                               T.C. Memo. 2015-134



                         UNITED STATES TAX COURT



            ESTATE OF JOHN A. PULLING, SR., DECEASED,
    JOHN A. PULLING, JR., PERSONAL REPRESENTATIVE, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1660-09.                            Filed July 23, 2015.



      Thomas R. Bolf, for petitioner.

      John R. Bampfield, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: Respondent determined a deficiency of $1,155,065 in

the Federal estate tax of the Estate of John A. Pulling, Sr. (estate). After
                                         -2-

[*2] concessions,1 the sole issue for decision is the total fair market value of three

parcels of land (estate’s property) included in the value of the gross estate.

                               FINDINGS OF FACT

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

facts and the attached exhibits are incorporated by this reference. John A. Pulling,

Sr. (decedent), died on April 17, 2005, and was a resident of Florida at that time.

Decedent’s will was admitted to probate in Florida. John A. Pulling, Jr. (Mr.

Pulling), decedent’s son, is the personal representative of the estate and was a

resident of Florida when the petition was filed.

I.    Background

      The issue in this case revolves around five contiguous parcels of land in

Collier County, Florida: the three parcels of the estate’s property and two larger

parcels (TCLT’s property) owned by the Temple Citrus Land Trust (TCLT), in

which the estate held a 28% interest at the date of death. The five parcels contain

a total of 130.84 acres, all of which was zoned agricultural. The only legal access

to this entire block of properties is from Airport Pulling Road, to the west, via


      1
         The parties have stipulated a variety of issues, as described in their
stipulation of settled issues and two supplemental stipulations of settled issues.
Additionally, on brief respondent conceded that the fair market value of the
estate’s interest in the property at 630 Fifth Avenue was $670,000.
                                       -3-

[*3] Willow Park Drive, a two-lane paved road that cuts across part of TCLT’s

property.

      A.    TCLT

      On June 1, 1971, decedent, his friend Miles Scofield, and various unrelated

parties came together to form TCLT. Decedent began with a 25% interest and Mr.

Scofield with a 20% interest. Mr. Scofield served as TCLT’s trustee until he

stepped down in 1992 when he was succeeded by Mr. Pulling. Pursuant to

TCLT’s trust agreement, Mr. Pulling then had the power to deal with TCLT’s

assets but only when authorized by persons holding a combined ownership interest

of at least 51%. At some point, WCI--the owner of a development to the east of

TCLT’s property--offered to purchase TCLT’s property as part of its development

plan. TCLT declined the offer.

      During 1971-1992 the ownership interests in TCLT were fluid, and

decedent’s ownership interest fluctuated between 25% and 38.9%.

      As of 1992 the ownership interests in TCLT were as follows:
                                       -4-

 [*4]                       Owner                   % Interest
                Decedent                              38.90
                Miles Scofield                        28.90
                Lucy Pulling Finch                    12.35
                John A. Pulling, Jr.                  11.10
                Lucy Pulling Finch, Trustee            2.50
                Michelle McCauley, Trustee             2.50
                John L. Finch, Sr.                     1.25
                William J. McCauley                    1.25
                Michelle McCauley                      1.25

        In 2000 the Scofield family formed the Scofield Temple Groves Partnership

(STGP), and Mr. Scofield’s 28.9% interest in TCLT was transferred to STGP. In

January 2005 decedent distributed a 10.9% interest in TCLT among various of his

family members. Afterwards, the ownership interests in TCLT were as follows:
                                          -5-

 [*5]                        Owner                  % Interest
                  STGP                               28.900
                  Decedent                           28.000
                  Lucy Pulling Finch                 13.600
                  John A. Pulling, Jr.               11.100
                  Peter & Jean McCauley                3.500
                  Lucy Pulling Finch, Trustee          2.500
                  Michelle McCauley, Trustee           2.500
                  William J. McCauley                  2.125
                  Michelle McCauley                    2.125
                  Mariaellena McCauley                 1.250
                  Steven McCauley                      1.250
                  Kenneth McCauley                     1.250
                  John & Marsha Pulling                1.000
                  Carol Pulling McCauley               0.900

The ownership interests then remained the same up through the date of decedent’s

death. Over 50% of the ownership interests in TCLT are held by members of the

Pulling family.

        On the date of decedent’s death TCLT owned two parcels of real estate: a

60.84-acre tract (parcel 1) and a 48.48-acre tract (parcel 2). These two parcels

were worth $150,575 per acre on the date of death. Historically, these parcels
                                          -6-

[*6] have been used for the cultivation of citrus fruit. TCLT also owns a store on

parcel 1 that sells fruit from the citrus groves as well as other goods and produce.

         B.    The Estate’s Property

         The estate’s property comprises parcel 3, parcel 4, and parcel 5 in Collier

County, Florida. Parcel 3 is a narrow 4.62-acre rectangular tract of land. Parcel 4

is a 6.9-acre tract with a sideways “T” shape. Parcel 5 is a roughly square 10-acre

tract.

         Parcel 3 abuts TCLT’s parcel 2 to the north; parcel 4 to the east; and a low-

income rental property to the south. To the west it is adjacent to Airport Pulling

Road but is separated from the road by a canal and, because of restrictions under

the Collier County Growth Management Plan and the Land Development Code,

lacks direct access to the road. The only way to access a public right-of-way from

parcel 3 would be by obtaining an easement through an adjacent parcel.

         Parcel 4 abuts parcel 2 to the north; a parcel owned by Mr. Pulling to the

east; the low-income rental property to the south (except for the easternmost

portion, which extends down to abut a parcel owned by the Collier County School

Board); and parcel 3 to the west. Parcel 4 also lacks access to a public right-of-

way and would require an easement through an adjacent parcel.
                                          -7-

[*7] Parcels 3 and 4 are undeveloped and have been used, historically, as a tree

and plant nursery. Development of either of these parcels on its own faces

significant obstacles. This difficulty is due, in part, to their lack of legal access to

a road but also to their narrowness in relation to their frontage width. A

residential development requires certain setbacks and a road right-of-way that,

when combined with the narrow shapes of the parcels, would leave very little land

available for residential units. Adding drainage for the properties would reduce

the available land even further. As a result, neither parcel 3 nor parcel 4 would be

economically feasible to develop unless they were first combined with other

adjacent parcels.

      Parcel 5 abuts parcel 2 to the north; land owned by unrelated parties to the

east; the Collier County School Board’s land to the south; and Mr. Pulling’s land

to the west. Although there is a four-lane road on the school board’s land just

south of parcel 5, it is restricted to school-related traffic. Consequently, parcel 5

has no direct access to a public right-of-way, and the only physical access is

through unpaved service roads on TCLT’s property. Parcel 5 is undeveloped and

has also been used by Mr. Pulling as a tree and plant nursery. Parcel 5 has no

adjacent utilities nor easements for utilities from the nearest roads although it has
                                        -8-

[*8] water onsite. Because of the lack of access and utilities, development of

parcel 5, on its own, is similarly not economically feasible.

II.    2004 and 2011 Appraisals

       In 2004 Mr. Pulling hired Raymond E. Carroll to appraise parcels 1 through

5 in connection with decedent’s January 2005 gift. Mr. Carroll completed his

report on December 1, 2004 (2004 report). The 2004 report was based on a

boundary survey that Mr. Pulling provided, which treated parcels 1 through 5 as if

they were a single large tract and valued parcel 3 at $990,000, parcel 4 at

$130,000, and parcel 5 at $1,250,000.

       The estate later hired Mr. Carroll to appraise parcels 3 through 5 as an

expert witness in this case. Mr. Carroll prepared an appraisal for parcels 3 and 4

and another for parcel 5, both dated March 24, 2011, with an effective date of

April 17, 2005 (2011 reports). These new appraisals, which treated the estate’s

property as separate from TCLT’s property, valued parcels 3 and 4 together at

$340,000 and parcel 5 at $600,000.

III.   Tax Return Preparation

       Respondent received the estate’s Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, on January 20, 2006. Included with

the Form 706 was a copy of Mr. Carroll’s 2004 report. On July 5, 2006, the estate
                                        -9-

[*9] filed a supplemental Form 706 and reported the values of the estate’s property

using the values given in Mr. Carroll’s 2004 report.

                                     OPINION

A.    Introduction

      Property includable in the value of a decedent’s gross estate generally is to

be valued as of the date of the decedent’s death. Sec. 2031.2 For purposes of the

estate tax, property value is determined by finding the price at which the property

would change hands between a willing buyer and a willing seller, neither being

under any compulsion to buy or to sell, and both having reasonable knowledge of

relevant facts. Sec. 20.2031-1(b), Estate Tax Regs. The willing buyer and the

willing seller are hypothetical persons. Estate of Newhouse v. Commissioner, 94

T.C. 193, 218 (1990) (citing Estate of Bright v. United States, 658 F.2d 999, 1006

(Former 5th Cir. 1981)). The hypothetical buyer and seller are presumed to be

dedicated to achieving the maximum economic advantage. Id.

      Valuation is a factual determination, and the trier of fact must weigh all

relevant evidence of value and draw appropriate inferences. Estate of Kelley v.




      2
         Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the date of decedent’s death, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                       - 10 -

[*10] Commissioner, T.C. Memo. 2005-235; Estate of Deputy v. Commissioner,

T.C. Memo. 2003-176.

B.    Assemblage

      1.    Background

      Each party called an expert witness to appraise the estate’s property. Both

parties’ experts agree that if the estate’s property could be assembled with TCLT’s

property, then residential development of the whole would be the highest and best

use. They also agree that if assemblage is not possible, residential development of

the estate’s property would not be economically feasible. The parties disagree,

however, over whether it is appropriate, under these circumstances, to consider a

use that requires combining a property to be valued with another property not

under common ownership.

       The estate argues that we should use a three-factor test under Florida law.

Respondent argues that assemblage is appropriate, citing United States ex rel.

TVA v. Powelson, 319 U.S. 266, 275 (1943).

      2.    Florida’s Three-Factor Test

      The estate suggests that, under State law, we should use the three-factor test

described in Dep’t of Transp., Div. of Admin. v. Jirik, 498 So. 2d 1253 (Fla.

1986), Mulkey v. Fla. Dep’t of Transp., 448 So. 2d 1062 (Fla. Dist. Ct. App.
                                        - 11 -

[*11] 1984), and Brevard Cnty. v. Canaveral Props, Inc., 658 So. 2d 590 (Fla.

Dist. Ct. App. 1995). Under this test, Florida courts look for the presence of

physical contiguity, unity of ownership, and unity of use to determine whether

adjoining parcels are separate and independent or a single tract. See, e.g., Jirik,

498 So. 2d at 1254; Mulkey, 448 So. 2d at 1065.

      We look to State law to determine the nature, scope, and validity of a

decedent’s legal interests and rights in property and to Federal law to determine

the Federal taxation of those interests and rights. See Morgan v. Commissioner,

309 U.S. 78, 80 (1940); Estate of Allen v. Commissioner, 29 T.C. 465, 467-468

(1957).

      The three-factor test is generally used “in the context of eminent domain

proceedings in which severance damages are in dispute”.3 Jirik, 498 So. 2d at

1255; see also Brevard Cnty., 658 So. 2d 590; Dade Cnty. v. Midic Realty, Inc.,

551 So. 2d 499, 500 (Fla. Dist. Ct. App. 1989); Mulkey, 448 So. 2d at 1065. The

Florida Supreme Court has also found the test appropriate to determine whether a

taking had occurred in an inverse condemnation action. Jirik, 498 So. 2d at 1255.


      3
         “Severance damages are awarded when government condemns only a
portion of a larger parcel.” Dep’t of Transp., Div. of Admin. v. Jirik, 498 So. 2d
1253, 1255 n.1 (Fla. 1986) (citing Sharp v. United States, 191 U.S. 341, 354
(1903)).
                                        - 12 -

[*12] In each of these cases Florida courts have used the test to determine whether

a government action had resulted in the separation of parcels that were, in effect, a

single tract. In other words, the purpose of the three-factor test is to determine

whether a landowner has property rights which were infringed by a condemnation

or eminent domain action. Our inquiry here is very different. We have not been

asked to determine what rights or interests the estate holds in TCLT--and the

extent of those rights and interests have in any case already been established.

Instead, we are determining the fair market value of the interests the estate holds

in its property; and, for that purpose, Federal law controls. See sec. 20.2031-1(b),

Estate Tax Regs. Moreover, to our knowledge, the Florida courts have never

applied the three-factor test in the context of assemblage, and we would decline to

extend the test’s use now. Instead we find that the reasonable likelihood test,

discussed below, is the more appropriate standard.

      3.     Reasonable Likelihood Standard

      Under Federal law, a property’s fair market value may reflect “not only the

use to which the property is presently devoted, but also that use to which it may be

readily converted.” Powelson, 319 U.S. at 275. If a special or higher use of the

land is only possible when it is combined with other parcels, we may consider that

special use, but “there must be a reasonable probability of the lands in question
                                        - 13 -

[*13] being combined with other tracts for that purpose in the reasonably near

future.” Id. at 275-276 (citing Olson v. United States, 292 U.S. 246, 255 (1934)).

      For example, in Stanley Works & Subs. v. Commissioner, 87 T.C. 389

(1986), we considered the value of a conservation easement placed on a piece of

land. The taxpayer argued that the highest and best use of the donated property

was as a hydroelectric power plant. Id. at 400. The Commissioner argued that the

Court should not consider this special use because a power plant could not be built

without assembling the donated property with other parcels not owned by the

taxpayer. Id. at 409. We found that “it must be reasonably probable that the

property owner would be able to acquire the additional land in the reasonably near

future without relying on the power of eminent domain.” Id. at 402. Noting that

there were several possible sites that could have been acquired by a developer and

“there was no evidence to suggest that it would have been unreasonably difficult

to acquire such property”, we found that assemblage was reasonable and that the

valuation of the donated easement should be based on the special use as a

hydroelectric power plant. Id. at 409-411.

      We have determined that we can value property on the basis of a use of land

requiring assemblage if it is reasonably likely that the land will be assembled in

the reasonably near future. We must now determine whether the estate’s property
                                           - 14 -

[*14] was reasonably likely to be combined with TCLT’s property at the time of

decedent’s death. This is a question of fact that can be resolved only by weighing

all of the evidence. Stanley Works & Subs. v. Commissioner, 87 T.C. at 408.

          Absent proof to the contrary, the use to which the land is currently being put

is presumed to be the highest and best use. United States v. L.E. Cooke Co., Inc.,

991 F.2d 336, 341 (6th Cir. 1993); United States v. 69.1 Acres of Land, 942 F.2d

290, 292 (4th Cir. 1991); Esgar Corp. v. Commissioner, T.C. Memo. 2012-35, slip

op. at 20, aff’d, 744 F.3d 648 (10th Cir. 2014). Therefore, the burden of proof is

on respondent to show that assemblage was reasonably likely.

          Respondent does not cite, nor have we found, any evidence in the record

suggesting that assemblage was reasonably likely. Instead, respondent asks us to

assume that assemblage was likely because of (1) the economic benefits of

assemblage and (2) the ties between decedent and the various stakeholders in

TCLT. The estate argues that respondent’s position is unsupported by the caselaw

and that the evidence shows that assemblage was unlikely. We agree with the

estate.

          Both parties’ experts opined that assembling the estate’s property and

TCLT’s property would yield the greatest economic benefits, and we agree.

However, using that fact as evidence that combining of the properties was
                                        - 15 -

[*15] reasonably likely places the cart before the horse. The economic benefits of

assemblage can only come into consideration once we have established that

assemblage is otherwise reasonably likely. The only evidence in the record,

however, suggests that assemblage was not likely.

      First, TCLT has had at least one prior offer to sell its property as part of a

residential development, but it declined the offer. This fact tends to show that

TCLT’s stakeholders were not interested in selling the property just because it

would have been in their economic interests. Moreover, both parties’ experts

testified at trial that they would not recommend to a hypothetical buyer of the

estate’s property that he purchase the land as a possible investment. Not even

respondent’s expert believed that assemblage was certain enough to recommend

purchase to a client.

      Respondent’s second argument is based on the premise that assemblage was

reasonably likely because decedent held a large minority interest in TCLT that,

when combined with either the interests of (1) STGP or (2) the other TCLT

stakeholders, would result in a majority vote enabling TCLT to combine its

property with the estate’s property. However, without any evidence regarding the

intent of the other TCLT stakeholders or details as to their relationship with

decedent, respondent’s position is left essentially attributing ownership of TCLT’s
                                        - 16 -

[*16] property to decedent solely on the basis of those relationships. This position

lacks merit.

      In support of his argument, respondent cites our decision in Esgar Corp. v.

Commissioner, slip op. at 42, for the proposition that personal friendships and

longtime business relationships are sufficient to justify assemblage. Respondent

misreads Esgar. In that case, although we did consider the taxpayers’ argument

that assemblage was reasonable because of their longtime business relationships,

we explicitly chose not to decide whether assemblage was reasonable. Id.

Furthermore, although it is true that decedent and Mr. Scofield had a business

relationship spanning decades, there is no other evidence in the record suggesting

that Mr. Scofield or STGP would be inclined to assemble TCLT’s property with

the estate’s property.

      There is also no evidence to support the proposition that other members of

the Pulling family would be reasonably likely to agree to combine the properties.

The mere fact that they are related to decedent is not enough. See Estate of Bright,

658 F.2d at 1006 (rejecting application of family attribution for purposes of

valuing property for estate tax purposes); see also Minahan v. Commissioner, 88

T.C. 492, 499 (1987) (“It has been noted that the Congress has explicitly directed

that family attribution or unity of ownership principles be applied in certain
                                           - 17 -

[*17] aspects of Federal taxation, and in the absence of legislative directives,

judicial forums should not extend such principles beyond those areas specifically

designated by Congress.”).4

      Accordingly, we find that assembly of the estate’s property with TCLT’s

property for purposes of residential development is not the highest and best use of

the estate’s property.

C.    Value of Estate’s Property

      Having determined that the estate’s property should be treated as individual

parcels, rather than as assembled with TCLT’s property, we must now determine

the fair market values of parcels 3, 4, and 5. The estate argues that we should

adopt the values recommended by its expert in his 2011 reports, which are as

follows:

                         Parcels 3 and 4              $340,000
                         Parcel 5                      600,000




      4
         Estate of Bright v. United States, 658 F.2d 999 (Former 5th Cir. 1981), is
binding on the Court of Appeals for the 11th Circuit, to which this case is
appealable. Allen v. Autauga Cnty. Bd. of Educ., 685 F.2d 1302, 1304 n.4 (11th
Cir. 1982) (“[D]ecisions of the former fifth circuit in which active judges of this
circuit participated are binding precedent, regardless of the date of decision.”);
Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981).
                                       - 18 -

[*18] Respondent argues that, assuming assemblage is not reasonably likely, we

should adopt the values recommended by the estate’s expert in his 2004 report,

which are as follows:

                        Parcel 3                     $990,000
                        Parcel 4                      130,000
                        Parcel 5                    1,250,000

      Respondent’s expert did not offer an opinion as to what the fair market

value of the estate’s property would be if assemblage was not reasonably likely.

Instead, respondent argues that we should adopt the estate’s expert’s 2004

valuation because, according to respondent, it takes into account additional value

provided to the estate’s property by the possibility of assembly with TCLT’s

property.5 In other words, respondent argues that even if the estate’s property’s

value should not be based on assemblage, we should recognize a “premium to fair

market value” that a buyer of TCLT’s property would place on the adjacent

property owned by the estate.


      5
         Respondent also argues that we should not adopt the values in Mr.
Carroll’s 2011 reports because the estate failed to adequately explain the
differences between the values in the 2011 reports and those in the 2004 report.
We disagree. At trial Mr. Carroll credibly testified that the 2004 report was
prepared using a boundary survey provided by Mr. Pulling that treated the estate’s
property and TCLT’s property as a single tract. We find this adequately explains
the difference between the values reached in the two reports.
                                       - 19 -

[*19] We find that respondent’s theory is too speculative and is not supported by

the record. In contrast, we found the estate’s expert, and his 2011 reports, to be

credible, and we therefore adopt the 2011 values. Accordingly we find that, as of

April 17, 2005, the estate’s property had a total fair market value of $940,000.

      In reaching our holdings herein, we have considered all arguments made,

and, to the extent not mentioned above, we conclude they are moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                                     Decision will be entered under

                                                Rule 155.
