                  T.C. Memo. 2000-193



                UNITED STATES TAX COURT



        ESTATE OF REBECCA A. WINEMAN, DECEASED,
           ELEANOR TRUOCCHIO AND DEAN WINEMAN,
               CO-EXECUTORS, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 27339-96.                      Filed June 28, 2000.



     1. Decedent (D) gave an aggregate 24-percent
interest in her homestead property to her children. In
the years following the transfer, she continued to
reside on the property. R determined that the 24-
percent interest is includable in D’s gross estate
pursuant to sec. 2036, I.R.C. Held: D’s continued use
of the homestead property as her residence following
the transfer of minority interests in the property to
her children was not a retained life estate in the
property interests conveyed to her children.
Consequently, the value of the minority interests is
not includable in her estate under sec. 2036, I.R.C.

     2. D rented her interests in certain real estate
to Coastal Ranches, a corporation owned by her
children, at a below-market rent. R determined that
the annual difference between fair market rent and
actual rent constituted taxable gifts. Held: R’s
computation of the amount of taxable gifts sustained.
                               - 2 -



          3. On its Form 706, U.S. Estate (and Generation-
     Skipping Transfer) Tax Return, P valued D’s real estate
     at $2,261,800. R determined that the fair market value
     was $2,785,248. Held: The fair market value was
     $2,417,491.

          4. P elected special use valuation of certain
     farm real property on its Form 706. R disallowed the
     election because P failed to document comparable rental
     property in accordance with sec. 2032A(e)(7), I.R.C.,
     and the regulations thereunder. See sec. 20.2032A-4,
     Estate Tax Regs. Held: P may not value its elected
     properties under the valuation formula of sec.
     2032A(e)(7), I.R.C. Held, further, by reason of sec.
     20.2032A-4, Estate Tax Regs. (which provides that if an
     executor does not identify comparable property and cash
     rentals as required by sec. 2032A(e)(7), I.R.C., all
     specially valued real property must be valued under the
     rules of sec. 2032A(e)(8), I.R.C.), P may value the
     properties under the provisions of sec. 2032A(e)(8),
     I.R.C. Held, further, P’s special use valuation under
     sec. 2032A(e)(8), I.R.C., is allowed.



     John W. Ambrecht and Gregory Arnold, for petitioner.

     Steven M. Roth, for respondent.


              MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   Respondent determined an estate tax

deficiency of $775,626 and an addition to tax under section 6662

of $3,844.   After concessions,1 the issues for decision are:

     1
      The parties conceded several items in a stipulation of
agreed adjustments, filed Sept. 14, 1998. Petitioner's
concessions are described therein and will not be repeated here.
Respondent has conceded that petitioner is not liable for the
addition to tax. On brief, respondent conceded that the fair
market values of decedent's interests in two parcels of estate
                                                   (continued...)
                               - 3 -


     1)   Whether Rebecca A. Wineman (decedent) retained a life

estate in partial interests in her homestead property transferred

to her children.   We hold that she did not.

     2)   Whether decedent rented her ranch properties to a

closely held corporation owned by her children at below-market-

value rates, thereby making taxable gifts to her children.    We

hold that she did.

     3) Whether the cumulative fair market value of certain real

property includable in the gross estate was $2,261,800 as

returned by petitioner, $2,785,248 as determined by respondent,

or some other figure.   We hold that the fair market value was

$2,417,491.

     4)   Whether petitioner’s election of special use valuation

qualified as a valid election under section 2032A.2   We hold that

it did.

                         FINDINGS OF FACT

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

The stipulation of facts is incorporated herein by this

reference.


     1
      (...continued)
property, the Homestead (parcel 3) and the Machado Ranch (parcel
8), were $52,000 and $231,000, respectively.
     2
      All section references are to the Internal Revenue Code as
in effect for the date of decedent’s death, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
All monetary amounts have been rounded to the nearest dollar.
                               - 4 -


     Rebecca A. Wineman (decedent) died on June 24, 1992 (the

valuation date).   Petitioner’s coexecutors resided in Santa

Maria, California, at the time the petition in this case was

filed.

Ranch Operations

     The Wineman family has been grazing cattle in the Nipomo,

California, area for approximately 115 years.    Decedent and her

husband, Vernon Wineman (Mr. Wineman), were full-time cattle

ranchers from the 1930's until their deaths.3    Until early 1992,

decedent performed numerous activities relating to the cattle

operation.   Her activities included feeding the cattle, deciding

which breed to run, helping brand cattle, cooking for the

branding crew, deciding when to buy and sell cattle and at what

prices, making decisions regarding feed purchases, negotiating

purchases of real estate and coordinating all the legal and sales

activities for the purchases, arranging for Land Bank lending,

painting and assisting in the repair and maintenance of corrals

and cattle facilities, and attending bull and cattle sales in San

Luis Obispo, Kern, and Santa Barbara Counties.    Decedent also

belonged to local and national cattle organizations.

     Coastal Ranches, a C corporation organized in 1979,

continues the cattle operations conducted by decedent and Mr.



     3
      Mr. Wineman died on Jan. 22, 1962.
                                - 5 -


Wineman.   Decedent owned no interest in Coastal Ranches.

Decedent and Mr. Wineman’s three children, Dean Wineman (Dean),

Eleanor Truocchio (Eleanor), and Marian Hanson (Marian), each own

21 percent of Coastal Ranches, and the remaining 37 percent is

owned by Mr. Wineman's testamentary trust (the trust), of which

the three children are beneficiaries.    Dean and Eleanor are full-

time cattle ranchers.    Marian lives in Montana and occasionally

participates in the cattle operation.

Nipomo Properties

     The Nipomo properties (parcels 3, 5, 6, 9, and 10) are

located within the greater urban area of Santa Maria, a city at

the northern end of Santa Barbara County, California.   The Santa

Maria area has a population of approximately 100,000.   Santa

Maria is primarily a farming community.   Other parts of the

coastal zone are more upscale, such as the Santa Ynez and Santa

Ynez River Valleys to the south.   Arroyo Grande, to the north and

west of Santa Maria and along the Pacific coast, is the location

of many second homes, attracting people seeking to escape the

summer heat of the San Joaquin Valley.    Further north along the

coast, the coastal towns of Morro Bay and Cambria are also

popular with tourists.   The area has attracted resort and second

home development.

     Although Santa Maria is within Santa Barbara County, the

town of Nipomo and the Nipomo properties are in San Luis Obispo
                               - 6 -


County.   These properties are at the southern entrance to San

Luis Obispo County.   As of the valuation date, the county

government intended to preserve this entrance as a scenic area

that extended back almost to the first range of hills.

Specifically, the San Luis Obispo County land use element in

effect at the valuation date placed the ranches in the South

County Planning Area.   Permitted uses of properties in this area

were limited to certain specified agricultural uses.

     As of the valuation date, the Nipomo properties were part of

an agricultural preserve and had been continuously since the

early 1970's.   A property is placed in an agricultural preserve

by the land owner by a contract with the county.   In exchange for

keeping the property as rural, open space agricultural land, the

land owner receives a preferential property tax rate.    Each

property in the agricultural preserve is encumbered by a 20-year

evergreen contract, which renews day to day.   Under the contract,

a landowner has the right to notify the county of an intent to

terminate the contract on its anniversary date, and once such

notice is provided, the contract will expire 20 years later.

The Winemans did not provide notice of intention to terminate the

evergreen contracts on the Nipomo properties at any time before

their deaths.
                               - 7 -


The Homestead Property

     Decedent's homestead property (parcel 3) is the site of two

residences.   One is a larger house with three bedrooms.   Decedent

occupied one bedroom at the time of her death and had the use of

the living room, kitchen, and dining area.    Dean used a second

bedroom as an office, where he kept his desk and all his

bookkeeping papers, although he had moved out of the main house

in 1979 or 1980 after his marriage.    Decedent used the other

bedroom as a guest bedroom, primarily for Marian when she visited

from Montana.   The main house also had a separate office that was

the corporate headquarters for Coastal Ranches.

     The second house on the homestead property is a smaller

house of approximately 1,500 square feet.    Dean has lived there

since 1979 or 1980 as a ranch employee.    He has never paid rent

for his use of the smaller house.

     In addition to the residences, parcel 3 has two large barns,

a small barn, a granary, cattle scales and corrals, a farm shop,

two garages, and a small orchard.

     During each of the years 1968, 1969, and 1970, decedent gave

each of her three children one-third of an undivided 8-percent

interest in her homestead property, for a total gift to all three

children after the 3-year period of 24 percent.    At the time of

her death, decedent owned a 51-percent interest in the homestead

property.   The trust owned the remaining 25 percent.
                               - 8 -


     Coastal Ranches stored hay in the barns, used the corrals

and farm shop, and kept vehicles in a garage and in one of the

big barns.   Coastal Ranches maintained and paid utilities for the

houses.   Coastal Ranches also sealed the driveway, installed a

sidewalk, and provided decedent with a pickup truck for her use.

Workers provided by Coastal Ranches assisted with yard

maintenance, including cutting down and pruning trees, repairing

water pipes, and removing bushes.   Coastal Ranches was also

responsible for replacing fences and corrals in the event of a

fire.

     Some of the soil on parcel 3 was contaminated by the

spillage of gasoline in a refueling area near one of the barns.

On February 9, 1996, NG Chemical estimated the soil remediation

expenses on parcel 3 to be $36,256.

     As of the valuation date, the fair market value of

decedent's interest in the homestead property, including land,

buildings, and site improvements, was $52,000.

The Nipomo Pasturelands

     The Nipomo pasturelands consisted of Rancho El Suey (parcel

5), Rancho Nipomo (parcel 6), Lot 74 (parcel 9), and the Pit

(parcel 10).   As of the valuation date, all of these properties

were vacant, unimproved lands used only for cattle grazing.

     Decedent owned 51 percent of parcel 5, which was an oblong,

irregularly shaped property consisting of 1,487 acres located on
                                - 9 -


the north side of Highway 166 between Temettate Ridge and

Twitchell Reservoir.   On the valuation date, the property carried

approximately 50 cows.

     Decedent owned 50 percent of parcel 6, which was a squarish,

648-acre property situated immediately west of Temettate Ridge

and parcel 5.   The easternmost corner of parcel 6 adjoined the

westernmost corner of parcel 5, but the properties did not

otherwise share a common boundary.      On the valuation date, the

property carried 20-25 cows.

     Decedent owned 100 percent of parcel 9, which was a

rectangular parcel of 90 acres, situated directly northwest of

parcel 6.   The longer side of the rectangle (the southeast

boundary) was also the northwest boundary of parcel 6.      The

record does not reflect parcel 9's carrying capacity as of the

valuation date.

     Decedent owned 100 percent of parcel 10, a triangular parcel

created by the realignment of Highway 166, which severed Parcel

10 from other Wineman properties.    Parcel 10 is bisected by two

ravines.    At 7 acres, it is below the minimum parcel size allowed

by local zoning.   Thus, it would be valuable only to a

neighboring landowner wishing to expand his acreage.

     Average annual precipitation on the properties ranged from

14 to 18 inches.   With the exception of only a few acres, the

soil composition and steep slopes made the properties unsuitable
                               - 10 -


for farming.   A variety of factors made these ranch properties

unattractive for residential development, including limited water

supplies and land use restrictions.     As of the valuation date,

the highest and best use of these properties was their continued

use as grazing land and pastureland.

     As of the valuation date, the fair market values of

decedent's interests in the Nipomo properties were as follows:

     Parcel no.        Parcel name         Fair market value

         5            Rancho El Suey           $580,153
         6            Nipomo Ranch              247,860
         9            Lot 74                     81,000
        10            The Pit                     1,750

The Machado Ranch

     Decedent owned a 25-percent interest in the Machado Ranch

(parcel 8), which consisted of approximately 1,204 acres of

unimproved grazing land located just behind the first ridge of

the Santa Lucia Mountains, approximately 8 miles west of the city

of San Luis Obispo.   Approximately 562 acres are steep, rocky, or

brushy, which limits the grazing utility of the property.      The

pasture quality is about average for the area.     The property is

perimeter fenced.   However, the topography of the property makes

the ranch difficult to manage.   Because of the steep slopes and

brushy canyons throughout the property, livestock are difficult

to round up, and extra labor is required to do so.     As of the
                                - 11 -


valuation date, the property carried 56 cows.    During 1998, it

was carrying about 75 cows.

     Parcel 8 is zoned for agricultural use, and the zoning is

burdened with a "geologic hazard" overlay.    Like the Nipomo

properties, Machado Ranch is in an agricultural preserve and is

the subject of a 20-year evergreen contract.

     The applicable land use laws permit rural residential use of

the property.    However, the steep terrain, rough-graded access

roadway, and third-party easement rights severely restrict the

desirability for residential use.    The property is also situated

in an area at risk for wildfires, and portions of the ranch were

burned in fires during 1985 and 1994.    There are no developed

utilities, and the ranch roads are usable only by four-wheel-

drive vehicles.

     As of the valuation date, the fair market value of

decedent's interest in parcel 8 was $231,000.

Rental of Decedent’s Ranch Properties

     During 1989, 1990, and 1991, decedent leased her interests

in the ranch properties to Coastal Ranches, pursuant to oral

agreements.     Coastal Ranches paid decedent $5,000 per year during

1989 and 1990 and $10,000 per year during 1991 for the right to

graze cattle on her ranch properties.    The rate of rent was not

negotiated.     For these years, decedent informed her children what

rent she intended to charge, and the children accepted that rent
                               - 12 -


without question.   Decedent did not tell her children how she

calculated the rent.   In 1989, 1990, and 1991, the fair market

rent for the ranch properties was $16,595 per year, net of

property taxes.

     Coastal Ranches contributed an unspecified amount of labor

and materials in connection with its lease of decedent's ranch

properties.   During 1989, 1990, and 1991, Coastal Ranches paid

property taxes, maintained fences, and paid utilities and other

expenses associated with the Wineman properties.

     In 1989, 1990, and 1991, decedent gave $10,000 in cash to

each of her three children.

The Special Use Valuation Election

     On its Form 706, U.S. Estate (and Generation-Skipping

Transfer) Tax Return, petitioner claimed special use valuation

for parcels 5, 6, 7, 8, and 9, pursuant to section 2032A.    The

election reduced petitioner's reported gross estate by $750,000,

the maximum then permitted by law.

     Respondent's estate tax attorney, Patricia Hiles (Ms.

Hiles), sent a letter with an attached document request to the

attorney for the estate on September 13, 1995.   Paragraph 23 of

the document request stated:

     The estate has submitted a one page computation of the
     Special Use Valuation which is not adequate to
     substantiate the special use valuation as required by
     IRS Regulations. If the estate wishes to retain the
     special use valuation reduction, and not have it
                              - 13 -


     denied, then we will need the following within the next
     60 days:

          a. Who did this calculation submitted with the
          706?

          b. If there are any other data to support it,
          please submit copies.

          c. It appears that the valuation is based upon
          what deceased received on her ranching operations.
          Please supply copies of those leases.

          d. Please comply with Regulation 20.2032A-4 (copy
          enclosed for your convenience) that requires
          documentation which identifies specific comparable
          rentals and taxes for five years prior to date of
          death, arms length transactions, to determine the
          net rents. (I am also enclosing a copy of the Tax
          Management discussion and example of how special
          valuations must be done in order to qualify.) The
          Farm Credit Bank rate for the Sacramento
          District for 1992 was 11.50%. (See copy of Revenue
          Ruling 92-12 enclosed.) A rate cannot be
          “assumed”.

          e. If the appropriate documentation for the
          special use valuation is not supplied, the
          $750,000 reduction will be disallowed, see
          Strickland, 92 TC 16, copy enclosed.

     At a meeting with the estate's attorney, Richard Weldon, and

the coexecutors on September 21, 1995, Ms. Hiles described the

requirements of electing special use valuation pursuant to

section 2032A(e)(7).   Ms. Hiles did not mention section

2032A(e)(8) because she did not believe the estate could properly

elect special use valuation under that section.   After the

meeting, Ms. Hiles extended the period for supplying the

requested information to 90 days.   On December 12, 1995 (within
                             - 14 -


the 90-day period), petitioner, through its appraisal firm,

Reeder, Gilman & Associates, submitted a section 2032A valuation

report.

     The report listed 10 properties in the vicinity of

decedent's ranch properties and listed the then-current rates of

rent, which ranged from $4.50 per acre to $15 per acre depending

upon the carrying capacity of the land.   The report did not set

forth the specific lease rates for any comparable properties in

the 5 years preceding 1992, but stated:

     Rents for the land types on the subject have been
     static and current levels are representative of rents
     over the last five to ten years and are considered
     indicative of a five year average.

The report concluded:

          Parcels 5, 6, and 9 are more arid and would
     compete relatively low in the range. Parcel 7,
     although the net grazing land is of good quality,
     competes lower than Parcel 8 because the difficulty of
     the terrain reduces the carrying capacity. * * *
     Parcel 8 is good grazing and competes well above the
     Nipomo parcels and the San Luis Obispo Ranch.

Petitioner's Special Use Valuation Report ultimately concluded

that rental values for the properties were:   $6 per acre for

parcels 5, 6, and 9; $7 per acre for parcel 7; and $8 per acre

for parcel 8.

     The report stated the following information with respect to

taxes:

          The Williamson Act, which governs the taxing of
     land in Ag Preserves, sets up a methodology for
                               - 15 -


     assessing land based upon rental values and built up
     capitalization rates. As a result taxes, county-wide,
     are based upon the average income producing ability of
     like properties. Since the tax assessment methods
     produce the same effect as an average, our estimate of
     taxes is based upon average of the 5 years prior to
     1992.

The report did not list the taxes assessed and paid on the

comparable ranch properties.

     In calculating the special use values for each of decedent's

properties, the report multiplied the gross rental per-acre value

by the number of acres, then subtracted the actual taxes for that

property to arrive at the net annual rent.   Each parcel's special

use value was calculated by dividing net annual rental by 11.5

percent, the Farm Bank rate for June 1992 (Sacramento District).

Finally, the estate's pro rata share of the special use value was

calculated by multiplying each parcel's special use value by the

estate's percentage ownership.   According to the report, the

total special use value for all elected properties was $127,681.4

                               OPINION

I.   Retained Life Estate in Parcel 3

     The first issue for decision is whether decedent retained a

life interest in the partial interests in her homestead property

that she gave to her children.   Respondent increased decedent's



     4
      Petitioner's report uses the figure $127,936, which
included $255 attributable to parcel 10, although petitioner did
not elect special use valuation for parcel 10 on its Form 706.
                               - 16 -


gross estate by the value of a life estate in the aggregate 24-

percent interest of her homestead property (parcel 3) that

decedent gave to her children.   Respondent asserts that the value

of that interest is properly includable in decedent's gross

estate pursuant to section 2036(a) because she retained a life

estate in that interest.5   Petitioner does not dispute

respondent's valuation of the purported life estate but contends

that decedent retained no such interest in her homestead

property.    Petitioner bears the burden of proof.   See Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).

     In support of its contention that decedent retained no life

estate in the children's partial interests, petitioner points out


     5
      The pertinent part of sec. 2036 provides:

     SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.

          (a) General Rule.--The value of the gross estate
     shall include the value of all property to the extent
     of any interest therein of which the decedent has at
     any time made a transfer (except in case of a bona fide
     sale * * *), by trust or otherwise, under which he has
     retained for his life or for any period not
     ascertainable without reference to his death or for any
     period which does not in fact end before his death--

                 (1) the possession or enjoyment of, or
            the right to the income from, the property,
            or

                 (2) the right, * * * to designate the persons
            who shall possess or enjoy the property or the
            income therefrom.
                              - 17 -


that decedent used much less than 76 percent of parcel 3 and the

main house.6   Petitioner also points to Dean’s testimony to the

effect that no agreement existed, implied or otherwise, for

decedent to retain the possession and enjoyment of the partial

interests at the time she transferred those interests to her

children.   Respondent argues that Dean’s testimony is self-

serving and contrary to the objective facts and circumstances.

Although Dean’s testimony was clearly self-serving, we disagree

with the assertion that the testimony    was contrary to the

objective facts and circumstances, and we ultimately agree with

petitioner that decedent did not retain a life estate includable

in her gross estate under section 2036.

     A decedent's reservation of a life interest need not be

provided for expressly in the instrument of transfer or

enforceable under local law to be includable under section 2036.

See Estate of McNichol v. Commissioner, 29 T.C. 1179 (1958),

affd. 265 F.2d 667 (3d Cir. 1959).     An implied agreement at the

time of transfer for the decedent to continue possession or

enjoyment of the property is sufficient and may be inferred from

all the circumstances surrounding the transfer.    See Guynn v.



     6
      Petitioner's argument implies that decedent owned 76
percent of the homestead property. However, the parties
stipulated that decedent owned 51 percent. At trial, Dean
testified that his father's testamentary trust owned the
remaining 25 percent.
                                - 18 -


United States, 437 F.2d 1148, 1150 (4th Cir. 1971).    In

determining whether an implied agreement existed, “all facts and

circumstances surrounding the transfer and subsequent use of the

property must be considered.”     Estate of Rapelje v. Commissioner,

73 T.C. 82, 86 (1979); sec. 20.2036-1(a), Estate Tax Regs.

     Decedent gave her children, collectively, a 24-percent

interest in parcel 3.    Parcel 3 consisted of just over 10 acres

and had two houses, two large barns, a small barn, a granary, a

farm shop, cattle scales and corrals, two garages, and a small

orchard.   Pursuant to its leases of decedent's properties,

Coastal Ranches stored hay in the barns, used the corrals and

farm shop, and kept vehicles in a garage and one of the big

barns.   Decedent occupied the larger house, although Dean kept

his desk and bookkeeping papers in one of the bedrooms and used

it as an office.    Another bedroom was used primarily by Marian

when she visited from Montana.    Coastal Ranches used an office in

the main house.    Dean resided in the smaller house on the

homestead property.    Other than the main house, decedent's

personal use of parcel 3 was limited to the garden and small

orchard next to the main house.

      Decedent’s limited personal use of the property does not

prove the absence of an implied agreement.    In fact, the record

is silent as to whether decedent could designate who might enjoy

the property.   See sec. 2036(a)(2); see also United States v.
                              - 19 -


Byrum, 408 U.S. 125, 145 (1972) (possession and enjoyment are

synonymous with substantial present economic benefit).     The fact

that decedent personally used less than all of the property does

not demonstrate that she did not possess and enjoy the entire

property.

     In contrast, where a decedent continues exclusive possession

and continues to pay taxes and other property expenses after the

transfer and the owner of record title neither charges rent nor

takes possession of the property, these facts are highly

indicative of an implied agreement.     See Guynn v. United States,

supra at 1150; Estate of Rapelje v. Commissioner, supra at 87.

Here, however, decedent shared the property with Dean and his

wife and rented the property at a below-market rent (discussed in

more detail infra sec. II) to Coastal Ranches.     Pursuant to its

leases, Coastal Ranches paid the taxes and other property

expenses associated with parcel 3.     These facts do not of

themselves prove the absence of an implied agreement.

     On balance, the objective facts convince us that an implied

agreement giving decedent continuing possession and enjoyment of

the entire homestead property did not exist.     Unlike the

authority that has been cited in respondent’s brief, this case

involves a transfer of less than a fee simple interest in

property.   The majority owner’s continued use and possession of

real property following transfer of a minority interest is not
                                 - 20 -


unusual.   Cf. Gutchess v. Commissioner, 46 T.C. 554, 557 (1966)

(where a husband transferred his entire interest in a homestead

property to his wife, who then allowed him to live in the house

without charge, the donor's continued use and enjoyment is a

natural use which does not diminish the wife's enjoyment and

possession).   In this case, decedent's continued use and

possession of parcel 3, of which she owned a controlling

interest, is natural in light of the children's minority

ownership.   It is not surprising that the children did not seek

to partition the property, since they also used the property

regularly and they had only a minority interest in the property.

      In addition to the objective facts, our decision rests

heavily on Dean’s testimony that there was no understanding

between decedent and her children.        While his testimony was

clearly self-serving, Dean's testimony was straightforward,

unequivocal, and credible.   Respondent’s counsel chose not to

cross-examine him on this point.     Because we credit his

testimony, we hold that petitioner has carried its burden of

proving that there was no implied agreement.        Cf. Hendry v.

Commissioner, 62 T.C. 861, 872 (1974).

II.   Taxable Gifts Adjustment

      The second issue is whether decedent rented ranch property

to her children at a below-market rate, thereby making a taxable

gift to her children.   In the notice of deficiency, respondent
                              - 21 -


determined that decedent had made taxable gifts to her children

amounting to $53,784 that are properly includable in decedent's

adjusted taxable gifts.   Only $23,784 of that determination

remains at issue and encompasses two types of gifts:    (1) Checks

of $10,000 delivered to each of decedent's three children and (2)

below-market-value rental of decedent's ranch properties.     After

reducing the amount of the gifts by $10,000 to account for the

annual exclusion, respondent determined that decedent had made

taxable gifts to her children amounting to $5,595 in 1989,

$11,595 in 1990, and $6,594 in 1991.

     The parties stipulated that decedent made the first type of

gifts.   Respondent asserts that the information submitted by

petitioner’s expert on comparable rentals demonstrates that

decedent's rate of rent was less than the market rate.

Petitioner argues that decedent charged a market rate because

Coastal Ranches paid various property-related expenses.    We agree

with respondent.

     Petitioner's special use valuation report indicated that the

annual fair market rent of decedent's pro rata interest in the

parcels rented to Coastal Ranches was $14,725.    The report did

not identify a fair market rent for parcel 3.    Respondent

estimated that the annual fair market rent of decedent's 51-

percent interest in parcel 3's land and improvements (excluding
                               - 22 -


the main house) was $1,872.7    Respondent determined that the

fair market rent of decedent's interests totaled $16,595, and

that the difference between actual rent charged and fair market

rent constituted a taxable gift.8

     It is conceded that Coastal Ranches paid property taxes and

other expenses in connection with its leases of decedent’s ranch

properties.   Dean testified that Coastal Ranches paid all the

property taxes, insurance, and maintenance (collectively, the

property expenses) on all the fences and ranch buildings.

However, petitioner was not able to establish the amounts of

those expenditures.9

     Petitioner argues that the Court should estimate the amounts

of the property expenses paid pursuant to the leases and thereby

find that decedent charged a fair market rent.   See Cohan v.



     7
      The difference between the sum of these figures, $16,597,
and the figure used in the notice, $16,595, is unexplained.
     8
      The parties stipulated that decedent rented the ranch
lands, in toto, to Coastal Ranches for $5,000 in 1989, $5,000 in
1990, and $10,000 in 1991.
     9
      Petitioner failed to share the salient documents with
respondent's counsel 15 days before trial, as required by the
Court's Standing Pre-Trial Order. Respondent objected to a
question put to Dean regarding the amounts of property-related
expenses, on the grounds that the records themselves were the
best evidence of the expenses. We sustained the objection.
Because the records had not been exchanged 15 days before trial
as required by the Court's Standing Pre-Trial Order, we also
sustained respondent's objection to petitioner's introduction of
the records themselves into evidence.
                               - 23 -


Commissioner, 39 F.2d 540 (2d Cir. 1930).    Respondent argues that

the Court should make no estimate, because the Court lacks any

evidentiary basis from which an estimate could be made.

     Petitioner contends that the rent charged by decedent

corresponded to a market rate because Coastal Ranches paid many

expenses associated with maintaining the properties, including

property taxes.   However, petitioner overlooks the fact that the

fair market rental values, as calculated by petitioner’s expert

and used by respondent in the notice of deficiency, are net of

property taxes; respondent used the net figures in computing the

amount of taxable gifts.   The record does not reflect amounts

paid for other property-related expenses.

     We need not invoke the Cohan rule when the failure to

introduce documentary evidence stems from the taxpayer's own

intransigence.    See Lerch v. Commissioner, 877 F.2d 624, 629 (7th

Cir. 1989), affg. T.C. Memo. 1987-295.    Moreover, we agree with

respondent that the rule is inapplicable where, as here, the

record lacks any evidentiary basis from which an estimate could

be made.   See Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).    Petitioner has failed to prove that the rent charged by

decedent corresponded to a market rate.   Since there is no
                                          - 24 -


dispute that the below-market rent is a taxable gift under

section 2503, respondent is sustained on this issue.10

III. Fair Market Value of Decedent's Real Estate

          A.       Introduction

          The penultimate issue in this case is the determination of

the fair market value of decedent's interest in the Nipomo

properties.           The positions of the parties and our conclusions

with respect to the properties in dispute are as follows:
                            Petitioner's              Respondent's
     Parcel             Form 706      Expert       Notice1      Expert    Court

 5   -   El Suey        $485,000    $485,000   $732,105       $819,000   $580,153
 6   -   Nipomo          205,000     205,000    302,315        331,000    247,860
 9   -   Lot 74           65,000      65,000     76,500        108,000     81,000
10   -   The Pit         nominal         150     34,950         8,000       1,750
          1
          Statutory Notice of Deficiency.

Our analysis is set forth below.

          Fair market value is “the price at which the property would

change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or to sell and both

having reasonable knowledge of relevant facts.”                    United States v.

Cartwright, 411 U.S. 546, 551 (1973); sec. 20.2031-1(b), Estate

Tax Regs.           The willing buyer and the willing seller are purely



          10
      A computational adjustment will be required to give effect
to the parties’ stipulation regarding decedent’s cash gifts. The
parties stipulated that decedent gave $10,000 in cash to each
child in 1989, although the taxable gifts adjustment in the
notice of deficiency was based on a determination that decedent
made an $8,000 gift to each child in that year. The stipulated
figure is given binding effect. See Rule 91(e).
                               - 25 -


hypothetical.   See Propstra v. United States, 680 F.2d 1248,

1251-1252 (9th Cir. 1982); Estate of Robinson v. Commissioner, 69

T.C. 222, 225 (1977).    Fair market value of property as of any

given date is a question of fact to be determined from the entire

record.   See Lio v. Commissioner, 85 T.C. 56, 66 (1985), affd.

sub nom. Orth v. Commissioner, 813 F.2d 837 (7th Cir. 1987).

While we must consider the entire record, we have broad

discretion in deciding which facts are most important in reaching

a decision because “finding market value is, after all, something

for judgment, experience, and reason”.     Colonial Fabrics, Inc. v.

Commissioner, 202 F.2d 105, 107 (2d Cir. 1953), affg. a

Memorandum Opinion of this Court dated Jan. 22, 1951.

     The determinations of value in respondent's statutory notice

of deficiency are presumptively correct.    See Welch v. Helvering,

290 U.S. 111 (1933).    Petitioner bears the burden of proving that

the fair market values of the properties are less than those

determined by respondent.   See Rule 142(a).    Respondent bears the

burden of proof with respect to any increases in value beyond

those determined in the notice of deficiency.    See id.

     In support of their positions, both parties presented expert

testimony.   Both expert witnesses are appraisers:   Leslie J.

Gilman (Mr. Gilman) for petitioner and David F. Hamel (Mr. Hamel)

for respondent.   We do not list or discuss here the

qualifications of the experts, because our decision is not based
                                - 26 -


on comparing qualifications, and listing them would unduly

lengthen this opinion.    The focus of our opinion is on the degree

to which the experts’ opinions are supported by the evidence.

     In reviewing the conclusions of each expert, we may accept

or reject expert testimony according to our own judgment, and we

may be selective in deciding what parts of an expert's opinion,

if any, we will accept.   See Parker v. Commissioner, 86 T.C. 547,

562 (1986).   Conclusory opinions that are unexplained or contrary

to the factual evidence will be rejected.    See Compaq Computer

Corp. v. Commissioner, T.C. Memo. 1999-220.

     B.   Petitioner's Expert

     Mr. Gilman appraised decedent's real estate interests in

conjunction with the filing of petitioner's Form 706.    He also

prepared an update of that appraisal as an expert report in

conjunction with this litigation.    Mr. Gilman used the sales

comparison approach11 to determine the fair market value of

decedent's interest in the properties.    Mr. Gilman chose nine

properties that he determined were comparable to the ranch




     11
      The sales comparison approach, also known as the
comparable sales or market data approach, is “‘generally the most
reliable method of valuation, the rationale being that the market
place is the best indicator of value, based on the conflicting
interests of many buyers and sellers.’” Estate of Spruill v.
Commissioner, 88 T.C. 1197, 1229 n.24 (1987) (quoting Estate of
Rabe v. Commissioner, T.C. Memo. 1975-26, affd. without published
opinion 566 F.2d 1183 (9th Cir. 1977)).
                              - 27 -


properties.   He also supplied sales data for two sales that

occurred after his original appraisal.

     Mr. Gilman or his associate, Ed Hawkes, verified each sale

and personally inspected each comparable property.   In his report

Mr. Gilman provided the date of sale, location, price, number of

acres, and price per acre of each comparable property.   Prices

per acre ranged from a low of $200 (an 11,250-acre ranch near

King City, about 120 miles to the north of decedent's Nipomo

properties) to $1,100 (several properties in Santa Barbara, San

Luis Obispo, and Monterey Counties).   The report contained a

summary description of each comparable property, with comments

indicating similarities and differences between the comparable

and subject properties.

     Without indicating exactly what adjustments were necessary

between the comparable and subject properties, Mr. Gilman

concluded:

          It is our opinion based on the sales data that a
     sales price of $1,000 per acre is an appropriate
     estimate of value for ranches with strong residential
     characteristics or ranches that are located in areas
     with strong urban influence that appeals to upscale
     buyers. It is our opinion that Machado Ranch fits
     within this category. Because of its shape,
     topography, and location the Rancho El Suey presents
     fewer opportunities for residential development. The
     Rancho Nipomo parcels appear to offer access
     difficulties and even greater topographic difficulties
     than the Rancho El Suey. It is our opinion that these
     parcels compete lower in the range; inferior to the
     sales with strong residential characteristics, but
     superior to the strictly grazing properties and the
                              - 28 -

     parcels with the most difficult problems. It is our
     opinion that the appropriate estimate of market value
     for each of these parcels is $750 per acre.

          Because of its marginal utility, it is our opinion
     that * * * [parcel 10–the Pit] is of less value per
     acre than the lowest priced sales. It is our opinion
     that the only possible market for the parcel is a
     neighboring land owner. Since the parcel would add
     little or no utility to the neighboring parcel, its
     value is accordingly nominal.

     Respondent criticized Mr. Gilman's failure to specify in his

report whether an adjustment was made to comparable properties

located in an agricultural preserve.   Mr. Gilman's report does

not indicate whether the comparable properties were in

agricultural preserves; however, if they were not, a positive

adjustment would have been required because a hypothetical

willing buyer would likely prefer the absence of such a

contractual restriction.   If the comparable properties were

located in agricultural preserves, no adjustment would have been

required.   Thus, we agree with petitioner that the lack of

adjustment, if any had been required, would have tended to result

in an overvaluation of decedent's property interests.

     After determining that the value of a fee simple interest

was $750 per acre for the Nipomo ranch properties and $1,000 per

acre for the Machado Ranch, Mr. Gilman proceeded to calculate the

value of decedent's partial interests in the properties.     He

examined six sales of partial interests and determined the

partial interest discount for each comparable sale.   Comparing
                              - 29 -

actual sale prices to the estimated pro rata share of market

value, Mr. Gilman concluded that a 15-percent discount would be

appropriate for decedent's 50- and 51-percent interests (parcels

5, 6, and 10), and that a 20-percent discount was appropriate for

decedent's 25-percent interest in parcel 8.12    Mr. Gilman

multiplied the estimated value of a fee simple interest in each

property by decedent's pro rata ownership interest and reduced

the product by his indicated discount rate.     We find Mr. Gilman’s

analysis regarding the partial interest discounts helpful and

incorporate that analysis into our findings.

     In contrast, we do not find the portion of Mr. Gilman’s

report that analyzed the per-acre values of the Nipomo properties

helpful.   In that section, the report is far too conclusory and

suffers generally from a dearth of data.   While the report lists

comparable properties, it lacks any detailed analysis of those

properties in relationship to the subject properties.    We also

have concern over Mr. Gilman's choice of comparable properties.

Some of the properties are hundreds of miles away from the

subject properties.   Although Mr. Gilman explained his selection

of these properties as providing the value based on grazing use



     12
      Mr. Gilman's analysis that a partial interest discount was
warranted for parcel 10 was predicated on his assumption that
decedent owned 51 percent of that property. As discussed infra
sec. III.D.2, on the record before us, we find that decedent
owned 100 percent of parcel 10.
                                - 30 -

alone, i.e., the lower range of indicated value, we reject that

explanation.   Mr. Gilman did not select any comparable properties

that would provide an upper range of indicated value, such as

ranches in the Santa Ynez Valley.    We are unable to determine how

much weight Mr. Gilman gave the various comparable properties

because of the lack of an adjustment grid.   Ultimately, these

flaws lead us to reject the per-acre values indicated by his

report.   See Buffalo Tool & Die Manufacturing Co. v.

Commissioner, 74 T.C. 441 (1980).

     C.   Respondent's Expert

     Mr. Hamel also used the Sales Comparison Approach to

determine the fair market value of decedent's interests in the

ranch properties.   In contrast to Mr. Gilman, who valued each

parcel individually, Mr. Hamel valued the four Nipomo properties

as if they were one integrated ranch property of 2,242 acres.13

     Mr. Hamel's selection of comparable ranch properties

included 12 sales occurring before the valuation date and four

sales occurring within 3 years thereafter.   Mr. Hamel's report

contains photos of the subject and comparable properties,

topographic and plat maps, and an adjustment grid reflecting

adjustments for parcel size and market timing.   In the text of


     13
      Petitioner did not criticize Mr. Hamel on this point. We
treat this as a concession that the integrated ranch approach is
appropriate in this case for the Nipomo properties, with the
exception of parcel 10.
                              - 31 -

his report, Mr. Hamel stated that he relied more heavily upon 10

of the 16 comparable sales for his opinion.

     Of those 10 properties, sale prices per acre ranged from

$600 (a 3,500-acre parcel known as the Biddle Ranch, sold almost

3 years after the valuation date) to $1,996 (a 248-acre parcel

located east of Nipomo and roughly 10 miles to the northwest of

decedent's Nipomo properties).   Mr. Hamel adjusted the latter

sale downward by $500 to account for the small size of the parcel

relative to the combined size of the Nipomo properties.    Mr.

Hamel added $388 per acre to the Biddle Ranch sale as a market

timing adjustment.   After adjustment, these properties were

valued at $988 and $1,496, respectively.   Similar adjustments for

size and market timing were made to a few other comparables.

From his data, Mr. Hamel concluded that the value of a fee simple

interest in the Nipomo properties was $1,200 per acre.

     Petitioner criticized Mr. Hamel’s selection of comparable

properties, claiming his selection resulted in an overestimation

of the fair market value of decedent’s ranch properties.    We

agree with this criticism.   Mr. Hamel's selection of comparable

properties included properties in the Santa Ynez River Valley,

yet no location adjustment was indicated for those properties.

In fact, no location adjustment was made for any of Mr. Hamel's

comparable properties, including those sold to Hollywood

celebrities who presumably were not interested in using the
                              - 32 -

properties for grazing.   Under cross-examination, Mr. Hamel

admitted that the Nipomo and Santa Maria properties had not

achieved the cachet of the Santa Ynez River Valley.   Inclusion of

these properties, without location adjustment, leaves us with

serious concerns as to Mr. Hamel's conclusions regarding market

value.

     Similarly, Mr. Hamel did not make any adjustment for the

presence of irrigated cropland in at least one of his comparable

sales,14 nor did he make any adjustment for water supply, zoning,

or topography.   Other than a downward adjustment to smaller

parcels, the only adjustment Mr. Hamel made to the comparables

was a market timing adjustment.   Although Mr. Hamel stated under

cross-examination that he gave the sale containing irrigated row

crops less weight in his overall analysis, his report does not so

state.

     Respondent explains the absence of adjustments for zoning,

water supply, and location by asserting that no adjustment was

necessary because all the comparable properties were cattle

ranches.   We reject respondent’s explanation because it ignores

the increased value that agricultural property may derive from

proximity to a metropolitan or resort area.   See, e.g., Estate of



     14
      Interestingly, Mr. Hamel had adjusted for the presence of
the irrigated cropland in a sales data sheet prepared in 1991
while he was employed by Reeder, Gilman & Associates.
                              - 33 -

Hughan v. Commissioner, T.C. Memo. 1991-275.     Such an increase in

value can be seen even where the agricultural land is subject to

land use restrictions similar to those burdening the properties

at issue in this case.   See id.   At a minimum, Mr. Hamel should

have adjusted the comparables to reflect the difference between

those cattle ranches that are desirable for second home use, such

as those from which distant ocean views are available, and those

properties that are not so desirable.

     In a similar vein, respondent defends Mr. Hamel’s lack of

water supply adjustment on the grounds that the subject

properties all had adequate water for grazing.    Because we think

that a hypothetical buyer and seller would attribute a higher

value to a property with good water, all other things being

equal, we do not accept that explanation.   See sec. 20.2031-1(b),

Estate Tax Regs.   The class of hypothetical buyers is not limited

to those interested solely in the grazing value of the land.

     Mr. Hamel added $399 to $621 per acre (1.5 percent per

month) as a market timing adjustment for those comparable

properties sold after the valuation date.   He based his market

timing adjustment on sales in the vicinity of the subject

properties and concluded that property values peaked as of June

1992.   On cross-examination regarding his market timing

adjustment, Mr. Hamel acknowledged that graphs from published

surveys on market trends, included in the addendum to his report,
                               - 34 -

indicated a somewhat different state of affairs.    Despite

admitting that he was probably one of the authors of the reports

from which the graphs were taken, Mr. Hamel sought to discredit

these graphs on the basis that they merely indicated the

consensus of the five or six individuals on the various

committees.    After reviewing the information as presented in his

report, we do not find Mr. Hamel’s explanation convincing.      The

inconsistency causes us to question his conclusion that market

values for San Luis Obispo County rangeland peaked as of the

valuation date, leaving us with skepticism regarding the

propriety and amount of his market timing adjustment.

          1.     Mr. Hamel’s Adjustments for Decedent’s Partial
                 Interests

     Once the per-acre value was obtained, the value of

decedent’s pro rata interest in each Nipomo property was obtained

by multiplying the number of acres in each property by $1,200.

The resulting figure was reduced by the percentage corresponding

to decedent's pro rata ownership in each parcel.    A partial

interest discount was then calculated.

     To calculate the amount of the partial interest discount,

Mr. Hamel examined 21 sales of partial interests.    He found that

an inverse relationship existed between the size of the pro rata

interest and the amount of the adjustment, and he predicted that

smaller fractional interests would lead to larger discounts.      He
                                - 35 -

concluded that a discount of 10 percent was appropriate for

parcels 5 and 10, of which decedent owned 51-percent interests.

For parcel 6, of which decedent owned a 50-percent interest, Mr.

Hamel concluded that a 15-percent discount was appropriate.

     We do not agree with Mr. Hamel’s conclusions regarding the

appropriate discount, because we disagree with his inclusion of

certain data in his analysis.    Some of the purportedly comparable

sales of partial interests, such as the sale that indicated a 4-

percent discount, resulted in the purchaser’s owning a 100-

percent interest.    A buyer consolidating all the fractional

interests is likely to pay a premium for those interests.    Such a

sale does not indicate the appropriate discount applicable

between the hypothetical willing buyer and willing seller for a

partial interest.    Inclusion of those sales skewed Mr. Hamel’s

analysis; as a result we find Mr. Gilman’s conclusions regarding

the appropriate discount more reliable.

     Ultimately, we find the conclusions in Mr. Hamel's report to

be questionable, in light of the analytical flaws mentioned

above.    Mr. Hamel’s use of data was incomplete and his

conclusions, therefore, suspect.

     D.     Conclusions Regarding Fair Market Value

     Recognizing that valuation is not an exact science, see

Messing v. Commissioner, 48 T.C. 502, 512 (1967), and selecting

those portions of each expert's report that we found helpful, see
                               - 36 -

Parker v. Commissioner, 86 T.C. at 562, we conclude the following

with respect to the fair market value of decedent's interest in

each of the Nipomo properties.

          1.    Per-Acre Value of the Nipomo Properties

     We conclude that the per-acre value of a fee simple interest

in parcels 5, 6, and 9 was $900.   This represents a 25-percent

reduction from Mr. Hamel's indicated value of $1,200.

Considering the paramount importance of location in valuing real

estate, Mr. Hamel’s failure to adjust for location in his report

was material.   Our determination of fair market values takes into

account his failure to adjust for location and for differences in

zoning, irrigated land, water rights, and other factors for which

he should have adjusted but did not.

     We conclude that the fair market value of a fee simple

interest in parcel 10 was $1,750, or approximately $250 per acre.

Petitioner claimed that the per-acre value of the property was

approximately $50, while Mr. Hamel valued it at $1,200, the same

as the other Nipomo parcels.   However, in the text of his report,

Mr. Hamel noted the difficulties associated with this parcel:

     Parcel 10 is, in my opinion, an uneconomic remnant that
     was the result of a realignment of Highway 166.
     Planning officials in San Luis Obispo have stated that
     bisection by a public road generally does not result in
     the creation of a new legal parcel.

Because we think that a transaction between a hypothetical

willing buyer and willing seller would factor in the possibility
                                - 37 -

that land use restrictions might yield to development of parcel

10, we find that the parcel had more than nominal value.

However, we cannot agree with Mr. Hamel that parcel 10 had a per-

acre value equal to that of the other Nipomo properties.

           2.     Decedent's Pro Rata Interest

      The parties agree as to decedent's percentages of pro rata

ownership of the Nipomo properties, except with respect to parcel

10.   We find that decedent owned 100 percent of parcel 10.    In

their respective briefs, petitioner asserted that decedent's

ownership was “not specified”, and respondent asserted that it

was 100 percent.    In the statutory notice, respondent specified

whether a partial interest was associated with each property and

did not so specify with regard to parcel 10.     In its petition,

petitioner alleged that respondent erred as to his valuation of

parcel 10 as follows: “i.    The fair market value of a 6.99 acre

parcel of land in a hole at the southwest corner of Highway 154

and Bull Canyon Road * * * was $0.00.”    The record lacks any

evidence that indicates that decedent owned less than a fee

simple interest in parcel 10, even assuming that petitioner

alleged error with respect to this issue by amended pleading.

See Rule 41(b).    Thus, we sustain respondent's determination of

decedent's ownership interest in parcel 10, see Rule 142(a),

although, as indicated above, we do not sustain respondent’s

determination of the parcel’s value.
                                               - 38 -

                  3.       Partial Interest Discount

         Both parties agree that a partial interest discount is

appropriate in this case.                   Their positions differ only as to the

size of the discount.                 For parcels 5 and 6, we find that a 15-

percent partial interest discount is warranted.                          As discussed

above, in calculating the appropriate amount of the partial

interest discount, we found the calculations of petitioner’s

expert more helpful and reliable than those of respondent’s

expert.         Accordingly, we have used the discounts suggested by

petitioner’s expert in reaching our conclusion.15                         See Parker v.

Commissioner, supra at 562; Buffalo Tool & Die Manufacturing Co.

v. Commissioner, 74 T.C. at 452.

                  4.       Calculation of the Fair Market Value of Decedent’s
                           Interests

         We calculated the fair market values of decedent’s interests

in parcels 5, 6, 9, and 10 in accordance with the following

formula:
          No. of              FMV            Decedent’s           Partial interest
Parcel     acres       X   per acre   X   pro rata interest   X       discount       =    Total

   5          1,487         $900                 .51                    .85              $580,153
   6            648          900                 .50                    .85               247,860
   9             90          900                1.00                   1.00                81,000
  10              7          250                1.00                   1.00                 1,750




         15
      Respondent’s expert also concluded that decedent’s 50-
percent interest in parcel 6 warranted a 15-percent partial
interest discount.
                                - 39 -

IV.   The Special Use Valuation

      A.    Introduction

      The last issue for decision concerns petitioner’s election

to value the interests in certain ranch properties under section

2032A.     On its Form 706, petitioner elected special use valuation

for several properties, claiming that it is entitled to the

$750,000 reduction in value for special use under section 2032A.

Respondent contends that petitioner may not take advantage of

section 2032A because it failed to comply with the statutory and

regulatory requirements for an election pursuant to that section.

       Section 2032A allows an executor to elect to value real

property on the basis of its value for farming purposes rather

than its fair market value.    See Stovall v. Commissioner, 101

T.C. 140, 146 (1993); sec. 20.2032A-3(a), Estate Tax Regs.    A

reduction of up to $750,000 is permitted.16    See sec. 2032A(a)(2).

Congress enacted the provisions allowing special use valuation

with the goal of reducing the estate tax burden on small family

farms and businesses, thereby limiting the liquidity problems and

forced sales of those businesses, with the ultimate goal of

allowing continued family operation of the qualifying farms and



      16
      Sec. 501(b) of the Taxpayer Relief Act of 1997, Pub. L.
105-34, 111 Stat. 846, amended sec. 2032A(a) to provide an
adjustment for inflation, effective for estates of decedents
dying after Dec. 31, 1997. As decedent died before the effective
date, the adjustment for inflation is not applicable.
                                   - 40 -

businesses.     See Estate of McAlpine v. Commissioner, 96 T.C. 134,

139 (1991), affd. 968 F.2d 459 (5th Cir. 1992).

     The requirements for a valid section 2032A election are

numerous, technical, and complex.          Although section 2032A is a

relief statute designed to encourage the continuation of family

farms, it provides for “exceptionally favorable tax treatment”,

and taxpayers must “come within its demanding terms”.          Martin v.

Commissioner, 783 F.2d 81, 84 (7th Cir. 1986), affg. 84 T.C. 620

(1985).     Over the years since enactment, procedural foot faults

have cost many estates the benefits that section 2032A might have

afforded.     See, e.g., Estate of Strickland v. Commissioner, 92

T.C. 16 (1989); Estate of McDonald v. Commissioner, 89 T.C. 293

(1987), affd. as to this issue 853 F.2d 1494 (8th Cir. 1988);

Estate of Johnson v. Commissioner, 89 T.C. 127 (1987).

     In general, estates that make timely elections that fail to

contain all required information have 90 days to provide the

missing information after notification of the defects.          See sec.

2032A(d)(3).17


     17
          Sec. 2032A(d)(3) provides:

             SEC. 2032A(d).   Election; Agreement.--

                     *    *    *       *     *    *   *

               (3) Modification of election and agreement to
     be permitted.–-The Secretary shall prescribe procedures
     which provide that in any case in which–-
                                                    (continued...)
                                 - 41 -

     B.      Respondent’s Motion in Limine

     Respondent sought to exclude two documents pertaining to

petitioner’s section 2032A election by motion in limine.      In his

motion, respondent argues that neither document is relevant to

the issue of whether petitioner made a valid section 2032A

election solely because petitioner’s notice of election failed to

comply substantially with the regulations.     The Court deferred

ruling on the motion until such time as the exhibits were

introduced.     At that time, respondent renewed his objections.

For the reasons that follow, we deny respondent’s motion.

     By letter dated September 13, 1995, respondent’s estate tax

attorney, Ms. Hiles, notified the executors that the estate’s


     17
          (...continued)
                   (A) the executor makes an election under
              paragraph (1) within the time prescribed for
              filing such election, and

                  (B) substantially complies with the
             regulations prescribed by the Secretary with
             respect to such election, but–-

                       (i) the notice of election, as filed,
                  does not contain all required information, or

                       (ii) signatures of 1 or more persons
                  required to enter into the agreement
                  described in paragraph (2) are not included
                  on the agreement as filed, or the agreement
                  does not contain all required information,

             the executor will have a reasonable period of time
             (not exceeding 90 days) after notification of such
             failures to provide such information or
             agreements.
                              - 42 -

computation of special use valuation was inadequate because the

documentation submitted did not identify “specific comparable

rentals and taxes for five years prior to date of death, arms

length transactions to determine the net rents” as required by

section 20.2032A-4, Estate Tax Regs.    Ms. Hiles’ notification,

however, contained no reference to section 2032A(e)(8) and did

not identify any deficiencies with respect to the requirements of

section 2032A(e)(8).   On December 12, 1995, petitioner submitted

additional documentation (hereinafter Exhibit 13-M) through its

appraisal firm, Reeder, Gilman & Associates.    This additional

documentation was received by respondent within the 90-day

curative period provided under section 2032A(d)(3).

      On August 6, 1998, Reeder, Gilman & Associates completed an

update to its special use valuation report of December 12, 1995

(hereinafter Exhibit 29).   Obviously, Exhibit 29 was submitted

well beyond the 90-day curative period, which ended on December

12, 1995.

      Before 1997, the availability of the 90-day curative period

depended upon the estate’s substantial compliance with the

regulations.   See Estate of Strickland v. Commissioner, supra at

23.   In 1997, Congress deleted the substantial compliance

requirement of section 2032A(d)(3), effective for estates of

decedents dying after August 5, 1997.    See Taxpayer Relief Act of

1997, Pub. L. 105-34, sec. 1313(a), 111 Stat. 1045.    Despite the
                              - 43 -

effective date, respondent concedes on brief that the amended

statute is applicable to petitioner.18

     There is no dispute that petitioner timely submitted the

recapture agreement described in section 2032A(d)(2).   Because

Congress deleted the requirement of substantial compliance in

1997, and respondent has now conceded the amendment’s retroactive

application to petitioner, the only remaining requirement for

curative information is that it be timely submitted after notice

of defect has been given.   Here, there is no dispute that Exhibit

13-M was timely.   Thus, we must deny respondent’s motion with

respect to that exhibit because it bears directly upon the issue

of whether a valid section 2032A election was made.   With respect

to Exhibit 29, however, this information was clearly submitted

well beyond the 90-day period allowed by statute.   But since the

notification provided pursuant to section 2032A(d)(3) did not

identify any deficiencies in petitioner’s election as it relates

to section 2032A(e)(8), the 90-day curative period with respect

to section 2032A(e)(8) has not commenced and, consequently, does

not foreclose submission of additional material arguably relevant

to the section 2032A(e)(8) requirements.   For these reasons,




     18
      Congress intended that, “with respect to technically
defective 2032A elections made prior to the date of enactment,
prior law should be applied in a manner consistent with the
provision.” H. Conf. Rept. 105-220, at 720 (1997).
                                 - 44 -

therefore, we deny respondent’s motion and admit the subject

reports.

     C.    Requirements for Special Use Valuation

     Only one of the requirements for a valid section 2032A

election is at issue here; i.e., the requirement that a notice of

election contain the method of valuation based on use.      See sec.

20.2032A-8(a)(3)(viii), Estate Tax Regs.      Section 2032A(e)(7)

provides the general formula and method to be used in valuing

farm property:

           (7) Method of valuing farms.--

                (A) * * * the value of a farm for farming
           purposes shall be determined by dividing–-

                      (i) the excess of the average
                 annual gross cash rental for comparable
                 land used for farming purposes and
                 located in the locality of such farm
                 over the average annual State and local
                 real estate taxes for such comparable
                 land, by

                      (ii) the average annual effective
                 interest rate for all new Federal Land
                 Bank loans.

     For purposes of the preceding sentence, each average
     annual computation shall be made on the basis of the 5
     most recent calendar years ending before the date of
     the decedent’s death.

                   *    *    *     *      *   *    *

                (C) Exception.-–The formula provided by
           subparagraph (A) shall not be used-–

                      (i) where it is established that
                 there is no comparable land from which
                               - 45 -

                 the average annual gross cash rental may
                 be determined * * *, or

                      (ii) where the executor elects to
                 have the value of the farm for farming
                 purposes determined under paragraph (8).

     Petitioner maintains that its special use valuation report

provided sufficient information to satisfy section 2032A(e)(7)

and the regulations thereunder.    In the alternative, petitioner

maintains that its method of valuation qualified under section

2032A(e)(8).   Respondent disagrees with both assertions.

          1.     Section 2032A(e)(7)

     The regulations interpreting section 2032A(e)(7) provide

that, in general, the special use value of farm real property is

determined by:

               (1) Subtracting the average annual state
          and local real estate taxes on actual tracts
          of comparable real property in the same
          locality from the average annual gross cash
          rental for that same comparable property, and


               (2) Dividing the results so obtained by the
          average annual effective interest rate charged on
          new Federal land bank loans. [Sec. 20.2032A-
          4(a)(1) and (2), Estate Tax Regs.]


The first issue we must decide is whether petitioner complied

with paragraph (1), above.    It is undisputed that petitioner did

not submit information on property taxes on comparable

properties.    Petitioner asserts that this lack of information

should not invalidate its election because the omission has not
                              - 46 -

operated to respondent’s detriment.    Respondent does not address

this argument squarely but maintains that the omission of

property tax information is fatal to the election.

     Petitioner makes a creative, if not entirely convincing,

argument.   Information on property taxes is a required element of

the capitalization of rents formula.   See sec. 2032A(e)(7)(A)(i);

Estate of Strickland v. Commissioner, 92 T.C. at 26.    Under the

statutory formula, plugging in the number zero to the formula in

the absence of tax information would yield higher special use

values.   Thus, petitioner’s argument that the information is

optional is not without some appeal in logic and common sense.

However, the requirement that an estate provide information on

the property taxes paid on the comparable properties also serves

to substantiate the claimed special use valuation.19   See Estate

of Strickland v. Commissioner, supra at 24.    In any event, we

need not and do not decide whether the absence of property tax

information, standing alone, is fatal to petitioner’s special use

election because other requirements of section 2032A(e)(7) and

the regulations thereunder were not satisfied within the 90-day

curative period.




     19
      Information on property taxes may serve to substantiate
the gross cash rental figures used in the calculation, because
some rough proportionality between the figures would normally be
expected.
                             - 47 -

     In order to measure the special use value of a farm under

section 2032A(e)(7), an executor must use information on actual

tracts of comparable real property for each of the 5 calendar

years preceding the year in which the decedent died.   See sec.

2032A(e)(7)(A); sec. 20.2032A-4(a), Estate Tax Regs.   In this

case, the applicable years are 1987 through 1991.   Appraisals or

other statements regarding rental value or areawide averages of

rentals, including those compiled by the U.S. Department of

Agriculture, may not be used because they are not true measures

of the actual cash rental value of comparable properties in the

same locality as the specially valued property.   See sec.

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

     Petitioner’s special use valuation report, submitted on

December 12, 1995, within the 90-day period, provided current

lease information on 10 comparable properties and stated that

“Rents for the land types on the subject have been static and

current levels are representative of rents over the last five to

ten years and are considered indicative of a five year average.”

     Petitioner argues that it complied with the regulations

because the assertion that rents were static rendered unnecessary

any separate listing of actual rents during 1987-91.   However,

the language of the report belies petitioner’s claim that the

current rents on each property were static.   Regarding rents, the

report asserts that “rental levels are * * * indicative of a five
                                - 48 -

year average.”   Thus, the report does not indicate the actual

cash rentals of comparable real property for the period 1987-91.

Instead, the report provides actual cash rentals of 10 comparable

properties for 1995 and an impermissible appraisal asserting that

the 1995 rental values were indicative of the 1987-91 rental

values.   See sec. 2032A-4(b)(2)(iii), Estate Tax Regs.   As in

Estate of Strickland, petitioner has failed to identify annual

gross cash rentals of comparable real property and State and

local taxes for such comparable properties for the requisite 5

calendar years preceding decedent’s date of death.    Petitioner’s

failure to comply with the requirements of section 2032A(e)(7)(A)

and the regulations thereunder precludes special use valuation

for the properties under that section.    See Estate of Strickland

v. Commissioner, supra at 33.

            2.   Section 2032A(e)(8)

     Petitioner maintains, in the alternative, that it was

entitled to value the properties under section 2032A(e)(8), that

the information submitted to the Service within the 90-day period

was adequate for that purpose, and that, in essence, respondent’s

failure to mention section 2032A(e)(8) at any time before trial

makes the requirements of that section new matter.    Respondent

takes exception to all aspects of petitioner’s alternative

argument.    In essence, respondent contends that petitioner may

not switch theories in midstream, and that, even if petitioner
                             - 49 -

were entitled to use the valuation formula of section

2032A(e)(8), it has not supplied sufficient information to comply

with the requirements of that section.   We reject respondent’s

contentions and hold that petitioner made a valid election to

value the properties under section 2032A(e)(8).

               a.   Section 20.2032A-4(b)(2)(i), Estate Tax Regs.

     The first issue is whether petitioner elected to value the

property under section 2032A(e)(8).   Citing section 20.2032A-

4(b)(2)(i), Estate Tax Regs., petitioner argues that it made an

election, by default, to value the properties under the method

provided by section 2032A(e)(8).   Respondent disagrees.20



     20
      Respondent’s position on brief contradicts the position
taken in a motion in limine. In that motion, respondent stated
as follows:

          Even though an estate initially has elected to
     value farm property pursuant to § 2032A(e)(7), the
     estate can still avail itself of the special use
     valuation provided under I.R.C.§ 2032A(e)(8). Section
     20.2032A-4(2)(i), Estate Tax Regs. states, in part,
     “[i]f the executor does not identify such property and
     cash rentals, all specially valued real property must
     be valued under the rules of section 2032A(e)(8) if
     special use valuation has been elected.” Therefore, if
     the estate attempts to comply with § 2032A(e)(7) but
     fails to identify the comparable property and cash
     rentals, the estate may qualify under § 2032A(e)(8),
     provided the information submitted by the estate
     substantially complies with the requirements of the
     regulations. * * *

Respondent subsequently conceded on brief that whether petitioner
substantially complied with the requirements of sec. 2032A and
related regulations is no longer an issue.
                               - 50 -

     Respondent’s argument rests upon section 2032A(e)(7), which

provides that unless an exception applies, the value of a farm

for farming purposes shall be measured according to the

capitalization of rents formula of that section.    See sec.

2032A(e)(7)(A), (C).    Only two exceptions are potentially

applicable here:   (1) Where there is no comparable land from

which average annual gross cash rental may be determined or (2)

where the executor elects to value the farm property under

section 2032A(e)(8).    See sec. 2032A(e)(7)(C).

     In this case, petitioner has not proven that there was no

comparable land from which the average annual gross cash rental

may be determined within the meaning of section

2032A(e)(7)(C)(i).    In fact, petitioner has acknowledged

implicitly that there was comparable land available.    The only

dispute, therefore, is whether petitioner elected to use the

valuation formula of section 2032A(e)(8), as required by section

2032A(e)(7)(C)(ii).

     By regulation, the Secretary has determined that “If the

executor does not identify such [actual comparable] property and

cash rentals, all specially valued real property must be valued

under the rules of section 2032A(e)(8)”.    Sec. 20.2032A-

4(b)(2)(i), Estate Tax Regs.    The regulation provides, in effect,

that where an executor fails to provide sufficient documentation

to use the capitalization of rents method described in section
                               - 51 -

2032A(e)(7), the executor, by default, has elected to use the

valuation formula of section 2032A(e)(8).   See id.; see also

Estate of Strickland v. Commissioner, 92 T.C. at 32.    The

regulation, by its terms, makes the election to use section

2032A(e)(8) automatic if the executor elects special use

valuation but fails to identify the comparable properties and

cash rentals necessary to calculate a property’s special use

value under section 2032A(e)(7).

     On brief, respondent does not address the plain language of

the regulation.   Instead, respondent argues that allowing

petitioner to value the properties under a different method of

election than originally elected should be precluded, as it would

purportedly encourage other taxpayers to play the audit lottery.

Respondent also asserts that the default election is foreclosed

by case law.

     We fail to see how allowing an estate to use the special use

method of section 2032A(e)(8) encourages the so-called audit

lottery.    Cf. Rev. Rul. 83-115, 1983-2 C.B. 155 (an executor may

change the method of special use valuation after the election has

been made); see also Estate of Rogers v. Commissioner, T.C. Memo.

2000-133.   This is particularly true where the Secretary has

promulgated a regulation making the election automatic.    The

Secretary chose to craft the regulation in a taxpayer-friendly

fashion.    Given the purpose of section 2032A, we cannot say that
                                - 52 -

the Secretary was wrong in doing so.     We are unconvinced by

respondent’s policy-based arguments and do not discuss them

further.

     Relying upon Estate of Strickland v. Commissioner, supra at

32, where we commented on the apparent inconsistency between the

statute and the regulation, respondent asserts that this Court

has already decided that if comparable property existed from

which the average gross cash rental values could be determined, a

taxpayer was not entitled to value the property using the method

set forth in section 2032A(e)(8).    We do not agree with

respondent’s interpretation of the Estate of Strickland case.

     Contrary to respondent’s assertion, we did not decide that

failure to document comparable properties precluded a default

election to value property under section 2032A(e)(8).     In Estate

of Strickland, the taxpayer failed to document comparable

property in accordance with the regulations and thus did not

comply with the documentation requirements of section 20.2032A-4,

Estate Tax Regs.   Therefore, we held that the estate could not

value its farm real property under section 2032A(e)(7)(A).       The

estate’s alternate position, that it was entitled to value its

property under the net share method of section 2032A(e)(7)(B),

failed because we found that comparable properties rented for

cash existed in the locality.    The estate did not argue that it
                               - 53 -

had made a default election to value its property under section

2032A(e)(8).

     In Estate of Strickland, we did not need to decide the

meaning of section 20.2032A-4(b)(2)(i), Estate Tax Regs., because

following the regulation would have led to the same result.      That

was because, under the facts present in Estate of Strickland, “a

valuation pursuant to section 2032A(e)(8) will equal the fair

market value of the property on the date of decedent’s death.”

Estate of Strickland v. Commissioner, supra at 33.

     Section 2032A provides the Secretary with the authority to

determine by regulation how section 2032A elections are to be

made.   See sec. 2032A(d)(1); Estate of Gunland v. Commissioner,

88 T.C. 1453, 1455 (1987).    By regulation, the Secretary has

determined that an executor elects the application of section

2032A(e)(8) whenever an executor, having elected special use

valuation, fails properly to document comparable property under

the rules of section 2032A(e)(7).    See sec. 20.2032A-4(b)(2)(i),

Estate Tax Regs.   Respondent has not supplied a cogent reason why

we should disregard the plain meaning of section 20.2032A-

4(b)(2), Estate Tax Regs.    We conclude that the apparent

inconsistency between the statute and the regulation noted in

Estate of Strickland evaporates when considered in light of the

Secretary’s legislatively conferred authority to determine the

manner in which section 2032A elections are to be made.
                               - 54 -

     We hold that petitioner’s special use valuation election

encompassed the right to value the property under section

2032A(e)(8) in the event petitioner failed properly to document

comparable properties under section 2032A(e)(7).   Because

petitioner failed to identify comparable properties sufficient

for purposes of section 2032A(e)(7), the property must be valued

under the rules of section 2032A(e)(8).   See sec. 20.2032A-

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

               b.   Special Use Valuation Under Section
          2032A(e)(8)

     Section 2032A(e)(8) sets forth five factors to be used in

measuring the value of real property used for farming or closely

held business purposes as follows:

          (8) Method of valuing closely held business
     interests, etc.-–In any case to which paragraph (7)(A)
     does not apply, the following factors shall apply in
     determining the value of any qualified real property:

               (A) The capitalization of income which the
          property can be expected to yield for farming or
          closely held business purposes over a reasonable
          period of time under prudent management using
          traditional cropping patterns for the area, taking
          into account soil capacity, terrain configuration,
          and similar factors,

               (B) The capitalization of the fair rental
          value of the land for farmland or closely held
          business purposes,

               (C) Assessed land values in a State which
          provides a differential or use value assessment
          law for farmland or closely held business,
                               - 55 -

                (D) Comparable sales of other farm or closely
           held business land in the same geographical area
           far enough removed from a metropolitan or resort
           area so that nonagricultural use is not a
           significant factor in the sales price, and

                (E) Any other factor which fairly values
           the farm or closely held business value of
           the property.

The statute clearly provides that all factors shall apply,

joining them with the conjunction “and”.     See Estate of Hughan v.

Commissioner, T.C. Memo. 1991-275.      However, the factors used in

any given circumstance are limited to those which are relevant.

See id.    Section 2032A(e)(8) prescribes a subjective method of

valuation, in contrast to the objective method of section

2032A(e)(7).    See Estate of Klosterman v. Commissioner, 99 T.C.

313, 317 n.4 (1992), affd. 32 F.3d 402 (9th Cir. 1994).     The

legislative history confirms that all relevant facts are taken

into account when the multiple factor method of valuation is

elected.    See S. Rept. 94-938 (Part 2), at 15 (1976), 1976-3 C.B.

(Vol. 3) 643, 657; see also Estate of Hughan v. Commissioner,

supra.

     In Estate of Hughan, the estate's section 2032A election was

disallowed on audit for failure properly to document comparable

property under the rules of section 2032A(e)(7).     In accordance

with section 20.2032A-4(b)(2)(i), Estate Tax Regs., the Service's

examiner increased the value of the farmland pursuant to an

appraisal under the multiple factor method of section
                                - 56 -

2032A(e)(8).    The validity of the estate’s election was

stipulated by the parties.    Thus, the only issue in Estate of

Hughan was how the farm's value was to be calculated under the

multiple factor method of section 2032A(e)(8).

     In Estate of Hughan, the parties agreed that the valuation

was to be governed by the method of valuation described in

section 2032A(e)(8).    In Estate of Strickland v. Commissioner, 92

T.C. at 33 n.12, we stated that “If sec. 2032A(e)(8) is used for

valuation purposes, none of the documentation requirements of

sec. 2032A(e)(7)(A) would be required.”21    Valuation disputes

under section 2032A(e)(8) will be settled or litigated in a

manner similar to that used in valuation disputes under section

2031.     See Estate of Hughan v. Commissioner, supra; sec. 20.2031-

1(b), Estate Tax Regs. (“All relevant facts and elements of value

as of the applicable valuation date shall be considered in every

case.”).

     In contrast to Estate of Hughan, and as discussed in detail

above, respondent did not apply section 20.2032A-4(b)(2)(i),

Estate Tax Regs., and set the stage for a valuation dispute under



     21
       In Estate of Hughan v. Commissioner, T.C. Memo. 1991-275,
documentation with respect to the sec. 2032A(e)(8) valuation was
presented and relied upon after the notice of election was filed.
For example, the expert witness reports bearing on the farmland’s
value under sec. 2032A(e)(8) that were introduced into evidence
at trial were dated between 2 and 4 weeks prior to the date of
trial.
                               - 57 -

section 2032A(e)(8).   Respondent ignored the automatic election

provision in section 20.2032A-4(b)(2)(i), Estate Tax Regs., and

never notified petitioner of any defects in its special use

valuation election under section 2032A(e)(8).    Respondent’s

determination in the notice of deficiency was that petitioner

failed to make an effective and timely election under the

provisions of section 2032A.    That rationale was based on

petitioner’s failure properly to document comparable properties

meeting the requirements of section 2032A(e)(7) and the

regulations thereunder.    The failure to document rentals of

comparable properties meeting the requirements of section

20.2032A-4, Estate Tax Regs., precludes valuing the properties

under section 2032A(e)(7).    As discussed above, however, that

failure does not make an otherwise valid election under section

2032A(e)(8) ineffective.    See sec. 20.2032A-4(b)(2)(i), Estate

Tax Regs.; see also Estate of Hughan v. Commissioner, supra.

     Having failed to persuade us that petitioner made no

election under section 2032A(e)(8), respondent now seeks to

invalidate the election by pointing out that petitioner did not

introduce evidence on all the required factors set forth in

section 2032A(e)(8).   We do not agree with this criticism of

petitioner’s election.

     Respondent’s principal arguments before the submission of

his posttrial briefs were threefold:
                              - 58 -

     (1) Petitioner failed to satisfy the requirements of section

2032A(e)(7) and section 20.2032A-4, Estate Tax Regs.;

     (2) petitioner failed to elect special use valuation under

section 2032A(e)(8); and

     (3) even if petitioner is deemed to have elected special use

valuation under section 2032A(e)(8), petitioner failed to comply

substantially with its requirements at the time its election was

made and therefore was not entitled to notice and an opportunity

to cure under section 2032A(d)(3).

In respondent’s posttrial brief, respondent now concedes that

substantial compliance is no longer an issue but asserts a new

argument, that petitioner has not met the requirements of section

2032A(e)(8) because petitioner has not introduced evidence on

each of the five factors.

     We reject respondent’s substantive challenge to petitioner’s

section 2032A(e)(8) election because respondent failed to give

petitioner the notice and opportunity to cure its election under

section 2032A(e)(8) as required by section 2032A(d)(3).   Section

2032A(d)(3) requires the Commissioner to prescribe procedures to

ensure that (1) an electing estate is given notice of defects in

its special use election and (2) an estate is given the

opportunity to cure a defective election by providing missing

information.   Although the Commissioner has not yet prescribed

the procedures required by section 2032A(d)(3), the Commissioner
                              - 59 -

nevertheless has taken the position administratively that the

required notice and opportunity to cure must be given.    The

Commissioner’s position is consistent with our own view of

section 2032A(d)(3).   See Estate of McAlpine v. Commissioner, 96

T.C. at 144, in which we stated with respect to section

2032A(d)(3) and section 20.2032A-8, Estate Tax Regs., that “The

fact that the regulation does not contain a provision permitting

perfection within 90 days does not, and cannot, nullify the

provision permitting perfection in section 2032A(d)(3).”22

     In this case, respondent gave the required notice and

opportunity to cure to petitioner but only with respect to

petitioner’s election under section 2032A(e)(7).   Respondent

provided no notice of any alleged defects with respect to

petitioner’s election under section 2032A(e)(8) and no

opportunity to cure the defects within the intendment of section

2032A(d)(3).   The first and only notice of a substantive problem

with petitioner’s election under section 2032A(e)(8) was provided

in respondent’s posttrial brief.


     22
      In general, when Congress requires the Secretary to
prescribe regulations implementing taxpayer-friendly statutory
provisions and the Secretary has not yet acted, this Court has
held that the statute’s operation is not conditioned upon the
issuance of regulations. See Hillman v. Commissioner, 114 T.C.
103, 111-112 (2000); Estate of Maddox v. Commissioner, 93 T.C.
228, 233-234 (1989); First Chicago Corp. v. Commissioner, 88 T.C.
663, 676-677 (1987), affd. 842 F.2d 180 (7th Cir. 1988);
Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819, 829
(1984).
                              - 60 -

     To satisfy the requirements of section 2032A(d), respondent

must give some meaningful notice of alleged defects and provide

petitioner with the opportunity to cure the defects identified in

the notice before respondent can rely on the defects to

invalidate petitioner’s election.   The notice given by respondent

to petitioner before the commencement of this case dealt only

with petitioner’s election under section 2032A(e)(7).   While

adequate with respect to petitioner’s election under section

2032A(e)(7), the notice was neither meaningful nor adequate with

respect to petitioner’s election under section 2032A(e)(8) and

section 20.2032A-4(b)(2)(i), Estate Tax Regs.

     By amending and broadening the scope of section 2032A(d) on

several occasions,23 Congress has demonstrated its intent to make

the benefits of section 2032A available to deserving estates.

See Estate of Sequeira v. Commissioner, T.C. Memo. 1995-450.

This intent is evidenced by the elimination of the substantial

compliance requirement in section 2032A(d)(3) and by Congress’

continuing direction to the Commissioner to prescribe procedures

by which an estate must be notified of alleged defects in its

special use valuation election and given an opportunity to cure

the defects.   See sec. 2032A(d)(3).


     23
      See Taxpayer Relief Act of 1997, Pub. L. 105-34, sec.
1313(a), 111 Stat. 1045; Deficit Reduction Act of 1984, Pub. L.
98-369, sec. 1025(a), 98 Stat. 1030; Economic Recovery Tax Act of
1981, Pub. L. 97-34, sec. 421(j)(3), 95 Stat. 313.
                                - 61 -

     In this case, petitioner had no notice that respondent was

challenging the adequacy of petitioner’s election under section

2032A(e)(8) (as opposed to whether petitioner had elected special

use valuation under section 2032A(e)(8)) before the filing of

respondent’s posttrial brief.    When respondent’s estate tax

auditor, Ms. Hiles, informed petitioner that its special use

valuation election was being disallowed, she provided information

that was pertinent only to section 2032A(e)(7).     She did not

provide information on how petitioner could satisfy the

requirements of section 2032A(e)(8).     The notice of deficiency

was equally uninformative with respect to the section 2032A(e)(8)

requirements, merely stating that petitioner had failed to make

an effective and timely election to value the properties in

accordance with the provisions of section 2032A.     At no point

before the filing of respondent’s posttrial brief was petitioner

given any notice that respondent intended to raise the

requirements of section 2032A(e)(8) as a bar to petitioner’s

election.   Until his posttrial brief was filed, respondent argued

only that petitioner had not made any election under section

2032A(e)(8); respondent did not contend that the election, if

made, was inadequate.   Since respondent did not give any notice

to petitioner regarding his challenge to petitioner’s special use

valuation under section 2032A(e)(8) on its merits until

respondent’s posttrial brief was filed, petitioner had no notice
                             - 62 -

before trial of the alleged defects in its election and should

not now be criticized for its failure to anticipate and deal with

respondent’s concerns at trial.

     We conclude that when it enacted and amended section

2032A(d)(3), Congress intended for estates to have a realistic

opportunity to correct defective special use valuation elections.

We hold that respondent’s incomplete notice under section

2032A(d)(3) deprived petitioner of the opportunity to correct its

allegedly defective election under section 2032A(e)(8) and

precludes respondent from raising the requirements of section

2032A(e)(8) as a bar to petitioner’s election.   To hold otherwise

would be tantamount to writing section 2032A(d)(3) out of the

statute or making respondent’s obligation to adhere to its

provisions optional.

     We uphold petitioner’s section 2032A election and hold that

petitioner is entitled to a reduction in the aggregate fair

market value of the qualified real property in the amount of

$750,000, the maximum reduction in value allowed by section

2032A(a)(2).

V.   Conclusion

     We have carefully considered the remaining arguments of both

parties for results contrary to those expressed herein, and, to

the extent not discussed above, find those arguments to be

irrelevant, moot, or without merit.
                        - 63 -

To reflect the foregoing and concessions by both parties,



                                   Decision will be entered

                              under Rule 155.
