DocketNumber： Docket No. 10462-92
Judges： WELLS
Filed Date： 5/11/1994
Status： Non-Precedential
Modified Date： 11/21/2020
*218 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS,
FINDINGS OF FACT
Some of the facts and certain documents have been stipulated for trial pursuant to Rule 91. The stipulated facts are incorporated in our findings of fact by this reference. On May 28, 1988, decedent died testate a resident of Midland, Texas. At the time of his death, decedent was 92 years old. Decedent's wife, Hahl E. Proctor, predeceased decedent, having died testate on*220 December 5, 1971. Decedent and his late wife had no children. The independent executor of decedent's estate is the First National Bank of Amarillo. Decedent's will is being probated in the County Court, Midland County, Texas. At the time the petition was filed in the instant case, the First National Bank of Amarillo's principal place of business was located in Amarillo, Texas.
1.
During his lifetime, decedent operated two major ranching operations in Texas: the C Ranch *221 The Channing Ranch was managed for decedent by intervenor Beth Hays and her late husband J.D. (Junior) Hays. Junior and Beth Hays began working for decedent at the Channing Ranch during 1953, and Junior Hays remained in decedent's employ until his untimely death on March 13, 1987. Mrs. Hays remained employed by decedent until his death in May 1988. Mrs. Hays still resides on the Channing Ranch.
Junior and Beth Hays were more than mere employees to decedent. Decedent valued their judgment and their friendship and entrusted them to run his personal and business affairs. For example, both Junior and Beth were authorized signatories on decedent's bank accounts and were entrusted with paying the expenses incurred in operating and maintaining the Channing Ranch. Decedent also entrusted Junior Hays with the management of other financial assets valued between $ 3 and $ 4 million.
During 1964, intervenor Clynice Baker began working for decedent as his secretary in Midland, Texas. Except for 2 years when she resided in Denver, Colorado, Ms. Baker worked continuously for decedent until his death on May 28, 1988. Ms. Baker also had authority to sign checks drawn on decedent's bank *222 accounts so that she could pay his personal and medical expenses as they came due. In addition to her secretarial duties, Ms. Baker also performed a number of personal services for decedent, such as driving him to and from doctors' offices and meetings with his friends and acquaintances. Ms. Baker also stayed with decedent when private duty nurses failed to arrive.
On January 22, 1987, decedent granted Junior and Beth Hays, along with Clynice Baker, a joint medical power of attorney regarding decisions concerning his medical treatment and hospitalization.
2.
During his lifetime decedent made gifts to both Junior and Beth Hays and to Clynice Baker. During 1985, decedent made the following cash gifts:
| Value Of Gift | Clynice Baker | $ 1,010,000 | $ 737,098 | |
| 10,000 | 10,000 | |||
| Junior Hays | 500,000 | 366,278 | ||
| Beth Hays | 500,000 | 366,278 |
During 1986, decedent made the following cash gifts:
| Clynice Baker | $ 47,500 | |
| Junior Hays | 28,750 | |
| Beth Hays | 28,750 |
*223 During 1987, decedent made the following cash gifts:
| Value Of Gift | Clynice Baker | $ 1,000,000 | $ 687,858 | |
| Beth Hays | 1,000,000 | 687,858 |
Also during 1987, decedent gave Ms. Baker an automobile but required her to pay the applicable Federal gift tax. The net value of the gift of the automobile to Ms. Baker was $ 7,084.
3.
During his lifetime, decedent had several drafts of his last will and testament prepared, but only executed three of them. All of the wills decedent executed, including the will, the terms of which are in issue in the instant case, were drafted by Richard S. Brooks, an attorney who practiced in Midland, Texas. Mr. Brooks, who is now deceased, represented decedent and his late wife, Hahl E. Proctor, for many years in connection with their estate planning.
On October 1, 1975, decedent executed a last will and testament in which he devised a one-half interest in the Channing Ranch to Junior and Beth Hays, as tenants in common. Decedent's remaining one-half interest in the Channing Ranch was devised to Melvin and Carol*224 Cotton, as tenants in common.
During 1980, decedent requested Mr. Brooks to draft another last will and testament which provided Junior Hays with a life estate in the surface rights of the Channing Ranch, with the remainder interest therein to be transferred to the trust created under the will of decedent's late wife. *225 On November 4, 1983, decedent executed a last will and testament which devised his interest in the Channing Ranch, along with all of the livestock and equipment owned by the Ranch, to Junior Hays for a term of years ending on the earlier of the date of Mr. Hays' death or upon Mr. Hays' attaining the age of 78. At the end of the term of years, the executor of decedent's estate was instructed to sell the Channing Ranch, along with the livestock and equipment thereon, and distribute one-half of the proceeds from the sale to Junior and Beth Hays, or to the survivor of them. The remaining proceeds were to be distributed to various other individuals.
4.
On October 3, 1986, decedent executed the will which would become his final Last Will and Testament. *226 and Hartley Counties, Texas. This Section 3 hereof does not include any interest in real estate nor any interest in tangible property situated at, or used in connection with, my residential homestead in Midland, Midland County, Texas.
4. CLYNICE BAKER
I give and devise to Clynice Baker my residential homestead situated in Midland, Midland County, Texas. This Section 4 hereof is restricted to real estate and is exclusive of tangible personal property situated at, or used in connection with, said residential homestead.
5. TEXAS TECH UNIVERSITY
5.1 SPECIAL DEVISE
I give and devise to Texas Tech University, an instrumentality of the State of Texas, for exclusively public purposes, my Channing Ranch situated in Oldham and Hartley Counties, Texas, in fee simple, including, but not by way of exclusion, all improvements and fixtures thereon and all of my record interest in and to the oil, gas and other minerals in and under and that may be produced therefrom.
5.2 OPTIONAL GRAZING LEASE
The special devise contained in Section 5.1 hereof shall be subject to a continuing option in favor of J. D. (Junior) Hays and wife, Beth Hays, or the survivor of them to lease said*227 Channing Ranch for grazing purposes, for a term or terms not to exceed the duration of the life of the survivor of them, plus six months. Such lease shall be negotiated and renegotiated from time to time between J. D. (Junior) Hays and wife, Beth Hays, or the survivor of them, and Texas Tech University to provide for lease terms conforming to the fair market value of the use of said land for grazing purposes, and for such terms and restrictions as are appropriate to the maintenance and preservation of the market value of said land for grazing purposes. * * * It is the intent hereof that Texas Tech University shall receive, upon my death, the full fee title to said premises, and that the terms of the optional lease available to J. D. (Junior) Hays and wife, Beth Hays, or the survivor of them, shall be such as conform to the market value of the grazing use of the premises, and shall not operate to reduce the commercial value of the premises as a ranch property.
5.3 DEATH TAXES
The special devise in favor of Texas Tech University contained in Section 5.1 hereof is made in the good faith, belief, and expectation that the value of the subject matter thereof will be deductible from*228 my gross estate for the determination of the United States estate tax liability of my estate, as provided in
6. RESIDUE
6.1 INTANGIBLE PERSONALITY AND REALTY
I give and bequeath the intangible personal property of my estate and the real estate thereof, not otherwise disposed of hereinabove, 2/3rds to J. D. (Junior) Hays and wife, Beth Hays, or the survivor of them, and 1/3rd to Clynice Baker.
* * *
7. DEBTS AND DEATH TAXES
The debts of my estate and the death taxes lawfully assessed against my estate (except as contingently provided in Section 5.3 hereof) shall be borne ratably, first by the residue of my estate passing under Section 6.1 hereof, second by the residue of my estate passing under Section 6.2 hereof, and finally by the properties passing under Sections 3 and 4 hereof.
*230 In a letter dated September 29, 1986, to decedent by Mr. Brooks, the attorney who drafted the will, Mr. Brooks explains the provisions of the will governing the distribution of decedent's property. Mr. Brooks' letter addresses the reasons for the devise of decedent's interest in the Channing Ranch to Texas Tech and why a condition subsequent was included in the will that causes the devise of the Channing Ranch to Texas Tech to lapse. The letter, in pertinent part, states: I have prepared and submit herewith for your consideration a draft will. In doing so, I have been guided by our conference Thursday, September 25, and the list of properties and values which you presented to me on that occasion. In preparing this draft, I have been concerned and guided by three significant problems; namely: 1. The probability of contest of the will by your next of kin because of the fact that the general scheme which we discussed diverts the major value of your estate from the persons who would take in the event of intestacy. 2. The effect of death taxes based upon the preponderant value of real estate to consume the liquidity of the estate. 3. The difficulty of being certain*231 that a provision giving the Channing Ranch to charity following the provision of a right in favor of J. D. (Junior) Hays and wife, Beth Hays, or the survivor of them to have the use thereof for life. * * * The principal device used in this draft and suggested in our conference to avoid the consumption of the liquidity of the estate by death taxes due to the preponderant value of real estate as compared with liquid assets, is the final disposition of the real estate to charity. Our discussion of that subject was very limited, both in respect of the identity of the charity and in respect of the charitable uses to be served. The feasibility of giving the use of property for life to a person or persons who are not exempt from federal income tax, and giving the property after such life use to a tax exempt entity, is very severely limited under "(e) Disallowance of Deductions in Certain Cases (1) No deduction shall be allowed under this section for a transfer*232 to or for the use of an organization or trust described in (2) Where an interest in property (other than an interest described in (A) in the case of a remainder interest, such interest is in a trust which is a charitable remainder annuity trust or a charitable remainder unitrust (described in (B) in the case of any other interest, such interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair market value of *233 the property (to be determined yearly)." You will recognize the quoted material as the provision with which we had difficulty in the Hahl Proctor estate. I find it impracticable to conform a life interest in the Channing Ranch in favor of J. D. (Junior) Hays and wife, Beth Hays, or the survivor of them, with a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund, as briefly described in the above quotation, and more elaborately defined in The escape from this problem is found in the cross reference in the above quotation, "other than an interest described in "(3) Denial of Deduction in Case of Certain Contributions of Partial Interests in Property. (A) In General. In the case of a contribution (not made by a transfer in trust) of an interest in property which consists of less than the taxpayer's entire interest in such property, a deduction shall be allowed under this section only to the extent that the value of the interest contributed would be allowable as a deduction under this*234 section if such interest had been transferred in trust. For purposes of this subparagraph, a contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer's entire interest in such property. (B) Exceptions. Subparagraph (sic) (A) shall not apply to- (i) a contribution of a remainder interest in a personal residence or farm. (ii) a contribution of an undivided portion of the taxpayer's entire interest in property, and (iii) a qualified conservation contribution." The key word in the above quotation is the word "farm" in subparagraph (B)(i). You may well ask why provide that J. D. (Junior) Hays and wife, Beth Hays, must pay rent to Texas Tech University for a grazing lease on the Channing Ranch. I have two reasons; namely, (1) It enables me to pass the fee simple title to the Ranch to the University immediately upon your death, thus distinguishing it from a remainder interest, which is a title postponed to a title having prior enjoyment, and (2) It should make the value of the interest passing to the University I have provided for an alternate disposition of the Ranch in the event that competent authority should determine that its value is not deductible from gross estate for assessment of estate tax liability. The alternate disposition is to J. D. (Junior) Hays and wife, Beth Hays, in fee, excluding the mineral interest but subject to a lien to secure payment of the amount by which the death taxes*236 assessed exceed what would have been assessed had the gift to the University been treated as tax deductible. I recognize that this contingency (1) greatly increases the provision made for J. D. (Junior) Hays and wife, Beth Hays, (2) creates the necessity for their mortgaging the premises quite heavily to pay the death taxes to which the Ranch would be subjected, and (3) eliminates the plan of giving the Ranch to charity following the death of the survivor of J. D. (Junior) Hays and wife, Beth Hays. My original suggestion was that the Ranch be left to the First National Bank of Amarillo, trustee for charitable purposes, following the use thereof for life by J. D. (Junior) Hays and wife, Beth Hays. Upon further thought, I concluded that it would be desirable to substitute the University for the Bank, because (1) the University, as a State institution is, beyond question, an eligible taker under the Internal Revenue Code, falling directly within the prescription of (2) the University will be as near perpetual as any institution*237 which could be selected, and (3) the University is engaged in teaching and research among other fields in agriculture, geology, engineering, biology, and social sciences. Any of those fields, particularly agriculture and related fields such as animal husbandry and soil conservation could make beneficial use of the premises in research and teaching. Social sciences, directly or in collaboration with other institutions, might well find it feasible to use the Ranch in whole or in part for an institution such as your Boys' Ranch suggestion. A highly tentative calculation of probable estate tax serves to indicate that it is not feasible, without borrowing money on the Ranch, to provide $ 3,000,000.00 in value for each of the three principal beneficiaries. A tentative and rather abbreviated estimate indicates that there would be $ 2,615,000.00 in value, but not all in cash, available after eliminating the Ranch property and paying the death taxes. This assumes that the entire estate tax value would be allowed as a charitable contribution deduction. (Emphasis added.) Though Section 5.2 of the will gives to Beth Hays a continuing option to lease the Channing Ranch for grazing purposes for a term or terms not to exceed the duration of her life plus six months, it contains restrictions intended to insure that the option will not be construed as repugnant to the fee given to Texas Tech University in Section 5.1, * * * Section 5.3 of the will subjects the gift to Texas Tech University appearing in Section 5.1 thereof to a condition subsequent which will defeat such gift, "should it be finally determined by competent authority that the expected deduction is not allowed, whether under * * *
5.
Subsequent to decedent's death, Mrs. Hays exercised the option to lease the surface rights of the Channing Ranch. On December 19, 1988, Mrs. Hays, petitioner, and Texas Tech entered into a 3-year grazing lease agreement (the lease). On December 9, 1991, Mrs. Hays, petitioner, and Texas Tech extended the lease until December 31, 1994. Under the terms of the lease, Mrs. Hays rents the 60,569.56 acres of the Channing Ranch at $ 3.20 per acre. *241 of the Channing Ranch. Subsequent to decedent's death, the mineral rights beneath the Channing Ranch were developed and have produced a total of $ 63,293.95 in royalty income for petitioner and Texas Tech through the period ending April 30, 1993.
6.
At the time of decedent's death, Mrs. Hays was 56 years of age and, based upon accepted actuarial tables, she had a life expectancy of 24.5 years. Petitioner reported a $ 6 million value for the Channing Ranch on its Federal estate tax return and claimed a corresponding $ 6 million charitable deduction for the value of interest in the Channing Ranch passing to Texas Tech.
OPINION
1.
Currently, no provision of the Rules of this Court*242 specifically permits intervention by third parties. Where in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.
The Tax Court, like other Federal courts, may permit intervention by third parties in those unique situations where the ends of justice so require. See
Although we have never definitively delineated the circumstances where intervention will be permitted, in
In the instant case, Texas Tech, Mrs. Hays, and Ms. Baker contend that intervention should be permitted for the following reasons: (1) Because, according to the terms of decedent's will, our decision regarding the deductibility and fair market value of the Channing Ranch subject to Mrs. Hays' lifetime lease affects whether the devise of the Channing Ranch to Texas Tech lapses, all three of the moving parties have a direct and immediate interest in the subject matter of this proceeding; (2) because petitioner has a fiduciary duty to deal impartially with all beneficiaries of decedent's estate, *246 to intervene.
We granted the motions to intervene of Texas Tech and Mrs. Hays and Ms. Baker. In so*247 doing, we limited the scope of intervention to (1) the issue of the fair market value of the Channing Ranch to be included in decedent's gross estate for purposes of
2.
In the instant case, decedent, on the date of his death, owned an undivided interest in the surface rights and the mineral rights of the Channing Ranch. In other words, decedent owned a fee simple interest in the Channing Ranch on the date of his death. Petitioner, respondent, Mrs. Hays, and Ms. Baker stipulated that on the date of decedent's death the fair market value of decedent's interest in the Channing Ranch, without regard to the impact of Mrs. Hays' lifetime lease option, was $ 6 million. *251 which is the value that Texas Tech contends should be included in decedent's gross estate under
In this case, Testator devised the Channing Ranch, subject to a fair market value grazing lease option. This is*250 the property that passed at the instant of Testator's death. The fact that the Channing Ranch was unencumbered prior to his death is simply immaterial as that is not the property that passed at his death. Moreover, nothing of value passed to Ms. Hays as she was required to pay full fair market value rental throughout the term or terms of her lease. Therefore, the value that passed included only the encumbered value of the Channing Ranch and nothing else.
In short, Texas Tech claims that the fair market value of the Channing Ranch at the moment of decedent's death is equal to the fair market value of the Channing Ranch subject to Mrs. Hays' lifetime lease option. Accordingly, if we were to accept Texas Tech's position, the value of decedent's interest in the Channing Ranch to be included in his gross estate for purposes ofThe Commissioner determined that both classes of stock were includable in the testator's gross estate at a uniform value of $ 157 per share. The Commissioner allowed a marital deduction for the class A stock bequeathed to the marital trust prior to the recapitalization plan at the $ 157 per share value. The executor of the testator's estate claimed that the stock held by the marital trust was worth more than $ 157 per share because the new class of preferred stock created pursuant to the recapitalization plan in the testator's will increased the value of the stock held by the marital trust. The testator's estate brought a refund suit*253 in Federal District Court, which sustained the Commissioner's determination.
On appeal the Court of Appeals for the Third Circuit reversed the District Court and held that (1) the interest in the stock which the testator bequeathed to the marital trust included the increased value of the new class of preferred stock created pursuant to the recapitalization plan; and, (2) that the value of the stock included in the testator's gross estate under
Texas Tech argues that, if the provision in the testator's will in
Texas Tech also relies on
The court held that, for purposes of
In We must distinguish, however, the effect of "predistribution" transformations and changes in value brought about by the testator's death, from changes in value resulting from the fact that under the decedent's estate plan the assets in the gross estate ultimately come to rest in the hands of different beneficiaries. The estate tax is a tax upon a transfer as the Foundation contends. However, it is a tax*256 on the privilege of passing on property, not a tax on the privilege of receiving property. "The tax is on the act of the testator not on the receipt of the property by the legatees."
The court, however, held that for purposes of The statute does not ordain equal valuation as between an item in the gross estate and the same item under the charitable deduction. Instead, it states that the value of the charitable deduction "shall not exceed the value of the transferred property required to be included in the gross estate." * * * * * * Thus, there are compelling considerations in conflict with the initially plausible suggestion that valuation for purposes of the gross estate must always be the same as valuation for purposes*257 of the charitable deduction. When the valuation would be different depending on whether an asset is held in conjunction with other assets, the gross estate must be computed considering the assets in the estate as a block. * * * The valuation of these same sorts of assets for the purpose of a charitable deduction, however, is subject to the principle that the testator may only be allowed a deduction for estate tax purposes for what is actually received by the charity -- a principle required by the purpose of the charitable deduction. * * * [
Texas Tech also relies on This rule is based, however, on an entirely different foundation: when a decedent retains complete freedom to prevent the property being subjected to a restriction or contingency [by making an inter vivos transfer] his inaction constitutes a passive transfer of an interest in the property to the person who stands to benefit by the limitation on the value of the property passing to the decedent's heir or legatee. The rule applies the same principle that underlies Section 2038 and 2041, which include within a decedent's estate property over which he held a power of disposition or appointment.
Finally, Texas Tech contends that our holding in
*260 After discussing both B. As to the second closely interrelated point, the two cases diverge. In * * * As to point B above, we think the reasoning of the
As to whether a testator's decision to split his ownership interest among more than one beneficiary affects the value of the asset for purposes of Since the [estate] tax is laid upon the decedent's estate as a whole, and not upon the property which is received by the various legatees, the valuation of decedent's assets,
Consequently, in
In the instant case, Texas Tech contends that, as in
Respondent, along with Mrs. Hays and Ms. *264 Baker, contends that any change in the value of the Channing Ranch results from decedent's will, which splits his fee simple interest in the Channing Ranch between Texas Tech and Mrs. Hays. Respondent contends that there is no predistribution transformation of decedent's ownership interest in the Channing Ranch at the moment of his death because decedent owned an unrestricted fee simple interest in the Channing Ranch at the moment of his death. As in
We conclude that, although Texas Tech is correct in contending that*265 the fair market value of a nontransferable right to rent property at its fair market value for the duration of the lease is not very significant, it is nonetheless an interest in property which has some value. Even Texas Tech's own expert pointed out that many long-term leases are purchased by owners of the underlying property and that Texas Tech might wish to purchase Mrs. Hays' option at some point in the future. Accordingly, we hold that Mrs. Hays' lifetime lease option has some monetary value and reject Texas Tech's argument that Mrs. Hays received nothing of value under decedent's will.
At the moment of decedent's death, decedent owned an unencumbered fee simple interest in the Channing Ranch. Because neither decedent's death nor his will altered
3.
Section 5.2 of decedent's will granted Mrs. Hays an option to lease the surface rights of the Channing Ranch for grazing purposes during her life, plus 6 months. Section 5.2 also provides that if Mrs. Hays exercises her option to lease the surface rights of the Channing Ranch, she must, under a lease to be negotiated with Texas Tech, pay Texas Tech a market rate of rent. Section 5.2 further provides that the lease shall be renegotiated periodically so that the rent paid to Texas Tech will always reflect the fair market value of use of the surface rights of the Ranch. Finally, section 5.2 of the will requires that the lease contain terms requiring Mrs. Hays to maintain and preserve the surface rights of the Channing Ranch for grazing purposes.
As is customary when an issue of valuation is before the Court, the parties and intervenors have relied extensively on experts to support their respective views on the fair market value of the Channing Ranch subject*268 to Mrs. Hays' lifetime lease option. Before turning to an analysis of the divergent expert opinions in the instant case, we note that we evaluate expert opinion evidence in light of both the qualifications of the expert and all other evidence of value.
Texas Tech originally claimed that the value of the Channing Ranch subject to Mrs. Hays' lifetime lease option was $ 5,250,000. In support of its contention, Texas Tech offered the report and testimony of its expert, J.B. *270 Featherston, who is a qualified expert in the area of real estate appraisal.
Mr. Featherston calculated that the net cash-flow from the current lease is $ 155,564. *271 He then applied a discount rate of 5 percent to calculate the present value of the net cash-flow of the rental payments. *272 which the owner of Channing Ranch would possess. These noncash benefits include $ 121,140 for recreational rights, *273 Respondent, along with Mrs. Hays and Ms. Baker, contends that Mr. Featherston engaged in double counting when he included the value of the "noncash items". Texas Tech admits that Mr. Featherston engaged in double counting, but only "with respect to a double counting of the remainder interest in such tangible and intangible rights." Texas Tech's revised estimate of the value of the Channing Ranch subject to Mrs. Hays' lifetime lease option is $ 4,890,312. *274 Next, Texas Tech calculates the value of the reversionary interest in the Channing Ranch beginning with $ 5,424,585 ($ 6 million stipulated value of the Channing Ranch less $ 575,415 for recreational and mineral rights) as the present value of the Channing Ranch. Texas Tech subtracts the noncash benefits from the $ 6 million stipulated value of the Channing Ranch to eliminate the double counting found in Mr. Featherston's initial report. Texas Tech projects that the value of the Channing Ranch at the end of the 19-year lease term, assuming an annual appreciation rate of 4.5 percent, is $ 12,519,184. Texas Tech then discounts the $ 12,519,184 to present value using a 9-percent discount rate. Consequently, Texas Tech concludes that the present value of the reversionary interest in the Channing Ranch is $ 2,434,856. On the basis of the foregoing calculations, Texas Tech contends that the value of the Channing Ranch subject to Mrs. Hays' lifetime lease option is $ 4,890,312 ($ 2,434,856 + $ 2,455,456). The "net implied penalty" due to Mrs. Hays' lifetime lease option is $ 1,109,688 or 18 percent of the $ 6 million stipulated value of the Channing Ranch. Respondent, along with *275 Mrs. Hays and Ms. Baker, also objects to Mr. Featherston's report on the ground that Mr. Featherston has no reliable basis for reducing the projected term of Mrs. Hays' lifetime lease option from 25 years to 19 years. The 25-year period is based on the stipulated life expectancy of Mrs. Hays plus 6 months. Mr. Featherston, on the basis of his general experience with long-term leases, contends that, because most long-term leases are bought out by the owners of the underlying property, Texas Tech may, at some point in the future, find it desirable to purchase Mrs. Hays' lifetime lease option. *276 While Mr. Featherston's rationale for the 19-year period is plausible, we note that all the other experts who testified in the instant case used Mrs. Hays' stipulated life expectancy in reaching their respective estimates of the present value of the income stream produced by Mrs. Hays' lease and the reversionary interest in the Channing Ranch at the end of the lease period. We are not persuaded that Mr. Featherston's experience with long-term leases is any more reliable than the actuarially determined life expectancy of Mrs. Hays, especially in light of the lack of independent evidence or objective criteria in support of his assumption. Respondent contends that the value of the Channing Ranch encumbered by Mrs. Hays' lifetime lease option is $ 4,414,000. Respondent offers the report and testimony*277 of Armand Smith, who is recognized by the parties as a qualified expert in the area of real estate appraisal. Mr. Smith calculated the value of the Channing Ranch subject to Mrs. Hays' lifetime lease option by averaging the results of two different methods of valuation -- the "investment differential" method and the "conventional lease analysis" method. *278 use of the Channing Ranch will total $ 5,484,574. Mr. Smith then discounted the $ 5,484,574 to present value using a 3-percent discount rate and concluded that the present value of the lease income is $ 3,753,320. Mr. Smith assumed that no rational person would invest $ 6 million for a return of only 3 percent because comparable investments were yielding an average of 11 percent. Accordingly, Mr. Smith discounted the $ 5,484,574 value of the lease payments to present value using an 11-percent discount rate. Mr. Smith calculated that the present value of lease payments using an 11-percent discount rate is $ 1,744,840. Mr. Smith next concluded that the loss in value to the owner of the Channing Ranch due to Mrs. Hays' lifetime option is $ 2,008,480. Mr. Smith arrived at that figure by subtracting the value of the lease payments discounted to present value using a 3-percent discount rate ($ 3,753,320) from the value of the lease payments discounted to present*279 value using an 11-percent discount rate ($ 1,744,840). Using the investment differential method of valuation, Mr. Smith found that the value of the Channing Ranch encumbered by Mrs. Hays' lifetime lease option is $ 3,991,520 ($ 6 million - $ 2,008,480). Mr. Smith also considered the value of the Channing Ranch using the "conventional lease analysis" method in which the income stream from the lease is discounted to present value and added to the present value of the reversionary interest in the property. On the basis of a chart contained in the U.S. Department of Agriculture's Index of Land Values, Mr. Smith calculated that ranch land used for grazing cattle had increased in value at an average rate of 5.84 percent per year during the 25 years prior to decedent's death. Mr. Smith predicted that if the same market trend for ranch land continued during the next 25 years (the estimated length of Mrs. Hays' lease option), the value of the Channing Ranch would increase by 146 percent and it would be worth approximately $ 14,718,000 at the end of Mrs. Hays' projected lease option. Mr. Smith reduced the $ 14,718,000 estimated future value of the Channing Ranch to present value using *280 an 11-percent discount rate and concluded that the present value of the reversionary interest in the Channing Ranch is approximately $ 1,083,000. Mr. Smith then added the $ 1,083,000 present value of the reversion in the Channing Ranch to the $ 3,753,320 discounted value (at 3 percent) of the income stream produced by the lease. Accordingly, using the "conventional lease analysis", Mr. Smith valued the Channing Ranch subject to Mrs. Hays' lifetime lease option at $ 4,836,320, which Mr. Smith then rounded to $ 4,836,000. Mr. Smith averaged the two values he calculated for the Channing Ranch using the "investment differential" method and the "conventional lease analysis" method, and concluded that the value of the Channing Ranch subject to Mrs. Hays' lifetime lease option was $ 4,414,000, a "net implied penalty" of 26 percent due to Mrs. Hays' lifetime lease option. Texas Tech criticizes Mr. Smith's report because he assumed that the duration of Mrs. Hays' lease would be equal to her stipulated life expectancy. As we stated above, we find that the 25-year period is the most accurate estimate of the length of time that Mrs. Hays will exercise her option to lease the Channing Ranch. *281 Texas Tech also criticizes Mr. Smith's report because he failed to take into account other valuable "noncash" rights, such as recreational and mineral rights, that Texas Tech could exploit during the period the Channing Ranch is subject to Mrs. Hays' lifetime lease option. Mrs. Hays and Ms. Baker offered the testimony and reports of two experts, Mr. James F. Hayes and Mr. Wayne Austin, who valued the Channing Ranch subject to Mrs. Hays' lifetime lease option at $ 2,150,000 and $ 4,500,000, respectively. We will analyze the testimony and reports of Mr. Hayes and Mr. Austin separately. Both Mr. Hayes and Mr. Austin are recognized by the parties as qualified experts in the area of real estate appraisal. Mr. Hayes used the "conventional lease analysis" method of valuation that both respondent's and Texas Tech's experts utilized in valuing the Channing Ranch subject to Mrs. Hays' lifetime lease option. In order to estimate the present value of the income stream produced by the lease, Mr. Hayes assumed that the value of the rental payments would increase at an annual rate of 5.7 percent for the next 25 years, the time period Mrs. Hays*282 is expected to exercise her lease option. *283 Next, Mr. Hayes calculated the present value of the reversionary interest in the Channing Ranch. Mr. Hayes estimated that the value of the real estate which comprises the Channing Ranch will appreciate at an annual rate of 3.73 percent. At the end of the 25-year period during which Mrs. Hays is expected to exercise her option to lease, the land will be worth $ 250 per acre. Mr. Hayes then discounted the $ 250 per acre future value of the land to present value using a 14-percent discount rate. Mr. Hayes calculated the present value of the reversion to be approximately $ 572,377 or $ 9.45 per acre. Mr. Hayes added the present value of the income stream produced by the lease ($ 1,574,794) to the present value of the reversionary interest in the land ($ 572,377) and concluded that the value of the Channing Ranch subject to Mrs. Hays' lifetime lease option is worth approximately $ 2,150,000. Thus, the "net implied penalty" due to Mrs. Hays' lifetime lease option is 61.5 percent. Texas Tech criticizes Mr. Hayes' report on the ground that he did not take into account the value of noncash benefits, such as recreational and mineral rights, that Texas Tech could exploit while the ranch*284 is subject to Mrs. Hays' lifetime lease option. Additionally, Texas Tech criticizes the 14-percent discount rate used by Mr. Hayes to calculate the net present value of both the income stream produced by Mrs. Hays' lease and the reversionary interest in the Channing Ranch. Texas Tech contends that the Treasury Department's 30-year bond had a yield of approximately 9 percent at the time of decedent's death and Triple A corporate bonds were yielding between 10 and 11 percent and that only junk bonds had yields approaching 14 percent. Texas Tech contends that an investment in ranch property, even property subject to a long-term lease, is not as risky as investing in junk bonds, and therefore, the 14-percent rate of return does not reflect the rate of return most investors in ranch properties expected to earn. Moreover, Texas Tech points to the fact that Mr. Hayes chose the 14-percent discount rate on the basis of a single transaction, which Texas Tech contends was not representative of the market. In short, Texas Tech contends that Mr. Hayes has not adequately supported his use of a 14-percent discount rate. We agree with Texas Tech's contention that Mr. Hayes has not provided *285 adequate support for his use of a 14-percent discount rate. We are not convinced that most ranchers expect a 14-percent return on their investment. Even Mr. Hayes conceded at trial that most ranchers, as opposed to investors, expected a return on their investment in the range of 5 to 6 percent. Mrs. Hays and Ms. Baker also presented the testimony and report of Mr. Wayne Austin. Mr. Austin estimates that the fair market value of the Channing Ranch subject to Mrs. Hays' lifetime lease option is $ 4,500,000, which represents a 25-percent discount from the $ 6 million stipulated value of the Channing Ranch. Mr. Austin reached his conclusion by surveying the opinions of various persons with experience in the buying and selling of ranches. Mr. Austin familiarized such persons with facts of the instant case and inquired of them what they believed a potential purchaser would be willing to pay for a ranch, similar to the Channing Ranch, encumbered by a 25-year lease that required the lessee to pay a market rate rent. Mr. Austin also utilized data he gleaned from the records of several sales of ranch properties he deemed "comparable" to a sale of the Channing Ranch subject to Mrs. Hays' *286 lifetime lease option. Based upon his survey of the opinions of real estate professionals and his analysis of the comparable sales data, Mr. Austin concludes that, due to Mrs. Hays' lifetime lease option, the Channing Ranch would sell on the market at a 25-percent discount from the value of Channing Ranch unencumbered by Mrs. Hays' lifetime lease option. Texas Tech criticizes Mr. Austin's report on the grounds that his analysis does not rely on objective criteria and that the sales of the ranch properties he analyzed would not be comparable to a sale of the Channing Ranch subject to Mrs. Hays' lifetime lease option. Texas Tech contends that Mr. Austin's report does not provide an adequate basis for the Court to determine whether the persons Mr. Austin contacted are qualified to give an expert opinion as to the value of the Channing Ranch subject to Mrs. Hays' lifetime lease option. Texas Tech argues that an expert report that merely surveys lay opinion should not be given the same weight as an expert report that utilizes objective criteria or relies on the opinions of other qualified experts. We agree. Consequently, we are not persuaded by the opinions of the individuals surveyed*287 by Mr. Austin. We also agree with Texas Tech's contention that sales of ranch properties that Mr. Austin analyzed would not be comparable to a sale of the Channing Ranch subject to Mrs. Hays' lifetime lease option. The sales Mr. Austin analyzed involved properties that were located in different areas of Texas and were encumbered by different types of leases. *288 We hold that the fair market value of the Channing Ranch subject to Mrs. Hays' lifetime lease option is $ 4,836,320, which is the value respondent's expert, Mr. Smith, calculated using the "conventional lease analysis" method of valuation. We reject the conclusion of respondent's expert that an average of the values that he calculated for the Channing Ranch, using the "investment differential" method and the "conventional lease analysis" method, is a proper method of valuation. The "investment differential" method of valuation is frequently used by appraisers to compare one potential investment to the whole spectrum of other investment opportunities available to a client. The "investment differential" method attempts to measure "investment value" rather than market value. Investment value is more subjective because it is predicated on the investment preferences of the individual investor. *289 measuring the investment value of the asset. Id. Consequently, we believe that the "conventional lease analysis" method of valuation is the best method to measure the fair market value of the Channing Ranch subject to Mrs. Hays' lifetime lease option. *290 We reject Texas Tech's revised estimate for several reasons. First, Mr. Featherston's estimate that Mrs. Hays would exercise her option to lease the Channing Ranch for only 19 years, as we stated above, is not grounded in objective criteria. Second, there is insufficient evidence in the record to enable us to conclude that the value Mr. Featherston assigned to the recreational rights reflects the market value of recreational rights for ranches located on the Texas panhandle. Further, we are not convinced that the value Mr. Featherston assigned to the minerals located beneath the Channing Ranch reflects the market value of such rights. In his report, Mr. Featherston concluded that at the time of decedent's death, the royalty income from the rights to the minerals beneath the Channing Ranch was "not capable of independent valuation". Mr. Featherston concluded, again on the basis of his experience, that decedent's interest in the minerals beneath the Channing Ranch "was responsible for approximately $ 7.50 per acre of value" of decedent's undivided fee simple interest. We find Mr. Featherston's appraisal of the mineral rights to be speculative in nature, and not grounded in objective*291 criteria. Finally, the discount rate Mr. Featherston selected does not accurately reflect the level of risk involved in owning ranch property. Mr. Featherston used a 9-percent discount rate, a rate of return which approximates the yield of 30-year Treasury bonds at the time of decedent's death. Treasury bonds are regarded by investors as essentially risk-free investments because they are backed by the full faith and credit of the U.S. Government. Owning real estate is considered a conservative investment in most instances, but such an investment is far from risk free. We believe that the 11-percent discount rate used by respondent's expert is a better reflection of risks associated with investing in ranch property, and is a more accurate estimate of the rate of return investors expect to earn when investing in ranch property. With regard to the expert reports provided by Mrs. Hays and Ms. Baker, we reject them for the reasons stated above. Based on the foregoing, we hold that the fair market value of the Channing Ranch subject to Mrs. *292 Hays' lifetime lease option is $ 4,836,320. Accordingly, the "net implied penalty" due to Mrs. Hays' lifetime lease option is slightly less than 20 percent [($ 6,000,000 - $ 4,836,320) / $ 6,000,000]. 4. For Federal estate tax purposes, we look to State law in order to determine what property rights are created, if any, under the terms of a decedent's will. Texas law provides that the primary objective in interpreting a will is to give effect to the testator's intent. A will is a unilateral instrument, and the court is concerned only with the intention of the testator as expressed in the document. The sense in which the words were used by the testator is the ultimate criterion, and the court may always receive and consider evidence concerning the situation of the testator, the circumstances existing when the will was executed, and other material facts that will enable the court to place itself in the testator's position at the time. Extrinsic evidence of that nature is received, of course, to assist the court in determining the sense in which the words were used by the testator. The general principle that admits*295 the evidence for that purpose is subject to at least one exception. The intention of the testator must be found, in the last analysis, in words of the will, and for that reason his other declarations of intention dealing with the subject of the specific document are generally not admissible. * * * [Citations omitted.] In the instant case, section 5.1 of decedent's will devised decedent's fee simple interest in the Channing Ranch to Texas Tech. Section 5.2 of decedent's will states that the "special devise" of the Channing Ranch to Texas Tech contained in section 5.1 is subject to a continuing option in favor of Mr. and Mrs. Hays, or the survivor of them, to lease the Channing Ranch for grazing purposes for a term or terms not to exceed the duration of the life of the survivor of them, plus 6 months. Section 5.3 of decedent's will, however, provides the following: The special devise in favor of Texas*296 Tech University contained in Section 5.1 hereof is made in the good faith, belief, and expectation that the value of the subject matter thereof will be deductible from my gross estate for the determination of the United States estate tax liability of my estate, as provided in Texas Tech contends that decedent's primary intent was to make a testamentary gift to Texas Tech that would qualify for a deduction under Alternatively, *297 Texas Tech argues that, in the event the Court decides that the phrase "expected deduction" is ambiguous, the extrinsic evidence contained in the record clearly shows that decedent intended that the special devise of the Channing Ranch to Texas Tech would lapse only in the event we decide decedent's estate is not entitled to a charitable deduction, under Respondent, along with Mrs. Hays and Ms. Baker, argues that decedent's use of the phrase "expected deduction", when read in the context of the will as a whole, shows that he intended the special devise*298 of the Channing Ranch to Texas Tech to lapse in the event his estate is not entitled to a deduction, under Additionally, respondent, along with Mrs. Hays and Ms. Baker, argues that, because the first sentence of section 5.3 refers to "the special devise to Texas Tech University contained in Section 5.1", the phrase "expected deduction", used in the second sentence of section 5.3, must refer to the fair market value of the devise contained in section 5.1 of decedent's will; *299 i.e., the fair market value of the Channing Ranch on the date of decedent's death. Respondent, along with Mrs. Hays and Ms. Baker, contends that, because all of the experts who testified in the instant case agree that petitioner is not entitled to a charitable deduction under Alternatively, respondent, along with Mrs. Hays and Ms. Baker, argues that if the Court decides that the phrase "expected deduction" is ambiguous, the extrinsic evidence contained in the record clearly shows that decedent intended the special devise of the Channing Ranch to lapse in the event we decide that his estate is not entitled to a charitable deduction, under We find the phrase "expected deduction" in section 5.3 of decedent's will to be ambiguous. Each of the parties has presented plausible readings of the phrase based upon the language found in other sections of decedent's will. We reject respondent's, and Mrs. Hays' and Ms. Baker's, argument that the sentence in section 5.2 which states that Mrs. Hays' lease "shall not operate to reduce the commercial value of the premises as a ranch property" is dispositive of the question of the amount of the deduction decedent expected his estate would be entitled to claim under Similarly, we reject respondent's, and Mrs. Hays' and Ms. Baker's, contention that the phrase "expected deduction" contained in section 5.3 of decedent's will can only be interpreted as decedent's expression of his desire that the devise of the Channing Ranch to Texas Tech lapse in the event we decide that his estate was not entitled to a charitable deduction under Because decedent's will contains ambiguous terms, we may, under Texas law, look to the extrinsic evidence for guidance in interpreting the phrase "expected deduction". In the instant case, the record contains several letters by Mr. Brooks, the attorney who drafted all of decedent's wills. The letters explain the significant provisions of decedent's will and provide insight into how decedent intended section 5.3 to operate. Mr. Brooks, in a letter dated September 29, 1986, explained to decedent that the special devise to Texas Tech was "the principal device [he] used in this draft * * * to avoid the consumption of the liquidity of the estate by death taxes due to the preponderant value of real estate as compared with liquid assets". Mr. Brooks continued with the explanation that You will recognize the quoted material as the provision with which we had difficulty in the Hahl Proctor estate. I find it impracticable to conform a life interest in the Channing Ranch in favor of J. D. (Junior) Hays and wife, Beth Hays, or the survivor of them, with a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund, as briefly described in the above quotation, and more elaborately defined in The escape from this problem is found in the cross reference in the above quotation, "other than an interest described in Mr. Brooks concluded his analysis of the requirement of The key word in the above quotation is the word "farm" in subparagraph (B)(i). You may well ask why provide that J. D. (Junior) Hays and wife, Beth Hays, must pay rent to Texas Tech University for a grazing lease on the Channing Ranch. I have two reasons; namely, (1) It enables me to pass the fee simple title to the Ranch to the University immediately upon your death, thus distinguishing it from a remainder interest, which is a title postponed to a title having prior enjoyment, and (2) It should make the value of the interest passing to the University In a subsequent letter, dated August 9, 1988, to decedent's executor, Mr. Brooks stated that the primary purpose of section 5 of decedent's will was to ensure that the devise of the Channing Ranch to Texas Tech qualified for a charitable deduction under Section 5.3 of the will subjects the gift to Texas Tech University appearing in Section 5.1 thereof to a condition subsequent which will defeat such gift, "should it be finally determined by competent authority that the expected deduction is not allowed, whether under In light of the foregoing, we hold that decedent's primary intent was to devise his interest in the Channing Ranch to charity in a manner that would allow his estate to claim a We note one additional consideration. The manner in which decedent structured the devise of the Channing Ranch to Texas Tech did not create a charitable remainder trust in either a legal or economic sense. The devise of the Channing Ranch subject to Mrs. Hays' lifetime lease option did not give Mrs. Hays a life estate (or life interest) in the Channing Ranch, and the will did not give Texas Tech a remainder interest in the Ranch in either a legal or economic sense. The lifetime lease option granted to Mrs. *310 Hays is different than a life estate in that a life estate gives the beneficiary the right to use the property or the right to receive the income produced from the property for the duration of his or her life. In the instant case, Mrs. Hays' lifetime lease option merely gives Mrs. Hays the right to lease the property at a market rate of rent for the duration of her life plus 6 months. The lifetime lease option cannot reasonably be construed as the legal or economic equivalent of a life estate. Rather than a remainder interest in land, Texas Tech received full title to the Channing Ranch at the moment of decedent's death. Texas Tech is free to exploit its interest in the Channing Ranch in any manner that is compatible with Mrs. Hays' lifetime lease option. Consequently, we conclude that Texas Tech did not receive a remainder interest in the Channing Ranch and that decedent's will did not create a charitable remainder trust. We have considered the other arguments proffered by respondent, Mrs. Hays, and Ms. Baker and find them to be without merit. *311 To summarize, we hold that the special devise of the Channing Ranch subject to Mrs. Hays' lifetime lease option does not lapse under the terms of decedent's will and that petitioner is entitled to a $ 4,836,320 charitable deduction under
1. The parties have agreed that respondent's adjustment of the funeral expenses and other administrative expenses reported on petitioner's Federal estate tax return will be resolved in the proceeding under Rule 155 which the Court will order
2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at the time of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. From 1952 until 1984, the C Ranch was managed for decedent by Melvin and Carol Cotton. During 1984, decedent gave Melvin and Carol Cotton all of the ranch equipment and cattle he owned on the C Ranch. The land that comprised the C Ranch had been rented by decedent. Decedent's disposition of his interest in the ranch equipment and cattle located on the C Ranch is not in issue in the instant case.↩
1. Decedent required each donee to pay the applicable Federal gift tax.↩
2. Scott Baker is Clynice Baker's son.↩
1. The record does not indicate the nature of the gifts or whether decendent required each donee to pay the applicable Federal gift tax.↩
1. Decedent required each donee to pay the applicable gift tax.↩
4. The last Will and Testament of Hahl E. Proctor, dated Apr. 30, 1965, was also drafted by Richard S. Brooks. In her will, Hahl E. Proctor gave an equitable life estate in her assets to decedent and the remainder interest in such assets to the First National Bank of Midland, as trustee, to be held according to the terms of the testamentary trust created under her will. The testamentary trust provided that the income of the trust was to be used solely for charitable purposes. Her estate claimed a charitable deduction under
5. The parties have stipulated that all prior wills were revoked by decedent, and that only the terms of decedent's 1986 will are controlling for purposes of the instant case.↩
6. For the period of May 28, 1988 (decedent's date of death), to Dec. 31, 1988, the $ 3.20 per acre rent was reduced to $ 2.56 per acre due to the fact that Mrs. Hays could not have stocked the ranch to full capacity prior to entering the grazing lease agreement with petitioner and Texas Tech.↩
7. Texas law incorporates the common law duties of a trustee where there is no specific statutory provision governing the trustee's conduct.
8. Texas Tech did not join in this stipulation. Petitioner reported a $ 6,000,000 value for the Channing Ranch on its Federal estate tax return.↩
9. Texas Tech's valuation of $ 4,890,312 is based on the appraisal by Texas Tech's expert, who appraised the Channing Ranch subject to Mrs. Hays' lifetime lease option.↩
10. Sec. 5.1 of decedent's will devises his fee simple interest in the Channing Ranch to Texas Tech. Sec. 5.2 of the will states that the devise of the Channing Ranch contained in sec. 5.1 is subject to Mrs. Hayes' lifetime lease option.↩
11. All of the experts who testified in the instant case agreed that the fair market value of the Channing Ranch subject to Mrs. Hays' lifetime lease option is less than $ 6,000,000.↩
12. If Texas Tech's position is sustained, the devise of the Channing Ranch provided in sec. 5 of decedent's will would not lapse because the condition subsequent contained in sec. 5.3 of decedent's will would not have occurred.↩
13. Texas Tech cites
14. Mr. Featherston calculated this figure by taking the terms of the current lease, which call for annual rental payments of $ 193,824, and subtracting ad valorem taxes, capital expenses, and other management fees the owner of the Channing Ranch will incur by virtue of owning the property.↩
15. Although the parties have stipulated that Mrs. Hays' life expectancy at the time of decedent's death was 24.5 years, Mr. Featherston estimated that Mrs. Hays would exercise her option to lease the surface rights of the Channing Ranch for a period of only 19 years. Mr. Featherston's estimate is based on his experience with long-term leases, which he claims are usually terminated prior to expiration of the lease period, frequently by means of a negotiated settlement with the owners of the underlying property.↩
16. Mr. Featherston used a 9-percent discount rate, but subtracted 4 percent in order to account for inflation.↩
17. Mr. Featherston concluded that the owner of the Channing Ranch would be able to sell hunting and fishing permits for $ 2 an acre.↩
18. Mr. Featherston estimated that a buyer would pay $ 7.50 per acre for the mineral rights beneath the Ranch.↩
19. Neither respondent nor Mrs. Hays and Ms. Baker have objected to the manner in which Texas Tech revised its estimate.↩
20. Mr. Featherston conceded that the $ 118,112 of intangible benefits derived from owning a big cattle ranch on the Texas panhandle is lost during the period of Mrs. Hays' lifetime lease option.↩
21. Texas Tech contends that Mrs. Hays' lifetime lease option has no monetary value because it requires her to pay a market rental.↩
22. Also known as the "income capitalization method".↩
23. Mr. Hayes assumed that the parties will negotiate a series of 5-year leases.↩
24. Mr. Hayes stated that the 14-percent discount rate was derived from a comparable sale of a ranch located near the Channing Ranch that was burdened by a 3-1/2-year lease. Mr. Hayes testified that the investor who purchased the ranch anticipated a 14-percent return on his investment. Mr. Hayes stated that the 14-percent return the investor anticipated when he bought the ranch included the cost of buying out the lessee.↩
25. One transaction Mr. Austin offered as a comparable sale was that of a ranch located in Jim Hogg County in south Texas that was encumbered by both grazing and hunting leases. Another transaction involved the sale of a ranch in Jeff Davis County which is located in western Texas and was encumbered by only a hunting lease. The Channing Ranch is located in Oldham and Hartley Counties, which are located on the Texas panhandle. Mr. Austin testified that he did not physically survey the ranches that formed the basis of his comparison. Consequently, Mr. Austin was unable to assess whether such ranches were similar to the Channing Ranch. Also, Mr. Austin was not aware of whether there were valuable mineral deposits located below the surface of the two ranches he compared.↩
26. We note that the Mr. Smith's selection of an 11-percent discount rate when applying the "conventional lease analysis" method reflects the investment value to the typical investor because the 11-percent discount rate was based upon the rate of return of similar investments at the time of decedent's death. Therefore, the "investment differential" method is superfluous for purposes of the instant case.↩
27. Investment value and market value may coincide if an investor's investment criteria are typical of investors in the market, but the two types of value are not necessarily interchangeable. Appraisal Institute, The Appraisal of Real Estate 413 (10th ed. 1992).↩
28. All of the other experts who testified in the instant case, with the exception of Mr. Austin, relied exclusively on the "conventional lease analysis" method.↩
29. Mrs. Hays and Ms. Baker argue that the charitable contribution deduction should be disallowed under sec. 20.2055-2(b)(1), Estate Tax Regs., because the possibility that the devise of the Channing Ranch will lapse is not so remote as to be negligible. Respondent did not raise this argument in her notice of deficiency, and she did not argue this position on brief. Mrs. Hays and Ms. Baker also argue that if we find petitioner is entitled to a partial deduction, but no lapse occurred, Texas Tech should be required to pay the additional estate tax due. Neither respondent nor petitioner has raised either of these issues for decision. Consequently, we do not decide them. We granted Texas Tech and Mrs. Hays and Ms. Baker the right to intervene on only two issues, the value of the Channing Ranch includable in decedent's gross estate and the value of the charitable deduction petitioner is entitled to claim under
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