                                            CHAPMAN GLEN LIMITED, PETITIONER v. COMMISSIONER
                                                   OF INTERNAL REVENUE, RESPONDENT

                                               Docket Nos. 29527–07L, 27479–09.                         Filed May 28, 2013.

                                                  In 1998, P was a foreign insurance company that elected
                                               under I.R.C. sec. 953(d) to be treated as a domestic corpora-
                                               tion for U.S. Federal income tax purposes. G signed the elec-
                                               tion in G’s reported capacity as P’s secretary. P also applied
                                               for and was granted tax-exempt status as an insurance com-
                                               pany effective Jan. 1, 1998. For 2003, P filed a Form 990,
                                               Return of Organization Exempt From Income Tax, that was
                                               not signed by one of P’s officers. In 2009, three years after P
                                               consented to R’s revocation of P’s tax-exempt status effective
                                               Jan. 1, 2002, R determined that (1) P’s election was termi-
                                               nated in 2002 because P was not an insurance company in
                                               that year and (2) P was therefore deemed under I.R.C. secs.
                                               354, 367, and 953(d)(5) to have sold its assets on Jan. 1, 2003,
                                               in a taxable transaction. P’s primary asset on Jan. 1, 2003,
                                               was its investment in a disregarded entity (E) that owned var-
                                               ious pieces of real property. Held: The three-year period of
                                               limitations under I.R.C. sec. 6501(a) remains open as to 2003
                                               because P’s Form 990 was not a valid return in that it was
                                               not signed by one of P’s corporate officers. Held, further, P
                                               properly elected under I.R.C. sec. 953(d) to be treated as a
                                               domestic corporation, and the termination of that election in
                                               2002 resulted in P’s making a taxable exchange under I.R.C.
                                               secs. 354, 367, and 953(d)(5) during a one-day taxable year
                                               commencing and ending on Jan. 1, 2003. Held, further, E’s
                                               real property is included in that taxable exchange, and the
                                               fair market value of the real property is determined. Held,

                                      294




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     295


                                               further, P’s gross income does not include amounts that R
                                               determined were ‘‘insurance premiums’’, and R may not for
                                               the first time in R’s posttrial opening brief recharacterize the
                                               premiums as a different type of taxable income.

                                        Vicken Abajian and Gary Michael Slavett, for petitioner.
                                        Najah J. Shariff, James C. Hughes, and Michael K. Park,
                                      for respondent.
                                        WHERRY, Judge: These cases are consolidated for purposes
                                      of trial, briefing, and opinion. Petitioner petitioned the Court
                                      in docket No. 29527–07L to review the Internal Revenue
                                      Service (IRS) Office of Appeals’ determination sustaining
                                      respondent’s proposed levy on petitioner’s property to collect
                                      $66,539 in additions to tax for 2004. The additions to tax
                                      relate to respondent’s determination that petitioner failed to
                                      timely file Forms 990, Return of Organization Exempt From
                                      Income Tax, and 990–T, Exempt Organization Business
                                      Income Tax Return (and proxy tax under section 6033(e)), for
                                      2004 and failed to timely pay the related tax. 1 The parties’
                                      only dispute remaining from this petition is a computational
                                      adjustment that turns on the amount of the deficiency for
                                      2004.
                                        Petitioner petitioned the Court in docket No. 27479–09 to
                                      redetermine respondent’s determination of the following defi-
                                      ciencies and additions to tax under section 6655:

                                                                                                              Addition to tax
                                                        Taxable year                  Deficiency                sec. 6655

                                                                 2002                   $43,719                      -0-
                                                  Jan. 1–Jan. 1, 2003                10,130,454                      -0-
                                                 Jan. 2–Dec. 31, 2003                   113,181                   $3,278
                                                                 2004                   111,696                    3,191


                                      Respondent alleged in an amendment to answer that the fair
                                      market value of real property underlying the deficiency for
                                      the one-day taxable year was $36,589,000 instead of
                                      $28,943,229 as determined in the notice of deficiency and
                                      that the deficiency for that year is therefore $12,806,452
                                           1 Unless
                                                 otherwise indicated, section references are to the Internal Rev-
                                      enue Code of 1986, as amended and in effect for the applicable years
                                      (Code), Rule references are to the Tax Court Rules of Practice and Proce-
                                      dure, and dollar amounts are rounded to the nearest dollar.




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                                      296                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      instead of $10,130,454. 2 Respondent asserts in respondent’s
                                      opening brief that recent concessions put the applicable value
                                      of the real property at $34,607,500. Petitioner argues that
                                      the fair market value of the real property is $13,711,775.
                                         Following concessions (including petitioner’s concessions
                                      that it is not an insurance company and that it does not
                                      qualify as a tax-exempt organization under section 501(c)(15)
                                      as of January 1, 2002), we are left to decide the following
                                      issues:
                                         1. whether respondent issued the deficiency notice to peti-
                                      tioner before the three-year period of limitations of section
                                      6501(a) expired as to 2003;
                                         2. whether petitioner properly elected to be treated as a
                                      domestic corporation under section 953(d);
                                         3. whether the subsequent termination of petitioner’s sec-
                                      tion 953(d) election resulted in a taxable exchange under sec-
                                      tions 354, 367, and 953(d)(5) during the one-day taxable year
                                      in 2003;
                                         4. whether the real property that Enniss Family Realty I,
                                      L.L.C. (EFR), owned was included in that taxable exchange;
                                         5. whether the fair market value of the real property at the
                                      time of the exchange on January 1, 2003 (valuation date),
                                      was $34,607,500 as respondent asserts; and
                                         6. whether petitioner’s gross income for the respective tax-
                                      able years includes ‘‘insurance premiums’’ of $128,584, $882,
                                      $299,178, and $298,000.

                                                                          FINDINGS OF FACT

                                      I. Preliminaries
                                        The parties submitted stipulated facts and exhibits. We
                                      incorporate the stipulated facts and exhibits herein. 3 Peti-
                                        2 Most currently, on the basis of certain concessions that respondent

                                      made after his amendment to answer, respondent alleged in his pretrial
                                      memorandum that the deficiency for the one-day taxable year is
                                      $12,693,052.
                                        3 Petitioner objected on grounds of relevancy to the admission into evi-

                                      dence of Exhibits 45–J, 46–J, and 47–J. The Court reserved ruling on
                                      those objections at trial. We now overrule the objections and admit the ex-
                                      hibits into evidence. See Fed. R. Evid. 401 (stating that evidence is rel-
                                      evant if it tends to make the existence of any fact or consequence more
                                      or less probable).




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     297


                                      tioner’s principal office was in Lakeside, California, when its
                                      petitions were filed.
                                         Petitioner was formed in the British Virgin Islands as a
                                      private international business company on August 29, 1996.
                                      It filed Forms 990 for 2002, 2003, and 2004 (as well as for
                                      earlier years). Later, in April 2006, petitioner submitted
                                      Forms 1120–F, U.S. Income Tax Return of a Foreign Cor-
                                      poration, for 2002 and 2003 to the IRS. The IRS did not
                                      accept those Forms 1120–F.
                                      II. Petitioner
                                           A. Background
                                         Petitioner was formed primarily to operate as an insurance
                                      (including captive insurance and reinsurance) company and
                                      to own, develop, and deal in real property, securities, and
                                      personal property. On January 8, 1998, its initial director
                                      resolved that all of petitioner’s stock be issued to Caesar
                                      Cavaricci and that Adam Devone and Bruce Molnar be
                                      appointed as petitioner’s directors. The initial director also
                                      resolved that its contemporaneously tendered resignation as
                                      petitioner’s initial director was accepted.
                                           B. Section 953(d) Election
                                         On or about November 16, 1998, petitioner delivered to the
                                      IRS a ‘‘Foreign Insurance Company Election Under Section
                                      953(d)’’ (section 953(d) election), stating that petitioner was
                                      electing under section 953(d) to be treated as a domestic cor-
                                      poration for U.S. tax purposes effective the first day of peti-
                                      tioner’s taxable year commencing December 27, 1997.
                                      Deanna S. Gilpin signed the election on November 16, 1998,
                                      in her reported capacity as petitioner’s secretary and under
                                      penalty of perjury that the statements therein were true and
                                      complete to the best of her knowledge and belief. On or about
                                      March 20, 2000, petitioner submitted to the IRS a Form
                                      2848, Power of Attorney and Declaration of Representative,
                                      designating Mr. Molnar, Mr. Cavaricci, and David B. Liptz
                                      (an associate of Mr. Molnar’s) as petitioner’s authorized rep-
                                      resentatives regarding the section 953(d) election and other
                                      stated matters, as each applied to petitioner’s Federal income
                                      tax for 1996 through 2000.




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                                      298                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      III. Enniss Family
                                           A. Family Members
                                        The Enniss family (as relevant here) has eight members.
                                      Arnold Reid Enniss (Reid Enniss) and his wife (now
                                      deceased), Delpha Enniss, are two of the members. Their
                                      children are the other six members. The children’s names are
                                      Chad Enniss, Wade Enniss, Blake Enniss, Carolyn Sandoval,
                                      Kelly Kufa, and Eric Enniss.
                                           B. Enniss Family Business
                                        The Enniss family has owned and operated a sand mine or
                                      quarry through various entities for over five decades. The
                                      related business mines or dredges sand, topsoil, and other
                                      dirt products (collectively, sand) mainly (if not solely) from
                                      riverbeds and markets and sells the mined sand. The Enniss
                                      family also for many years has through various entities
                                      owned and operated a general engineering and general
                                      building contracting business and a steel fabrication and
                                      erection, construction trucking, demolition, and grading busi-
                                      ness. Each member of the Enniss family is involved in the
                                      family businesses.
                                        The Enniss family began operating the sand mine in the
                                      early 1970s through their controlled corporation, Enniss
                                      Enterprises, Inc. In 1987, Enniss Enterprises, Inc., applied
                                      for a major use permit (MUP) with respect to the sand mine.
                                      The sand mine was in Lakeside, and a significant portion of
                                      the property was on the San Vicente Creek riverplain. On
                                      April 5, 1990, the San Diego County Planning and Environ-
                                      mental Review Board approved the MUP, allowing Enniss
                                      Enterprises, Inc., for a 15-year period, to conduct a mining
                                      operation that excavated and removed 2.2 million cubic yards
                                      of sand and gravel and conducted related screening. 4
                                      Eventually, from January 2002 through 2004, the sand mine
                                      business was owned and operated by Enniss, Inc. (another
                                      entity that the Enniss family controlled as discussed below).
                                      The Enniss family, through their various entities, excavated
                                      approximately 1,708,960 tons of sand (approximately

                                           4 One   cubic yard of sand generally weighs 11⁄2 tons.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     299


                                      1,139,307 cubic yards) from the sand mine from 1990 to
                                      2001. 5
                                      IV. Lawsuit
                                         In February 1998, an employee of the Enniss family busi-
                                      ness was seriously injured while at work, and he sued some
                                      or all of the Enniss family members both personally and
                                      through their business. The Enniss family retained various
                                      attorneys to defend them in the lawsuit and to structure the
                                      family’s finances to protect their assets. The Enniss family
                                      asked Earl Husted, an attorney, for advice on asset protec-
                                      tion and estate planning. Mr. Husted recommended that the
                                      Enniss family contact another attorney, Fred Turner, and
                                      Mr. Molnar, a certified public accountant (C.P.A.). Mr.
                                      Turner and Mr. Molnar coowned a business in Orange
                                      County, California, named Global Advisors.
                                      V. Petitioner’s Application for Tax Exemption
                                         On June 17, 1999, petitioner filed with the IRS a Form
                                      1024, Application for Recognition of Exemption Under Sec-
                                      tion 501(a), seeking tax-exempt status under section
                                      501(c)(15) as a tax-exempt insurance company. The applica-
                                      tion stated that petitioner was a licensed property and cas-
                                      ualty insurance company which had entered into reinsurance
                                      contracts and anticipated continuing that line of business.
                                        5 The parties stipulated that Exhibit 74–J contains the Mining Operation

                                      Annual Reports for Enniss Enterprises, Inc., Enniss, Inc., and Commercial
                                      Conservancy Number One (another Enniss family controlled entity d.b.a.
                                      Enniss Enterprises) for 1991 through 2001 and 2003 through 2009. Re-
                                      spondent in his opening brief cited this exhibit and proposed that the
                                      Court find that approximately 1,708,960 tons of sand were excavated be-
                                      tween 1991 and 2001. Petitioner in its answering brief admitted this pro-
                                      posed finding. We find in Exhibit 74–J, however, that the first annual re-
                                      port, while signed in 1991, actually reports sand that was excavated in
                                      1990 and this sand is included in the 1,708,960 tons. We therefore find
                                      contrary to the stipulation that the sand was excavated between 1990 and
                                      2001. See Gerdau MacSteel, Inc. v. Commissioner, 139 T.C. 67, 144 n.55
                                      (2012) (stating that, where justice requires, the Court may disregard a
                                      stipulation which is clearly contrary to the record). We also note that the
                                      annual report for 1995 lists a number that appears to be 140,000 but could
                                      be 190,000. Respondent in his proposed finding of fact has reflected that
                                      number as 190,000, and we do the same given petitioner’s agreement with
                                      respondent’s proposed finding.




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                                      300                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      The application stated that petitioner did not insure related
                                      parties or reinsure any related-party insurance. The applica-
                                      tion listed Mr. Cavaricci as petitioner’s president and
                                      director and Vince Ambrose as petitioner’s secretary and
                                      director. On or about September 15, 1999, petitioner sub-
                                      mitted to the IRS a Form 2848 authorizing Mr. Molnar (as
                                      a C.P.A.), Mr. Cavaricci (as an officer of petitioner), and Ms.
                                      Gilpin (as a full-time employee of petitioner) to represent
                                      petitioner as to the application and to petitioner’s Forms 990,
                                      as each related to petitioner’s Federal income tax for 1996
                                      through 1999.
                                         On November 24, 1999, the IRS (through the Chief of
                                      Exempt Organizations Technical Branch 3) notified peti-
                                      tioner by letter that the IRS had considered the application
                                      and determined solely on the basis of the information fur-
                                      nished therewith that petitioner was tax exempt as an
                                      organization described in section 501(c)(15), effective January
                                      1, 1998. The IRS noted in the letter that petitioner had filed
                                      its section 953(d) election. Petitioner subsequently filed its
                                      Forms 990 for 2002, 2003, and 2004 consistent with the
                                      status of a domestic tax-exempt entity for Federal tax pur-
                                      poses.
                                      VI. Enniss Family’s Asset Protection and Estate Planning
                                          Strategies
                                        During or before 2001, Mr. Turner and Mr. Molnar met
                                      with the Enniss family at the family’s office in Lakeside. The
                                      attendees discussed the previously mentioned lawsuit (which
                                      was then pending), the Enniss family’s business operations,
                                      and the possible benefits of a captive insurance company. 6
                                      Mr. Turner and Mr. Molnar suggested that the Enniss family
                                      consider using a captive insurance arrangement to protect
                                       6 As the Court explained in Hosp. Corp. of Am. v. Commissioner, T.C.

                                      Memo. 1997–482:
                                             The insurance laws of some States provide for a category of limited
                                           purpose insurance companies, popularly called captive insurance compa-
                                           nies or captive insurers. Captive insurance company statutes generally
                                           apply to companies that insure on a direct basis only the risks of compa-
                                           nies related by ownership to the insurer. Because pure captive insurance
                                           companies typically are formed for the purpose of insuring the risks of
                                           related companies, the function of risk selection, in essence, is attained
                                           at the onset.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     301


                                      their assets. Later that year, the Enniss family decided to
                                      avail themselves of the proffered benefits of a captive insur-
                                      ance company. Global Advisors recommended that the Enniss
                                      family purchase petitioner, an already-existing captive insur-
                                      ance company that the then owner wanted to sell, in order
                                      to avoid the costs of forming a new entity and to save money
                                      on the venture. Petitioner’s stock was then wholly owned by
                                      Mr. Cavaricci.
                                      VII. Enniss Family Purchases Petitioner Through BC Invest-
                                           ments, L.L.C.
                                        From August through December 2001, the Enniss family
                                      caused a series of transactions to be consummated to effect
                                      the family’s purchase of all petitioner stock from Mr.
                                      Cavaricci. Through the transactions, petitioner first relin-
                                      quished all of its assets and liabilities and then Mr. Cavaricci
                                      sold his petitioner stock to BC Investments, L.L.C., for
                                      $10,000. 7 At that time, each member of the Enniss family
                                      owned a 12.5% interest in BC Investments, L.L.C., and the
                                      IRS had issued the Enniss family a Federal identification
                                      number for the company.
                                        BC Investments, L.L.C., continued to be petitioner’s sole
                                      owner through 2004. BC Investments, L.L.C., did not file a
                                      Form 1065, U.S. Return of Partnership Income, or a Form
                                      1120, U.S. Corporation Income Tax Return, for any of the
                                      years 2001 through 2004.




                                           7 The
                                               parties have stipulated that Exhibit 21–J is a stock purchase
                                      agreement between Mr. Cavaricci and BC Investments, L.L.C., dated De-
                                      cember 11, 2001, and that Exhibit 23–J is a copy of the Form 990 that pe-
                                      titioner filed for 2002. The former exhibit states that BC Investments,
                                      L.L.C., is a Nevis limited liability company, and the latter exhibit states
                                      that BC Investments, L.L.C., is a California general partnership. The par-
                                      ties also have stipulated that petitioner has not stipulated that BC Invest-
                                      ments, L.L.C., is either a Nevis limited liability company or a California
                                      general partnership. The record fails to indicate whether BC Investments,
                                      L.L.C., is a Nevis limited liability company, a California general partner-
                                      ship, or something else, and we need not and do not make a finding as
                                      to that matter.




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                                      302                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      VIII. Enniss, Inc., and EFR
                                           A. Overview
                                         Mr. Turner and Mr. Molnar wanted to establish an entity
                                      (eventually, Enniss, Inc.) to operate the Enniss family’s gen-
                                      eral engineering and general building contracting business
                                      and another entity (eventually, EFR) to hold the Enniss fam-
                                      ily’s real property. Mr. Turner and Mr. Molnar wanted peti-
                                      tioner to provide insurance coverage for Enniss, Inc., and for
                                      EFR.
                                           B. EFR
                                           1. Background
                                        Effective December 31, 2001, the Enniss family formed
                                      EFR as a California limited liability company to hold and to
                                      manage their real property. Incident to this formation, each
                                      Enniss family member contributed $125 to EFR in exchange
                                      for a 12.5% interest in EFR. Each Enniss family member
                                      later transferred his or her real property to EFR. From 2002
                                      through 2004, EFR owned various pieces of real property and
                                      operated primarily as a real property management company.
                                      Reid Enniss was EFR’s general manager, and members of
                                      the Enniss family performed in the United States activities
                                      related to the management of EFR’s real properties. EFR did
                                      not file a Form 1065 (or a Form 1120) for any of the years
                                      2001 through 2004.
                                           2. Transfers
                                        On or about January 1, 2002, the Enniss family contrib-
                                      uted their membership interests in EFR to BC Investments,
                                      L.L.C. 8 BC Investments, L.L.C., then contributed those
                                      interests to petitioner. As of January 1, 2002, petitioner
                                      owned EFR as a ‘‘Disregarded Entity’’ for Federal tax pur-
                                      poses. 9 Petitioner has treated EFR as its wholly owned dis-
                                      regarded entity since January 1, 2002.
                                        8 While Ms. Sandoval testified that she never transferred her member-

                                      ship interest in EFR to BC Investments, L.L.C., that testimony is dis-
                                      proved by the credible evidence in the record.
                                        9 See secs. 301.7701–1(a)(4) (providing that ‘‘certain organizations that

                                      have a single owner can choose to be recognized or disregarded as entities
                                      separate from their owners’’), 301.7701–3(b)(1) (providing that a domestic




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     303


                                           3. Specific Real Property Holdings
                                        During 2002 and 2003, EFR owned the following nine
                                      groups of property, as identified by Eichel, Inc., real estate
                                      analysis and appraisers, with the following corresponding
                                      parcels: 10

                                                                                                           Approximate
                                      Property group                Parcel            Parcel No.             acreage   Zoning
                                      1—Sand mine
                                                               A: Lot 210           375–040–01–00               18.38          A70
                                                               B: Lot 209           375–040–18–00               14.50          A70
                                                               C: Lot 206           375–040–15–00                9.90          A70
                                                               D: Lot 203           375–040–14–00               10.15          A70
                                                               E: Lot 215           375–040–33–00               17.70          M58

                                                                                                                70.63
                                      2—Rock quarry
                                                               F: Highway           326–050–11–00                7.53          M58
                                                                  67
                                      3—Vacant in-
                                       dustrial land
                                                               G: Lot 212           375–041–41–00                2.86          M58
                                                               H:                   375–041–44–00                4.70          M58
                                                               I: Lot 1             375–190–01–00                0.88          M58

                                                                                                                 8.44
                                      4—Vacant in-
                                       dustrial land
                                                               J: Lot 2             375–190–02–00                1.05          M58/
                                                                                                                               A70
                                                               K: Lot 4             375–190–04–00                2.37          M58/
                                                                                                                               A70
                                                               L: Lot 10            375–190–10–00                1.14          M58
                                                               M: Lot 11            375–190–11–00                1.29          M58
                                                               N: Lot 12            375–190–12–00                3.93          M58

                                                                                                                 9.78
                                      5—Vacant mul-
                                       tifamily site
                                                               O: Graves            384–120–63–00               22.23           HL
                                                               P:                   378–120–62–00                6.25           HL
                                                               Q:                   378–120–31–00                2.99           HL

                                                                                                                31.47

                                      entity is ‘‘Disregarded as an entity separate from its owner if it has a sin-
                                      gle owner’’ and does not elect otherwise), Proced. & Admin. Regs.
                                        10 For part of this time, EFR also owned lot 8, parcel No. 375–190–08–

                                      00, in addition to the listed parcels. That 1.08-acre parcel was sold on Oc-
                                      tober 8, 2002, for $635,000.




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                                      304                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                                                                                           Approximate
                                      Property group                Parcel            Parcel No.             acreage   Zoning
                                      6—Single-fam-
                                       ily dwelling
                                                               R: Lot 17            379–060–21–00                2.76          A70
                                      7—Single-fam-
                                       ily dwelling
                                                               S: Via Viejas        404–300–03–00                  2.5         A70
                                      8—Vacant sin-
                                       gle-family lots
                                                               T: Utah              27–02–426–002                0.13           R
                                                               U: Utah              27–02–426–005                0.16           R

                                                                                                                 0.29
                                      9—Vacant resi-
                                       dential site
                                                               V: Ramona            287–031–26–00               39.24          A72

                                         A70 zoning allows limited agricultural and commercial
                                      uses related to agricultural or civic uses. M58 zoning reflects
                                      high-impact industrial use (e.g., steel fabrication and contrac-
                                      tors’ yards), and vacant land with M58 zoning provides an
                                      additional advantage to certain businesses in that it allows
                                      for unenclosed commercial and industrial uses having poten-
                                      tial nuisance characteristics. HL zoning allows for limited
                                      residential development.
                                           4. Description of Properties
                                           a. Property Group 1
                                         Property group 1 is the Enniss family’s sand mine plant at
                                      the corner of Vigilante Road and Moreno Avenue. As of the
                                      valuation date, parcels A through D were used to mine sand
                                      and topsoil, and parcel E, which had a few small buildings
                                      on it, was used primarily as the sand mine’s business office
                                      and for storage. The highest and best use of property group
                                      1 as of the valuation date was continued mining of the prop-
                                      erty’s mineral resources. The highest and best use for the
                                      property after the mineral resources are depleted is indus-
                                      trial development or outdoor storage.
                                           b. Property Group 2
                                        Property group 2 is vacant land north of Vigilante Road,
                                      on State Highway 67. This property’s use is limited to source
                                      material for a rock quarry operation. The parties agree that




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     305


                                      the fair market value of property group 2 as of the valuation
                                      date was $500,000.
                                           c. Property Groups 3 and 4
                                        Property groups 3 and 4 (which the parties refer to as the
                                      Vigilante Industrial Lots) are vacant industrial lots across
                                      the street from each other on Vigilante Road between prop-
                                      erty group 1 and State Highway 67. The eight underlying
                                      parcels are irregular in shape, they are accessible by way of
                                      Vigilante Road, and they have available water, sewer, and
                                      electricity service.
                                        As of the valuation date, property groups 3 and 4 were
                                      used for open surface and minor office buildings. The highest
                                      and best use for these property groups was industrial usage,
                                      open storage, or outdoor manufacturing.
                                           d. Property Group 5
                                        Property group 5 (which the parties refer to as the Graves
                                      Avenue Properties) is undeveloped Rattlesnake Mountain
                                      hillside land in Santee, California, approximately five miles
                                      south of property groups 3 and 4. Property group 5 is located
                                      at the terminus of Graves Avenue.
                                        The Enniss family bought property group 5 for $300,000 in
                                      1998. The previous owner had mined granite on the property,
                                      leaving a decomposed granite pit with several hundred thou-
                                      sand tons of large boulders weighing from 1 to 30 tons each.
                                      The Enniss family purchased property group 5 to resell the
                                      boulders for rip rap along the coast of California. Rip rap is
                                      the rock revetment that goes along the beach to dissipate the
                                      energy from the ocean so that it does not erode the cliffs.
                                        The Enniss family started marketing the boulders as rip
                                      rap during the spring of 1999, but a local sheriff ordered
                                      them in 2001 to stop their activities on property group 5. The
                                      property remained idle until 2002, when a lawyer for a devel-
                                      oper, Joel Faucetta, approached the Enniss family to buy the
                                      property as part of Mr. Faucetta’s efforts to redevelop a sur-
                                      rounding area to the west. Graves Avenue was the proposed
                                      development’s only access road, and Mr. Faucetta wanted
                                      property group 5 to access his proposed development. Santee
                                      was backing and spearheading a development of the sur-
                                      rounding area for residential use.




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                                      306                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                        On August 12, 2002, EFR, as optionor, and Faucetta
                                      Development Co. (FDC), as optionee, entered into an option
                                      agreement that provided FDC, for a term of up to 24 months
                                      (or, if earlier, five days after the recordation of the first final
                                      subdivision map for the development), with the right to pur-
                                      chase property group 5 for $5 million. 11 FDC paid EFR $1
                                      for the option. If FDC failed to exercise the option, EFR had
                                           11 The   option agreement provided in part:
                                              A. Optionor has offered to grant Optionee an option to purchase its fee
                                           title interest in approximately 30 acres (plus or minus) of real property
                                           located in the City of Santee, County of San Diego, California * * * on
                                           the terms and conditions hereinafter set forth.
                                             B. Optionee desires to acquire an option to purchase the Property
                                           under the terms and conditions hereinafter set forth.
                                             C. Optionee understands and agrees that the Property will be proc-
                                           essed for development entitlements with other adjacent property con-
                                           sisting of approximately 275 acres under a joint application for one Mas-
                                           ter Project.
                                            NOW THEREFORE, in consideration of the payment of $1.00 and the
                                           mutual promises contained herein, the parties agree as follows:
                                             1. Grant of Option. Optionor hereby grants to Optionee, or its As-
                                           signee, the exclusive right and option to purchase the Property upon the
                                           terms and conditions and for the purchase price hereinafter set forth.
                                                                               * * * * * * *
                                              6. Exercise of Option. In the event that Optionee, or its Assignee, exer-
                                           cises this Option, such exercise shall be effected by Optionee, or its As-
                                           signee, sending written notice to Optionor of the intent to exercise the
                                           option. Thereafter, Optionee shall within three (3) business days of the
                                           date of the written notice open an escrow to purchase the Property in
                                           accordance with the terms provided herein.
                                             In the event that Optionee does not exercise the Option provided for
                                           herein, Optionor shall sell to Optionee an easement for ingress and
                                           egress over the road across the Property shown on the approved ten-
                                           tative map for the Master Project. In addition, Optionor shall grant
                                           Optionee an easement over the land at the entrance of the Master
                                           Project, not to exceed one-half acre, in order to erect appropriate entry
                                           monumentation for the Master Project. In exchange for the purchase of
                                           the easement for the road and the easement for entry monumentation
                                           of the Master Project, Optionee shall improve the access road, the entry
                                           monumentation area and provide stubbed underground utilities, includ-
                                           ing sewer, water, electricity and cable to all the approved lots on the
                                           Property and pay the sum of Two Million and No/Dollars ($2,000,000)
                                           within five (5) business days after the approval of the first final subdivi-
                                           sion map for the Master Project.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     307


                                      to sell FDC two easements over property group 5 at a total
                                      cost of $2 million and FDC had to make certain improve-
                                      ments to the property. When the option agreement was
                                      entered into, Reid Enniss knew that Mr. Faucetta was trying
                                      to acquire several surrounding parcels for a larger develop-
                                      ment. On the valuation date, property group 5 was zoned
                                      Hillside Limited, which allowed residential development of
                                      approximately seven to nine homes.
                                         On August 8, 2004, FDC notified EFR that FDC was exer-
                                      cising the option to purchase property group 5 on or before
                                      September 12, 2004. FDC and EFR eventually agreed on
                                      September 20, 2004, to extend the close of the sale and the
                                      escrow until April 15, 2005, in exchange for FDC’s agreeing
                                      to pay EFR an additional $500,000. The option was ulti-
                                      mately assigned to Lennar Homes, a national home builder,
                                      which purchased property group 5 on April 15, 2005, for its
                                      Sky Ranch development project.
                                           e. Property Group 6
                                        Property group 6 is an older single-family dwelling in
                                      Lakeside. The parties agree that the fair market value of
                                      property group 6 was $367,500 as of the valuation date.
                                           f. Property Group 7
                                        Property group 7 is a high-end single-family dwelling in
                                      Alpine, California. The parties agree that the fair market
                                      value of property group 7 was $918,000 as of the valuation
                                      date.
                                           g. Property Group 8
                                        Property group 8 is two adjacent single-family lots in
                                      Sandy, Utah. The parties agree that the fair market value of
                                      property group 8 was $126,000 as of the valuation date.
                                           h. Property Group 9
                                        Property Group 9 is vacant land in a remote rural area of
                                      northeast San Diego County. The parties agree that the fair
                                      market value of property group 9 was $145,000 as of the
                                      valuation date.
                                           5. Leases
                                       From 2002 through 2004, EFR entered into leasing agree-
                                      ments with various third parties for rental of its properties.




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                                      308                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      On January 1, 2002, EFR leased parcels A through D of
                                      property group 1 to Enniss, Inc., in exchange for a royalty
                                      payment of $2 per ton of material processed and sold from
                                      those parcels.
                                           C. Enniss, Inc.
                                         Mr. Husted incorporated Enniss, Inc., in the State of Cali-
                                      fornia on or about December 19, 2001. Enniss, Inc., is
                                      involved in general engineering, general building contracting,
                                      steel fabrication and erection, construction trucking, demoli-
                                      tion, and grading and operates the Enniss family’s sand
                                      mine. Enniss, Inc., is controlled by the Enniss family.
                                         Since January 1, 2002 (including on the valuation date),
                                      Enniss, Inc., has operated the sand mine on parcels A
                                      through D pursuant to its lease agreement with EFR. The
                                      agreement provided that Enniss, Inc., could use the property
                                      as its sand mining operation, materials division office, and
                                      maintenance facilities. The parties to that lease also entered
                                      into a second lease agreement on the same date under which
                                      Enniss, Inc., used one acre and 4,800 feet of office space on
                                      parcel E. As of the valuation date, Enniss, Inc., used parcel
                                      E as the site for its offices and storage and maintenance
                                      sheds, as well as a yard area for the stacking and processing
                                      of materials. 12
                                      IX. Reclamation Plan
                                           A. Background
                                         The Surface Mining and Reclamation Act of 1975
                                      (SMARA), Cal. Pub. Res. secs. 2710 through 2796 (West 2001
                                      & Supp. 2013), required that the sand mine have an
                                      approved reclamation plan that details how the mine would
                                      be reclaimed to a usable condition in a manner that pre-
                                      vented or minimized adverse environmental impacts and
                                      eliminated residual hazard to the public health and safety.
                                      The reclamation plan for property group 1, as in effect on the
                                      valuation date, generally required that the operator of the
                                      sand mine reclaim the sand mine after the mining was com-
                                      plete. Specifically, as of that time, fill had to be transported
                                      to the pits on the property to construct various stable and
                                           12 Minimal    mining also occurred on parcel E.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     309


                                      compacted pads. The reclamation plan also required that a
                                      drainage channel be constructed through the two southern
                                      parcels of the site to carry water from the lake to the existing
                                      San Vicente Creek south of the site.
                                        The SMARA also required a financial assurance mecha-
                                      nism (e.g., a bond or a letter of credit) to guarantee that the
                                      costs associated with reclaiming the land in accordance with
                                      the approved reclamation plan would be paid if the mine
                                      operator became financially insolvent. Regardless of the mine
                                      operator’s financial condition, the land owner is ultimately
                                      responsible for the cost of reclamation. As of the valuation
                                      date, no financial assurance was in place to guarantee that
                                      reclamation of property group 1 would occur. Property group
                                      1, once in the 1990s, had a $40,000 bond but the bond
                                      expired before the valuation date.

                                           B. Fill
                                         The primary reclamation activity is obtaining fill to refill
                                      the mined pits. 13 Sand mine owners and operators in San
                                      Diego County sometimes purchase fill, especially when the
                                      fill is of a specialized material. Other times, the owners and
                                      operators receive free fill from construction debris and other
                                      off-site sources, or charge a $2 to $6 per ton tipping fee to
                                      allow companies desiring to dispose of their fill to dump the
                                      fill in the mined pits at the sand mines.
                                         As of the valuation date, multiple mining enterprises in
                                      the San Diego area used fill for reclamation purposes. Many
                                      of these enterprises charged tipping fees for accepting the
                                      fill. Development projects in downtown San Diego provided a
                                      major source of the fill in San Diego County, and other sites
                                      outside of the downtown area did as well. Additional fill
                                      sources in the Lakeside area at or around that time included
                                      concrete rubble, asphalt rubble, construction overburden, and
                                      sand and gravel that was not suitable for processing. During
                                      2002 and 2003, the amount of fill that these areas around
                                      the sand mine were capable of generating was projected over
                                      five years to comprise between 475,000 and 2 million cubic
                                      yards.
                                         13 Other reclamation activities included removing equipment and struc-

                                      tures, revegetation, and certain indirect items. The costs of these other ac-
                                      tivities were relatively minimal in relation to the cost of the fill.




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                                      310                 140 UNITED STATES TAX COURT REPORTS                                    (294)


                                        Enniss, Inc.’s nearby neighbor, Hanson Materials (Han-
                                      son), had about two million cubic yards of fill dirt at that
                                      time sitting in a large pile on the property. The Hanson site
                                      was near property group 1 but, inter alia, a 5,700-foot con-
                                      veyor system would have had to be constructed to transport
                                      the fill to property group 1. Baxter owned a parcel of real
                                      property between property group 1 and the Hanson site. The
                                      owner of property group 1 would need Baxter’s consent to
                                      build the conveyor on or over Baxter’s property. Baxter was
                                      a blasting contractor and stored explosives on its land. Other
                                      parcels of land also were between the Hanson site and prop-
                                      erty group 1, and the owner of property group 1 also needed
                                      the consent of those property owners to build the conveyor on
                                      or over their properties. The Enniss family had no permis-
                                      sion from Baxter or from any of the other property owners
                                      to run a conveyor over their properties. The Enniss family,
                                      however, may have then owned the other properties. 14
                                        Beginning in 2002, Enniss, Inc., charged companies tipping
                                      fees to dump their fill at its sand mine. The relevant data
                                      underlying the tipping fees that Enniss, Inc., received in
                                      2002 and 2003 is as follows:

                                                                   Fill received           Tipping fees        Average tipping
                                                 Year                  (tons)                collected           fee per ton

                                                 2002                2,769.52                 $84,128               $30.38

                                                 2003               10,483.37                 144,450                13.78


                                           C. Lakes
                                        Property group 1 included a northerly lake. As of the valu-
                                      ation date, no sand remained for permissible excavation in
                                      that lake. The approved mining depth was generally 35 feet,
                                      and the northerly lake had been overexcavated to a depth of
                                      at least 40 feet and perhaps as deep as 75 feet. The approved
                                      reclamation plan and the MUP called for the area to remain
                                      a lake.
                                           14 Although
                                                     the record is ambiguous, Chad Enniss testified that to con-
                                      struct and to operate the proposed conveyor system Enniss, Inc., would
                                      have needed ‘‘permission [i.e., an easement or license] from Hanson, Bax-
                                      ter, [and] possibly a couple of the others there on Vigilante Road, but at
                                      that time, I think that we owned all of those’’ other parcels of property.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     311


                                        Property group 1 also included a southerly lake. As of the
                                      valuation date, no sand remained for permissible excavation
                                      in the southerly lake. The southerly lake had to be filled as
                                      part of the reclamation of property group 1.
                                           D. Condition of Mine on the Valuation Date
                                        On the valuation date, property group 1 was in the worst
                                      condition it had been in since the Enniss family started
                                      mining the property. Few if any conditions of the MUP had
                                      been met; little reclamation had taken place; and the prop-
                                      erty had been mined out of phase, over depth, and too close
                                      to the road. In addition, no financial assurance was in place;
                                      existing roads were not widened; new roads were not built;
                                      and the mines were approximately 60 to 80 feet deep from
                                      the surface elevation.
                                      X. Ms. Sandoval
                                        Ms. Sandoval was petitioner’s secretary during the subject
                                      years. She was in charge of filing and signing petitioner’s tax
                                      returns.

                                      XI. Petitioner’s Forms 990 and 990–T

                                           A. Form 990 for 2002
                                         Petitioner filed its Form 990 for 2002 on or about January
                                      15, 2004. The return lists Chad Enniss as petitioner’s presi-
                                      dent and Ms. Sandoval as petitioner’s secretary. The return
                                      is signed and dated by Ms. Sandoval, and she also printed
                                      her name and title (‘‘Secretary’’) next to her signature on the
                                      line for those items. The return was prepared and also
                                      signed by a representative of Molnar and Associates on
                                      behalf of that entity in his or her capacity as the return’s
                                      preparer. The representative’s signature is illegible.
                                         The Form 990 for 2002 reports that EFR is a limited
                                      liability company that petitioner wholly owned. The return
                                      also reports that EFR is a disregarded entity. In addition,
                                      the return reports that petitioner received tax-exempt insur-
                                      ance premium revenue of $128,584 during 2002.




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                                      312                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                           B. Form 990 for 2003
                                         Petitioner filed its Form 990 for 2003 on or about
                                      November 19, 2004. The return lists Chad Enniss as peti-
                                      tioner’s president and Ms. Sandoval as petitioner’s secretary.
                                      The return was prepared and signed by a representative of
                                      Molnar and Associates on behalf of that entity in his or her
                                      capacity as the return’s preparer. The representative’s signa-
                                      ture is illegible, but it appears to be that of the same indi-
                                      vidual who signed the Form 990 for 2002 as its preparer. 15
                                      The return was not signed by anyone other than the pre-
                                      parer.
                                         The Form 990 for 2003 reports that EFR is a limited
                                      liability company that petitioner wholly owns. The return
                                      also reports that EFR is a disregarded entity. The return
                                      also reports that petitioner received tax-exempt insurance
                                      premiums revenue of $300,000 during 2003.
                                           C. Form 990 for 2004
                                         Petitioner filed its Form 990 for 2004 on or about
                                      November 21, 2005. The return lists Chad Enniss as peti-
                                      tioner’s president and Ms. Sandoval as petitioner’s secretary.
                                      The return was prepared by J. Douglass Jennings, Jr., on
                                      behalf of his professional corporation, and was signed by him
                                      in that capacity. The return also was signed and dated by
                                      Ms. Sandoval in her capacity as petitioner’s secretary, and
                                      she also printed her name and title (‘‘Secretary’’) under her
                                      signature on the line for those items.
                                         The Form 990 for 2004 reports that petitioner received tax-
                                      exempt insurance premiums revenue of $298,000 during
                                      2004.
                                           D. Form 990–T for 2004
                                       Petitioner filed its Form 990–T for 2004 on or about
                                      November 15, 2005.




                                       15 While petitioner asks the Court to find that the signature is that of

                                      Mr. Molnar, the signature is most likely that of Mr. Liptz.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     313


                                      XII. Respondent’s Examination

                                           A. Tax-Exempt Status
                                         During or about June 2005, the IRS (through its Tax-
                                      Exempt and Government Entities Division) began an exam-
                                      ination for petitioner’s 2002 and 2003 taxable years and most
                                      specifically petitioner’s tax-exempt status under section
                                      501(c)(15). The IRS ultimately determined that petitioner
                                      was not an insurance company and did not qualify as a tax-
                                      exempt organization described in section 501(c)(15) as of
                                      January 1, 2002. Petitioner eventually agreed with this
                                      determination. On April 12, 2006, Ms. Sandoval, as peti-
                                      tioner’s secretary and treasurer, signed Form 6018–A, Con-
                                      sent to Proposed Action, consenting to the IRS’s revocation of
                                      petitioner’s tax exemption as of January 1, 2002.
                                           B. Income Tax
                                         During or around November 2005, the IRS (through its
                                      Large and Mid-Size Business Division) began an examination
                                      for petitioner’s income tax liabilities for 2002 and 2003. The
                                      examination was later expanded to include 2004.
                                         Respondent used substitute for return procedures to deter-
                                      mine petitioner’s income tax liability for each subject year.
                                      Respondent determined that the termination of petitioner’s
                                      section 953(d) election caused petitioner to be a taxable cor-
                                      poration which sold its assets to a controlled foreign corpora-
                                      tion on January 1, 2003 (which, respondent determined, was
                                      a one-day taxable year in and of itself). Respondent
                                      bifurcated petitioner’s 2003 taxable year into the one-day
                                      taxable year beginning and ended on January 1, 2003, and
                                      a second taxable year consisting of the remainder of 2003.
                                      For the one-day taxable year, respondent determined peti-
                                      tioner’s income tax liability in part on the basis of the
                                      deemed sale.

                                      XIII. Notice of Deficiency

                                         On August 5, 2009, respondent issued petitioner the notice
                                      of deficiency underlying these cases.




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                                      314                 140 UNITED STATES TAX COURT REPORTS                                   (294)

                                                                                  OPINION

                                      I. Burden of Proof
                                         With one exception, petitioner bears the burden of proving
                                      that respondent’s determination of the deficiencies set forth
                                      in the deficiency notice is incorrect. See Rule 142(a)(1); Welch
                                      v. Helvering, 290 U.S. 111, 115 (1933); Baxter v. Commis-
                                      sioner, 816 F.2d 493, 495 (9th Cir. 1987), aff ’g in part, rev’g
                                      in part on an issue not relevant here T.C. Memo. 1985–378.
                                      Section 7491(a) sometimes shifts to the Commissioner part or
                                      all of the burden of proof where the taxpayer introduces cred-
                                      ible evidence of a factual matter, but that section does not
                                      apply where a taxpayer fails to satisfy the related require-
                                      ments. See, e.g., sec. 7491(a)(2)(A), (B), and (C). Petitioner
                                      has failed to establish that it meets all of those require-
                                      ments.
                                         The single exception is that respondent bears the burden
                                      of proof as to the fair market value of the real property
                                      underlying the deficiency for the one-day taxable year. These
                                      cases are appealable to the Court of Appeals for the Ninth
                                      Circuit (absent the parties’ stipulation to the contrary), and
                                      this Court will follow a decision of that court which is
                                      ‘‘squarely in point’’. See Golsen v. Commissioner, 54 T.C. 742,
                                      757 (1970), aff ’d, 445 F.2d 985 (10th Cir. 1971). The Court
                                      of Appeals for the Ninth Circuit has indicated, on at least
                                      three occasions, that the presumption of correctness that
                                      attaches to a notice of deficiency is forfeited where the
                                      Commissioner adopts a litigating position different from the
                                      valuation stated in a deficiency notice. See Estate of Mitchell
                                      v. Commissioner, 250 F.3d 696, 701–702 (9th Cir. 2001), aff ’g
                                      in part, vacating in part and remanding 103 T.C. 520 (1994)
                                      and T.C. Memo. 1997–461; Estate of Simplot v. Commis-
                                      sioner, 249 F.3d 1191, 1193–1194 (9th Cir. 2001), rev’g and
                                      remanding 112 T.C. 130 (1999); Morrissey v. Commissioner,
                                      243 F.3d 1145, 1148–1149 (9th Cir. 2001), rev’g and
                                      remanding Estate of Kaufman v. Commissioner, T.C. Memo.
                                      1999–119. 16 Respondent’s litigating position as to the fair
                                           16 In
                                              each of these cases, the Commissioner determined an estate tax de-
                                      ficiency on the basis of an increase in the fair market value over that re-
                                      ported on the estate tax return and later submitted expert reports sup-
                                      porting the Commissioner’s concessions that the fair market value was less
                                      than that determined in the statutory notice. See Estate of Mitchell v.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     315


                                      market value of the real property underlying the deficiency
                                      in the one-day taxable year differs from the value stated in
                                      the deficiency notice.
                                      II. Period of Limitations
                                         Petitioner argues that the three-year period of limitations
                                      of section 6501(a) precludes respondent from assessing any
                                      tax for the one-day taxable year. To that end, petitioner
                                      asserts, it filed a Form 990 for 2003 that commenced the
                                      period of limitations for the one-day taxable year.
                                      Respondent argues that the period of limitations for the one-
                                      day taxable year never began because, respondent asserts
                                      (among other reasons), petitioner did not file a valid Form
                                      990 for any part of 2003. We agree with respondent.
                                         Section 6501(a) generally provides that the Commissioner
                                      must assess any income tax for a taxable year within three
                                      years after the return was filed. For this purpose, section
                                      6501(g)(2) provides that ‘‘[i]f a taxpayer determines in good
                                      faith that it is an exempt organization and files a return as
                                      such under section 6033, and if such taxpayer is thereafter
                                      held to be a taxable organization for the taxable year for
                                      which the return is filed, such return shall be deemed the
                                      return of the organization’’. Section 6033(a)(1) requires, with
                                      limited exceptions not applicable here, that every organiza-
                                      tion exempt from tax under section 501(a) file an annual
                                      return listing certain information, and section 1.6033–
                                      2(a)(2)(i), Income Tax Regs., generally states that the return
                                      shall be filed on Form 990. Section 6062 requires that a cor-
                                      poration’s ‘‘president, vice-president, treasurer, assistant
                                      treasurer, chief accounting officer or any other officer duly
                                      authorized so to act’’ sign the corporation’s income tax
                                      return. Filing an unsigned form is not the filing of a valid
                                      return for purposes of commencing the running of the period
                                      of limitations. See Lucas v. Pilliod Lumber Co., 281 U.S. 245
                                      (1930); Elliott v. Commissioner, 113 T.C. 125 (1999); see also
                                      Richardson v. Commissioner, 72 T.C. 818, 823–824 (1979)
                                      Commissioner, 250 F.3d 696, 698–699 (9th Cir. 2001), aff ’g in part,
                                      vacating in part and remanding 103 T.C. 520 (1994) and T.C. Memo.
                                      1997–461; Estate of Simplot v. Commissioner, 249 F.3d 1191, 1193–1194
                                      (9th Cir. 2001), rev’g and remanding 112 T.C. 130 (1999); Morrissey v.
                                      Commissioner, 243 F.3d 1145, 1149 (9th Cir. 2001), rev’g and remanding
                                      Estate of Kaufman v. Commissioner, T.C. Memo. 1999–119.




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                                      316                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      (and the cases cited thereat). This is true even where the IRS
                                      accepts and processes the unsigned return. See Pilliod
                                      Lumber Co., 281 U.S. at 249; Plunkett v. Commissioner, 118
                                      F.2d 644, 650 (1st Cir. 1941), aff ’g 41 B.T.A. 700 (1940).
                                         The parties dispute whether petitioner’s Form 990 for 2003
                                      that was submitted to the IRS was signed by one of peti-
                                      tioner’s officers. Petitioner asserts in its brief that the form
                                      was signed by Ms. Sandoval but that neither petitioner nor
                                      respondent has been able to produce a copy of the signed
                                      form. Petitioner asserts alternatively that the return was
                                      signed by Mr. Molnar as a director who was duly authorized
                                      to sign the return on petitioner’s behalf. We disagree with
                                      petitioner on both points. 17
                                         Exhibit 24–J is a joint exhibit that was entered into evi-
                                      dence through a stipulation that the exhibit ‘‘is a true and
                                      correct copy of the Form 990 Return of Organization Exempt
                                      from Income Tax filed by CGL [petitioner] for tax year 2003.’’
                                      The form bears no signature on the line for the ‘‘signature of
                                      officer’’. Nor does it list any date on the corresponding line
                                      for the date, or any information on the corresponding line for
                                      ‘‘Type or print name and title’’. In the section that is labeled
                                      ‘‘Paid Preparer’s Use Only’’, a signature was reportedly
                                      entered on November 4, 2004, by a preparer who worked for
                                      Molnar and Associates. The preparer’s signature is illegible,
                                      however, and the return does not otherwise identify the pre-
                                      parer. The signature does not appear to be that of either
                                      Chad Enniss or Ms. Sandoval, who the return reports are
                                      petitioner’s only officers. Nor does the return contain any
                                      other signatures.
                                         Petitioner asks the Court to find as a fact that Ms.
                                      Sandoval signed petitioner’s Form 990 for 2003 notwith-
                                      standing the fact that Exhibit 24–J contains no such signa-
                                      ture and that the parties have stipulated that the exhibit is
                                      a true copy of petitioner’s Form 990 for 2003. To that end,
                                      petitioner invites the Court to minimize the significance of
                                      the stipulation by observing that Ms. Sandoval testified at
                                      trial that ‘‘I think I signed the [2002 through 2004] returns.’’
                                      Ms. Sandoval also testified that ‘‘I believe I did’’ sign peti-
                                         17 Petitioner argues that the term ‘‘officer’’ in sec. 6062 naturally in-

                                      cludes a corporation’s director even if the director is not also a corporate
                                      officer. We need not and do not decide that issue.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     317


                                      tioner’s returns for 2002 through 2004. We decline peti-
                                      tioner’s invitation to make its desired finding. A stipulation
                                      that only one of the parties thereto challenges is generally
                                      treated as a conclusive admission to the extent of its terms,
                                      and the party is not allowed to qualify, change, or contradict
                                      any or all parts of a stipulation unless justice requires. 18 See
                                      Rule 91(e); Spencer v. Commissioner, 110 T.C. 62, 81 (1998);
                                      Modern Am. Life Ins. Co. v. Commissioner, 92 T.C. 1230,
                                      1249 (1989); see also Bail Bonds by Marvin Nelson, Inc. v.
                                      Commissioner, 820 F.2d 1543, 1547–1548 (9th Cir. 1987),
                                      aff ’g T.C. Memo. 1986–23. We are not persuaded that Ms.
                                      Sandoval’s equivocal testimony supports a conclusion that
                                      justice requires that we disregard any part of the parties’
                                      stipulation that Exhibit 24–J ‘‘is a true and correct copy of
                                      the Form 990 Return of Organization Exempt from Income
                                      Tax filed by CGL [petitioner] for tax year 2003’’.
                                         Nor are we persuaded that the Form 990 which petitioner
                                      submitted to respondent for 2003 was appropriately signed
                                      by one of petitioner’s officers through the preparer’s signing
                                      of his or her name as the return preparer. The preparer’s sig-
                                      nature is illegible, as stated above, and the record does not
                                      otherwise allow us to definitively find the preparer’s identity.
                                      Even if we were to assume that the preparer’s signature on
                                      the Form 990 for 2003 was Mr. Molnar’s, an assumption
                                      which we do not find as a fact notwithstanding petitioner’s
                                      request that we do so, our view would stay the same. The
                                      preparer’s signature on that form is explicitly that of an indi-
                                      vidual in his or her capacity as the preparer of the return;
                                      it is not explicitly that of an officer of petitioner in his or her
                                      capacity as such. Contrary to petitioner’s suggestion, the fact
                                      that the preparer signed his or her name under penalties of
                                      perjury, as was required for the corporate officer’s signature
                                      as well, is not enough to carry the day. We conclude that
                                      petitioner did not file a Form 990 for 2003 which commenced
                                         18 We note that the parties’ Joint Stipulation of Facts further states

                                      ‘‘that either party may introduce other and further evidence not incon-
                                      sistent with the facts herein stipulated unless otherwise stated as re-
                                      served.’’ (Emphasis added.) Stipulation 27, referencing Exhibit 24–J, does
                                      not reserve the issue as to its accuracy but does state: ‘‘The truth of asser-
                                      tions within stipulated exhibits may be rebutted or corroborated with addi-
                                      tional evidence.’’




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                                      318                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      the period of limitations for that year and that the period
                                      remains open. 19 See sec. 6501(c)(3).
                                      III. Section 953(d) Election
                                           A. Validity of Election
                                         A foreign corporation may elect to be taxed as a domestic
                                      entity if the corporation would qualify under the Code as an
                                      ‘‘insurance company’’ (if it were a domestic entity) and it
                                      meets the other requirements set forth in section 953(d). The
                                      parties dispute one of the other requirements, which the IRS
                                      included in Notice 89–79, 1989–2 C.B. 392, as guidance for
                                      a foreign corporation’s making a section 953(d) election. 20
                                      See also sec. 953(d)(1)(C) and (D) (authorizing the Secretary
                                      to prescribe rules to ensure that taxes imposed on the cor-
                                      poration are paid and stating that the foreign corporation
                                      must make the requisite election). The disputed requirement
                                      is that a ‘‘responsible corporate officer’’ sign a corporation’s
                                      election statement.
                                         Ms. Gilpin signed petitioner’s section 953(d) election state-
                                      ment under penalty of perjury in her stated capacity as peti-
                                      tioner’s secretary, and she was a ‘‘responsible corporate
                                      officer’’ if she was petitioner’s ‘‘president, vice-president,
                                      treasurer, assistant treasurer, chief accounting officer, or any
                                      other officer duly authorized so to act.’’ See sec. 6062; see also
                                      Notice 89–79, supra. Ms. Gilpin’s signing of her name on the
                                      election statement is prima facie evidence that petitioner
                                      authorized her to make the election on its behalf. See sec.
                                      6062.
                                         Petitioner argues that its section 953(d) election was
                                      invalid because, petitioner states, Ms. Gilpin was not an
                                      officer authorized to sign the election statement. We are
                                      unpersuaded that Ms. Gilpin lacked the requisite authority
                                      to sign the statement. The fact that Ms. Gilpin signed the
                                      election under penalty of perjury in her stated capacity as
                                      petitioner’s officer and that petitioner then filed the election
                                        19 Petitioner also argues that the period of limitations began to run in

                                      April 2006 when it gave a Form 1120–F for 2003 to the IRS. We disagree.
                                      The IRS never accepted that return, and the return was never filed.
                                        20 Notice 89–79, 1989–2 C.B. 392, was modified and superseded by Rev.

                                      Proc. 2003–47, 2003–2 C.B. 55, but that action is not effective as to the
                                      election here.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     319


                                      with the IRS speaks loudly as to petitioner’s and Ms. Gilpin’s
                                      understanding that Ms. Gilpin was then an officer authorized
                                      to make the election. The same is true as to petitioner’s later
                                      reliance on the elected status in applying for tax-exempt
                                      status under section 501(c)(15) and the fact that petitioner
                                      during this proceeding has not come forward with any cred-
                                      ible documentary or testimonial evidence directly refuting
                                      that Ms. Gilpin was an officer who was properly authorized
                                      on November 16, 1998, to make the election. We also bear in
                                      mind that petitioner, after it filed the election statement
                                      with the IRS, confirmed its understanding that the election
                                      was valid by submitting on or about March 20, 2000, a power
                                      of attorney that referenced the election without any dispute
                                      as to its validity and that petitioner has repeatedly filed Fed-
                                      eral returns consistent with its election. The mere fact that
                                      some or all of the Forms 990 that petitioner filed with the
                                      IRS may have failed to include a copy of petitioner’s election
                                      statement and that Notice 89–79, supra, instructs a taxpayer
                                      to attach its election statement to its ‘‘annual income tax
                                      return, Form 1120PC or Form 1120L,’’ does not mean, as
                                      petitioner concludes, that petitioner’s election is rendered
                                      invalid ab initio. Nor do we agree with petitioner’s assertion
                                      that respondent was on notice as to the identity of peti-
                                      tioner’s officers so as to know, as petitioner now claims, that
                                      Ms. Gilpin was not petitioner’s officer at the time of the elec-
                                      tion. We conclude that petitioner’s section 953(d) election was
                                      valid. While respondent argues alternatively that the doc-
                                      trine of estoppel precludes petitioner from contesting the
                                      validity of its section 953(d) election, we need not and do not
                                      address this alternative argument. 21
                                          21 We also need not decide respondent’s request to amend the answer to

                                      allege an affirmative defense of equitable estoppel to petitioner’s claim that
                                      the election was invalid for lack of signature by a corporate officer. We
                                      note, however, that any such amendment appears unnecessary because the
                                      petition does not allege that the election was invalid. Rule 34(b)(4) and (5)
                                      requires that the petition contain ‘‘[c]lear and concise assignments of each
                                      and every error which the petitioner alleges to have been committed’’ and
                                      ‘‘[c]lear and concise lettered statements of the facts on which petitioner
                                      bases the assignments of error’’, respectively. The petition states simply
                                      that respondent erred in determining that the election was revoked during
                                      the subject years, thus indicating that petitioner’s view as set forth in the
                                      petition is that the election is still in place (which, of course, is contrary
                                                                                                      Continued




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                                      320                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                           B. Termination of Election
                                         A foreign corporation’s election under section 953(d) to be
                                      taxed as a domestic corporation applies for the year in which
                                      the election is made and to all subsequent years, unless
                                      terminated or revoked with the Secretary’s consent. See sec.
                                      953(d)(2). Such an election is terminated when the corpora-
                                      tion fails to meet the election requirements prescribed under
                                      section 953(d)(1). See sec. 953(d)(2)(B). The termination
                                      applies for all taxable years beginning after the year in
                                      which the corporation failed to meet the election require-
                                      ments prescribed under section 953(d)(1). See sec.
                                      953(d)(2)(B).
                                         Petitioner concedes it was not operating as an insurance
                                      company during 2002. Petitioner therefore failed to satisfy
                                      that requirement for maintaining the section 953(d) election
                                      throughout 2002, see sec. 953(d)(1)(B), and its election was
                                      thereby terminated. The termination applied to all of peti-
                                      tioner’s taxable years after 2002. See id.
                                      IV. Consequences of Termination
                                        Respondent determined that the termination of petitioner’s
                                      section 953(d) election caused petitioner to be treated as a
                                      taxable corporation which is deemed to have sold its assets
                                      to a controlled foreign corporation on January 1, 2003
                                      (which, respondent determined, was a one-day taxable year
                                      in and of itself). We agree with this determination.
                                        Upon termination of a corporation’s election under section
                                      953(d), the corporation is treated for purposes of section 367
                                      as a domestic corporation which transfers all of its assets to
                                      a foreign corporation in an exchange to which section 354
                                      applies. See sec. 953(d)(5). The transfer is deemed to occur on
                                      the first day of the taxable year following the revocation of
                                      the election. See id. The ‘‘first day’’ here is January 1, 2003.
                                        Under section 367(a)(1), a foreign corporation receiving
                                      property in an exchange to which section 354 applies is gen-
                                      to its claim now that the election was invalid from the beginning). We also
                                      note that a pleading need not be amended when issues not raised by the
                                      pleadings are tried by express or implied consent. See Rule 41(b)(1). It ap-
                                      pears that the parties have tried the issue by express or implied consent
                                      and that respondent’s amendment simply formalizes respondent’s position
                                      as to petitioner’s invalid election claim raised outside of the pleadings. We
                                      will deny respondent’s request as moot.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     321


                                      erally not considered a corporation for purposes of deter-
                                      mining the extent to which gain is recognized by the trans-
                                      feror. Thus, absent an exception, the termination of a cor-
                                      poration’s election under section 953(d) results in a deemed
                                      transfer of the domestic corporation’s assets to a foreign cor-
                                      poration in an exchange that is taxable to the domestic cor-
                                      poration. After the deemed transfer on the ‘‘first day’’, the
                                      taxpayer’s taxable year as a domestic corporation naturally
                                      terminates as of the end of that day, given that it is no
                                      longer taxed as a domestic corporation, and the taxable year
                                      of the deemed transferee foreign corporation then begins and
                                      naturally runs through the end of the transferor’s taxable
                                      year as ascertained as if the transfer had not occurred.
                                         Petitioner’s primary activity during 2002 was managing
                                      the real property that its disregarded entity, EFR, owned. All
                                      of the real property was in the United States, and the activi-
                                      ties related to the management of these properties were per-
                                      formed within the United States by members of the Enniss
                                      family. As no exception was applicable at the time of the
                                      deemed exchange on January 1, 2003, petitioner’s deemed
                                      transfer of property is a taxable exchange for which peti-
                                      tioner must recognize gain under section 367. Because peti-
                                      tioner failed to file a Federal income tax return for its tax-
                                      able year beginning and ending on January 1, 2003,
                                      respondent determined petitioner’s income tax liability for
                                      that one-day taxable year taking into account, inter alia, the
                                      deemed sale.
                                         Petitioner argues that section 367 was not intended to
                                      apply in the setting at hand. We disagree. By its terms, sec-
                                      tion 953(d)(5) provides that the termination of petitioner’s
                                      section 953(d) election requires that petitioner, ‘‘[f]or pur-
                                      poses of section 367’’, be ‘‘treated as a domestic corporation
                                      transferring (as of the 1st day of such subsequent taxable
                                      year) all of its property to a foreign corporation in connection
                                      with an exchange to which section 354 applies.’’ We read
                                      nothing in section 953, or in section 367, or in the regula-
                                      tions under either provision, that would trump the quoted
                                      rule of section 953(d)(5). While petitioner looks to strands of
                                      legislative history to support its argument of a contrary legis-
                                      lative intent, the best source of legislative intent is found in
                                      the text of the statute. See Bedroc Ltd., L.L.C. v. United
                                      States, 541 U.S. 176, 177 (2004); United States v. Lanier, 520




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                                      322                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      U.S. 259, 267 n.6 (1997); Conn. Nat’l Bank v. Germain, 503
                                      U.S. 249, 253–254 (1992). Absent absurd, unreasonable, or
                                      futile results, there is ‘‘no more persuasive evidence of the
                                      purpose of a statute than the words by which the legislature
                                      undertook to give expression to its wishes.’’ United States v.
                                      Am. Trucking Ass’ns, Inc., 310 U.S. 534, 543 (1940); cf.
                                      Albertson’s, Inc. v. Commissioner, 42 F.3d 537, 545 (9th Cir.
                                      1994), aff ’g 95 T.C. 415 (1990). Congress has specifically and
                                      unambiguously provided in section 953(d)(5) that a termi-
                                      nation of a section 953(d) election results in a transfer of
                                      property within the rules of section 367, and there is nothing
                                      that is absurd, unreasonable, or futile in applying that text
                                      as written. We are not unmindful that unequivocal evidence
                                      of a clear legislative intent may sometimes override the
                                      words of a statute and lead to a different result, but that
                                      unequivocal bar is a high one to clear. See Consumer Prod.
                                      Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 108
                                      (1980); Landreth v. Commissioner, 859 F.2d 643, 646 n.6 (9th
                                      Cir. 1988), aff ’g T.C. Memo. 1986–242; Halpern v. Commis-
                                      sioner, 96 T.C. 895, 899 (1991). The legislative history here
                                      provides scant and unpersuasive support for a holding con-
                                      trary to that which we reach. 22
                                         Petitioner also argues from a factual point of view that
                                      petitioner was not EFR’s owner. As petitioner sees it, EFR
                                      was a limited liability company that the Enniss family owned
                                      directly. Moreover, petitioner asserts, even if the facts for-
                                      mally establish that petitioner was EFR’s owner, the sub-
                                      stance of the facts trumps their form and requires a contrary
                                      finding that the Enniss family directly owned EFR. We dis-
                                      agree in both regards. The record establishes, and we have
                                      so found, that petitioner owned EFR. We note in support of
                                      this finding, but not as the sole reason for the finding, that
                                      petitioner’s statements in its returns are admissions that
                                      may be overcome only through cogent evidence, see Waring
                                      v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), aff ’g per
                                      curiam T.C. Memo. 1968–126; Estate of Hall v. Commis-
                                      sioner, 92 T.C. 312, 337–338 (1989), and that petitioner filed
                                        22 Petitioner argues from an equitable point of view that sec. 367 should

                                      not apply because, petitioner states, it will be taxed on the unrealized gain
                                      when it eventually sells the properties. We disagree that equity plays any
                                      part in our interpretation and implementation of secs. 367 and 953(d)(5)
                                      in the setting at hand.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     323


                                      a Form 990 for 2002 and 2003, each of which listed petitioner
                                      as the sole owner of EFR. 23 We also note that EFR has
                                      never filed a partnership (or corporate) tax return with
                                      regard to any of the subject years. 24
                                         Nor do we believe that the substance of the facts supports
                                      petitioner’s proposed finding. The U.S. Supreme Court ‘‘has
                                      observed repeatedly that, while a taxpayer is free to organize
                                      his affairs as he chooses, nevertheless, once having done so,
                                      he must accept the tax consequences of his choice, whether
                                      contemplated or not, * * * and may not enjoy the benefit of
                                      some other route he might have chosen to follow but did not.’’
                                      Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co.,
                                      417 U.S. 134, 149 (1974) (citations omitted); see also Wilkin
                                      v. United States, 809 F.2d 1400, 1402 (9th Cir. 1987); Lomas
                                      Santa Fe, Inc. v. Commissioner, 693 F.2d 71, 73 (9th Cir.
                                      1982), aff ’g 74 T.C. 662 (1980). 25 Thus, petitioner and the
                                      Enniss family, while they were entitled at the start to struc-
                                      ture their affairs so that the Enniss family members owned
                                      EFR as of the relevant time, must now accept the con-
                                      sequences of instead causing petitioner to be EFR’s sole
                                      owner (although their actions on this point probably resulted
                                      from questionable legal advice). EFR’s ownership as struc-
                                      tured by its controlling owners must ‘‘be given its tax effect
                                      in accord with what actually occurred and not in accord with
                                      what might have occurred.’’ Commissioner v. Nat’l Alfalfa
                                      Dehydrating & Milling Co., 417 U.S. at 148. We note in
                                      passing, however, that we disagree with petitioner’s primary
                                      premise for finding that the members of the Enniss family
                                      were in substance EFR’s owners. The mere fact that peti-
                                      tioner and the Enniss family may have treated EFR as an
                                           23 Whilepetitioner’s Form 990 for 2003 failed to be a valid return be-
                                      cause it was not signed by one of petitioner’s officers, petitioner’s prepara-
                                      tion and filing of the document with the IRS expressed petitioner’s under-
                                      standing that petitioner was the sole owner of EFR.
                                          24 Ms. Sandoval and Reid Enniss each testified in a conclusory manner

                                      (and without further elaboration) that they were members of EFR. We do
                                      not accept this testimony as the credible evidence in the record disproves
                                      it.
                                          25 Of course, where the issue is one of law as to the proper substantive

                                      characterization of facts, the label used by the taxpayer may not always
                                      be determinative if it is incorrect. See Selfe v. United States, 778 F.2d 769,
                                      774 (11th Cir. 1985); Pinson v. Commissioner, T.C. Memo. 2000–208; LDS,
                                      Inc. v. Commissioner, T.C. Memo. 1986–293.




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                                      324                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      independent entity for purposes of management and oper-
                                      ations, as petitioner asserts, does not necessarily mean that
                                      EFR was owned by the Enniss family rather than by peti-
                                      tioner.
                                      V. Subject of Exchange
                                        Petitioner asserts that it never owned the real property
                                      and that it may not be taxed as to any property that EFR
                                      owned. We disagree. For Federal income tax purposes,
                                      although petitioner may not have actually owned the real
                                      property that EFR owned, petitioner is deemed to own EFR’s
                                      real property because EFR’s owners chose to characterize
                                      EFR as an entity that is disregarded as separate from its
                                      owners. See secs. 301.7701–1(a)(4), 301.7701–3(b)(1), Proced.
                                      & Admin. Regs.; cf. Samueli v. Commissioner, 132 T.C. 37,
                                      39 n.3 (2009) (where a grantor trust was a disregarded entity
                                      that owned an interest in a limited liability company, the
                                      Court treated the grantor as the owner of that interest), aff ’d
                                      and remanded on another issue, 661 F.3d 399 (9th Cir. 2011).
                                      Our disregard of the entity EFR essentially means that we
                                      view the facts as if EFR did not exist for Federal income tax
                                      purposes and as if EFR’s sole owner, petitioner, was the sole
                                      owner of EFR’s assets. Cf. Samueli v. Commissioner, 132
                                      T.C. at 39 n.3.

                                      VI. Fair Market Value of Disputed Property
                                           A. Overview
                                         The parties dispute the applicable fair market value of four
                                      of the property groups. These groups are property groups 1,
                                      3, 4, and 5. We proceed to determine those values.
                                         A determination of fair market value is a factual inquiry
                                      in which the trier of fact must weigh all relevant evidence of
                                      value and draw appropriate inferences. See Commissioner v.
                                      Scottish Am. Inv. Co., 323 U.S. 119, 123–125 (1944);
                                      Helvering v. Nat’l Grocery Co., 304 U.S. 282, 294 (1938);
                                      Zmuda v. Commissioner, 79 T.C. 714, 726 (1982), aff ’d, 731
                                      F.2d 1417 (9th Cir. 1984). Fair market value is measured as
                                      of the applicable valuation date, which in this case is
                                      January 1, 2003. See Estate of Proios v. Commissioner, T.C.
                                      Memo. 1994–442; Thornton v. Commissioner, T.C. Memo.
                                      1988–479, aff ’d without published opinion, 908 F.2d 977 (9th




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     325


                                      Cir. 1990). The willing buyer and the willing seller are hypo-
                                      thetical persons, instead of specific individuals or entities,
                                      and the characteristics of these hypothetical persons are not
                                      always the same as the personal characteristics of the actual
                                      seller or a particular buyer. See Propstra v. United States,
                                      680 F.2d 1248, 1251–1252 (9th Cir. 1982); Estate of Bright v.
                                      United States, 658 F.2d 999, 1005–1006 (5th Cir. 1981);
                                      Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990).
                                      The views of both hypothetical persons are taken into
                                      account, and focusing too much on the view of one of these
                                      persons, to the neglect of the view of the other, is contrary
                                      to a determination of fair market value. See Estate of
                                      Scanlan v. Commissioner, T.C. Memo. 1996–331, 72 T.C.M.
                                      (CCH) 160 (1996), aff ’d without published opinion, 116 F.3d
                                      1476 (5th Cir. 1997); Estate of Cloutier v. Commissioner, T.C.
                                      Memo. 1996–49. Fair market value reflects the highest and
                                      best use of the property on the valuation date, and it takes
                                      into account special uses that are realistically available
                                      because of the property’s adaptability to a particular busi-
                                      ness. See Mitchell v. United States, 267 U.S. 341, 344–345
                                      (1925); United States v. Meadow Brook Club, 259 F.2d 41, 45
                                      (2d Cir. 1958); Stanley Works & Subs. v. Commissioner, 87
                                      T.C. 389, 400 (1986). Property is generally valued without
                                      regard to events occurring after the valuation date to the
                                      extent that those subsequent events were not reasonably
                                      foreseeable on the date of valuation. See Ithaca Trust Co. v.
                                      United States, 279 U.S. 151 (1929); Trust Servs. of Am., Inc.
                                      v. United States, 885 F.2d 561, 569 (9th Cir. 1989); Bergquist
                                      v. Commissioner, 131 T.C. 8, 17 (2008); Estate of Giovacchini
                                      v. Commissioner, T.C. Memo. 2013–27.
                                           B. Approaches Used To Determine Fair Market Value
                                           1. Overview
                                        Generally, three approaches are used to determine the fair
                                      market value of property. See United States v. 99.66 Acres of
                                      Land, 970 F.2d 651, 655 (9th Cir. 1992). These approaches
                                      are: (1) the market approach, (2) the income approach, and
                                      (3) the asset-based approach. See Bank One Corp. v. Commis-
                                      sioner, 120 T.C. 174, 306 (2003), aff ’d in part, vacated in part
                                      and remanded on another issue sub nom. JP Morgan Chase
                                      & Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006); Cohan




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                                      v. Commissioner, T.C. Memo. 2012–8. The question of which
                                      approach to apply in a case is a question of law. Powers v.
                                      Commissioner, 312 U.S. 259, 260 (1941). Because neither
                                      party relies upon the asset-based approach, and we agree
                                      that it is not applicable in these cases, we limit our discus-
                                      sion of that approach to a brief explanation of it.
                                           2. Three Approaches
                                           a. Market Approach
                                         The market approach requires a comparison of the subject
                                      property with similar property sold in an arm’s-length trans-
                                      action in the same timeframe. The market approach values
                                      the subject property by taking into account the sale prices of
                                      the comparable property and the differences between the
                                      comparable property and the subject property. See Estate of
                                      Spruill v. Commissioner, 88 T.C. 1197, 1229 n.24 (1987);
                                      Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19–
                                      20 (1979). The market approach measures value properly
                                      only when the comparable property has qualities substan-
                                      tially similar to those of the subject property. See Wolfsen
                                      Land & Cattle Co. v. Commissioner, 72 T.C. at 19–20. Where
                                      comparable properties are present, the market approach is
                                      generally the best determinant of value. See Whitehouse
                                      Hotel Ltd. P’ship v. Commissioner, 131 T.C. 112, 156 (2008),
                                      vacated and remanded on another issue, 615 F.3d 321 (5th
                                      Cir. 2010); Van Zelst v. Commissioner, T.C. Memo. 1995–396,
                                      aff ’d, 100 F.3d 1259 (7th Cir. 1996). Moreover, while
                                      unforeseeable events occurring after the valuation date are
                                      generally not taken into account in determining a property’s
                                      fair market value, a sale of other property within a reason-
                                      able time after the valuation date may be a proper starting
                                      point for the measure of the property’s fair market value. See
                                      Estate of Scanlan v. Commissioner, 72 T.C.M. (CCH), at 162–
                                      163 (adjustments made to redemption price to account for
                                      passage of time and the change in the setting from the date
                                      of the decedent’s death to the date of the later redemption);
                                      see also Estate of Trompeter v. Commissioner, T.C. Memo.
                                      1998–35, 75 T.C.M. (CCH) 1653, 1660–1661 (1998), vacated
                                      and remanded on other grounds, 279 F.3d 767 (9th Cir.
                                      2002).




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                                           b. Income Approach
                                        The income approach relates to capitalization of income
                                      and discounted cashflow. This approach values property by
                                      computing the present value of the estimated future cashflow
                                      as to that property. The estimated cashflow is ascertained by
                                      taking the sum of the present value of the available cashflow
                                      and the present value of the asset’s residual value.
                                           c. Asset-Based Approach
                                         The asset-based approach generally values property by
                                      determining the cost to reproduce it less applicable deprecia-
                                      tion or amortization.
                                           C. Expert Witnesses
                                           1. Background
                                        Each party retained experts to value the properties at
                                      issue. Petitioner retained and called Harry B. Holzhauer as
                                      a real estate expert and Warren R. Coalson as a mining
                                      expert. Respondent retained and called Norman Eichel as a
                                      real estate expert and John A. Hecht as a mining expert.
                                      Respondent also called Steve C. Cortner to testify in rebuttal
                                      to a portion of Mr. Coalson’s testimony and recalled Mr.
                                      Eichel and Mr. Hecht to testify in rebuttal to the respective
                                      testimony of Mr. Holzhauer and Mr. Coalson. Petitioner
                                      recalled Mr. Holzhauer and Mr. Coalson to testify in rebuttal
                                      to the respective testimony of Mr. Eichel and Mr. Hecht.
                                           2. Qualifications of Experts
                                           a. Mr. Holzhauer
                                        Petitioner retained Mr. Holzhauer to ascertain the fair
                                      market value of the subject nine property groups. Mr.
                                      Holzhauer has appraised real estate for over three decades,
                                      and he holds the Appraisal Institute designation of MAI,
                                      SRA, and SRPA. 26 He has previously testified in Federal and
                                      State courts as an expert witness. He has taught classes on
                                      appraisal at colleges and for professional organizations for
                                        26 The designation of MAI is awarded to qualifying members of the

                                      American Institute of Real Estate Appraisers, and it is the most highly
                                      recognized appraisal designation within the appraisal community. The des-
                                      ignations SRA (senior residential appraiser) and SRPA (senior real estate
                                      property appraiser) are awarded to qualifying members of the Society of
                                      Real Estate Appraisers.




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                                      approximately two decades. He has developed a course for
                                      the IRS on the uniform standards of professional appraisal
                                      practice, and he has taught that course for the IRS to IRS
                                      agents nationwide.
                                         The Court recognized Mr. Holzhauer as an expert in the
                                      field of real estate appraisals, with no objection by
                                      respondent.
                                           b. Mr. Coalson
                                         Petitioner retained Mr. Coalson to ascertain the cost of
                                      reclaiming the mined property, to help determine the value
                                      for the mineral resources that remained on the property, and
                                      to estimate the amount of potentially developable land that
                                      would be created by site reclamation. Mr. Coalson is a
                                      mining consultant with over 30 years of experience in the
                                      mining industry, inclusive of 23 years of consulting on
                                      mining. He has a bachelor of arts degree, with a double
                                      major in geography and environmental reclamation, and he
                                      has previously testified as an expert on (among other mat-
                                      ters) property and mineral resource valuation. For approxi-
                                      mately the last 20 years, he has been the president of a com-
                                      pany that he founded, which provides environmental and
                                      mine permitting services.
                                         The Court recognized Mr. Coalson as an expert in the field
                                      of mining, with no objection by respondent.
                                           c. Mr. Eichel
                                         Respondent retained Eichel, Inc., to ascertain the fair
                                      market value of the subject nine property groups. Eichel,
                                      Inc., is a real estate research and appraisal firm which
                                      specializes in the valuation of real estate in the Los Angeles,
                                      California, and surrounding areas, and in litigation con-
                                      sulting with respect to real estate valuation matters. Eichel,
                                      Inc.’s president is Mr. Eichel. Mr. Eichel has a bachelor of
                                      science degree from the University of Southern California
                                      with a major in finance, and he performed graduate work in
                                      the field of real estate research. Mr. Eichel holds the
                                      Appraisal Institute designation of MAI.
                                         The Court recognized Mr. Eichel as an expert in the field
                                      of real estate appraisals, with no objection by petitioner.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     329


                                           d. Mr. Hecht
                                         Respondent retained Sespe Consulting, Inc. (Sespe), and its
                                      president Mr. Hecht, to estimate the cost to reclaim property
                                      group 1 as of the valuation date, among other things. Mr.
                                      Hecht holds a bachelor of science degree in electrical
                                      engineering from Valparaiso University and a professional
                                      degree in geophysics from Colorado School of Mines. He has
                                      worked professionally in the mining industry for almost
                                      three decades, and he is a certified registered professional
                                      engineer in the State of California and a registered environ-
                                      mental assessor. He currently is the president of Sespe, an
                                      environmental and engineering consulting firm, where he
                                      devotes approximately 65% of his work to mining and
                                      construction material projects (mainly reclamation planning,
                                      preparing reclamation plans, and financial cost estimates) in
                                      California.
                                         The Court recognized Mr. Hecht as an expert in the field
                                      of mining, with no objection by petitioner.
                                           e. Mr. Cortner
                                        Mr. Hecht (through his firm) retained Mr. Cortner to
                                      determine some costs of product and materials and to assist
                                      Mr. Hecht with the applicable reclamation standards. Mr.
                                      Cortner has worked in the mining industry in southern Cali-
                                      fornia, mostly in and around San Diego County, for over 35
                                      years. The Court did not specifically recognize Mr. Cortner as
                                      an expert but allowed him to testify as a fact witness in
                                      rebuttal to a portion of Mr. Coalson’s testimony.
                                           D. Applicable Standards
                                        Each expert testified on direct examination primarily
                                      through his expert report, see Rule 143(g)(1), which the Court
                                      accepted into evidence. Each expert then generally testified
                                      on cross-examination, redirect examination, and recross-
                                      examination, through the typical question and answer
                                      process.
                                        We may accept or reject the findings and conclusions of the
                                      experts, according to our own judgment. See Helvering v.
                                      Nat’l Grocery Co., 304 U.S. at 294–295; Parker v. Commis-
                                      sioner, 86 T.C. 547, 561–562 (1986). In addition, we may be
                                      selective in deciding what parts (if any) of their opinions to
                                      accept. See Parker v. Commissioner, 86 T.C. at 561–562. We




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                                      also may reach a determination of value based on our own
                                      examination of the evidence in the record. Silverman v.
                                      Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff ’g T.C.
                                      Memo. 1974–285.
                                           E. Analysis
                                           1. Nine Property Groups
                                        Mr. Holzhauer and Mr. Eichel each valued the nine prop-
                                      erty groups discussed herein. As part of his analysis, Mr.
                                      Holzhauer reduced his total value of the nine property
                                      groups by 15% to apply a ‘‘bulk discount’’ and then rounded
                                      that number to reach his final total value. Mr. Eichel did not
                                      apply a similar discount to his total value.
                                        The parties later agreed on the applicable fair market
                                      values of property groups 2, 6, 7, 8, and 9. The fair market
                                      values that Mr. Holzhauer and Mr. Eichel ascertained and
                                      the agreed amounts are as follows:
                                           Property group                   Mr. Holzhauer                  Mr. Eichel     Agreed value
                                                        1                     $5,000,000                  1 $15,876,000         ---
                                                        2                        300,000                     2,100,000       $500,000
                                                        3                      3,625,000                     5,425,000          ---
                                                        4                      5,000,000                     6,250,000          ---
                                                        5                        450,000                     5,000,000          ---
                                                        6                        310,000                       425,000        367,500
                                                        7                        962,000                       918,000        918,000
                                                        8                        126,000                       126,000        126,000
                                                        9                        210,000                       145,000        145,000

                                                        Total                 15,983,000                    36,265,000           ---
                                                        Discount               2,397,450                        -0-              ---

                                                        Net                   13,585,550                    36,265,000           ---
                                                        Rounded               13,600,000                    36,265,000           ---
                                        1 Mr. Eichel in his original written expert witness report valued this
                                      property at $16,200,000 but revised this number in his rebuttal report to
                                      $15,876,000 to correct for a computational error of $324,000 that he dis-
                                      covered in his original written expert witness report and direct testimony.

                                        We are therefore left to decide the fair market values of
                                      the remaining property groups as well as the appropriateness
                                      of a ‘‘bulk discount’’. In rendering our decisions, we are aided
                                      by the testimony of each of the four experts, all of whom we
                                      consider to be qualified in their areas of expertise. Each
                                      expert testified in favor of the party who called him, and we
                                      have weighed the experts’ testimony with due regard to their




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                                      (294)                  CHAPMAN GLEN LTD. v. COMMISSIONER                                                             331


                                      qualifications, the credible evidence in the record, and our
                                      judgment. See Estate of Christ v. Commissioner, 480 F.2d
                                      171, 174 (9th Cir. 1973), aff ’g 54 T.C. 493 (1970); Chiu v.
                                      Commissioner, 84 T.C. 722, 734 (1985). On some matters, we
                                      were persuaded more by petitioner’s experts than by
                                      respondent’s experts, while on other matters we were per-
                                      suaded more by respondent’s experts than by petitioner’s
                                      experts.
                                            2. Property Group 1
                                            a. Overview
                                        We summarize each expert’s valuation of property group 1
                                      as follows:
                                                                                  2003                           2004                          2005

                                                                   Mr.                    Mr.          Mr.               Mr.          Mr.                Mr.
                                                                Holzhauer                Eichel     Holzhauer           Eichel     Holzhauer            Eichel

                                       Tonnage                   188,000                  148,164    188,000             193,455    188,000             122,037

                                       Royalty rate (per
                                          ton)                              $4               ---       $4.14                ---       $4.28                ---
                                       Sale price                     ---                  $14.50       ---                  $15       ---               $15.50

                                       Sales revenue                  ---           $2,148,378           ---        $2,901,825         ---            $1,891,574
                                       Fill material fees             ---              $70,000           ---         $130,000          ---             $400,000

                                       Gross income1            $752,000            $2,218,378       $778,320       $3,031,825     $805,561           $2,291,574

                                       Reclamation costs           ---                       ---        ---                 ---         ---                ---
                                       Selling costs               ---                       ---        ---                 ---         ---                ---
                                       Real estate taxes         $28,500                  $53,500    $29,070             $54,570    $29,651             $55,661

                                       Production cost                ---                $592,656        ---            $773,820       ---             $549,167
                                       Fill material
                                           processing                 ---                  $5,000        ---              $5,000       ---             $200,000
                                       SG&A                           ---                $200,000        ---            $200,000       ---             $200,000

                                       Net operating
                                          income                $723,500            $1,367,222       $749,250       $1,998,435     $775,910           $1,286,746

                                       Reclamation costs              ---                    ---         ---                ---        ---                  ---
                                       Zoning action                  ---                    ---         ---                ---        ---                  ---
                                       Land sale                      ---                    ---         ---                ---        ---                  ---
                                       Permit compliance              ---                $250,000        ---                ---        ---                  ---

                                           Total                      ---           $1,117,222           ---        $1,998,435         ---            $1,286,746
                                           Discount
                                            factor2                   .8811                             .7763                         .6839

                                       PV NOI                   $637,445                             $604,180                      $550,948



                                                                           2006                                 2007                           2008

                                                                  Mr.                     Mr.          Mr.               Mr.          Mr.                 Mr.
                                                               Holzhauer                 Eichel     Holzhauer           Eichel     Holzhauer             Eichel

                                      Tonnage                   188,000                  148,623     188,000             66,377        ---                26,568
                                      Royalty rate (per
                                        ton)                         $4.43                  ---        $4.59               ---         ---                  ---
                                      Sale price                     ---                     $16        ---                 $16        ---                $14.50

                                      Sales revenue                  ---            $2,377,968          ---        $1,062,032          ---              $385,497




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                                                                              2006                                        2007                                2008

                                                                        Mr.              Mr.               Mr.                    Mr.               Mr.                   Mr.
                                                                     Holzhauer          Eichel          Holzhauer                Eichel          Holzhauer               Eichel

                                      Fill material fees                ---           $1,200,000              ---                $375,000             ---              $250,000

                                      Gross income1                  $833,756         $3,577,968        $862,937             $1,437,032               ---              $635,497

                                      Reclamation costs                 ---                ---              ---                      ---        $24,600,000                ---
                                      Selling costs                     ---                ---              ---                      ---             ---                   ---
                                      Real estate taxes               $30,244           $56,775          $30,849                  $57,910           $31,466             $59,068
                                      Production cost                   ---            $743,115             ---                  $356,074            ---               $150,211
                                      Fill material
                                        processing                      ---            $600,000               ---                $125,000             ---               $25,000
                                      SG&A                              ---            $200,000               ---                $200,000             ---              $200,000

                                      Net operating
                                      income                         $803,511         $1,978,078        $832,088                 $689,048       ($24,631,466)          $201,218

                                      Reclamation costs                 ---                     ---           ---                    ---              ---                   ---
                                      Zoning action                     ---                     ---           ---                 $34,000             ---                $33,000
                                      Land sale                         ---                     ---           ---                    ---              ---                   ---
                                      Permit compliance                 ---                     ---           ---                    ---              ---                   ---

                                           Total                        ---           $1,978,078              ---                $655,048                              $168,218

                                           Discount
                                            factor2                     .6026                                .5309                                     .4678

                                           PV NOI                    $502,407                           $458,142                                ($11,522,600)



                                                                                                      2009                           2010                      Total

                                                                                        Mr.                   Mr.                    Mr.                       Mr.
                                                                                     Holzhauer               Eichel                 Eichel                  Holzhauer

                                            Tonnage                                       ---                  29,126                     ---                   ---
                                            Royalty rate (per ton)                        ---                    ---                      ---                   ---
                                            Sale price                                    ---                     $14                     ---                   ---

                                            Sales revenue                                 ---                $407,764                  ---                      ---
                                            Fill material fees                            ---                $250,000                $125,000                   ---

                                            Gross income                             $34,505,673             $657,764                $125,000                   ---
                                            Reclamation costs                             ---                    ---                   ---                      ---
                                            Selling costs                             $1,035,170                 ---                   ---                      ---
                                            Real estate taxes                            $32,096              $60,250                 $61,455                   ---
                                            Production cost                               ---                $164,562                  ---                      ---
                                            Fill material processing                      ---                 $25,000                  ---                      ---
                                            SG&A                                          ---                $200,000                 $25,000                   ---

                                            Net operating income                     $33,438,407             $207,952                  $38,545                  ---
                                            Reclamation costs                             ---                    ---                $2,547,529                  ---
                                            Zoning action                                 ---                 $33,000                   ---                     ---
                                            Land sale
                                             Parcel A–D                                   ---                       ---           $18,220,000                   ---
                                             Parcel E                                     ---                       ---           $15,188,500                   ---

                                             Total                                        ---                $174,952             $30,899,516                   ---
                                             Discount factor2                               .4121                                      ---                      ---

                                             PV NOI                                  $13,779,967                                       ---                  $5,040,211
                                             NPV @14%                                                                             $15,876,320                   ---
                                             Rounded                                                                              $15,876,000               $5,000,000
                                              1 For each year 2005 through 2007, the gross income shown in Mr. Holzhauer’s columns is slightly dif-
                                            ferent from the product of his royalty rate shown for the year, and 188,000. Mr. Holzhauer first calculated
                                            the gross income for 2003 and then calculated the gross income for each year 2004 through 2007 by in-
                                            creasing the previous year’s gross income by 3.5%. Mr. Holzhauer then backed into his royalty rates by di-
                                            viding the income for the year by 188,000, and rounding the quotient to the nearest cent.
                                              2 For each year 2003 through 2007, the PV NOI shown in this chart is slightly different from the product
                                            of the net operating income shown for the year and the discount factor shown for the year. Mr. Holzhauer
                                            rounded his discount factors shown in this chart to the nearest ten-thousandths, but he apparently did not
                                            round the factors when performing his calculations. For 2003, Mr. Holzhauer multiplied his discount factor
                                            by net operating income to arrive at his PV NOI. For each of the other years 2004 through 2007, Mr.
                                            Holzhauer multiplied his discount factor by gross income to arrive at his PV NOI.




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                                        With a single exception, we find that Mr. Holzhauer’s anal-
                                      ysis underlying his $5 million value is a better measure of
                                      property group 1’s fair market value than Mr. Eichel’s anal-
                                      ysis underlying his $15,876,000 value, notwithstanding that
                                      Mr. Holzhauer’s analysis sometimes appears to be outcome
                                      driven. While both Mr. Holzhauer and Mr. Eichel generally
                                      ascertained their values as the sum of the present value of
                                      the remaining mineable sand on the property plus the
                                      present value of the residuary interest in the property, only
                                      Mr. Holzhauer adequately recognized as of the valuation date
                                      that the property was primarily in poor condition, out of
                                      compliance with the MUP, and zoned primarily for agricul-
                                      tural use; that the property’s value stemmed mainly from the
                                      underlying real property; and that the mining operation was
                                      conducted by Enniss, Inc., not petitioner. Mr. Holzhauer also
                                      opined most persuasively that the highest and best use of
                                      property group 1 was to extract the remaining sand, then
                                      perform reclamation, and then to redevelop or to sell the
                                      land; and that the value of the remaining sand was best
                                      derived on the basis of the net income from royalties that a
                                      third party would pay for extracting the sand, see, e.g.,
                                      Terrene Invs., Ltd. v. Commissioner, T.C. Memo. 2007–218
                                      (the Court used a royalty-based income capitalization method
                                      to value a tract of land with sand and gravel deposits), as
                                      opposed to, as Mr. Eichel concluded, an extraction of the
                                      sand by the land owner. 27 The single exception is that Mr.
                                      Holzhauer, in contrast to Mr. Eichel, improperly minimized
                                      the value that inhered in the tipping fees that the owner of
                                      property group 1 would receive as to the property. We turn
                                      to discuss some specifics of Mr. Holzhauer’s valuation and
                                      our discussion of the tipping fees.
                                           b. Value of Remaining Mineable Sand
                                           i. Background
                                       Mr. Holzhauer ascertained his value of the remaining
                                      mineable sand by relying upon Mr. Coalson’s opinion of the
                                        27 Mr. Eichel also considered various sales of property that occurred in

                                      2007 to ascertain the fair market value of property group 1 (and property
                                      groups 3 and 4). We disagree with his use of those sales which occurred
                                      too far after the valuation date.




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                                      volume of the remaining sand, the rate of extraction, and the
                                      per-ton value for the remaining material.
                                           ii. Mineable Sand
                                        Mr. Coalson calculated the volume of extractable sand on
                                      the basis of a review of the site of and MUP conditions of
                                      parcels A through D as of the valuation date. He concluded
                                      that no material remained for excavation in the lake portions
                                      of property group 1 and estimated the recoverable material
                                      as the product of: (1) the undisturbed acreage on parcels B,
                                      C, and D (taking into account certain setbacks as required
                                      under the MUP); (2) an assumed excavation depth in con-
                                      formity with the MUP; and (3) a conversion factor for cubic
                                      yards per acre/foot. He arrived at an estimated volume of
                                      625,000 cubic yards of remaining sand and applied the
                                      appropriate conversion factor of 1.5 tons per cubic yard to
                                      reasonably calculate that 940,000 tons of recoverable salable
                                      sand remained on the premises. The then-current market
                                      price for washed sand was $14.50 per ton in 2003, a total
                                      value in place at 2003 prices of $13,640,000. 28 He likewise
                                      reasonably assumed that the remaining sand would be mined
                                      at the same approximate rate that it was previously mined
                                      (plus or minus 200,000 tons a year) and reasonably con-
                                      cluded that the mine life was five years given that the mine
                                      was five years from depletion as of the valuation date. He
                                      conservatively ascertained that the remaining sand would be
                                      extracted at an even rate over the five-year period (in other
                                      words, at 188,000 tons (940,000/5) per year). 29
                                        Mr. Coalson opined credibly that as of the valuation date
                                      there was a high demand in San Diego County for 940,000
                                      tons of sand. He valued the remaining sand under two sce-
                                      narios: (1) the property owner mines the sand and (2) a third
                                      party mines the sand and pays the property owner a royalty
                                      for the sand. As to the first scenario, i.e., the owner mines
                                           28 There
                                                 appears to be a rounding or math error of $10,000 (i.e., 940,000
                                      × 9.50 = $13,630,000).
                                        29 Mr. Eichel, on the other hand, estimated that the remaining sand was

                                      734,368 tons and that this sand would be extracted over a seven-year pe-
                                      riod at rates that he improperly ascertained through his consideration of
                                      data that was not reasonably foreseeable as of the valuation date. In line
                                      with this estimate, Mr. Eichel also unpersuasively concluded that property
                                      group 1 would be sold in 2010.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     335


                                      the sand, Mr. Coalson explained that the owner would first
                                      have to acquire a permit to mine the sand and that the
                                      permit process had previously taken 18 years in the case of
                                      one site in San Diego County. As to the second scenario, i.e.,
                                      a third party mines the sand and pays a royalty for the sand,
                                      Mr. Coalson explained that royalty arrangements were
                                      common in circumstances where the owner did not want to
                                      develop a mining plan, hire consultants, and get the requisite
                                      permit. He opined that an owner of a sand mine in San
                                      Diego County would likely enter into a royalty agreement
                                      with a mining company rather than mine the property itself.
                                      He estimated a ‘‘very generous royalty rate’’ of $4 per ton for
                                      sand mined by the third party, explaining that his estimate
                                      was derived from two royalty agreements that his company
                                      aggressively negotiated in Lakeside during 2002, and opined
                                      reasonably that the owner would expect a 3.5% annual
                                      increase in that rate to take into account inflation. Mr.
                                      Holzhauer concluded that the real property owner would pay
                                      the real estate taxes and the reclamation costs.
                                        Mr. Holzhauer projected that $24.6 million of reclamation
                                      costs would be owed in 2008, the year after the sand was
                                      excavated. Mr. Coalson had estimated that the reclamation
                                      costs would total $24,913,003, using unadjusted 2003 price
                                      data to estimate that amount, and Mr. Holzhauer first
                                      rounded that amount to $25 million and then ultimately con-
                                      cluded that reclamation costs would total $24.6 million. Mr.
                                      Holzhauer did not explain why he ultimately reduced the $25
                                      million to $24.6 million.
                                        As Mr. Coalson saw it, as of the valuation date, the volume
                                      of fill required to reclaim the mining pits in the sand mine
                                      was 1,982,500 cubic yards determined as follows: 30
                                         30 Mr. Hecht opined that no fill need be added to the northerly lake or

                                      to a portion of the southerly excavation area. We disagree. Mr. Coalson
                                      testified persuasively that the northerly lake had to be filled, noting among
                                      other things that the sand in the lake was very permeable, as contrasted
                                      with the compacted sand found in the pits, and that fill had to be added
                                      to the lake to raise the bottom of the lake to its required depth. As to the
                                      southerly extracted area, Mr. Hecht opined that this area need not be
                                      filled because nothing was extracted from that area during 2003. Mr.
                                      Coalson opined, however, that the sand on property group 1 would be ex-
                                      tracted over a five-year period. Mr. Hecht acknowledged in his testimony
                                      that the 625,000 cubic yards of fill would appropriately be taken into ac-
                                                                                                      Continued




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                                      336                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                                                   Fill area                                   Cubic yards

                                           Northerly lake                                                           372,500
                                           Southerly lake                                                           985,000
                                           Remaining southerly extraction area                                      625,000

                                             Total volume backfill required                                       1,982,500

                                      Mr. Coalson logically determined these amounts by multi-
                                      plying the area that was required to be filled by the depth
                                      of the area. Mr. Coalson determined on the basis of his
                                      review of the market that the fill would cost $9.50 per cubic
                                      yard, or $18,833,750 in total (1,982,500 × $9.50), which takes
                                      into account both the price to purchase specialized fill and to
                                      transport the fill to the site. Mr. Coalson also took into
                                      account various other secondary costs relating to the prop-
                                      erty’s reclamation and arrived at a total reclamation cost of
                                      $24,913,003 (which, as previously mentioned, Mr. Holzhauer
                                      rounded down to $24.6 million).
                                         Mr. Holzhauer concluded that the owner of the sand mine
                                      would receive no income from the acceptance of fill because,
                                      Mr. Holzhauer stated, this income does not relate to the real
                                      property value. Mr. Holzhauer rationalized that income gen-
                                      erated from tipping fees had ‘‘nothing to do’’ with the owner
                                      of the land into which the fill was deposited. Mr. Coalson
                                      (and thus Mr. Holzhauer) did not consider whether the
                                      owner of property group 1 could receive free fill from the
                                      Hanson site because he believed that Hanson desired a buyer
                                      for its fill and would not give its fill to a competitor for free.
                                      Mr. Coalson also opined that Hanson’s excess fill was dedi-
                                      cated to fill one of its own projects and was unavailable to
                                      fill property group 1. Mr. Coalson also asserted, without fur-
                                      ther elaboration, that accepting free fill was contrary to
                                      ‘‘state policy’’ because its availability at the time of need
                                      could not be foreseen with any certainty.

                                      count if the amount of sand was extracted in 2003 but that applicable fi-
                                      nancial standards do not take this amount into account because the extrac-
                                      tion is after one year. We do not believe that the referenced one-year rule
                                      is an appropriate guide to ascertaining the fair market value of property
                                      group 1. Instead, we believe that the hypothetical willing buyer and the
                                      hypothetical willing seller would take into account all costs associated with
                                      the property, whether the anticipated costs are to be incurred before one
                                      year or afterwards.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     337


                                         We disagree with Mr. Holzhauer that the ability to receive
                                      tipping fees with respect to property group 1 has nothing to
                                      do with the owner of the property or, more importantly, with
                                      a determination of the fair market value of property group
                                      1. Mr. Eichel persuasively opined that these fees belong to
                                      the owner of the property, and he took the fees into account
                                      in his analysis. Moreover, as we see it, a hypothetical willing
                                      buyer and a hypothetical willing seller would both take into
                                      account the ability to receive tipping fees from property
                                      group 1 when agreeing on the purchase price of that prop-
                                      erty. The ability to receive income as to property is an impor-
                                      tant attribute of the property and factors into its value. To
                                      say the least, net-income-producing property is certainly
                                      worth more than the exact same property that does not
                                      produce net income.
                                         That said, we believe that a hypothetical purchaser would
                                      not assume, as of the valuation date, that it could receive the
                                      relevant industry minimum $2 per ton tipping fee or benefit
                                      from free fill over the next five years of the sand mine oper-
                                      ation plus any additional time required to complete the land
                                      reclamation project. Tipping fees and free fill are factually
                                      speculative, depending on time-sensitive nearby demand and
                                      nearby supply, and could be achieved only as long as San
                                      Diego County and the California Department of Conservation
                                      permitted the sand mine operation and/or reclamation activi-
                                      ties to continue. Any such continuation was speculative, as
                                      of the valuation date, in view of the uncontradicted testi-
                                      mony that SMARA, Cal. Pub. Rec. secs. 2710 and 2773,
                                      required an appropriate financial assurance mechanism to
                                      ensure that adequate funds to complete all required reclama-
                                      tion work are available when mining ends. 31 The sand mine
                                      was out of compliance with that provision given that an
                                      appropriate reclamation financial assurance plan was not
                                      then in place. The original 1990s financial plan was obsolete


                                           31 See
                                               generally People ex rel. Dept. of Conservation v. El Dorado County,
                                      116 P.3d 567 (Cal. 2005), as to procedural enforcement matters and People
                                      ex rel. Connell v. Ferreira, 2003 WL 22022032 (Cal. Ct. App. 2003), and
                                      McCain v. County of Lassen, 2003 WL 123065 (Cal. Ct. App. 2003), as to
                                      fines and penalties.




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                                      338                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      because significant mining had occurred since then and the
                                      posted $40,000 bond for that plan had expired. 32
                                         Other serious major problems with the MUP and with the
                                      reclamation plan were present as of the valuation date. The
                                      MUP set numerous requirements that were not met. The
                                      MUP required the construction of certain roads, but those
                                      roads were not then built. Sand had been mined too close to
                                      the roadways to allow an acceptable slope on the sides of the
                                      pits. Sand was mined in large quantities far below the per-
                                      mitted maximum mining depth. Reclamation and channel
                                      work were far behind schedule. The approved mining plan
                                      regulating which areas were to be mined first and in which
                                      order, known as the mining phases, had been ignored on
                                      account of flooding and the lack of channel work. Con-
                                      sequently, the sand mine’s entire operation was at significant
                                      risk that the underlying business could, and would, be fined
                                      and/or shut down by San Diego County and/or by the Cali-
                                      fornia Department of Conservation and the required reclama-
                                      tion work demanded immediately.
                                         Should that have occurred, there would be no further rev-
                                      enue from sand sales or tipping fees until, if ever, govern-
                                      ment authorities approved a new MUP and reclamation plan.
                                      Even worse, a shutdown would force use of the Hanson fill
                                      if still available and permission for the conveyor system
                                      could be obtained, or if not, suitable fill material would have
                                      to be purchased on the open market to reclaim the land at
                                      great cost. These facts would be of great concern to a hypo-
                                      thetical purchaser and would significantly temper its
                                         32 In 2005, San Diego County pursued the matter further and Enniss,

                                      Inc., after several meetings, persuaded the county to accept a $2.9 million
                                      letter of credit coupled with Hanson’s representation that Enniss, Inc.,
                                      could use fill available on the Hanson site to reclaim Enniss, Inc.’s sand
                                      mine. Whether Enniss, Inc., could have actually used the Hanson fill, how-
                                      ever, was questionable because Hanson also was considering using some
                                      or all of that fill for other projects. Moreover, even if Hanson allowed
                                      Enniss, Inc., to use the fill, there was no certainty that the required con-
                                      veyor system which would require at least an easement over the nearby
                                      properties could be constructed to transport the fill between the two sites.
                                      Absent the Hanson fill, the necessary but then-absent bond or letter of
                                      credit to keep the sand mine open would have had to be in the amount
                                      of approximately $20 million as the county had indicated that the bond or
                                      letter of credit would have to reflect the cost of two million cubic yards of
                                      fill at $9.50 per cubic yard.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     339


                                      thinking regarding the purchase price and any offsetting
                                      consideration of potential tipping fees and free fill.
                                         Still, sand mine owners and operators in San Diego County
                                      routinely received tipping fees in exchange for allowing
                                      others to dump debris in the pits at their mines. We fail to
                                      see why a hypothetical owner of property group 1, to the
                                      extent that it could, would not charge a tipping fee to do the
                                      same at that site. 33 While Mr. Coalson testified that special-
                                      ized fill had to be used to reclaim property group 1, we are
                                      unpersuaded that this is the case as to all of the property.
                                      In fact, as Mr. Hecht pointed out, environmental documents
                                      for property group 1 state specifically that construction
                                      debris can be used to fill the pits.
                                         Fill for dumping was available as of the valuation date, yet
                                      Mr. Coalson improperly minimized the receipt of the tipping
                                      fees when ascertaining his value of property group 1. 34 The
                                      record does not allow us to find with precision the portion of
                                      the 1,982,500 cubic yards of fill that the hypothetical owner
                                      of property group 1 would have to pay $9.50 for vis-a-vis the
                                      portion that the owner would pay nothing for but instead
                                      would receive tipping fees. We believe it reasonable to reduce
                                      Mr. Holzhauer’s calculation that the owner would pay $9.50
                                      for each of the 1,982,500 cubic yards of fill by a stated
                                      amount in tipping fees and then apply the net amount to the
                                      1,982,500.
                                         To the extent that Mr. Coalson asserted that State policy
                                      for determining an appropriate financial assurance plan pro-
                                      hibits the receipt of fill for free would also apply to receiving
                                      fill and a tipping fee, we are unpersuaded that any such
                                      policy is as cut and dried as Mr. Coalson stated. Mr. Coalson
                                      did not explain or otherwise elaborate on his asserted policy,
                                      and the record establishes apart from the determination and
                                           33 Tipping
                                                   fees are inversely related to hauling costs.
                                           34 The
                                               record does not allow us to find as of the valuation date the exact
                                      amount of fill that could be received either for free or with a tipping fee.
                                      We note, however, that on November 9, 2004, Chad Enniss informed the
                                      Department of Planning and Land Use that five nearby named ‘‘truckers
                                      and dirt brokers’’ had 3,721,000 cubic yards of fill available for dumping
                                      within a one-year period and that these truckers and brokers had ex-
                                      pressed a desire to dump their product at the sand mine. He also named
                                      20 other dirt and rubble producers in the county and stated that the 25
                                      total producers were ‘‘just a small list of company’s that haul, dump, or
                                      produce dirt or rubble’’.




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                                      340                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      approval of financial assurance plans that in the real oper-
                                      ating world sand mines regularly received tipping fees during
                                      the relevant period. At the same time, we are unpersuaded
                                      that the hypothetical buyer and the hypothetical seller would
                                      have concluded, as of the valuation date, that fill for property
                                      group 1 could be obtained and economically transported from
                                      the Hanson site.
                                        Valuation is an inexact science which does not call for sci-
                                      entific precision, see, e.g., Frazee v. Commissioner, 98 T.C.
                                      554, 577 (1992), and we believe that simply reducing the
                                      $9.50 cost by three-fourths of the minimal but customary $2
                                      per ton in tipping fees (i.e., by $1.50 per ton) is the best
                                      measure for the overall cost of the fill related to property
                                      group 1 to adequately consider the risk of a government
                                      shutdown and to blend the amount of fill that would be pur-
                                      chased vis-a-vis the amount of fill that would be accepted for
                                      a fee. The parties should factor these tipping fees into Mr.
                                      Holzhauer’s calculation in their Rule 155 computation(s). 35
                                           c. Residuary Interest in Property
                                        Mr. Holzhauer calculated a value for the reclaimed sand
                                      mine on the basis of his valuation of the underlying indi-
                                      vidual parcels. His calculation assumed a highest and best
                                      use of each lot primarily as storage. He reviewed 12 real
                                      property sales as part of his analysis. The sites of the prop-
                                      erties underlying these sales were as follows:
                                            Sale   1       12566 Vigilante Rd., Lakeside CA
                                            Sale   2       9120 Jamacha Rd., Spring Valley CA
                                            Sale   3       Woodside Ave. and Wheatlands Rd., Santee CA
                                            Sale   4       ES Rockville St., Santee CA
                                            Sale   5       SWC Jamacha Blvd. and Folex Way, Spring Valley CA
                                            Sale   6       1596 North Johnson Ave., El Cajon CA
                                            Sale   7       10007 Riverford Rd., Lakeside CA
                                            Sale   8       Woodside Ave., North of Marilla Dr., Lakeside CA
                                            Sale   9       Woodside Ave. and Hartley Rd., Santee CA
                                            Sale   10      11322 North Woodside Ave., Santee CA
                                            Sale   11      SEC Riverford Rd. & Riverside Dr., Lakeside CA
                                            Sale   12      NWC Mapleview St. & Channel Rd., Lakeside, CA

                                         35 As a point of clarification, Mr. Holzhauer’s $24.6 million of reclama-

                                      tion costs in 2008 should be reduced by $4,460,625 in tipping fees (i.e.,
                                      $1.50 per ton × the 1.5 tons per cubic yard conversion rate × 1,982,500
                                      cubic yards). We recognize that each cubic yard of fill received with a tip-
                                      ping fee will likewise produce a savings of $9.50 per cubic yard and have
                                      blended that savings into our $1.50-per-ton calculation.




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                                      (294)                        CHAPMAN GLEN LTD. v. COMMISSIONER                                               341


                                      The pertinent information underlying the sales (as adjusted
                                      to reflect additional costs to the buyers for items such as
                                      required fill or grading and adjustments for size to reflect
                                      actual usable land) is as follows: 36
                                                                                               Square
                                       Sale #         Sale date      Sale price    Acreage      feet1      Price/SF     Zoning             Use

                                            1           Oct. 02      $635,094         1.08     47,045          $13.50    M58     Industrial development;
                                                                                                                                   outdoor storage
                                            2          May 02          650,000        1.09     47,480           13.69    M54     Industrial development;
                                                                                                                                   outdoor storage
                                            3          May    02       681,507        1.39     60,548           11.26    IL      Industrial development
                                            4          Apr.   01       750,000        1.50     65,340           11.48    IL      Church parking
                                            5          Apr.   03     1,310,000        2.36    102,802           12.74    M58     To build ministorage
                                            6          Mar.   04     1,277,000        3.81    165,964            7.69    M       Industrial development;
                                                                                                                                   outdoor storage2
                                            7          Apr. 02       1,335,000        3.86    168,142            7.94    S88     Industrial development
                                            8          Aug. 03       1,218,500        4.78    208,217            5.85    S88     Industrial development
                                            9          July 03       2,251,177        5.44    236,966            9.50    IL      Industrial development
                                           10          Sept. 04      2,200,000        7.29    317,552            6.93    IG      Industrial development;
                                                                                                                                   outdoor storage2
                                           11          Feb. 00       2,711,500        8.00    348.480            7.78    S88     Industrial development
                                           12          June 04       2,140,000       20.06    873,814            2.45    S88     Preservation
                                            1 One   acre equals 43,560 square feet.
                                            2 The   use for outdoor storage depends on a conditional permit.



                                      Mr. Eichel’s comparable sales, by contrast, involved many
                                      properties which were sold in 2007 and other properties
                                      which were not actually comparable to the properties under-
                                      lying property group 1.
                                        Mr. Holzhauer considered sales 1, 2, 6, and 10 to be the
                                      most relevant to his analysis because they each were actually
                                      used or going to be used for outdoor storage. He reasonably
                                      concluded that sale 1 was the most relevant sale because the
                                      underlying parcel was on Vigilante Road and had been pur-
                                      chased primarily for outdoor storage. He also reasonably
                                      considered sales 2, 6, and 10 to ascertain the square-foot
                                      value of the reclaimed land because the reclaimed land was
                                      much larger than the property underlying sale 1. He con-
                                      cluded from these four comparable sales that the sand mine
                                      parcels, when fully reclaimed, had an average value as of the
                                      valuation date of $8 per square foot (or approximately $24.5
                                      million in total). He then applied a real estate appreciation
                                      factor of 5% per year to arrive at a future residuary value of
                                      $34,505,673 in 2009 for the fully reclaimed properties and
                                      reduced that value by selling expenses of approximately 3%
                                      ($1,035,170) to be incurred when the reclaimed property was
                                      sold in 2009. Costs included annual real estate taxes of 1.5%
                                         36 M54 and IG zoning is general industrial use. IL zoning is light indus-

                                      trial use. S88 zoning is limited industrial use.




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                                      342                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      of the market value of the property, with a 2% annual
                                      increase ($32,096 per year by 2009).
                                           d. Applicable Discount Rate
                                         Mr. Holzhauer applied a 13.5% discount rate to capitalize
                                      cashflows arising from property group 1 to arrive at a final
                                      present value for the property of $5,040,211 before consider-
                                      ation of the cost to comply with certain MUPs and the value
                                      of real property improvements (e.g., a 4,300-square-foot office
                                      building on parcel E). After considering these items, $330,000
                                      and $400,000, respectively, he arrived at a value of
                                      $4,995,000, which he rounded to $5 million. He opined that
                                      this rate was appropriate because an investment in royalties
                                      from a sand mine carried a high risk, given the regulatory
                                      risk, reclamation risks, and the risk of demand and pricing
                                      for sand. He reviewed the yield rates listed in a reliable
                                      survey of real property economic indicators and chose 13.5%
                                      as a rate that was slightly less than the mean rate for higher
                                      risk properties.
                                         We agree that Mr. Holzhauer’s 13.5% rate is a reasonable
                                      rate to apply in the setting at hand and in conjunction with
                                      our resolution of the fill dirt costs. Discount rates are gen-
                                      erally set at the rates of return that property buyers in the
                                      marketplace will demand to invest in property, see, e.g.,
                                      Terrene Invs., Ltd. v. Commissioner, T.C. Memo. 2007–218,
                                      and the rate to apply in a given case must reflect an ade-
                                      quate return on investment with due respect to the attend-
                                      ant risks in the investment. As of the valuation date, an
                                      investment in property group 1 was a high risk, given among
                                      other things that the property was in poor condition and
                                      many of the MUP and reclamation plan conditions were not
                                      met. The 13.5% rate, which falls within the lower half of the
                                      high risk rates included in the referenced survey, is reason-
                                      able in that it reflects a sensible return on investment as of
                                      January 1, 2003, when considering the attendant risks in
                                      investing in property group 1.
                                           3. Property Groups 3 and 4
                                        These property groups include eight parcels on either side
                                      of Vigilante Road. Mr. Holzhauer opined that the applicable
                                      fair market values of property groups 3 and 4 were




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     343


                                      $3,625,000 and $5 million, respectively. 37 He arrived at
                                      those values by applying a sales comparison approach and by
                                      comparing the attributes of the parcels underlying property
                                      groups 3 and 4 and the comparable properties. Mr. Eichel
                                      ascertained that the rounded respective values were
                                      $5,425,000 and $6,250,000 using a comparative sales anal-
                                      ysis that reviewed the same properties he reviewed to value
                                      the residuary interest in property group 1. As was similarly
                                      true in the case of property group 1, the properties under-
                                      lying Mr. Eichel’s comparable sales were for the most part
                                      not comparable to the parcels in property groups 3 and 4 or
                                      the sales were too far removed from the valuation date.
                                        We find Mr. Holzhauer’s analysis underlying his values to
                                      be more persuasive than Mr. Eichel’s analysis underlying his
                                      values. Mr. Holzhauer determined the highest and best use
                                      for property groups 3 and 4 to be continued use for open stor-
                                      age or outdoor manufacturing. He valued property groups 3
                                      and 4 using 11 of the 12 comparable sales he analyzed in val-
                                      uing the reclaimed land in property group 1 (he concluded
                                      that the remaining sale was not pertinent to this valuation).
                                      He ascertained that the mean of the 11 sales was $9.77 per
                                      square foot and noted that the sale price per square foot
                                      tended to decrease for those sales as the size of the property
                                      increased.
                                        Mr. Holzhauer reasonably concluded that sale 1, the
                                      underlying parcel of which was the smallest parcel in the 11
                                      sales, was a good benchmark in valuing the smallest parcels
                                      in property groups 3 and 4 because the property underlying
                                           37 He   broke down these amounts as follows:
                                             Property                   Acres             Value/SF               Value
                                             G                           2.86                 $10            $1,245,816
                                             H                           4.70                   9             1,842,588
                                             I                            .88                  14               536,659
                                              Total                                                           3,625,063
                                              Total (as rounded)                                              3,625,000
                                             J                           1.05                 13                594,594
                                             K                           2.37                 12              1,238,846
                                             L                           1.14                 14                695,218
                                             M                           1.29               13.50               758,597
                                             N                           3.93                 10             31,711,908
                                              Total                                                            4,999,163
                                              Total (as rounded)                                               5,000,000




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                                      344                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      sale 1 was on the same block as the properties underlying
                                      property groups 3 and 4. He also reasonably concluded that
                                      sales 7, 8, and 9 provided guidance on the impact of size on
                                      value. He acknowledged that group 3 property was sold in
                                      2007, but here where the sale was more than four years later
                                      he properly minimized or disregarded that sale either
                                      because the value of industrial properties had surged since
                                      2004 or the sale date was too far removed from the valuation
                                      date. 38
                                           4. Property Group 5
                                        Mr. Holzhauer opined that the applicable fair market value
                                      of property group 5 was $450,000. Mr. Eichel ascertained
                                      that the applicable value was $5 million. We find that the
                                      value was $3,975,000 (or, as explained below, $5 million as
                                      adjusted to reflect an average 1% per month appreciation in
                                      the property from the valuation date to the original option
                                      exercise date of August 12, 2004).
                                        Mr. Eichel noted that property group 5 was under option
                                      as of the valuation date for purchase at a price of $5 million.
                                      He noted that the property was later sold to a national
                                      builder of homes and opined that a key element of the value
                                      of property group 5 was the option purchase price. He ana-
                                      lyzed other sales of similar residential development land in
                                      the surrounding area and concluded that the $5 million
                                      option price for property group 5 was significantly lower than
                                      the other sale prices but that a reasonable purchaser would
                                      pay no more than $5 million for property group 5.
                                        Mr. Holzhauer minimized the fact that Santee was driving
                                      a development of the property surrounding property group 5
                                      and determined that the highest and best use for property
                                      group 5 was mining with a remote possibility of future resi-
                                      dential development. He ascertained his $450,000 fair
                                      market value for property group 5 by first determining a
                                      trended value for the property on the basis of the price that
                                        38 Actual sales of the same property within a reasonable period after the

                                      valuation date are relevant and admissible. See Estate of Giovacchini v.
                                      Commissioner, T.C. Memo. 2013–27, at *50-*58 (and cases cited thereat).
                                      That said, where relevant events materially affecting value were not rea-
                                      sonably foreseeable on the valuation date, the price effect of those events
                                      should be discounted or adjusted in determining value as of the valuation
                                      date, or the entire subsequent sale should be disregarded.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     345


                                      petitioner paid for the property approximately 54 months
                                      before the valuation date. He then applied an appreciation
                                      rate of approximately 1% per month to reflect the apprecia-
                                      tion of industrial land. He concluded that the option agree-
                                      ment was irrelevant to his valuation of property group 5
                                      because, he stated, the rules of valuation require that the
                                      property be valued as if it were for sale ‘‘free and clear’’ of
                                      the option.
                                         We disagree with Mr. Holzhauer’s analysis as to property
                                      group 5. Contrary to his belief, the option agreement was not
                                      irrelevant in valuing property group 5. In addition, contrary
                                      to petitioner’s statements in its brief, we do not ignore the
                                      option agreement in valuing property group 5 or otherwise
                                      value that property as if it were for sale free and clear of the
                                      option. The fact that property group 5 was subject to the
                                      option agreement on the valuation date and that our hypo-
                                      thetical buyer and hypothetical seller are considered to know
                                      the same are important facts that must be taken into
                                      account when valuing that property. In other words, the
                                      hypothetical buyer and the hypothetical seller in buying and
                                      selling the property would know that the option agreement,
                                      as it existed on the valuation date, had to be consummated
                                      by August 12, 2004 (201⁄2 months after the valuation date).
                                      This agreement further provided that the owner of the prop-
                                      erty immediately before consummation of the option would
                                      either sell property group 5 to the optionee for $5 million, or
                                      if it did not, the owner, petitioner, would sell the optionee the
                                      referenced easements for $2 million, in which case the
                                      optionee at its cost would improve the access road and stub
                                      utilities at the access road to all other approved property
                                      lots. 39 While the initial optionee may have been a strategic
                                           39 Petitioner
                                                     invites the Court to find as a fact that the optionee had
                                      both an option to purchase property group 5 for $5 million and an option
                                      to purchase the easements for $2 million. We decline to do so. As we read
                                      the option agreement, and as we ultimately find in consideration of the
                                      record as a whole, the option applies only to the purchase of property
                                      group 5 for $5 million. To be sure, the option agreement explicitly distin-
                                      guishes the option from the mandatory sale of the easements. The option
                                      agreement states in part:
                                             In the event that Optionee does not exercise the Option provided for
                                           herein, Optionor shall sell to Optionee an easement for ingress and
                                                                                                      Continued




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                                      346                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      buyer as Mr. Holzhauer opined, this does not mean, as Mr.
                                      Holzhauer concluded, that a hypothetical willing buyer and
                                      a hypothetical willing seller would ignore the fact that the
                                      optionee was contemplating buying the property at a future
                                      date for $5 million. Nor would the hypothetical willing buyer
                                      and the hypothetical willing seller ignore the fact that the
                                      optionee was obligated to pay $2 million to the owner of the
                                      property for easements on the property, make road improve-
                                      ments, and stub utilities if the optionee did not exercise the
                                      option.
                                        As we see it, forgetting for the moment any appreciation
                                      in property group 5 between the valuation date and the date
                                      that the option is consummated, that property was worth at
                                      least approximately $2 million on the valuation date given
                                      that the optionee, at a minimum, was going to pay $2 million
                                      for easements on the property approximately 201⁄2 months
                                      later. 40 The question, therefore, is how much more than $2
                                      million was it worth? Petitioner argues that the exercise of
                                      the option was ‘‘very speculative’’ as of the valuation date
                                      and should be given no weight. We disagree.
                                        The optionee was committed to pay $2 million for the ease-
                                      ments alone (exclusive of the additional cost of the improve-
                                      ments), and we do not consider it unreasonable to conclude
                                      that the optionee would pay the extra $3 million (or less,
                                      when taking into account the improvement cost) to acquire
                                      the full bundle of the property rights included in the 31.47
                                      acres of property group 5. This is especially true given that
                                      Santee was spearheading the development of the nearby
                                      property as a residential development, and the record leads
                                      to the conclusion that a hypothetical buyer and a hypo-
                                      thetical seller would both anticipate that the option was
                                      going to be exercised at the $5 million strike price. 41 To be
                                        egress over the road across the Property shown on the approved ten-
                                        tative map for the Master Project * * * [and that] Optionor shall grant
                                        Optionee an easement over the land at the entrance of the Master
                                        Project, not to exceed one-half acre, in order to erect appropriate entry
                                        monumentation for the Master Project.
                                        40 We say ‘‘approximately’’ because the optionee also had to make certain

                                      improvements to the property in return for the easements.
                                        41 The fact that the parties to the option agreement expected the devel-

                                      opment to go through is also seen in part by observing that the option
                                      agreement provided that FDC would pay EFR $2 million for the easements
                                      after the first final subdivision map for the master project was approved.




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     347


                                      sure, we doubt that sophisticated longtime businessmen such
                                      as the members of the Enniss family would encumber their
                                      property with the two-year option in return for a single
                                      dollar and the permanent easement sale for $2 million were
                                      they not confident that the option was likely to be exercised.
                                        Mr. Eichel analyzed various similar properties and con-
                                      cluded that the fair market value of property group 5 was at
                                      least $5 million. Respondent invites the Court to set the
                                      applicable value at $5 million. We decline to do so. We
                                      believe that the $5 million option price is a reliable guide to
                                      the fair market value of property group 5 as of the exercise
                                      date but that the price must be adjusted to take into account
                                      the time value of money (also appreciation in property group
                                      5) between August 12, 2004, and the valuation date. See
                                      Estate of Trompeter v. Commissioner, T.C. Memo. 1998–35;
                                      Estate of Scanlan v. Commissioner, T.C. Memo. 1996–331.
                                      Similar property in the area was appreciating at the rate of
                                      1% per month, and we believe it appropriate to discount the
                                      $5 million option price by 20.5% to reflect (primarily but
                                      among other things) the passage of time from the valuation
                                      date to August 12, 2004.
                                        While, theoretically speaking, the fair market value of
                                      property group 5 should also take into account the risk that
                                      the optionee would not have the funds to pay $5 million to
                                      exercise the option, the fact that Santee was pushing the
                                      development of the nearby property and that we apply the
                                      1% rate for each of the 201⁄2 months persuades us that this
                                      calculation best establishes the fair market value of property
                                      group 5 as of the valuation date. We hold that the applicable
                                      fair market value of property group 5 was $3,975,000 (i.e., $5
                                      million × (1 - .205)).
                                           5. Bulk Sale Discount
                                        Mr. Holzhauer applied a bulk sale discount of 15% to the
                                      total value of the nine property groups. Petitioner argues
                                      that the discount is appropriate to reflect the fact that the
                                      nine groups of property are valued as if they were sold as of
                                      the same time. While petitioner calls this discount a ‘‘bulk
                                      discount’’, we understand petitioner to refer to a ‘‘market
                                      absorption’’ or ‘‘blockage’’ discount. See Estate of Auker v.
                                      Commissioner, T.C. Memo. 1998–185.




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                                      348                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                         We agree with petitioner that a 15% discount is reasonable
                                      under the facts herein. Relevant evidence of value may
                                      include consideration of a market absorption discount in that
                                      such a discount reflects the fact that the sale of a large block
                                      of property in the same general location over a reasonable
                                      period of time usually depresses the price for that property.
                                      See id.; see also Estate of Sturgis v. Commissioner, T.C.
                                      Memo. 1987–415 (20% market absorption discount applied to
                                      11,298.86 acres of undeveloped land); Carr v. Commissioner,
                                      T.C. Memo. 1985–19 (30% market absorption discount
                                      applied to 175 developed lots; no discount applied to 437.5
                                      undeveloped lots); Estate of Folks v. Commissioner, T.C.
                                      Memo. 1982–43 (20% market absorption discount applied to
                                      five leased lumberyards with the same tenant and in the
                                      same geographical area); Estate of Grootemaat v. Commis-
                                      sioner, T.C. Memo. 1979–49 (15% market absorption discount
                                      applied to undeveloped lots totaling 302 acres). We believe
                                      that the sale of the nine property groups on or about the
                                      valuation date would depress the price for that property and,
                                      under the facts at hand, conclude that the 15% discount that
                                      petitioner requests is a reasonable measure of that depres-
                                      sion.
                                      VII. Insurance Premiums
                                        Respondent determined that petitioner failed to recognize
                                      insurance premium income of $128,584, $882, $299,178, and
                                      $298,000 received respectively in 2002, the one-day taxable
                                      year in 2003, the remaining taxable year in 2003, and 2004.
                                      Respondent determined these amounts on the basis of insur-
                                      ance revenues that petitioner reported on its Forms 990 for
                                      2002 through 2004. Respondent continued to argue that
                                      these amounts were taxable as insurance premiums up until
                                      respondent’s opening brief was filed. In that brief,
                                      respondent abandoned the characterization of the amounts
                                      as insurance premiums income, arguing instead that the
                                      amounts are rental income. Respondent asserts that the
                                      amounts petitioner reportedly received as insurance pre-
                                      miums were actually received as rent because the royalty
                                      rate set forth in the lease between EFR and Enniss, Inc., was
                                      not at fair market value. Respondent asserts that EFR could
                                      extract whatever amount of rent it deemed appropriate from




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                                      (294)                CHAPMAN GLEN LTD. v. COMMISSIONER                                     349


                                      Enniss, Inc., during the subject years because EFR could
                                      change lease terms at its discretion and terminate at will the
                                      leasehold of Enniss, Inc.
                                         Petitioner argues in its pretrial memorandum (and in its
                                      opening brief) that the disputed amounts do not reflect insur-
                                      ance premiums income because petitioner failed to provide
                                      insurance. Instead, petitioner argues, the amounts are non-
                                      taxable contributions to capital pursuant to Carnation Co. v.
                                      Commissioner, 640 F.2d 1010 (9th Cir. 1981) (holding that
                                      funds that a corporation received as insurance premiums
                                      were recharacterized as nontaxable contributions to capital
                                      because the corporation did not provide insurance), aff ’g 71
                                      T.C. 400 (1978). Petitioner argues in its answering brief that
                                      it is prejudiced by respondent’s attempted recharacterization
                                      of the disputed amounts at this late stage of this proceeding
                                      because it never knew that it had to prove that the funds
                                      were not rent. Petitioner asserts that it would have devel-
                                      oped and presented evidence at trial showing that the lease
                                      terms were at arm’s length had it known that respondent
                                      was going to make the arguments that respondent now
                                      advances.
                                         We agree with petitioner that respondent’s new position is
                                      untimely. A party may not raise an issue for the first time
                                      on brief if the Court’s consideration of the issue would sur-
                                      prise and prejudice the opposing party. See Smalley v.
                                      Commissioner, 116 T.C. 450, 456 (2001); Seligman v.
                                      Commissioner, 84 T.C. 191, 198–199 (1985), aff ’d, 796 F.2d
                                      116 (5th Cir. 1986). In deciding whether the opposing party
                                      will suffer prejudice, we consider the degree to which the
                                      opposing party is surprised by the new issue and the
                                      opposing party’s need for additional evidence to respond to
                                      the new issue. See Pagel, Inc. v. Commissioner, 91 T.C. 200,
                                      212 (1988), aff ’d, 905 F.2d 1190 (8th Cir. 1990). In addition,
                                      a party may not rely upon a new theory unless the opposing
                                      party has been provided with fair warning of the intention
                                      to base an argument upon that theory. See id. at 211–212.
                                      ‘‘Fair warning’’ means that a party’s ability to prepare its
                                      case was not prejudiced by the other party’s failure to give
                                      notice, in the notice of deficiency or in the pleadings, of the
                                      intention to rely on a particular theory. See id.
                                         We conclude that respondent’s raising of the rental income
                                      issue in respondent’s opening brief precluded or limited peti-




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                                      350                 140 UNITED STATES TAX COURT REPORTS                                   (294)


                                      tioner’s opportunity to present pertinent evidence and that
                                      petitioner would be significantly prejudiced if we decided
                                      that issue on the basis of the record at hand. Respondent had
                                      numerous opportunities to raise the new theory, and the
                                      failure to raise this issue when respondent could have done
                                      so waives the argument. See Aero Rental v. Commissioner, 64
                                      T.C. 331, 338 (1975). We decline to consider it. Because peti-
                                      tioner did not provide insurance during the subject years, we
                                      conclude that the funds that it received as insurance pre-
                                      miums could not have been received as such but were
                                      instead received as contributions to its capital. See Carnation
                                      Co. v. Commissioner, 640 F.2d at 1013–1014.
                                         The Court has considered all contentions, arguments,
                                      requests, and statements that the parties made and has
                                      rejected those not discussed here because they were without
                                      merit, moot, or irrelevant.
                                         To reflect the foregoing,
                                                                        Decisions will be entered under Rule 155.

                                                                           f




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