                         T.C. Memo. 1999-201



                       UNITED STATES TAX COURT



              ESTATE OF JAMES G. FRAZIER, DECEASED,
         JAMES G. FRAZIER, JR., EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18886-97.              Filed June 18, 1999.



     John J. McGregor, for petitioner.

     Jeffrey L. Heinkel, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a deficiency of

$1,546,156 in the Federal estate tax of the estate of decedent

James G. Frazier.
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     After concessions, the sole issue for decision is whether

certain trade fixtures were includable in decedent's gross

estate.1

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts, supplemental stipulation of facts,

stipulation of settled issues, and attached exhibits are

incorporated herein by this reference.

     James G. Frazier (decedent) died on March 20, 1993.    At the

time of his death, decedent resided in Waterford, California.

     On or about June 22, 1994, petitioner James G. Frazier, Jr.,

as executor, filed decedent's estate tax return.    At the time the

petition was filed, petitioner resided in Stanislaus County,

California.

     In 1981, decedent incorporated Frazier Nut Farms, Inc.

(FNF).     FNF conducted an almond and walnut processing, packaging,

marketing, sales, and shipping business.

     On January 1, 1983, decedent, as landlord, and FNF, as

tenant, executed a lease for a 5-acre tract of land located in

Waterford, California (the land).    Under the terms of the lease,




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the date of decedent's
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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FNF agreed to pay $1,000 per year in rent plus all maintenance

and taxes on the land.

     The lease contained an initial term of 10 years with two

options to renew for 10 years each.     The options to renew

required FNF to give written notice to decedent.     The lease also

specified that any holdover by the tenant with the landlord's

consent "shall be construed as a tenancy at will and shall be

determinable at the will of * * * [landlord] upon * * *

[landlord] giving notice in writing to * * * [tenant] to vacate

said premises."

     During the 10-year term of the lease, FNF made numerous

improvements on the land for the purposes of its business and at

its sole cost.    These improvements included a lunchroom, a

storage building, fumigation and truck bays, a storage-warehouse

building, nut bins, and asphalt paving.     The improvements could

be removed by taking down the buildings and digging out the

concrete and asphalt.

     The initial term of the lease expired on December 31, 1992.

FNF never exercised its option to renew the lease.     After the

expiration of the lease and until the time of trial, FNF

continued to occupy the land and use the improvements located

thereon.
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                               OPINION

     A decedent's gross estate includes all property to the

extent of the decedent's interest therein at the time of his

death.   See sec. 2033.   A decedent's interest in property is

determined by State law.    See Morgan v. Commissioner, 309 U.S.

78, 80 (1940).

     Under California law, a fixture is a thing that is so

attached to realty as to be considered in law a part of the

realty itself.   See Cal. Civ. Code sec. 660 (West 1982).

Generally, a tenant of real property has no right to remove

fixtures from the leased premises, regardless of whether the

tenant placed the fixtures there at his own expense.    See Cal.

Civ. Code sec. 1013 (West 1982).    However, where fixtures are

placed on leased premises for the purposes of trade (i.e., trade

fixtures), a tenant has a limited right to remove those fixtures.

     Section 1019 of the California Civil Code provides:

          A tenant may remove from the demised premises, any
     time during the continuance of his term, anything
     affixed thereto for purposes of trade, * * * if the
     removal can be effected without injury to the premises,
     unless the thing has, by the manner in which it is
     affixed, become an integral part of the premises.

Cal. Civ. Code sec. 1019 (West 1982).    The improvements placed on

the land by FNF were "trade fixtures" within the meaning of

California Civil Code section 1019.
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Parties' Arguments

     In the statutory notice of deficiency, respondent determined

that the trade fixtures were includable in decedent's gross

estate.   On brief, respondent argues that FNF failed to remove

its trade fixtures during the "continuance of * * * [its] term"

as required by section 1019 of the California Civil Code;

therefore, the trade fixtures belonged to decedent at the time of

his death and are includable in his gross estate.

     Petitioner argues that FNF's right to remove its trade

fixtures continued after decedent's death; therefore, decedent

held no interest in the trade fixtures at death, and they are not

includable in decedent's gross estate.

Time for Removal

     When FNF initially took possession of the land, it did so

under a written lease with decedent.   The term of the lease was

for 10 years with two options to renew for 10 years each.

     Upon the lease's expiration on December 31, 1992, FNF

retained its possession of the leased tract and continued to use

the trade fixtures it had placed thereon.   This holdover tenancy

was a tenancy at will in accordance with the original lease's

holdover provision.   See Hull v. Laugharn, 3 Cal. App. 2d 310,

314 (1934); see also Spaulding v. Yovino-Young, 30 Cal. 2d 138,

141 (1947); Psihozios v. Humberg, 80 Cal. App. 2d 215, 220
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(1947).    Neither party disputes that FNF's holdover created a

tenancy at will.

     Under section 1019 of the California Civil Code, a tenant

may remove his trade fixtures only "during the continuance of his

term".    We endeavor to interpret this phrase as a California

court would.    See Commissioner v. Estate of Bosch, 387 U.S. 456,

465 (1967).    We must determine whether "the continuance of his

term" refers only to the original 10-year term or whether it also

includes FNF's holdover period.

     In Merritt & Bourne v. Judd & Byrne, 14 Cal. 59 (1859), a

case decided prior to the enactment of section 1019 of the

California Civil Code, the California Supreme Court held that a

tenant's renewal of his lease constituted a new tenancy, and the

tenant's right to remove trade fixtures was lost upon his

renewal.    The court reasoned that upon the commencement of the

new lease, the tenant was "in the same situation as if the

landlord, being seized of the land, had leased both land and

fixtures to him."    Id. at 71.   In Wadman v. Burke, 147 Cal. 351,

353-354 (1905), a case decided after the enactment of section

1019 of the California Civil Code, the California Supreme Court

held:

     Unless there is some understanding, * * * between the
     lessor and the lessee in the second lease, at the time
     it was executed, as to the fixtures, the rule of law is
     * * * that the tenant entitled to remove trade
     fixtures, must avail himself of that right before the
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     expiration of the term of the lease during which they
     are affixed. * * *

     In Earle v. Kelly, 21 Cal. App. 480, 484 (1913), a

California district court of appeal held, relying on Merritt and

Wadman, that "where the tenant makes a new lease which contains

no stipulation giving him the right to remove fixtures which he

might have removed during the first term, he loses the right to

remove the fixtures."    The court further held that when a tenant

renews his original lease or holds over after the expiration of

his lease and the landlord accepts rent from him, his renewal or

holdover creates a new tenancy, and the tenant loses his right to

remove trade fixtures.   See id. at 484-485.   Since Earle, other

California district courts of appeal have held that a holdover

tenancy is treated as a new lease and not as an extension of the

original lease.   See Staudigl v. Harper, 76 Cal. App. 2d 439, 451

(1946); Kaye v. M'Divani, 6 Cal. App. 2d 132, 134 (1935).

     Petitioner argues that FNF's holdover should be treated as

an extension of its original term and not a new tenancy.

Petitioner cites two California district courts of appeal

decisions, Woods v. Bank of Haywards, 10 Cal. App. 93 (1909), and

Knox v. Wolfe, 73 Cal. App. 2d 494 (1946), as support for his

proposition.

     In Woods, the tenant held over, with the landlord's consent,

under the same terms as the original tenancy except the rent was
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increased and the term was limited to month to month.      See Woods

v. Bank of Haywards, supra at 94, 96.       The court held that the

tenant's "continued occupancy of the premises must be regarded as

an extension of the [prior] lease".       Id. at 96.

       In Woods, however, the original lease contained a provision

which allowed the tenant the right to remove its trade fixture

(contractual right of removal).     See id.    The court read this

contractual right of removal into the holdover tenancy.      See id.

       In Knox v. Wolfe, supra at 502, the court held that a

tenant's holding over did not result in a new tenancy but only

extended his original tenancy.     As in Woods, the original lease

in Knox contained a contractual right of removal.      See id. at

499.    The Knox lease additionally provided that any holdover

would be "upon all of the terms and conditions" of the original

lease.    Id. at 501.   The court, therefore, found that the

tenant's contractual right of removal was carried over from the

original lease into the tenant's holdover tenancy.      See id. at

502.

       In the case at bar, there was no contractual right of

removal in the original lease.     Furthermore, the original lease

did not provide that any holdover was "upon all of the terms and

conditions" of the original lease.       Therefore, Woods and Knox are

distinguishable from the case at bar.
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     Based upon our review of California State law, we conclude

that FNF's holdover created a new tenancy.       Accordingly, FNF's

original tenancy expired on December 31, 1992.       At the expiration

of the original tenancy, FNF's statutory right to remove its

trade fixtures under section 1019 of the California Civil Code

expired.   Therefore, at the time of decedent's death, the trade

fixtures belonged to decedent and were includable in decedent's

gross estate under section 2033.

     To reflect the foregoing,

                                              Decision will be entered

                                         under Rule 155.
