg totaled the two portions and arrived at

a fee interest value of $5,188,000.18    This averages $11.10 per

square foot.   All of Hulberg’s comparable sales were of

properties smaller than the Lafayette Property.    Hulberg’s expert

witness report makes a downward adjustment in each comparable

property’s sales price (in an amount that Hulberg failed to

disclose) to account for the phenomenon that, at those sizes in

that market, smaller properties were worth more per square foot

than otherwise equivalent larger properties.    At trial, Hulberg

presented adequate rebuttals to the Kidder/Kirby attacks on many

of the elements of Hulberg’s analysis.

     However, we remain troubled by Hulberg’s failure to guide us

through his decision-making process, as described in the opinion

text at supra note 14.   Also, we are unwilling to accept

Hulberg’s explanation at trial that his shift from $3,417,000 and

$3,618,000 valuation conclusions to his final valuation of

$3,960,000 was entirely the result of his shifting view of the

impact of environmental concerns.   We have not found in the

record anything that would lead us to believe that Hulberg really




18
     First portion: 179,903 sq. ft. x $10.50 per sq. ft. =
$1,889,000. Second portion: 286,886 sq. ft. x $11.50 per sq.
ft. = $3,299.000.
                                 - 41 -
thought that environmental concerns would drive the value of the

Lafayette Property down in the market by $600,000.19

     Doing the best we can with a record that, although fairly

extensive is also fairly murky, we conclude, and we have found,

that the fair market value of the Lafayette Property on the date

of decedent’s death was $3.7 million.

C.   Parker Property

     Atkinson valued the Parker Property using three approaches:

(1) The comparable sales approach; (2) the income approach; and

(3) the cost approach.   Under the latter two approaches, Atkinson

valued the land component of the Parker Property using the

comparable sales approach.

     Hulberg valued the Parker Property using the comparable

sales approach and the income approach.   He considered, but

rejected, the cost approach.20

19
     Hulberg valued the Lafayette Property at $4,020,000. He
then subtracted $60,000 for environmental concerns to arrive at
his final valuation of $3,960,000. To go from $4,020,000 to his
earlier-stated final valuation of $3,417,000, he would have had
to attribute $603,000 to environmental concerns. Atkinson’s
estimate of the impact of environmental concerns was only
$132,000.
20
     Hulberg gives the following reasoning for rejecting the cost
approach for the Parker Property.

     The cost approach is not considered to be an applicable
     approach for older buildings such as the subject
     property. This is due to a number of factors, the most
     important being the lack of support for a detailed
     estimate of the depreciation, and lack of knowledge of
     the exact condition of the property as of our valuation
                                                   (continued...)
                                - 42 -
        Kidder/Kirby valued the Parker Property using the discounted

cash-flow approach.     In determining the reversionary value

element of the discounted cash-flow approach, Kidder/Kirby used

the comparable sales approach.

        Table 7 shows Atkinson’s, Hulberg’s, and Kidder/Kirby’s

valuation of the Parker Property under their respective

approaches.

                                Table 7

Approach                 Atkinson     Hulberg     Kidder/Kirby

Comparable sales         $665,300    $1,468,000         --
Income                    462,000     1,448,000         --
Cost                      803,500        –-             --
Discounted cash-flow         –-          –-         $940,000 to
                                                     995,500
Conclusion                600,000     1,460,000      940,000 to
                                                     995,000

        Atkinson made many of the same errors in valuing the Parker

Property as he did with the Lafayette Property.     Hulberg relied

on one such error.

        In his income approach, Hulberg treated the tenant on the

Parker Property as “holding over on a month-to-month tenancy.”

He based this on Atkinson’s report, which does indeed make this



20
     (...continued)
         date. In addition, potential purchasers of older
         properties rarely, if ever, estimate the value of
         potential purchases utilizing the depreciated cost
         method; purchasers for similar properties typically
         consider only the market and income approaches. When
         the cost approach is used, it is typically used to
         ascertain the feasibility of new construction.
                              - 43 -
statement.   The lease, attached to Atkinson’s report, provides

that “Any holding over after the expiration of the said terms,

[May 31, 1990] with the consent of the Lessor, shall be construed

to be a tenancy from month to month”.   Accordingly, Hulberg

ignored the then-existing tenancy, proceeded to determine market

rentals and lessor’s expenses, and concluded that the market

would have produced a net operating income of $101,346 per year.

He capitalized this at 7 percent and came to a valuation of

$1,448,000 by the income approach.

     However, the lease on the Parker Property also provides that

the lessee has two options to renew for consecutive 5-year terms,

at rentals to be agreed upon by lessee and lessor.   Hinz

testified that the first option to renew had been exercised and

the lessee was still paying $1,500 per month at decedent’s death.

At the end of this renewal term (May 31, 1995), the tenant balked

at Hinz’s proposal to increase the monthly rental to $6,000, and

moved out.   Hinz’s testimony is believable, is supported by

evidence of actual receipts from the Parker Property for 1992

through 1997, and was not contradicted by any evidence of record.

We have so found.   Thus, at decedent’s death, the Parker Property

was going to produce no more than $18,000 per year ($1,500 per

month) for the next three years, notwithstanding Hulberg’s

estimate of market net operating income of $101,346 per year.     If

Hulberg’s estimates as to other elements of value are correct,
                              - 44 -
then his conclusion as to date-of-death value should be reduced

by about $250,000 to reflect the expectation of 3 years (decedent

died on May 4, 1992; the lease renewal term expired on May 31,

1995) of below-market rental income.

     The Parker Property immediately adjoins the Lafayette

Property.   In substantially all respects, the Parker Property’s

value indicia are the same as those of the Lafayette Property.

Compare our findings of fact as to the Lafayette Property with

those as to the Parker Property supra.   The Parker Property is

about 27.3 percent the size of the Lafayette Property.   Because

smaller properties in that area were worth more per square foot

than larger properties, we conclude that the Parker Property was

worth more than 27.3 percent of the value of the Lafayette

Property.   The then-current rent under the Parker Property lease

was about 40 percent as much as the then-current rent under the

Lafayette Property lease, another factor nudging upward the value

of the Parker Property.   Also, the building improvements on the

Parker Property were about as large as those on the Lafayette

Property.   Under these circumstances, we believe it is not

fruitful to set forth in any greater detail the concerns we have

as to the experts’ presentations.

     We conclude, and we have found, that the fair market value

of the Parker Property on the date of decedent’s death was $1.2

million.
                               - 45 -
D.   Richard Property

       Atkinson valued the Richard Property using three approaches:

(1) The comparable sales approach, (2) the income approach, and

(3) the cost approach.    Under the cost approach, Atkinson valued

the land component of the Richard Property using the comparable

sales approach.

       Hulberg valued the Richard Property using the comparable

sales approach and the income approach.    He considered, but

rejected, the cost approach for the same reasons he gave with

respect to the Parker Property.    See supra note 19.

       Table 8 shows Atkinson’s and Hulberg’s valuations of the

Richard Property under their respective approaches.

                               Table 8

     Approach                 Atkinson             Hulberg

Comparable sales              $223,860            $321,000
Income                         190,000             301,000
Cost                           221,000                --
Conclusion                     200,000             320,000

       In their comparable sales approaches both Atkinson and

Hulberg valued the Richard Property solely by reference to the

floor area of the machine shop building, and not by reference to

the total area of the property.    Atkinson concluded that the

Richard Property should be valued at $39 per square foot of floor

area in the machine shop building; Hulberg concluded $65 per

square foot.    Atkinson also valued the Richard Property by
                              - 46 -
reference to its total lot area ($8 per square foot), but only as

one element in his cost approach.

     Again, Atkinson’s expert witness report descriptions of his

comparable properties conflict with the matrices that he presents

in order to quantify his observations.    Again, Hulberg avoided

Atkinson’s error by not presenting any adjustment matrix.

     Hulberg makes the following point:

     In correlating these comparable sales to the subject
     property, the primary characteristic difference
     requiring consideration is the floor area ratio of the
     comparables in relation to that of the subject. Floor
     area ratio (FAR) is the ratio of building area to site
     size. It is calculated by dividing the building size
     by the site size. The subject property has a floor
     area ratio of 25 percent. The floor area ratios
     exhibited by the comparable sales vary widely between
     18 percent and 69 percent. Typically, an inverse
     relationship exists between floor area ratio and the
     overall value of the property expressed as a price per
     square foot of building area.

     Intuitively, we agree with Hulberg’s observation.

Obviously, all other matters being equal, we would expect that

the Richard Property (20,000 sq. ft.) would be worth more if the

machine shop building stood on a 1-acre lot and would be worth

less if the building stood on a quarter-acre lot.    Curiously,

both Atkinson and Hulberg focused on comparable properties where

the floor area ratio was 2 to 3 times that of the Richard

Property.   Hulberg states that the floor area ratio is “The

primary characteristic difference dominating the adjustments made

to these comparables”.   Atkinson appears to have ignored this
                                - 47 -
matter.   Although we are persuaded that the prices of all five of

Atkinson’s comparable properties and of four of Hulberg’s five

comparable properties should be adjusted upward because of the

floor area ratio, neither side’s expert helps us to decide the

magnitude of this adjustment.

     The income method valuations of the Richard Property

constitute another setting in which the state of the record makes

our task difficult.   Hulberg states that the Richard Property was

leased to a tenant as of the valuation date.   Hulberg states that

he asked for, but did not receive, a copy of the lease.

Accordingly, Hulberg says, he valued the Richard Property without

regard to the lease, but warned that

     The value of the leased fee interest in the property
     could be the same, greater than, or less than the value
     of the fee simple interest, depending on the terms of
     the lease in effect as of the date of our valuation.

Atkinson says that “Although [the] lease had expired the rental

had been extended on a month to month basis for the same rent.”

On brief, petitioner asks us to find as follows:

          d. Valuation of Richard Avenue Property. This
     property was subject to a legally enforceable lease
     with S.B. Machine Works (Transcript, p. 42) and the
     rent it yielded was $1,500 and any valuation by
     capitalization of income should reflect this income
     figure. (Petitioner’s Exihibit [sic] 18).

     The reference to transcript, p. 42, is to Hinz’s testimony,

as follows:

          Q [Doyle] And how--and was–-at the time of your
     mother’s death, was it rented to someone?
                                 - 48 -
            A [Hinz]     Yes, sir.

            Q   And who was it rented to?

            A   S.B. Machine Works.

            Q   Okay.   And how much rent did S.B. Machine Works
     pay?

            A   At that time?

            Q   Yes.

            A   Five hundred and fifty dollars a month.

            Q   Okay.   And did they have a lease?

          A I’m a little hazy on that. Their lease expired
     somewhere in ‘92 or ‘93. They were on month to month
     for a period of time, and just when that happened, the
     best –- the best record I have of that is that they
     paid $550 a month for the month of September ‘93 or
     August ‘93, somewhere in there, and the next month they
     paid 1500.

     On brief, petitioner also relies on Exhibit 18.      That

exhibit shows that the Richard Property did not produce any

income at all in 1992, the year of decedent’s death.      Finally,

neither side produced any lease for the Richard Property, and

neither side called any witness who could give us any evidence

about any lease that was clearer than Hinz’ “hazy” recollection.

     The sources petitioner relies on convince us, and we have

found, that the facts are just the opposite of what petitioner

asks us to find.

     In that portion of his expert witness report that deals with

the income approach to valuing the Richard Property, Hulberg

presents a map showing the locations of the Richard Property and
                                - 49 -
the six rental comparable properties.      The map shows that

comparable property 6 is far closer to the Richard Property than

is any of the other five rental comparable properties.      However,

Hulberg’s chart and other descriptive materials do not refer to

property 6.    Hulberg does not enlighten us as to the

characteristics of property 6 or why he shows it on the map,

given that he does not take property 6 into account in this

evaluation.

     Hulberg concluded that a prospective buyer of the Richard

Property would be able to lease it for a gross rental of $26,676

per year, with net operating income of $24,075 per year.        As we

have noted, petitioner and decedent did not receive any 1992

rental income from the Richard Property.      The Richard Property

produced for 1993 $10,400 income and $3,851 expenses; for 1994

$18,000 income and $2,186 expenses.      Application of Hulberg’s

capitalization analysis to petitioner’s actual rental results for

these 2 years would lead to an income approach fair market value

of about $200,000, essentially similar to Atkinson’s income

approach’s $190,000.    See supra table 8.

     As noted, Hulberg rejected the cost approach for the Richard

Property.     Although Atkinson used the cost approach, he gave

little weight to it because the other approaches “are the most

reliable as they represent verifiable market data.”
                                - 50 -
     As the foregoing shows, the work of the experts in the

instant case does not give us confidence in their analyses and

also does not lead us to any clear conclusion.   We are satisfied

that the fair market value of the Richard Property is

significantly more than Atkinson’s $200,000 and significantly

less than Hulberg’s $320,000.

     Doing the best we can with the record presented by the

parties in the instant case, we conclude, and we have found, that

the date-of-death fair market value of the Richard Property was

$250,000.

E.   Conclusion

      As table 2 supra shows, we conclude that the aggregate fair

market value of the four disputed properties is $7,350,000.   This

is $535,000 less than petitioner reported on the estate tax

return, $2,732,000 less than respondent determined in the notice

of deficiency, and $3,140,000 more than petitioner asserted in

the petition.

      Based on our conclusions, the Christy-Hinz initial slap-dash

valuations were far better than the work product that anyone–-

whether party or expert witness–-produced once the parties got

into their confrontational mode.

      We now proceed to consider the additions to tax.
                                - 51 -
             II.   Late Filing Addition–-Sec. 6651(a)(1)

     The estate tax return was due by February 4, 1993.

Petitioner requested an extension to July 31, 1993.    Respondent

granted an extension to August 4, 1993.    See supra table 1.    The

tax return was received by respondent on February 4, 1994.      Thus,

the tax return was not timely filed.     At the time of filing the

tax return, both Hinz and Christy thought that petitioner had

been granted a filing extension to February 4, 1994, and that the

filing was timely.

     Petitioner contends that its failure to timely file the tax

return was due to reasonable cause and not due to willful neglect

because (1) Hinz, as executor, relied on Christy’s erroneous

advice that respondent had extended the filing period to February

4, 1994, and (2) the late filing was due to extraordinary

circumstances–-confusing and illegible extension dates by

respondent combined with Christy’s then-unsuspected eye

disease.21


21
     Petitioner does not contend, in the alternative, that the
amount of any addition to tax for failure to timely file the
estate tax return should be less than 25 percent because the tax
return was not filed more than 4 months late or because of the
interplay of paragraphs (1) and (2) of sec. 6651(a). See sec.
6651(c)(1). As a result, we do not consider any such issue.
However, we treat as implicit in the pleadings, and petitioner
notes on opening brief, the alternative computational contention
that the amount of the sec. 6651(a)(1) addition to tax should
take into account any reduction in the amount of the deficiency
resulting from the parties’ settled issues and our determinations
under Issue I, supra. This computation shall be made under Rule
                                                   (continued...)
                              - 52 -
     Respondent maintains that Hinz relied on Christy to file the

tax return on time, that this was an attempt to delegate a

nondelegable duty, and that this does not constitute reasonable

cause for failing to timely file the tax return.   Respondent

contends that, “additionally, it was not reasonable for Mr.

Christy to believe that the estate had been granted an extension

to file the Federal estate tax return until February 4, 1994”.

     Both sides rely on the opinion of the Supreme Court in

United States v. Boyle, 469 U.S. 241 (1985).   Respondent stresses

the focus of the Court in Boyle on the executor’s duty to timely

file the estate tax return.   Petitioner points to the Supreme

Court’s ratification through Boyle of judicial holdings that

reliance on counsel’s advice constitutes reasonable cause, and

contends that Hinz relied on Christy’s advice and that Hinz did

not delegate to Christy the duty of timely filing.   Respondent

contends that Hinz delegated the duty to Christy and did not

merely rely on Christy’s advice.

     We agree with respondent’s conclusion and with some of

respondent’s analysis.




21
 (...continued)
155.
                              - 53 -
     Section 6651(a)(1)22 imposes an addition to tax of 5 percent

per month (with a maximum of 25 percent) in case of failure to

file a timely tax return, unless it is shown that this failure is

due to reasonable cause and not due to willful neglect.

     Petitioner has the burden of proving error in respondent’s

determination that this addition to tax should be imposed against

the estate.   See Church of Scientology of California v.

Commissioner, 823 F.2d 1310, 1322 (9th Cir. 1987), affg. 83 T.C.



22
     Sec. 6651(a) provides, in pertinent part, as follows:

     SEC. 6651.   FAILURE TO FILE TAX RETURN OR TO PAY TAX.

          (a) Addition to the Tax.–-In case of failure--

               (1) to file any return required under authority of
          subchapter A of chapter 61 * * * on the date prescribed
          therefor (determined with regard to any extension of
          time for filing), unless it is shown that such failure
          is due to reasonable cause and not due to willful
          neglect, there shall be added to the amount required to
          be shown as tax on such return 5 percent of the amount
          of such tax if the failure is for not more than 1
          month, with an additional 5 percent for each additional
          month or fraction thereof during which such failure
          continues, not exceeding 25 percent in the aggregate;

               (2) to pay the amount shown as tax on any return
          specified in paragraph (1) on or before the date
          prescribed for payment of such tax (determined with
          regard to any extension of time for payment), unless it
          is shown that such failure is due to reasonable cause
          and not due to willful neglect, there shall be added to
          the amount shown as tax on such return 0.5 percent of
          the amount of such tax if the failure is for not more
          than 1 month, with an additional 0.5 percent for each
          additional month or fraction thereof during which such
          failure continues, not exceeding 25 percent in the
          aggregate;
                              - 54 -
381, 526 (1984); Ehrlich v. Commissioner, 31 T.C. 536, 540

(1958).   In the instant case petitioner has the burden of proving

that the failure to timely file the estate tax return was due to

reasonable cause and not due to willful neglect.   See supra note

22.   United States v. Boyle, 469 U.S. at 245; Funk v.

Commissioner, 687 F.2d 264, 266 (8th Cir. 1982), affg. T.C. Memo.

1981-506; Davis v. Commissioner, 81 T.C. 806, 820 (1983), affd.

without published opinion 767 F.2d 931 (9th Cir. 1985).     The

Supreme Court has characterized this as a “heavy burden.”     United

States v. Boyle, 469 U.S. at 245.

      A taxpayer’s failure to file timely is due to “reasonable

cause” if the taxpayer exercised ordinary business care and

prudence and was nevertheless unable to file the return within

the prescribed time.   See United States v. Boyle, 469 U.S. at

246; Estate of Paxton v. Commissioner, 86 T.C. 785, 819 (1986);

sec. 301.6651-1(c)(1), Proced. & Admin. Regs.   “Willful neglect”

is defined as “a conscious, intentional failure or reckless

indifference.”   United States v. Boyle, 469 U.S. at 245.

      We conclude that petitioner is liable for an addition to tax

for failure to timely file the tax return, for two reasons.

           (1) By the time Christy told Hinz that the tax return

      due date was February 4, 1994, the true due date (Aug. 4,

      1983) had already passed.
                                - 55 -
          (2) Hinz did not merely retain Christy to give legal

     advice as to the due date of the tax return, but rather

     attempted to delegate to Christy the task of filing a timely

     tax return.

Each of these reasons is by itself sufficient to require a

holding for respondent on this issue.

A. The Tax Return Was Already Late.

     Under section 6651(a)(1), petitioner is liable for the late

filing addition to tax “unless it is shown that such failure [to

timely file the tax return] is due to reasonable cause and not

due to willful neglect”.    (Emphasis added).

     Petitioner maintains that the “reasonable cause” is

Christy’s advice to Hinz that the tax return’s filing due date

was February 4, 1994.    Hinz testified that Christy first told him

of the February 4, 1994, due date when Christy “kind of hustled

me up as far as getting appraisals”.     By that time, Hinz

testified they “had very little choice but to use the probate

referee’s figures”.

     From this we conclude that, when Christy gave his erroneous

advice to Hinz, relatively little time remained before February

4, 1994, and thus, that August 4, 1993, had already passed.    We

have so found.     It follows that Hinz’s failure to timely file the

tax return by August 4, 1993, was not “due to” Christy’s

misinforming Hinz.
                               - 56 -
     Because (a) both of petitioner’s reasonable cause

contentions are based on Christy’s misinforming Hinz, and (b) we

have concluded that petitioner’s failure to timely file the tax

return was not due to Christy’s misinforming Hinz, we conclude

that (c) petitioner’s failure to timely file the tax return was

not due to reasonable cause.

B. Which Side of the Boyle “Bright Line”?

     In United States v. Boyle, 469 U.S. 241 (1985), Boyle, as

executor of his mother’s estate, retained Keyser to serve as

attorney for the estate.   Boyle--

     relied on Keyser for instruction and guidance. He
     cooperated fully with his attorney and provided Keyser
     with all relevant information and records. Respondent
     [i.e., Boyle] and his wife contacted Keyser a number of
     times during the spring and summer of 1979 to inquire
     about the progress of the proceedings and the
     preparation of the tax return; they were assured that
     they would be notified when the return was due and that
     the return would be filed “in plenty of time.” App.
     39. When respondent called Keyser on September 6,
     1979, he learned for the first time that the return was
     by then overdue. Apparently, Keyser had overlooked the
     matter because of a clerical oversight in omitting the
     filing date from Keyser’s master calendar. Respondent
     met with Keyser on September 11, and the return was
     filed on September 13, three months late.

United States v. Boyle, Id. at 242-243.

     In Boyle, the Supreme Court focused on the language of

section 6651(a)(1) and section 301.6651-1(c)(1), Income Tax

Regs., and noted the variety of conclusions that Courts of

Appeals had come to as to when a taxpayer’s reliance on a tax

adviser may constitute reasonable cause.    See id. at 247-248.   As
                               - 57 -
to failure to file a timely estate return, the Supreme Court

concluded that “The time has come for a rule with as ‘bright’ a

line as can be drawn consistent with the statute and implementing

regulations.”   (Fn. ref. omitted.)     Id. at 248.   The Supreme

Court stated that reliance “on the erroneous advice of counsel

concerning a question of law”, such as advice “that it was

unnecessary to file a return * * * may constitute reasonable

cause for failure to file a return.”      Id. at 250.   But the

Supreme Court concluded that Boyle had not relied on Keyser’s

legal advice but had, as a practical matter, delegated to Keyser

the duty of seeing to it that the estate tax return was filed

timely.    The Supreme Court ended its opinion as follows, id. at

252:

            It requires no special training or effort to
       ascertain a deadline and make sure that it is met. The
       failure to make a timely filing of a tax return is not
       excused by the taxpayer’s reliance on an agent, and
       such reliance is not “reasonable cause” for a late
       filing under §6651(a)(1). The judgment of the Court of
       Appeals is reversed.

       In Estate of La Meres v. Commissioner, 98 T.C. 294 (1992),

we reached the opposite result, based on the facts there of

record.    In Estate of La Meres the estate’s personal

representative retained a lawyer as counsel to the estate.        The

personal representative knew when the estate tax return was

originally due.   When the original due date approached and

appraisals were not ready, the personal representative consulted
                               - 58 -
the lawyer, who advised her to apply for a 6-month extension.

The personal representative filed the proper form, together with

a $20,000 check.    The IRS negotiated the check and approved the

request, but failed to notify the personal representative that

the request had been approved, until about 2 years later.       When

the extended due date approached and the personal representative

still had not assembled all the necessary information, she again

consulted the lawyer, who again advised her to apply for a 6-

month extension.    Again, the personal representative filed the

proper form, this time together with a $50,000 check.     Again, the

IRS negotiated the check.    This time, the IRS denied the

extension request, but again failed to notify the personal

representative until about 2 years later.     See id. at 304-306.

Under the last sentence of section 20.6081-1(a), Estate Tax

Regs., the first 6-month extension used up all the permitted

extension time, and so the lawyer’s advice to file a request for

a second 6-month extension was based on an error of law.        See id.

at 320-321, 324.    If the second extension request could have been

granted and had been granted (as the personal representative

thought was the case), then the estate tax return filing would

have been timely.    See id. at 306.    We concluded that the

personal representative reasonably relied on erroneous advice

from the estate’s lawyer, this reliance caused the filing of the

estate tax return to be untimely, and thus the failure to timely
                              - 59 -
file the estate tax return was due to reasonable cause.    See Id.

at 324.

     In the instant case, we note that Hinz did not ask Christy

whether the requested extension was approved and what was the new

due date.   Hinz merely let time pass until Christy finally got in

touch with him.   Christy did not understand that his task was

merely that of legal adviser--he did not promptly notify Hinz,

and, when he did get around to notifying Hinz, he did not bother

to send a copy of the returned Form 4768 to Hinz.   The foregoing

leads us to conclude, and we have found, that Hinz delegated to

Christy the task of filing a timely tax return, precisely the

wrong side of the Boyle “bright line”.

     We have examined the original Form 4768 in light of

petitioner’s contention, and Christy’s testimony, that Christy’s

misunderstanding of the due date was due to the combination of

respondent’s alleged sloppiness and Christy’s diminishing

eyesight.   We can see why Christy might well have been puzzled by

certain of the notations on the returned Form 4768, some of the

notations being quite faint or otherwise unclear.   However, we do

not see how any reasonable interpretation of the notations would

lead anyone to conclude that (1) the approved extended due dates

were the same for both filing and paying, or (2) the approved

extended due date for filing was in 1994.   Apparently, petitioner

means to suggest that Hinz’s failure to file timely should be
                                - 60 -
excused because respondent contributed to Christy’s

misunderstanding, and so Christy’s misunderstanding was

reasonable.    We do not believe that Christy’s misunderstanding

was reasonable.     We do not believe that respondent’s failure to

respond more clearly and legibly23 contributed to Christy’s

misunderstanding.    And we do not believe petitioner’s failure to

timely file the tax return was due to reasonable cause.

     We hold for respondent on this issue.24    See supra note 21.

     III.     Late Payment Addition–-Secs. 6651(a)(2) and 6166

     Section 6651(a)(2) imposes an addition to tax of 0.5 percent

per month (with a maximum of 25 percent) in case of failure to

pay the amount shown as tax on the tax return on or before the

date prescribed for the payment of the tax, taking into account

any extension of time for payment, unless it is shown that this

23
     On opening brief respondent states in two places that “the
Form 4768 is clearly stamped in blue ink ‘The Maximum Extension
Allowed for Filing is Six Months.’” (Emphasis added). Respondent
makes substantially the same statement on answering brief. As we
have found, the stamped legend is faint on the original. The
exhibit the parties initially offered is a photocopy of the
estate tax return. The Form 4768 that is part of that exhibit is
a photocopy of the original Form 4768. On that photocopy the
stamped legend is totally illegible. Until the Court insisted
that the original Form 4768 be made part of the record, the
parties’ respective counsels apparently were content to allow the
Court to proceed on the basis of the illegible photocopy.
24
     Because we hold that petitioner did not have reasonable
cause for the failure to file income tax returns, we do not need
to address the question of whether the failure to file was also
caused by willful neglect. See sec. 6651(a); see United States
v. Boyle, 469 U.S. 241, 247-248 (1985); Jackson v. Commissioner,
86 T.C. 492, 539 (1986), affd. 864 F.2d 1521, 1528 (10th Cir.
1989).
                              - 61 -
failure is due to reasonable cause and not due to willful

neglect.

     Respondent granted an extension of the payment due date

until February 4, 1994.   See supra table 1.   The estate tax

return, which was filed on February 4, 1994, included an election

to pay the estate taxes in installments as described in section

6166.

     We consider first the validity of petitioner’s section 6166

election, and then whether petitioner had reasonable cause for

failing to pay when due the tax shown on petitioner’s estate tax

return.

A. Validity of Sec. 6166 Election

     Petitioner contends that it “properly elected Section 6166

deferral on what should be construed by the Court to be a timely

filed return.”   Respondent contends that this Court does not have

jurisdiction to review respondent’s determination that petitioner

is not eligible for section 6166 relief, relying on Estate of

Sherrod v. Commissioner, 82 T.C. 523 (1984), revd. on another

issue 774 F.2d 1057 (11th Cir. 1985); Estate of Meyer v.

Commissioner, 84 T.C. 560 (1985).   Petitioner acknowledges Estate

of Sherrod, but urges us to follow Estate of La Meres v.

Commissioner, 98 T.C. 294 (1992), in which, petitioner maintains,

we “applied an administrative/equitable estoppel theory in ruling
                              - 62 -
* * * that the election was valid.”    Respondent argues that, if

we have jurisdiction to determine the validity of the section

6166 election, then this election is not valid because it was not

timely.   Finally, respondent argues that, if we have jurisdiction

and if the section 6166 election was timely, then petitioner “is

not entitled to I.R.C. §6166 treatment because 35% of the

decedent’s assets were not in a closely held business.”

Petitioner responds to this last argument by asserting that well

over 50 percent of the gross estate consisted of decedent’s

commercial real estate holdings.

     We agree with petitioner’s conclusion that we have

jurisdiction in the instant case to determine the validity of

petitioner’s section 6166 election, but we agree with

respondent’s first alternative that the election is not valid

because it was not timely.

     (1) Jurisdiction

     A predicate for imposition of the addition to tax under

section 6651(a)(2), see supra note 22, is that there has been a

“failure * * * to pay the amount shown as tax on any return * * *

on or before the date prescribed for payment of such tax

(determined with regard to any extension of time for payment)”.

(Emphasis added).
                              - 63 -
     Under section 6166(d),25 if a valid section 6166 election

has been made, then “the provisions of this subtitle [subtitle F,

including section 6651(a)(2)] shall apply as though the Secretary

[or the Secretary’s delegate, the Commissioner] were extending

the time for payment of the tax.”

     Thus, in order for us to exercise our jurisdiction to

determine the payment due date, for purposes of section

6651(a)(2), we must first determine whether the time for payment

of the tax has been extended, under section 6166 or otherwise.


25
     Sec. 6166 provides, in pertinent part, as follows:

     SEC. 6166. EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX
     WHERE ESTATE CONSISTS LARGELY OF INTEREST IN CLOSELY HELD
     BUSINESS.

          (a) 5-year Deferral; 10-year Installment Payment.--

               (1) In general.–-If the value of an interest in a
          closely held business which is included in determining
          the gross estate of a decedent who was (at the date of
          his death) a citizen or resident of the United States
          exceeds 35 percent of the adjusted gross estate, the
          executor may elect to pay part or all of the tax
          imposed by section 2001 in 2 or more (but not exceeding
          10) equal installments.

              *     *     *     *      *    *     *

          (d) Election.–-Any election under subsection (a) shall
     be made not later than the time prescribed by section
     6075(a) for filing the return of tax imposed by section 2001
     (including extensions thereof), and shall be made in such a
     manner as the Secretary shall by regulations prescribe. If
     an election under subsection (a) is made, the provisions of
     this subtitle shall apply as though the Secretary were
     extending the time for payment of the tax.
                              - 64 -
In order to make that determination, in the context of the

instant case we must determine whether petitioner made a valid

section 6166 election.

      Because our determination as to whether petitioner made a

valid section 6166 election can affect our resolution of the

parties’ dispute over the section 6651(a)(2) addition to tax in

the instant case--a matter over which we have undisputed

jurisdiction26--it follows that we have jurisdiction to decide

the validity of the section 6166 election in the instant case.

Cf.   Estate of Bell v. Commissioner, 92 T.C. 714, 721-723 (1989),

affd. on another issue 928 F.2d 901 (9th Cir. 1991).   The same

analysis has been applied to a variety of matters, including

interest on overpayments (see Winn-Dixie Stores, Inc. & Subs. v.

Commissioner, 110 T.C. 291 (1998); Estate of Baumgardner v.

Commissioner, 85 T.C. 445 (1985)), compliance with the

Administrative Procedure Act (see Redhouse v. Commissioner, 728

F.2d 1249, 1253 (9th Cir. 1984), affg. Wendland v. Commissioner,

79 T.C. 355 (1982)), review of the Commissioner’s exercise of


26
     See Estate of Young v. Commissioner, 81 T.C. 879 (1983),
holding this Court generally lacks jurisdiction over the sec.
6651(a)(2) addition to tax for failure to pay tax. The Congress
believed it was appropriate for the Tax Court to have
jurisdiction over this addition to tax, and therefore amended
sec. 6214(a) in the Tax Reform Act of 1986, Pub. L. 99-514, sec.
1554(a), 100 Stat. 2754, effective for any action or proceeding
before the Tax Court which had not become final before Oct. 22,
1986.
                              - 65 -
discretion under section 6081 (see Estate of Gardner v.

Commissioner, 82 T.C. 989, 999 (1984)), and application of the

First Amendment to the Constitution; see Kessler v. Commissioner,

87 T.C. 1285 (1986), affd. without published opinion 838 F.2d

1215 (6th Cir. 1988) (compare 87 T.C. at 1287-1292 with 87 T.C.

at 1293).

     Respondent’s reliance on Estate of Sherrod v. Commissioner,

supra, and Estate of Meyer v. Commissioner, supra, is misplaced.

In those cases we held that, under the law then in effect, we did

not have jurisdiction over disputes about the validity of a

section 6166 election.   Our broadly stated conclusions in those

two opinions were based on the matters in dispute in those two

cases and the statutes in effect for those two cases.   However,

the statutes have changed, and, as a result, the settings of the

disputes have changed.   Of controlling significance in the

instant case27 is the 1986 legislation giving us jurisdiction

over disputes as to the section 6651(a)(2) addition to tax, see

supra note 22, respondent’s notice of deficiency determination of

27
     The enactment of sec. 7479 (relating to declaratory judgment
jurisdiction over certain sec. 6166 election matters) by sec.
505(a) of the Taxpayer Relief Act of 1997 (TRA 1997), Pub. L.
105-34, 111 Stat. 788, 854, also modifies the continued
effectiveness of our broadly stated conclusions in Estate of
Sherrod v. Commissioner, 82 T.C. 523 (1984), revd. on another
issue 774 F.2d 1057 (11th Cir. 1985), and Estate of Meyer v.
Commissioner, 84 T.C. 560 (1985). See Estate of Heffley v.
Commissioner, 89 T.C. 265, 277 n.4 (1987), affd. 884 F.2d 279
(7th Cir. 1989). However, sec. 7479 applies only to estates of
decedents dying after the date of enactment, Dec. 2, 1997. See
TRA 1997, sec. 505(c), 111 Stat. at 855. In the instant case,
decedent died on May 4, 1992. Thus, sec. 7479 does not affect
the instant case.
                                - 66 -
a deficiency in that addition to tax, and petitioner’s placing

that determination in dispute.

     We hold, for petitioner, that we have jurisdiction in the

instant case to determine the validity of petitioner’s section

6166 election; we now proceed to exercise that jurisdiction.

     (2) Timeliness

     Section 6166(d) provides that the election of deferral of

payment of estate tax “shall be made not later than the time

prescribed by section 6075(a) for filing the return of tax

imposed by section 2001 (including extensions thereof)”.

(Emphasis added.)     As explained supra, the section 6166 election

was made with the tax return, but the tax return was not timely

filed.    As a result, the section 6166 election was not timely

made.    Because the section 6166 election was not timely made, as

a matter of law, this election is not valid.    See Bank of the

West v. Commissioner, 93 T.C. 462, 473 (1989); Estate of La Meres

v. Commissioner, 98 T.C. 294, 324 (1992).

     On answering brief, petitioner states that

     Petitioner demonstrated “reasonable cause” for the late
     filing of the Return, and therefore his IRC §6166
     election to pay the Estate taxes in installments was
     timely and valid.

Later in that brief, petitioner stated that this Court had ruled

in Estate of La Meres v. Commissioner, supra, that the section

6166 election involved in that case was valid.    Petitioner

misstates the law and misstates our holding.    In Estate of La
                                 - 67 -
Meres v. Commissioner, 98 T.C. at 324, we plainly stated as

follows:

          Petitioner did not timely pay the estate tax shown
     on the return because it elected to defer payment under
     section 6166. The section 6166 election was invalid
     because it was made in a return which was not timely
     filed.

     We hold, for respondent, that petitioner did not make a

valid section 6166 election.28

B. Reasonable Cause for Late Payment

     The amount of any addition to tax under section 6651(a)(2)

depends on the amount shown as the liability on the estate tax

return (or, if less, then the correct liability–-see sec.

6651(c)(2)) and the amount paid at any time during the

potentially 50-month addition period.     See sec. 6651(b)(2).   In

light of our holdings as to the Subject Properties’ values, supra

table 2, as well as the parties’ stipulations of settled issues,

the correct liability is to be determined under Rule 155.     The

parties have not directed our attention to information in the

record as to the dates and amounts of the tax payments.     Thus, we

are not in a position to quantify the section 6651(a)(2) dispute.




28
     Our holding that petitioner’s sec. 6166 election is invalid
because it was not timely, makes it unnecessary to rule on the
parties’ dispute as to whether petitioner’s real estate holdings
constituted “a closely held business,” the value of which
exceeded 35 percent of the adjusted gross estate, as required by
sec. 6166(a)(1).
                              - 68 -
     Nevertheless, the parties have presented the issues in such

a way as to lead us to conclude that they believe that (1) if the

section 6166 election was valid, then there would not be a

section 6651(a)(2) addition to tax, and (2) if the section 6166

election was not valid, then there would be a section 6651(a)(2)

addition to tax, unless the failure to timely pay the tax was due

to reasonable cause and not willful neglect.   Under these

circumstances, we will ignore the other considerations that might

have been dispositive, and limit ourselves to the reasonable

cause issue.   See Estate of Fusz v. Commissioner, 46 T.C. 214,

215 n.2 (1966).

     Petitioner contends that its failure to timely pay the

estate tax liability shown on its tax return was due to

reasonable cause and not due to willful neglect because (1)

illiquidity of the estate’s assets meant that prompt payment

would have resulted in “undue hardship”, relying on sec.

301.6651-1, Proced. & Admin. Regs., (2) the section 6166 election

was made in good faith and was untimely as “the direct result of

Petitioner’s reasonable reliance on his attorney’s erroneous

advice”, and (3)--

     Petitioner did not receive any information that there were
     any concerns with the filing of the return until he received
     a letter from the IRS on March 8, 1995, more than a year
     after the return was filed. In addition, the IRS did not
     inform petitioner until September 30, 1996, that the section
     6166 election was not going to be honored by the IRS.
                             - 69 -
Respondent maintains that petitioner did not have reasonable

cause for the failure to pay on time because (1) the invalidity

of the section 6166 election was due to Hinz’s attempt to

delegate a nondelegable duty to Christy, (2) petitioner has

failed to show that the estate’s assets were largely illiquid,

and thus petitioner has failed to show undue hardship, and (3)

“Petitioner misstates fact when he states that the IRS ‘did not

initially reject the section 6166 election.’”

     We agree with petitioner’s conclusion.

     Before we analyze the section 6651(a)(2) reasonable cause

requirements as applied to the facts of the instant case, we are

impelled to note the following with respect to the parties’

erroneous statements.

     We have found that, by letter dated March 30, 1994,

respondent informed Hinz that respondent was tentatively allowing

petitioner’s section 6166 election.   Not until a letter dated

February 6, 1995, did respondent inform Hinz that petitioner’s

section 6166 election was invalid because it was untimely.    Thus

(a) respondent errs in denying that respondent did not initially

reject the section 6166 election–-for about 10 months, petitioner

operated under respondent’s tentative acceptance of the election;

and (b) petitioner errs in asserting that the IRS did not inform

petitioner of the election’s denial until September 30, 1996–-
                               - 70 -
respondent had informed Hinz of the denial almost 19 months

earlier.

     We proceed to the merits.

     A taxpayer’s failure to pay the tax shown on the return is

due to reasonable cause if the taxpayer exercised ordinary

business care and prudence and was nevertheless unable to pay the

tax within the prescribed time.    See sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.   Willful neglect is defined as “a

conscious, intentional failure or reckless indifference.”       United

States v. Boyle, 469 U.S. at 245.    Petitioner must show that

reasonable cause existed at the time payment of the estate tax

was due.   See Estate of La Meres v. Commissioner, 98 T.C. at 324.

     The Court dealt with this question and reached opposite

results in Estate of La Meres v. Commissioner, 98 T.C. at 324,

and Bank of the West v. Commissioner, 93 T.C. at 472.      In Estate

of La Meres, the Court held that the addition to tax under

section 6651(a)(2) did not apply because (among other reasons) at

the time the estate tax was due the taxpayer reasonably believed

that a section 6166 election was proper.    The Court in Estate of

La Meres noted that the Internal Revenue Service had initially

accepted the taxpayer’s section 6166 election.    See Estate of La

Meres v. Commissioner, 98 T.C. at 324.     In Bank of the West the

Court held that the taxpayer’s reliance on a section 6166

election was not reasonable.     See Bank of the West v.
                                - 71 -
Commissioner, 93 T.C. at 472.    The Court in Bank of the West

noted that there was no “evidence of any action by the Internal

Revenue Service exercising its discretion to permit the payment

of the tax in installments.”    Id. at 473.   Because reasonable

cause must have existed when the tax was due, the significance of

the Internal Revenue Service’s action or inaction regarding a

section 6166 election is in determining the taxpayer’s

reasonableness in believing that a valid election was made at the

time the tax was due.

     In the instant case petitioner’s executor, Hinz, at the time

the estate tax was required to be paid reasonably believed that

the section 6166 election was valid.     Before the extended due

date for payment of the tax, Christy advised Hinz that a section

6166 election could be made to pay the estate tax in

installments.   Hinz as executor of the estate relied on this

advice.   Furthermore, respondent, having the untimely filed

return and a copy of the approved request for extension of time

to file, tentatively approved petitioner’s section 6166 election.

Under these circumstances, we hold that Hinz exercised ordinary

business care and prudence in providing for the payment of

petitioner’s tax liability subject to the section 6166 election.

     We hold for petitioner on this issue.
                               - 72 -
       To take account of the parties’ concessions and of our

determinations as to the valuations of several assets, and the

effect of these concessions and determinations on the

calculations of the amounts of the section 6651(a)(1) addition to

tax,



                                          Decision will be entered

                                     under Rule 155.
