                  T.C. Memo. 1998-325



                UNITED STATES TAX COURT


      ESTATE OF LEWIS S. THOMPSON, III, DECEASED,
     SYNOVUS TRUST COMPANY, SUCCESSOR EXECUTOR TO
    SECURITY BANK AND TRUST COMPANY, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 14929-96.               Filed September 16, 1998.



     D died testate on Feb. 19, 1992. At the time of
his death, D owned a 3,489-acre parcel of real property
(CMP), which was used to produce merchantable timber
and crops and as a hunting preserve. P borrowed funds
from D's insurance trust for purposes of paying Federal
and State estate taxes and for the maintenance of CMP
pending the resolution of this dispute.

     On a timely filed Federal estate tax return, P
reported the value of CMP at its fair market value
(FMV). P also made a valid protective election for
special use valuation of CMP under sec. 2032A, I.R.C.
In addition, P deducted the interest incurred on the
borrowed funds from the value of D's gross estate as an
administrative expense under sec. 2053(a)(2), I.R.C.

     On a timely filed amended estate tax return, P
claimed that it is entitled to a refund for overpayment
                                 - 2 -

     of Federal estate tax. In that connection, P attempted
     to perfect its sec. 2032A, I.R.C., protective election
     with respect to approximately 2,929.1 acres of
     timberland located on CMP for which a "qualified
     woodlands" election had been made under sec.
     2032A(e)(13), I.R.C. P also increased the amount of
     its interest expense deduction under sec. 2053(a)(2),
     I.R.C.

           R disallowed the sec. 2053(a)(2), I.R.C.,
     interest expense deduction in its entirety, on the
     grounds that Georgia law requires prior court approval
     for the executor to borrow funds and that the interest
     expense was not "necessarily" incurred for the
     administration of the estate within the meaning of sec.
     20.2053-3, Estate Tax Regs. R accepted the FMV of CMP
     as reported on the original estate tax return.

          1. Held: P failed to supply the information and
     documentation necessary under sec. 2032A(e)(7)(A) and
     secs. 20.2032A-4(b)(2) and -8(a)(3), Estate Tax Regs.,
     to perfect its protective election for special use
     valuation with respect to the subject property;
     therefore, P is required to value CMP at its undisputed
     FMV on the date of decedent's death; i.e., $2,882,000.
     Sec. 2031(a), I.R.C.; Estate of Strickland v.
     Commissioner, 92 T.C. 16 (1989), followed.

          2. Held, further, P is entitled to deduct as an
     administrative expense under sec. 2053(a)(2), I.R.C,
     interest incurred on the funds borrowed from D's
     insurance trust.



     Robert H. Hishon, for petitioner.

     Clinton M. Fried, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

     NIMS, Judge:     Respondent determined a deficiency of $101,192

in the Federal estate tax of the Estate of Lewis S. Thompson, III

(petitioner).
                               - 3 -

      After a concession by petitioner, the issues for decision

are as follows:

(1)   Whether petitioner is entitled to value certain real

property owned by Lewis S. Thompson, III, (decedent), at the time

of his death pursuant to the special use valuation provisions of

section 2032A; and (2) whether petitioner incurred an interest

expense which is deductible under section 2053(a)(2).

      All section references are to sections of the Internal

Revenue Code in effect at decedent's date of death, unless

otherwise indicated.   All Rule references are to the Tax Court

Rules of Practice and Procedure.

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

The stipulated facts and attached exhibits are incorporated

herein by this reference.   Synovus Trust Company (Synovus),

successor executor to Security Bank and Trust Company, had its

principal place of business in Albany, Georgia, at the time the

petition was filed.

                         FINDINGS OF FACT

      Decedent died testate on February 19, 1992.    At the time of

his death, decedent resided in Albany, Georgia.     Decedent was

divorced, and was survived by his four adult children and a

brother.

      The reported value of decedent's total gross estate at the

date of his death, as adjusted under section 2032A(b)(3)(A), was

$5,439,313.   Among the assets included in decedent's gross estate
                                - 4 -

were publicly traded stock valued at $1,335,344; mortgages,

notes, and cash in the amount of $67,632; and life insurance in

the amount of $400,740.

     On the date of his death, decedent also owned a 3,489-acre

irregularly shaped parcel of real property known as Cane Mill

Plantation (Cane Mill) located in Dougherty County, Georgia.

Under the terms of decedent's Last Will and Testament (will),

Cane Mill was left in trust for his 4 children.

     Cane Mill is composed of property having the following

characteristics:

           Land Class                    Acres

           Irrigated cropland              160
           Dry cropland                    378
           Pasture land                     22.2
           Upland timberland             2,378.3
           Bottom timberland               550.8
             Total                       3,489.3

     The highest and best use of Cane Mill for all relevant times

in this case was for the production of merchantable timber and

crops and as a hunting preserve.

     Decedent's Irrevocable Insurance Trust (Trust) held an

insurance policy on decedent's life in the face amount of $2

million.   After decedent's death, the Trust collected the

insurance proceeds and interest earned thereon for an aggregate

amount of $2,011,562.

     Item Seven of decedent's will provides in pertinent part

that "Any and all estate or inheritance taxes shall be paid from
                               - 5 -

the residue of my estate, and no claim shall be made against any

life insurance beneficiary for payment of any part of such

taxes."

     Item Ten of decedent's will provides in pertinent part that

the "Executor * * * shall, without order of any court, have the

power to:   * * * Borrow money for any purpose that the fiduciary

may deem proper."   (Emphasis added.)

     On November 17, 1992, the executor borrowed $2 million from

the Trust without the approval of any court.   The executor

executed a promissory note (Note) in favor of the Trust in the

amount of $2 million, bearing annual interest at the rate of 5

percent, with principal and interest payable 1 year from the date

the Note was executed.   New 1-year notes with differing interest

rates were thereafter executed on November 17, 1993, July 26,

1995, and July 26, 1996.   Additional notes dated July 26, 1995,

and July 26, 1996, representing the capitalization of interest

due on the Note, were executed by petitioner in the amounts of

$123,834.44 and $111,070.64, respectively.

     Petitioner used the funds borrowed from the Trust to pay

Federal and Georgia estate taxes in the respective amounts of

$1,665,000 and $355,000, as well as to pay expenses for the

ongoing maintenance and preservation of Cane Mill pending the

resolution of the issues in this case.   As of the date of trial,

the funds borrowed from the Trust had not been repaid.
                               - 6 -

     Petitioner timely filed Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return (original return), on

May 19, 1993.   On Schedule A, Real Estate, attached thereto,

petitioner valued Cane Mill at $2,882,000, its fair market value

(FMV) as determined by its appraiser, Eley C. Frazer III

(Frazer).   Petitioner made a valid protective election for

special use valuation under section 2032A with respect to Cane

Mill on the Schedule A-1, Section 2032A Valuation, attached to

the original return.   Petitioner also made a "qualified

woodlands" election pursuant to section 2032A(e)(13) with respect

to 2,929.1 acres of timberland located on Cane Mill.   In

addition, petitioner claimed a deduction for interest on the Note

in the amount of $49,589 on Schedule J, Funeral Expenses and

Expenses Incurred in Administering Property Subject to Claims,

attached to the original return.   Petitioner also claimed a

deduction in the amount of $545,536 for alimony due decedent's

former wife under the terms of their divorce on Schedule K, Debts

of the Decedent, and Mortgages and Liens, attached to the

original return.

     By letter dated January 10, 1996, respondent's estate tax

attorney, Travis Vance III, advised petitioner that respondent

proposed to make certain adjustments to decedent's taxable

estate, none of which were related to the FMV of Cane Mill as

reported on the original return.   On March 8, 1996, petitioner

timely filed an amended Form 706 (amended return) in an effort to
                                - 7 -

perfect its protective election for special use valuation.      On

Schedule A-1, petitioner claimed a special use value for the

qualified woodlands in the amount of $375,711 (compared to the

woodlands' reported FMV of $2,028,730).     The remainder of the

Cane Mill property was reported at its FMV of $853,270.

     On the Schedule A attached to the amended return, petitioner

reported a total value of $2,132,000 for the Cane Mill property.

This amount represents the FMV of Cane Mill as reported on the

original return, $2,882,000, less $750,000, the maximum allowable

reduction for special use valuation under section 2032A.     See

sec. 2032A(a)(2).   Furthermore, on Schedule J of the amended

return, petitioner increased the amount of its section 2053(a)(2)

interest expense deduction with respect to funds borrowed from

the Trust to a total of $265,754.    In connection with these

amendments, petitioner claimed a refund for an overpayment of

estate tax in the amount of $369,248 on line 28 of the amended

return.

     Respondent issued a statutory notice of deficiency to

petitioner on April 23, 1996.   Among other adjustments to

decedent's gross estate, respondent disallowed the interest

expense deduction in its entirety.      Respondent further disallowed

the deduction for alimony paid to decedent's former spouse to the

extent it exceeded $400,000.    (Petitioner has conceded that the

proper amount of the alimony deduction is $400,000.)     Respondent
                               - 8 -

made no adjustment to the FMV of Cane Mill as reported on the

original return.

                              OPINION

      Petitioner asks us to find an overpayment of its Federal

estate tax.   We have jurisdiction to determine the amount of any

overpayment of petitioner's Federal estate tax since respondent

has determined a deficiency therein.    Sec. 6512(b); Barton v.

Commissioner, 97 T.C. 548, 552 (1991).     We must first decide

whether petitioner is entitled to special use valuation under

section 2032A for the qualified woodlands situated on Cane Mill.

We must also decide whether petitioner is entitled to deduct

interest expense incurred on funds borrowed from the Trust

pursuant to section 2053(a)(2).

I.   Section 2032A Special Use Valuation

      Generally, a decedent's gross estate subsumes the fair

market value of the decedent's interest in all property in which

he owned an interest at the time of his death.    Secs. 2032(a);

2033.   However, in the case of certain real property used by the

decedent or a member of his family for farming or in a closely

held business, section 2032A allows the decedent's personal

representative to elect to value the real property on the basis

of its value as a farm or in the closely held business, rather

than the fair market value of such property based on its "highest

and best use".   Sec. 2032A(e)(7) and (8); Stovall v.

Commissioner, 101 T.C. 140, 146 (1993); sec. 20.2032A-3(a),
                                - 9 -

Estate Tax Regs.    The fact that the highest and best use of real

property may coincide with its special use, as here, does not

preclude special use valuation under section 2032A.    Sec.

20.2032A-3(a), Estate Tax Regs.

       Section 2032A was added to the Code by the Tax Reform Act of

1976, Pub. L. 94-455, sec. 2003, 90 Stat. 1520, 1856.    The

purpose of the special valuation provision is to reduce the

estate tax burden, thereby alleviating liquidity problems faced

by the surviving family of a person who dies owning real property

used as a farm or in a closely held business.    H. Rept. 94-1380

at 21-22 (1976), 1976-3 C.B. (Vol. 3) 735, 755-756; S. Rept. 94-

938 (Part 2), at 15 (1976), 1976-3 C.B. (Vol. 3) 643, 657.

Congress sought to allow the family to continue operating the

farm or other business, rather than force the sale of the land to

pay estate taxes.    Estate of Mapes v. Commissioner, 99 T.C. 511,

516-617 (1992); H. Rept. 94-1380, supra, 1976-3 C.B. (Vol. 3) at

755-756; S. Rept. 94-938 (Part 2), supra, 1976-3 C.B. (Vol. 3) at

657.

       Although section 2032A is a relief statute designed to

encourage, among other things, the continuation of family farms,

it provides for "exceptionally favorable tax treatment", and

taxpayers must "come within its demanding terms".     Martin v.

Commissioner, 783 F.2d 81, 82, 84 (7th Cir. 1986), affg. 84 T.C.

620 (1985).    An estate must meet a number of conditions for

property to be eligible for special use valuation:    (1) The
                              - 10 -

decedent must have been a citizen or resident of the United

States, and the subject property must be located in the United

States; (2) at least 50 percent of the adjusted value of the

gross estate must consist of the adjusted value of real or

personal property which, on the date of decedent's death, was

being used for a qualified use by the decedent or a member of his

family, and was acquired from or passed from the decedent to a

qualified heir; (3) a minimum of 25 percent of the adjusted value

of the gross estate must consist of the adjusted value of real

property that passes to a qualified heir and that at least 5

years in the 8-year period immediately preceding decedent's death

was owned by decedent or a member of his family and used for a

qualified use; and (4) the decedent or a member of his family

must materially participate in the operation of the farm or

business.   Secs. 2032A(a)(1) and (b)(1).

     The above requirements all show Congress' intent to limit

the tax relief to what is generally regarded as a family farm or

business.   See Estate of Heffley v. Commissioner, 89 T.C. 265,

271 (1987), affd. 884 F.2d 279 (7th Cir. 1989); Estate of Geiger

v. Commissioner, 80 T.C. 484, 488 (1983).   Moreover, the benefit

afforded by section 2032A is not open-ended; the maximum

aggregate reduction in value allowable by the statute for

qualified real property with respect to any decedent is $750,000.

Sec. 2032A(a)(2).
                               - 11 -

     Special use valuation is not automatic.    Estate of Gardner

v. Commissioner, 82 T.C. 989 (1984).    Rather, the executor must

elect special use valuation on a Federal estate tax return, and

file the agreement referred to in section 2032A(d)(2).    Sec.

2032A(a)(1)(B).    A protective election may be made, as here, to

specially value qualified real property.    Sec. 20.2032A-8(b),

Estate Tax Regs.    (On brief, respondent has conceded that, for

purposes of this case, petitioner made a valid protective

election for special use valuation under section 2032A on the

original return.)    In addition, although an election need not

include all real property included in an estate which is eligible

for special use valuation, sufficient property to satisfy the

threshold requirements of section 2032A(b)(1) must be specially

valued under the election.    Sec. 20.2032A-8(a)(2), Estate Tax

Regs.   (Respondent does not dispute that this last requirement

has been satisfied.)

     Section 2032A(d)(1) directs the Secretary to prescribe

regulations to establish the manner in which the special use

valuation election is to be made.    See Estate of Gunland v.

Commissioner, 88 T.C. 1453, 1455 (1987).    To that end, section

20.2032A-8(a)(3), Estate Tax Regs., lists 14 items of information

that the executor must submit with the Federal estate tax return,

including the fair market value of the real property to be

specially valued under section 2032A and its value based on its

qualified use, as well as the method used to determine the
                                - 12 -

subject property's special use value.      Sec. 20.2032A-8(a)(3)(iv)

and (viii), Estate Tax Regs.    (On brief, petitioner asserts the

"Petitioner timely perfected its election for special use

valuation" under section 2032A(d)(3), and respondent does not

challenge this assertion.)

     The method of valuation under section 2032A is an integral

part of the statutory scheme.    See Estate of Sequeira v.

Commissioner, T.C. Memo. 1995-450.       Here, petitioner sought to

perfect its protective election with respect to the qualified

woodlands under the income capitalization method set forth in

section 2032A(e)(7)(A).   This method measures the present value

of the projected future cash-flows from the real property by

using cash rent figures for the 5 years preceding decedent's

death.   Sec. 2032A(e)(7)(A); Estate of Strickland v.

Commissioner, 92 T.C. 16, 24 (1989).

     Under the income capitalization method, a computation is

made of the "average annual gross cash rental" for comparable

land used for farming purposes and located in the locality of

such farm (comparable land).    (Gross cash rental is the amount of

cash received during the year for the use of actual tracts of

comparable farmland in the same locality, undiminished by any

expenses or liabilities associated with the farm operation.      Sec.

20.2032A-4(b)(1), Estate Tax Regs.; see Estate of Klosterman v.

Commissioner, 32 F.3d 402, 404 (9th Cir. 1994), affg. 99 T.C. 313

(1992).)
                               - 13 -

     From the average annual gross cash rental, as above

computed, the average annual State and local real estate taxes

for the comparable land is subtracted.   The result of the

subtraction is then divided by the average annual effective

interest rate for all new Federal Land Bank loans.    Sec.

2032A(e)(7)(A).   (The IRS issues an annual revenue ruling setting

forth the effective interest rate for each of the regional

Federal Land Bank Districts.   The effective interest rate for the

Columbia Farm Credit Bank district in which the respective

property is located was 10.87 percent for 1992.   Rev. Rul. 92-12,

1992-1 C.B. 311.)   The quotient resulting from the foregoing

division is the special use value of the qualified real property.

     Petitioner claims to derive its special use value of the

subject property from the annual cash rental value of $15 per

acre set forth in the May 10, 1993, special use valuation report

(report) of its expert, Frazer.   (We note that the figure of

$375,711 reported on the amended return appears nowhere in

Frazer's report, nor has the Court been able to determine how

such a special use value was reached by petitioner.    Based on our

calculations, and assuming for this purpose only that Frazer's

$15 per acre cash rental value for the subject property is

correct, 2,929.1 acres of qualified woodlands times $15 per acre,

without subtracting property taxes (Frazer stated that these were

usually paid by lessees in these types of leases, so it is

assumed that Frazer's $15 per acre is a net figure), equals
                               - 14 -

$43,936.50.    Dividing this amount by the capitalization rate of

10.87 results in a special use value for the subject property of

$404,199.63.    Petitioner contends that the report attached to the

amended return fully comports with the requirements of section

2032A(e)(7) and accompanying regulations, and that petitioner's

protective election has thereby been perfected.    Petitioner

further maintains that the subject property was used for a

qualified use, and that decedent materially participated in its

operation.    (No other requirements of section 2032A are in

issue.)

     Respondent argues, on the other hand, that petitioner failed

to properly perfect its election with respect to the qualified

woodlands on the amended return.    More specifically, respondent

argues that, in electing to value the subject property pursuant

to section 2032A(e)(7)(A), petitioner failed to identify

comparable properties and annual gross cash rent figures as

required.    Respondent also argues that petitioner failed to

demonstrate that the subject property was in qualified use and

that decedent materially participated in its operation.

     Section 20.2032A-4(b)(2), Estate Tax Regs., describes the

documentation required from the executor in order to value

property under section 2032A(e)(7)(A).    The regulation states

that "The executor must identify to the Internal Revenue Service

actual comparable property for all specially valued property and

cash rentals from that property" for each of the 5 calendar years
                               - 15 -

preceding the year of the decedent's death.    Sec. 20.2032A-

4(b)(2)(i) and (iv), Estate Tax Regs.

     The determination of whether property is comparable is a

factual one and is made according to "generally accepted real

property valuation rules".    Sec. 20.2032A-4(d), Estate Tax Regs.

Factors to be considered in such a determination include, but are

not limited to, whether the property is situated in the same

locality as the specially valued property; whether the property

is segmented or unified; whether the property is subject to

flooding; and, in the case of timberlands, the comparability of

the timber to the timber located on the property to be specially

valued.   Sec. 20.2032A-4(d), Estate Tax Regs.

     Frazer utilized 8 timberland properties as comparables in

his report.    The report identified the lessor and lessee, the

location of the property, the initial year of the lease, and the

cash consideration paid for each of the 8 properties used as

comparables.    The report also listed the "Adjusted Net Lease

Income/Acre" for the 8 properties and the "Average" thereof

($15).    The report indicated no adjustments to any of the 8

properties used as comparables based on the factors set forth in

section 20.2032A-4(d), Estate Tax Regs.

     For the following reasons, we conclude that the report is

completely unreliable as to whether any of the 8 properties were

indeed comparable to the subject property.    The putative

comparables ranged in size from 44 acres to 34,365 acres, yet no
                              - 16 -

adjustment to any of them was made for size even though the

substantially disparate sizes of the properties would appear to

have some significance in terms of economies of scale.    Frazer

also did not make any adjustments for location, land quality, or

timber type/maturity in his report.    Moreover, no description of

the properties was contained in the report, from which Frazer

appears implausibly to be inferring that they were sufficiently

similar so as to warrant none of the above adjustments.

     We are also not convinced that the special use valuation of

the subject property was based on actual cash rents of the

putative comparables as is called for under the regulations.

Section 20.2032A-4(b)(2)(iii), Estate Tax Regs., provides that

"appraisals or other statements regarding rental value as well as

area-wide averages of rentals * * * may not be used under section

2032A(e)(7) because they are not true measures of the actual cash

rental value of comparable property in the same locality as the

specially valued property."   (Emphasis added.)

     Although in effect for the 5 years preceding decedent's

death in 1992, the 8 timberland leases were entered into over the

27-year period from 1957 through 1984.   For those leases which

did not contain rent escalation clauses, Frazer claimed to have

applied the "Producer Price Index" (PPI) to the consideration

stated therein in an effort to calculate the market rental value

of those properties for the 5-year period preceding decedent's
                              - 17 -

death.   The result was termed the "Adjusted Net Lease

Income/Acre" in his report.

     Petitioner requests that the Court take judicial notice of

Report 807, Escalation and Producer Price Indexes: A Guide for

Contracting Parties issued by the U.S. Department of Labor,

Bureau of Labor Statistics in September 1991 for the purpose of

establishing that the PPI can be applied to contract rents to

calculate accurately fair market rents for future years in the

absence of escalation clauses, as Frazer claims to have done.

     Rule 201 of the Federal Rules of Evidence provides in part:

          (a) Scope of rule. This rule governs only
     judicial notice of adjudicative facts.

          (b) Kinds of facts. A judicially noticed fact
     must be one not subject to reasonable dispute in that
     it is either (1) generally known within the territorial
     jurisdiction of the trial court or (2) capable of
     accurate and ready determination by resort to sources
     whose accuracy cannot be reasonably questioned.

We take judicial notice of Report 807.    However, we do not find

Report 807 relevant for the purpose for which it is offered by

petitioner.   Fed. R. Evid. 401.   Contrary to petitioner's

argument, Report 807 does not support the proposition that market

rents for the relevant period can be accurately calculated from

contract rents entered into several decades beforehand via the

application of the PPI for purposes of section 2032A(e)(7)(A) for

those leases which do not themselves contain rent escalation

clauses.   Rather, Report 807 provides guidance to contracting

parties with respect to the use of price adjustment clauses at
                              - 18 -

the time the contract is entered into.   In that connection,

Report 807 states

     This report provides guidance on the development of
     escalation clauses in contracts which are to be tied to
     Producer Price Index data. * * *

     * * * Because index methodology and publication
     conventions could be crucial in developing escalation
     clauses, this report is intended to alert users to
     potential problems arising in these areas.

     Even if Report 807 could be construed to support the

proposition for which it is offered, Frazer's report failed to

indicate which index he relied upon to come up with the adjusted

net lease income per acre figures for the properties used as

comparables.   This omission flies in the face of the guidelines

set forth in Report 807, one of which admonishes contracting

parties to avoid "Vague citation of 'the Producer Price Index'

rather than a reference to a specific index by its title and any

identifying code number."   Moreover, upon being questioned by the

Court, Frazer was unable to explain the calculations leading to

his adjusted net lease income per acre figures.   Cf. Estate of

Sequeira v. Commissioner, T.C. Memo. 1995-450 ("The regulations

* * * require more than a brief narrative and calculations on the

return.   The regulations require that petitioner be able to

substantiate these figures with supporting documentation").

     We think that Frazer's adjusted net lease income per acre

figures are more akin to an appraisal, which is expressly

prohibited by section 20.2032A-4(b)(2)(iii), Estate Tax Regs.,
                              - 19 -

rather than an accurate calculation of the cash rents required

thereunder.

     As a further indication of his report's unreliability,

Frazer testified that the adjusted net lease income per acre

figures for each of the 8 properties used as comparables were not

used to derive an average gross cash rental for the 5 years

preceding decedent's death, despite the fact that section

2032A(e)(7)(A) expressly requires this to be done.   Rather,

Frazer explained that the $15 per acre "Average" used to

calculate the special use value of the subject property was an

amount based on his "personal knowledge".   Frazer stated that "I

chose what I thought would be the indicated market rent for what

I knew about the whole business, and that's it."   Frazer conceded

that his report failed to adequately explain the $15 figure.

Petitioner attempts to gloss over the report's fundamental flaws

by stating that "Based on * * * [Frazer's] knowledge and

experience in valuing timberland, the $15 per acre rate was the

appropriate valuation rate within this range."   However, an

amount that Frazer himself termed a "judgment call" does not

suffice for purposes of satisfying the stringent terms of section

2032A(e)(7)(A).   See Martin v. Commissioner, 783 F.2d at 84.

     Finally, Frazer testified that he validated his estimate of

the cash rental rate for the Cane Mill timberland by reference to

the prevailing rental rate for cropland during the relevant

period.   However, there is no evidence in the record as to how
                               - 20 -

this comparison was made, or even that timberland and cropland

rental rates are in any way proximate.

      In view of the foregoing, we conclude that petitioner has

failed to identify comparable real properties and cash rentals

therefor within the meaning of section 2032A(e)(7).     See sec.

20.2032A-4(b)(2), Estate Tax Regs.      As a result, petitioner has

not established the special use value of the Cane Mill

timberland.   Sec. 20.2032A-8, Estate Tax Regs.    We hold,

therefore, that petitioner has failed to perfect its protective

election for special use valuation under section 2032A;

petitioner is required to value the entire Cane Mill property at

its undisputed FMV on the date of decedent's death; i.e.,

$2,882,000.   Sec. 2031(a); see Estate of Strickland v.

Commissioner, 92 T.C. at 33.

      Because of our holding above, we need not consider whether

the subject property was in qualified use or whether decedent

materially participated in its operation.     See Estate of

Strickland v. Commissioner, 92 T.C. at 33 n.12.

II.   Section 2053 Administrative Expenses

      Section 2053(a) provides in part that the value of a

decedent's taxable estate shall be determined by deducting from

the value of the gross estate such amounts for administrative

expenses as are allowable by the laws of the jurisdiction under

which the estate is being administered.     Section 20.2053-3(a),

Estate Tax Regs., provides further that the
                             - 21 -

     amounts deductible from a decedent's gross estate as
     'administration expenses' * * * are limited to such
     expenses as are actually and necessarily incurred in
     the administration of decedent's estate; that is, in
     the collection of assets, payment of debts, and
     distribution of property to the persons entitled to it.
     * * * Expenditures not essential to the proper
     settlement of the estate, but incurred for the
     individual benefit of the heirs, legatees, or devisees,
     may not be taken as deductions. Administration
     expenses include (1) executor's commissions; (2)
     attorney's fees; and (3) miscellaneous expenses.
     [Emphasis added.]

In defining "miscellaneous" administration expenses, section

20.2053-3(d), Estate Tax Regs., provides that

     Expenses necessarily incurred in preserving and
     distributing the estate are deductible, including the
     cost of storing or maintaining property of the estate,
     if it is impossible to effect immediate distribution to
     the beneficiaries. Expenses for preserving and caring
     for the property may not include outlays for additions
     or improvements; nor will such expenses be allowed for
     a longer period than the executor is reasonably
     required to retain the property.

     Respondent does not dispute that petitioner is entitled to

deductions under section 2053(a)(2) for its legal fees and

appraisal fees to the extent such fees are substantiated.

Respondent also does not take issue with the general proposition

that interest on funds borrowed to pay estate tax liabilities,

among other things, may be deductible as administration expenses.

See, e.g., Estate of Todd v. Commissioner, 57 T.C. 288 (1971);

McKee v. Commissioner, T.C. Memo. 1996-362.     Rather, respondent

argues that Georgia, the jurisdiction under which the estate is

being administered, requires prior court approval for an estate

to incur an interest expense for borrowed funds, which approval
                              - 22 -

petitioner did not obtain.   In addition, respondent argues that

the interest expense at issue was not "necessarily" incurred

within the meaning of section 20.2053-3, Estate Tax Regs.

     We first look to Georgia law to determine whether the

interest expense claimed by petitioner as an administration

expense is properly deductible thereunder.   See Estate of Todd v.

Commissioner, supra at 294-296; McKee v. Commissioner, supra.

      Former Georgia Code section 53-7-7, applicable to decedents

dying before January 1, 1998, provides in pertinent part as

follows:

          (a) An executor * * * shall have the legal right
     to borrow money * * * for the purpose of paying any
     gift, estate, inheritance, income, sales, or ad valorem
     taxes due the United States * * * [or] state * * *.

          (b) An executor * * * desiring to borrow money
     shall petition the judge of the probate court, setting
     forth the facts, and shall specify in his petition the
     amount of money to be borrowed, the purpose for which
     the same shall be used, the rate of interest to be
     paid, the property to be pledged as security, and the
     period of time over which the money is to be repaid.
     * * * After a hearing, if the judge is satisfied of
     the truth of the allegations in the petition and deems
     it in the best interest of the estate, an order shall
     be passed granting leave to borrow money and encumber
     the estate or any part thereof, specifying the portion
     of the estate to be bound as definitely as possible.
     The order by the judge granting permission * * * to
     borrow shall be binding, final, and conclusive * * *
     provided, however, that nothing in this Code section
     shall prevent any party at interest from entering an
     appeal from the order within the time provided by law;
     and provided further that nothing in this Code section
     shall limit the powers contained in the will of a
     decedent. [Emphasis added.]
                                - 23 -

     We take the underscored language above to mean that an

executor need not petition the probate court judge for permission

to borrow funds if a decedent's will otherwise invests the

executor with such authority.    In this case, Item Ten of

decedent's will unequivocally states that the executor may borrow

money without a court order "for any purpose that the fiduciary

may deem proper."   We therefore conclude that the interest

incurred on the borrowed funds is an allowable administration

expense under Georgia law.   See Estate of Todd v. Commissioner,

supra at 295 n.4.

     We must now consider whether interest on the Note was

"necessarily incurred in the administration of the decedent's

estate."    Sec. 20.2053-3(a), Estate Tax Regs.; see Estate of Todd

v. Commissioner, supra; McKee v. Commissioner, supra.

     Petitioner argues that, without the borrowed funds, the

estate would have been required to exhaust all of its liquidity

to pay its estate taxes and, even then, a shortfall would have

remained.   Moreover, no funds would have been left to provide for

the ongoing costs of maintenance and preservation of Cane Mill

until such time as that asset could be distributed to decedent's

heirs.   Thus, petitioner asserts, the interest expense was

necessary and appropriate in the fiduciary's administration of

the estate.

     Respondent, on the other hand, argues that the estate held

sufficient liquid assets from which its Federal and State estate
                                - 24 -

tax liabilities could have been paid.    In that connection,

respondent maintains that the executor resorted to borrowing

funds from the Trust rather than selling such assets (which

included such publicly traded stocks as Synovus, Exxon, and

Amoco), in order for decedent's heirs to reap the benefit of

anticipated appreciation of the stocks.    In effect, respondent

argues that the interest expenditure was incurred for the benefit

of decedent's heirs, rather than the estate, in contravention of

section 20.2053-3(a), Estate Tax Regs.

     We are convinced that the financial position of the estate

at the time of the borrowing was insufficient to make the

required tax payments and provide for the maintenance of Cane

Mill until such time as the asset could be distributed to

decedent's heirs.    Cf. Estate of Street v. Commissioner, T.C.

Memo. 1994-568.     In that connection, William O. Dorough, Jr., a

senior vice president of Synovus and the individual responsible

for the administration of decedent's estate from the date of

decedent's death, testified credibly that a shortfall of

approximately $600,000 existed between estate tax liabilities and

liquid assets (the publicly traded stocks) available to pay them.

     Contrary to respondent's assertion, the $400,740 in life

insurance proceeds includable in the gross estate was not

available to the estate for purposes of paying its estate tax

liability, inasmuch as Item Seven of decedent's will provides

that all estate taxes shall be paid out of the residuary, and
                             - 25 -

that no claim "shall be made against any life insurance

beneficiary for payment of any part of such [estate] taxes."    See

Estate of Papson v. Commissioner, 73 T.C. 290, 297 n.7 (1979).

Even if the life insurance proceeds were available, a gap of

almost $200,000 remained between liquid assets and estate tax

liabilities.

     Although respondent has suggested that the executor could

have clearcut merchantable Cane Mill timber to make up the

difference, Dorough testified that this fairly drastic measure

would not have supplied the estate with the necessary amount of

funds, and he did not consider this course of action advisable.

     In addition to its estate tax liabilities, Dorough testified

that the estate had other obligations, including liability for

property taxes, the salaries of two regular employees, and the

wages of occasional laborers, all of which required the retention

of a certain amount of liquidity pending the resolution of the

instant dispute, inasmuch as the estate itself did not generate

sufficient income to maintain the Cane Mill operations.

     This Court stated in Estate of Sturgis v. Commissioner, T.C.

Memo. 1987-415 that "we are not prepared to second guess the

judgments of a fiduciary not shown to have acted other than in

the best interests of the estate."    The same sentiment holds sway

in the instant case; the regulations under section 2053 do not

require that an estate totally deplete its liquid assets before

an interest expense can be considered necessary.
                              - 26 -

     Moreover, we do not think that the interest expense was

incurred for the benefit of decedent's heirs.   See sec. 20.2053-

3(a), Estate Tax Regs.   Although Dorough testified that the value

of the stocks retained by the estate had indeed increased after

the Note was executed, to the benefit of decedent's heirs, such

an increase could not have been forecast at the time of the

borrowing.   As Dorough explained, predictions as to the direction

of the market were "very uncertain".

     In any event, retaining the marketable securities for

potential appreciation does not strike us as the sole or even

principal factor for retaining the stocks given the estate's

liquidity problem.   Although not identical, we think that Marcus

v. DeWitt, 704 F.2d 1227, 1232 (11th Cir. 1983), involving the

deductibility of expenses incurred in the sale of a decedent's

residence, is analogous to the instant case.    In Marcus, the

Court of Appeals for the Eleventh Circuit, to which an appeal of

this case would ordinarily lie, stated that "If the sale was made

for the benefit of the estate it is not significant that the

beneficiaries also benefitted.   The law is well established that

such dual benefit does not affect deductibility."   Accord Estate

of Papson v. Commissioner, supra at 295; compare Estate of Posen

v. Commissioner, 75 T.C. 355, 365 (1980) (disallowing deduction

for expenses related to the sale of an apartment upon a finding

that the sale was "made solely for the benefit of * * *

[decedent's daughter] as heir.") (Emphasis added.)).
                              - 27 -

     We also do not think that the interest expense was

unnecessary because the administration of the estate has been

unduly prolonged.   Sec. 20.2053-3(d), Estate Tax Regs.   Contrary

to respondent's argument, the facts here differ from those in

Hibernia Bank v. United States, 581 F.2d 741 (9th Cir. 1978).     In

Hibernia Bank, the court held that the estate's interest payments

were unnecessary inasmuch as the estate's administration had been

unduly prolonged.   In that case, all the specific bequests and

claims had been paid out of the estate by December 1967.   Only

two main estate assets remained:   a mansion and 10,000 shares of

the executor's stock.   Rather than distribute the remaining

assets, the executor attempted to sell the mansion, a feat not

accomplished until 1972.   (The mansion was sold because the heirs

preferred a cash distribution to certain residuary trusts rather

than a distribution of undivided interests in the mansion.)

Rather than sell the stock, the executor borrowed funds for the

upkeep of the mansion until it was sold.    There were, apparently,

no affairs to be wound up or reason for the estate to remain

open, other than the sale of the mansion.   In contrast, in the

case before us, there is at least the matter of the estate's

eligibility for special use valuation of the subject property

which requires that the estate remain open.   Cf. Estate of

Sturgis v. Commissioner, supra.

     On the basis of the above discussion, we hold that

petitioner is entitled to deduct interest incurred on funds
                               - 28 -

borrowed from the Trust pursuant to section 2053(a)(2).    The

correct amount of such deduction will be calculated under Rule

155.

       We have considered all other arguments advanced by the

parties, and to the extent they are not addressed herein, we find

them to be either not germane or unconvincing.

       To reflect the foregoing and petitioner's concession,


                                          Decision will be entered

                                     under Rule 155.
