                          R E V I S E D

                 United States Court of Appeals,

                          Fifth Circuit.

                          No. 96-60057.

          ESTATE OF Golda E. Rixon KOKERNOT, Deceased,

    Mary Ann Kokernot LACY, Executrix, Petitioner-Appellant,

                                 v.

     COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

                          May 27, 1997.

Appeal from the United States Tax Court.

Before REYNALDO G. GARZA, EMILIO M. GARZA and DeMOSS, Circuit
Judges.

     REYNALDO G. GARZA, Circuit Judge:

     A decedent's estate appeals a judgment of the United States

Tax Court holding that it waived its ability to elect special-use

valuation for certain qualified property under I.R.C. § 2032A

because it failed to raise the topic in its petition for review or

during the negotiations that led to the filing of a stipulation of

settlement with the Tax Court.   We affirm.

                                 I.

     Golda E. Rixon Kokernot ("Decedent") died on December 7, 1990.

Her daughter was named executrix of her estate.   At the time of her

death, Decedent partly owned a 103,843.21 acre cattle ranch in West

Texas called the "Kokernot 06 Ranch" ("Ranch"), which property was

includible in Decedent's estate ("Estate") for tax purposes.    The


                                 1
Ranch was composed of several parcels, one of which, the "Upper

Ranch," is of import here.       The executrix filed a federal estate

tax return on September 7, 1991, reporting the date-of-death,

fair-market value of the Upper Ranch as $2,142,456 and the value of

the entire Ranch as $2,696,536.             The return also included a

Schedule A-1 "Section 2032A Valuation" on which the executrix made

a protective election pursuant to IRS regulations in order to

preserve its opportunity to specially value the Ranch, under §

2032A, by reference to its continued use as a working ranch.

     The return was selected for audit, the principal issue being

the fair market value for the Ranch.           Because the parties were

unable to     resolve   their   differences    at   the   audit    level,   the

Commissioner proceeded to issue a notice of deficiency on June 9,

1994.    The notice determined a deficiency of $3,443,931 in estate

taxes.    In the notice, the Commissioner valued the Upper Ranch at

$7,863,001,     causing,   after    other     unrelated     adjustments,     a

$5,720,545 increase in the value of the gross estate.             The Estate's

protective election of § 2032A valuation was not mentioned and the

Commissioner's calculation of deficiency amounts did not take into

consideration any offset for the property's use as a cattle ranch.

Challenging the notice of deficiency, the Estate filed a petition

in the United States Tax Court for a redetermination of the

deficiency, alleging, inter alia, that the Commissioner erred in

her finding of the date-of-death fair market value for the Ranch.



                                     2
The Estate's petition did not mention the subject of § 2032A

valuation.

      The   case   was   set    for   trial        on       June   19,   1995.     At   the

suggestion of the court, the parties entered negotiations prior to

trial to attempt to resolve the debate over the Ranch's fair market

value at the time of Decedent's death.                       At no time during these

negotiations was the subject of § 2032A valuation raised by the

Estate.     When the parties appeared for trial on June 19, counsel

for   the   Commissioner       announced       that         the    parties   had   reached

settlement on all issues raised in the notice of deficiency.                            On

July 3, 1995, the parties filed a "Stipulation of Settlement" with

the court.    The agreement provides in relevant part:

           THE PARTIES HEREBY NOTIFY the Court that they have
      reached a basis of settlement concerning all adjustments to
      petitioner's estate tax return in respondent's statutory
      notice of deficiency, dated June 9, 1994.

                           *      *    *       *        *     *

      2. The $5,720,545.00 increase in the value of real estate
      included a determination by respondent that petitioner under
      reported the reported fair market value per acre of the
      deceased's interest in 89,503 acres of an 103,843 acre cattle
      ranch. In addition, respondent determined that only 13,098 of
      the 89,503 acres of the ranch in dispute were subject to a
      partial ownership discount;    and, that gifts made in 1990
      pursuant to a durable power of attorney were invalid and,
      therefore, the value of the gifts should be included in the
      gross estate.

      3. The parties stipulate to the following terms of settlement:

           a. With respect to the increase in the value of the real
      estate included in the gross estate, the issues were resolved
      as follows:

            i. The parties agree to value the entire 103,843 acres of

                                           3
     the cattle ranch at $80.00 per acre.

          ii. In addition, the parties agree that petitioner is
     entitled to discount of 20% on the entire 103,843 acres to
     reflect the deceased's partial interest in the property.

                            *    *   *       *   *     *

             The parties agree to this STIPULATION OF SETTLEMENT.

Thus the stipulated value of the property, after the discount, was

$64 per acre, or $6,645,952 for the entire Ranch.                    The agreement

contains no reference to § 2032A valuation.

     Based     on   this   agreement,    the     court     allowed    the   parties

additional time in order to exchange information regarding various

administrative expenses discussed elsewhere in the agreement, to

compute the correct amount of estate tax due, and to prepare

decision documents.        After reviewing the agreed-upon value for the

Ranch, the Estate's counsel advised counsel for the Commissioner

that the Estate intended to pursue its protective election of

special valuation and, on August 26, 1995, the Estate sent to the

Commissioner an amended federal estate tax return in which it made

the § 2032A election.

     The parties thereafter filed motions for entry of a decision

determining     the    deficiency,       with    the       Commissioner     seeking

$889,910.20 and the Estate seeking $626,119.32.                   The Commissioner

argued that the settlement reflected the parties' agreements with

respect   to   all    of   the   adjustments      stated     in    the   notice   of

deficiency and that it finally set a value to be attached to the

Ranch for purposes of the calculation of the gross estate.                        It

                                         4
further argued that a determination of the value of the property

under § 2032A presented a new factual issue that could not be

raised at this stage of the proceedings.              The Estate argued that

the Stipulation of Settlement encompassed only the issues raised in

the notice of deficiency and not the amount of deficiency or its

computation,   that   the    application    of    §    2032A   was    merely    a

computational process, and that the Commissioner's failure to

consider during settlement negotiations the possible impact of the

Estate's protective election did not constitute a valid basis for

denying the benefits of the election.

     The court agreed with the Commissioner, finding that the

Estate failed to preserve its claim to special-use valuation in the

Stipulation of Settlement.       It found that the Commissioner entered

into the agreement (thereby foregoing the higher value for the

Ranch determined in the notice of deficiency) on the premise that

the "value" of the Ranch stated in the stipulation was its "value"

for estate tax purposes.         The Commissioner was entitled to make

that conclusion, the court reasoned, because the Estate's counsel

never mentioned the § 2032A election during the negotiations.

Further, the Tax Court concluded that the question of whether the

Estate was entitled to value the Ranch property under § 2032A was

not merely computational but required the determination of several

factual   issues,   none    of   which   were    mentioned     in    either   the

pleadings or the negotiations leading to the agreement. It refused



                                     5
to allow the Estate to raise the issue at that point in the

litigation    and       entered    a   decision     in   accordance     with     the

Commissioner's figures.           The Estate appeals.

                                           II.

      We review decisions of the Tax Court in the same manner we do

those of a district court.             We review its findings of fact for

clear error but review its conclusions of law de novo.                        Dresser

Indus. v. Commissioner, 911 F.2d 1128, 1132 (5th Cir.1990).                      Its

interpretation of the terms of a settlement agreement is a legal

conclusion.       Accord Goldman v. Commissioner, 39 F.3d 402, 405 (2d

Cir.1994).

     The Estate's argument on appeal is that the agreement cannot

be construed as effecting a waiver of its right to make the § 2032A

valuation.    It argues that it was legally privileged to raise the

issue when it did.         The Commissioner answers that the Tax Court

correctly held that the Estate failed to preserve its right to

value the Ranch under § 2032A.

      We begin by analyzing the agreement itself.                   A settlement

agreement    is     a    contract;         mutual   forbearance     supplies     the

consideration.          As such, we interpret its terms using general

contract    law    principles.         Treaty    Pines   Invs.    Partnership     v.

Commissioner, 967 F.2d 206, 211 (5th Cir.1992). If the language of

the agreement is unambiguous, we will not consider any extrinsic

evidence:         the    meaning    will    be   determined      from   the    terms


                                            6
encompassed within the proverbial four corners of the agreement.

Goldman, 39 F.3d at 406.       Where the language is not so clear,

however, we will examine the language within the context of the

circumstances surrounding the execution of the agreement.             Robbins

Tire & Rubber Co. v. Commissioner, 52 T.C. 420, 435-436, 1969 WL

1677 (1969).      Our examination of the language of the agreement

leads us to conclude that the $64 per acre figure was meant to be

the final figure, thereby foreclosing any use of special-use

valuation.   The agreement specifically states that "[w]ith respect

to the increase in value of real estate included in the gross

estate, ... the parties agree to value the entire 103,843 acres of

the cattle ranch at" $64 per acre.        The agreement does not refer to

the fair market value of the Ranch, but to its value for estate tax

purposes. While the language appears unambiguous to us, the Estate

asserts that its true significance cannot be divined outside of the

circumstances within which it was executed.

     Central to the circumstances here is the topic of special-use

valuation under I.R.C. § 2032A.       The federal government ordinarily

assesses estate tax on inherited real property by means of the

property's   fair   market   value.       Section    2032A     represents   an

exception    to   this   general   scheme    by     allowing    a   qualified

agricultural property to be taxed at its actual-use value, i.e. its




                                      7
value as an agricultural property.1                The purpose of the exception

is "to grant relief to heirs of such properties who might otherwise

find the financial burden imposed by the estate tax so great that

it would be necessary to sell the farm or business to pay the tax."

McAlpine       v.   Commissioner,     968       F.2d    459,    460    (5th   Cir.1992).

Applied here, it would allow the Estate to value the Ranch based on

its use as a cattle ranch rather than at some higher value.                            The

Estate has calculated that the employment of § 2032A valuation to

the amounts agreed to in the stipulation would result in a $750,000

reduction in value for the property.2                          In exchange for this

alternate method of property valuation, the successors must agree

to maintain familial ownership and the agricultural nature of the

property for a period of ten years.               The successors must also agree

to assume personal responsibility for additional taxes should the

two conditions be breached.           I.R.C. § 2032A(c).              The Code requires

that this agreement be memorialized in a "recapture agreement"

which must be submitted along with the tax return making the §

2032A election.        I.R.C. § 2032A(d)(2).

      The       benefits     and    obligations         of   this     section   "do    not

appertain automatically just because all prerequisites happen to


           1
         See        I.R.C.   §     2032A(e)(7)         (discussing      the   method    of
valuation).
       2
        The Code provides that the aggregate decrease in value
allowed "shall not exceed $750,000." I.R.C. § 2032A(a)(2). Absent
this ceiling the Estate could claim a reduction in the vicinity of
$1 million.

                                            8
coalesce:       The    estate   must   act    affirmatively     to    elect    such

treatment."        Estate of Hudgins v. Commissioner, 57 F.3d 1393, 1397

(5th Cir.1995).         The applicable regulations allow a taxpayer to

make a "protective election" of special-use valuation and thereby

preserve its right to elect the alternate method of valuation

"pending final determination of values."              26 C.F.R. § 20.2032A-

8(b). The notice of protective election must be made on the estate

tax return. Once the values are "finally determined," the taxpayer

has    60   days    within   which   to   make   a   full-blown      election    of

special-use valuation on an amended tax return.

       As noted above, the Estate gave notice on its original return

that it was undertaking a protective election with respect to the

Ranch.      The Estate asserts that it made the protective election,

rather than outright making the election, for strategic reasons.

It states, and the Commissioner does not dispute, that it satisfies

all the requirements set forth in § 2032A.                     However, at the

fair-market value it provided on its original tax return, the

savings allowed by § 2032A would have been "de minimis " and not

worth the legal obligation the successors would undertake. Perhaps

anticipating that the fair-market value of the Ranch would become

a debated issue, the Estate made a protective election, thereby

allowing it to take advantage of § 2032A valuation in the event

that   the    finally    determined    fair-market     value    for   the     Ranch

increased to the point where it would make economic sense for the


                                          9
successors to incur the legal obligations described above.

     The regulation states that the availability of the election

"is contingent upon values as finally determined (or agreed to

following examination of a return) meeting the requirements of

section 2032A....     If it is found that the estate qualifies for

special use valuation based upon values as finally determined (or

agreed to following examination of a return)," the estate may then

make the election on an amended return. 26 C.F.R. § 20.2032A-8(b).

The Estate seizes upon this language to justify its position.        It

claims that its protective election preserved its opportunity to

make the election whenever a final determination was made regarding

fair-market value.     It asserts that the final determination was

made in the settlement agreement.       Accordingly, it reasons that it

then had 60 days to perfect its election.

     The Commissioner has conceded that the Estate has otherwise

met all the procedural niceties required for making the election.

She argues, however, that the Estate waived its opportunity to make

the election after the matter proceeded past the audit stage and

into litigation.     We agree.    We do not read the language in the

regulation as broadly as the Estate does.          Under the Estate's

interpretation,     the   final    step    in   litigation   over   the

Commissioner's determination of fair-market value establishes the

date on which the 60-day period for making the election commences.

This final step might be the entry of a settlement agreement, as

was the case here, or in another situation it might be the Tax

                                   10
Court's ruling or that of a reviewing Article III court.

       We do not believe this is what the regulation contemplates

when it speaks to a final determination.              Following the audit of a

tax return, the Commissioner notifies the taxpayer of any disputes.

The taxpayer is allowed an administrative appeal to resolve this

preliminary determination.                After the appeal is decided, the

Commissioner then sends the taxpayer a notice of deficiency.

I.R.C. § 6212(a). This notice constitutes the final administrative

determination of the taxpayer's tax deficiency.                       Absent further

action by the taxpayer, this decision is final.                       If the taxpayer

decides to challenge this figure by lodging a petition for review

in   the    Tax    Court,   it    bears    the   burden    of    proving     that   the

Commissioner's determination is incorrect. Welch v. Helvering, 290

U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933);                           J. & O.

Altschul Tobacco         Co.     v.   Commissioner,   42    F.2d      609,   610    (5th

Cir.1930);        Tax Ct. R. 142.         We conclude the final determination

contemplated by the regulations is the Commissioner's notice of

deficiency.

           If     the   Estate    was     content   with        the    Commissioner's

determination of fair-market value for the Ranch, as evidenced in

the notice of deficiency, it was free at that point to take

advantage of its protective election by filing an amended tax

return which made the election.             Because it chose to challenge the

Commissioner's determination, the Estate should have raised the §


                                           11
2032A issue in its petition for review.            As the Tax Court noted,

the   Estate    was   free   to    plead   special-use    valuation   as    an

alternative position.        Tax Ct. R. 31(c).     It chose not to do so.

Instead,   it    attempted    to   raise   the   issue   after   entering   an

agreement which, as we interpret it, established a final value for

the Estate.     We agree with the Tax Court that the Estate waived its

ability to claim § 2032A valuation.3

      AFFIRMED.




      3
      The Commissioner's brief implies that the Estate might have
preserved the issue by broaching the topic during the settlement
negotiations in the Tax Court.    As a consequence, we need not
determine whether the Estate's failure to make reference to
special-use valuation in its petition for review would have been
enough to waive the issue.

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