Estate of Axel O. Adler, Deceased, Anna Axina Adlerbert, Administrator, Petitioners

T.C. Memo. 2011-28 UNITED STATES TAX COURT ESTATE OF AXEL O. ADLER, DECEASED, ANNA AXINA ADLERBERT, ADMINISTRATOR Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 25113-08.

Filed January 31 2011.

Beniamin Crfspin Sanchež and Martin J. Tierriev for petitione .

Trent D. Usitalo and Nicholas D. Doukas for 'respor dånt.

MEMORANDUM OPINION

MORRISON, Judge:

In a notice dated July 18, 2008, the respondent (ithe IRS) determined aedeficiency in the federal estate tax of the Estate ofeAxel O. Adler (the estate) .

The estate and the IRS agreed too submït this case for decision under $ÈRVED dAN 3 1 2011 Rule 1 2.1 The parties execúted à stipulation of settled issues, leaving one issue to be resolved.

The issue is whether the value of approximately 1, 100 acres of land included in the value of the gross state is subject to fractional-interest discounts.

We find that it is not.

Background Wë adopt the stipulation of facts as our findings of fact.

The decedent, Axel O. Adler (Adler) , died on June 20, 2004.

At the time of his death, Adler resided at 26446 Oliver Road, Carmel California.

Anna Axina Adlerbert is the administrator of the Estate of Axel O. Adler At the time she filed the petition, Anna A ina dlerbert resided at Jarkholmsvarden 616, 63656 Hovas, Sweden Before December 8, 1965, Adler owned property on Palo Colorado Road in Carmel, .California.

That property, known as the Rancho Aguila property, consisted of approximately 1, 100 acres at the date .of his death.

O December 8, 1965, Adler executed a grant deed transferring undividedrone-fifth interests² in the Rancho Aguila IP Unless otherwise indicated, all Rule references~ are to the Tax Coilrtr Rules of Practice and Procedure, and all section refere ces are to the Internal Revenue Code (Code) as in effect for the date of -Axel O.- Adler's death.

2The owner of an undivided ;interest does not have a claim on a specific portion of the property.

3- property to his five children--Inna Maria Adler, Lena Kristina y Bidegard, Dag Ivar Adler, Ruth Erikka Adlerbert, and Axel Jerker Adlerbert--as tenants in common.

The deed, however, exyressly stated that Adlers " [reserved] unto himself the full, user, contral, income and possession of * * * [the Rancho -Aguilasproperty] and every part thereof for and during * * *.

[his] natural life".

The transfer was gratuitous; Adler received no consideration.

After the transfer, ,Adler continued to use the Rancho 'Aguila property.

None of this children resided there. Nor did the children interfèfe with his use, possession, or enjoyment of the property.- Adler paid all expenses associated with the property, including taxes, upkeep, and maintenance. Adler was not-required to--and did not--pay rent to the children. Adler was not required to--and did not--seek the children's permission to alter or improve the property.

On August 16, 1991, daughter Inna executed a quitclaim deeds transferring her interest back to Adler, but neither she nor Adler recorded the'deed. Adler died on June 20, .2004., The parties have stipulated that on that date,. the fair market value SIt is unclear whether daught-er Inna received consideration The quitclaim 'deed states that for the transfer. the estate was "for a valuáble consideration" . claimed that the conveya'nce was 'in "ex~change for tNe cancellation of daughter Inna's debt the answer, The stipulation of was gratuitous or for consideration.

the IRS denied this for lack of sufficient knowledge.

facts does not address whether the transfer to Adler of 150,000 Swedish kronor.

In the petition, the transfer' In of a fee simple interest in the entire Rancho Aguila property was $6, 390 000 .

Because Adler and .daughter Inna never recorded the I 1991. q itclaim deed, litigation over her interest occurred during the pr bate of Adler's estate.

.As a -result, daughter Inna execut d a grant deed transferring her interest in the Rancho a Aguila property to the, estate in May 2005.

A issue is whether the value to include in the value of the gross éstate is (i) the undiscounted value of a fee simple interest in- the Rancho Aguil'a property or (ii) the value of several fractional interests in the Rancho Aguila property,. which must bè valued separately with -appropriate fractional-interest discounts.

As explained below, we f ind that no discount is approp iate.

I Discussion Sèction 2001(a) imposes the estate tax on the transfer of thÉ ta able estate of a decedent. Section 2051 defines the value of the taxable estate as the value of the gross estate minus the estate tax "deductions. The'value of the gross estate is "determined by including to the extent provided for in * * of * * * * [sections 2031 through 2046] , the value at the -time [the decedent's] death of all property, real or personal, tangible or intangible, wherever situated.'' Sec.

2031(a .

T Section 2033 includes' "the value of all property to the, extentsof -the interest therein of the decedent at the time -of his death" ~in the value of the gross estate.

Thus section 2033 includes the valuesof the decedent's interest in property at the time of death.

- If a decedent owned a life estate,' section 2033 would not include its'value 'in the value of the gross estatel A life a estate his no -value a't- the time 6f death. But if the decedent gratuitously transferred a remainder interest in property and retained a life estate, the value of th'e property would be included in the value of the gross estate by section 2036.

Section 2036(a) provides:

The value öf the gross eNtåtè 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 for an adequate and £1111 consideration in morfey or money's worth), by trust or otherwise, under which he has retained for his life or for ariy period not asäertainable without reference to his death or for any period which does not in fact énd before his death-- , (1) the possession or enjoyment of , - or the right to the income from, the property, or (:2) the right,a either "alone or in conjuncti'on with any person, possess or enjoy the'property or the income therefrom.

to designate the persons who shall 4We use the term "life estate" here to refer to only a life include a estate measured by the life of life estate for the life of another in the term "life estate".

the decedent; we do not Section 2036 (a) (13) thus includes othe value of trans f erred property in the ,value of the; gross estate if othree conditions" are med:

(i) the decedent transferred -an interestein the property during life, 3(ii) the atransfer,was not at sale, arid- (iii) the decedent retained possession or enjoyment of the property Êor life.

Sec. 20.2036-1(a), Estate Tax Regs.; see also Estate of Bongard v. Commissioner, 1 4 T.C. 95, 112 (2005) .

If a decedent gratui ously transferred a gmainder interest in property and retained, a life estate, the decedent transferred the property while etaining possession or enjoyment for life arid thus sectio 2036 (a) (1). would apply .

The general purpose of section 2036 is to include the .value of property in the value of the gross estate wl ere the decedent transf rs the property durir life and the transfe is essentially testamentary in nature. United States v. Estàte of Grace, 395 U.S". 316, 320 (1969) (discussing statut ry predecessor of sec ion 2036) .

A testamentary transfer is a transfer made in a will Black's Law Dictiònary 1636 (9th ed. 2009)a. Trarisfers includ d under section 2036(a) (1) .are.essentially testamentary in nature because the transferor controls the- disposition of the- s ee also sec. 2036(c) (limiting application of sec. 2036(a) for trÅnsfers made before Mar. 4, 1931 and for transfers made after 1 ar. 3, 1931, but beforê June 7, 1932) .

Sec. 2036 (a) also .appTies to other situations not relevant he e property at death but possesses and enjoys the -property during life.

If section 2033 or section 2036 includes the value of prop'erty in the value' of the gross estate, the amount ináÏuded is the property's fair market value at the time of death (or on the alternate vaiuation date, if the execut·or so elects) .' Sec.

20 . 20 31-1 (b) ,"Edtate Tax Regs . Fair maiket value in the context of the estate tax 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. " Id The standard is an objective standard, which determines fair-markets value by neither a forced sale price nor a price in a market "other than that in which * * * [the type of property) is most commonly sold to the public". »Id.; see-alsorEstate of Kahn v.

Commissioner, 125 T.C. 227, 230-231 (2005) (discussing fair - marke t evalue) The owner of a fractional interest in property often lacks the ability to contfol the ];>roperty or to sell the interest freely.a See, é.g., Estate of Amlie v. Commissioner T.C. Memo.

A "fractional interest" in property is also known as an "undivided interest" (9th ed. 2009).. An undivided interest is commonly understood to began interest held undere thersame title by two or morespersons" andlincludes interests held as tenants in common.

See Black's Law Dictionary 728, 885-886 Id. at 886.

2006-7N· (applying fractional-interest discounts) ; -Estate of .

Pillsbùrv v. Commissioner, T.C. Memo. 1992-425 (same) .

If To « reflec the decrease in value the estate claims was caused by the fractional ownership of the Rancho Aguila property, the estate applied minority-interest and marketability discounts."

A minority-interest discount is due to lack of control;. a marketability discount is due to lack of liquidity.

W¹ en a person dies holding a fractional interest in property, it is often appropriate to discount the value of the- intereåt because the lack of control and the lack of liquidity decrea e the property's value.

. Whether property should be valued as a wl ole or as separate fractional interests--with appropriate discoui ts for split ownership--depends on when the interests are separated.

If ownership is split during the decedent's lifetime, the interest the decedent retained is valued separately.

- If the split ccurs only at death, the property is valued as a whole-- without a discount for split ownership.

Suppose, for example, "On Form 706, United States Estate- (and Generation-Skipping the estate Transfèr) Tax Return, Schedule A, Real Estate, report d a one-fifth interest in the Rancho Aguila,property subject to a "32% marketability discount and a 16% minority- intereht discount". Exhibit 2-J at 15. Transf rs During Decedent's Life, separage one-fifth interests in the Rancho Aguila property, each subject iritereht discount". real p operty owned by the decedent, sec. 2033 applies. vivos transfers, to a "22% marketability discount and a 16% minority- including transfers to which sec. 2036 applies.

including property to which the estate reported four Form 706, Schedule A, Form 706, Schedule G, lists certain inter - On Form 706, Schedule G, Id. at i21-22.

lists that an owner of land gives a one-half interest in the land to a child. When the owner dies holdincj the remaining one-half interest, tha~t "interest should be valued separately from the child's:

sthe interests were separated during the owner's life.

See Propstra v.aUnited States, 680 F.2d 1248 (9th Cir. 1982) (before he died,- the husband held a one-harf community'property interest in land and his wife heldsthe othe'r one-half- interest; the hu'sband's nterest ^at 'death nas Nälued separately ffoni the wife's interesti) .

On the other hand, suppose- that an owner of land continued to ,oen'the land until death, and at his death, pursuant to his will the land wa's transfeired-to his two children.

Because the downer owned the land at death, no discount would be recognized to account for the fact that the land later had multiple owners.

See Ahmanson-Found. v. United States, 674 F.2d 361, 768 (9th Cir., 1981) -(in valuing the assets of an estate, the property,valued is not the property received, and thuss no -discount is made for the fact that the asset will "come to rest .in several-hands rather than one"; to do so would invite abuse) .

For these purposes, the ownership of the Ranclio Aguila property should be considered to have been split up at Adler's death., i In 1965, Adler transferred a one-f:ifth remainder interest to reach of his five children.

He retained a life estate in the property.· Thus, it was as.if Adler had retained the entire !

intere t in the land during his life and transferred the property to his children at death.

The two transactions are not identi al, but their similarity led Congress to enact section 2036, hich treats the inter vivos transfer of a remainder interest with a retained life estate as a testamentary transfer || of the entire property. Section 2036 is significant because it is the Code section that primarily includes the value of the property in the value of the gross estate.t It is consistent with s ction 2036 to value the Rancho Aguila property as if the children's interests were transferred only at Adler's death.

A proper y interest transferred to separate owners ,at death.is not valued separately for estate tax purposes.

Of the cases the estate cites for t'he idea that we -must - value Áultiple interests in the Rancho Aguila property || separa ely, the closest to being on point is Estate of Mellinger v. Com issioner, 112 T.C. 26 (1999) .

• In Estate of Mellinger; a wife and husband owned a block of stock as community-property.

E at 27.

The husband died first and left his interest to a qualified terminable interest property trust for the lifetime "The estate argues that it is sec. 2033--not sec. 2036--that the one - f i f th int ere s t that was trans f erred inc lud s the value of from Adler to daughter Inna in 1965 and that daughter Inna transf rred (or attempted to transfer) back to Adler in 1991. Even if this is true, considèred to have been split from the remaining interest only at Adler' remaining interest should be made to account for separate ownership of the other four interests should be death, and therefore no discount the other four interests .

to the value of the ' benefit of his wife.

Id. When the wife died, she still owned her one-half interest in the stock, the value sof -which was included in the value of her gross estate under section 2033.

The value of the husband's interest was also included in the value of the gross estate under section 20.44 . We held thate the interests must be valued-separately and that discounts.wered appropriate.

One reason the interests were valued separately was that at no time did the wife a"possess, control, or have any power of disposition"; over the interest'held in the trust.

-Id. at 36.

Unlike-the wife in Estate of Mellinger, Adlere controlled the Rancho Aguila property." He transferred remainder interests in the property in 1965, and he retained a life ,estate in-the property from 1965 until his death in 2004.

"In Estate of Fontana v. Commissioner, 118 T.C. 318 (2002), the -estate sought the decedent owned one to the decedent's we declined to interpret Estate of Mellinger v. Commissioner, 112 two interests in T.C. 26 (1999), to require separate valuation of property where the decedent controlled both interests. In Estate of Fontana v. Commissioner, supra at 318-319, to value two blocks of stock separately; block outright and the other was subject testamentary general power of appointment. blocks of stock was included in the value of Id. at 319. was included under sec. 2033. that was subject included under sec. 2041. Fontana controlled the disposition of to the general power of appointment qualified terminable interest property trust in Estate of Mellinger), we aggregated it with the stock the decedent owned outright for valuation purposes.

the stock the decedent owned outright And the value of to the decedent's power of appointment was The value of both the gross estate.

(unlike the property in the the.stock that was subject Because the decedent .The value of in Estate of Id. at 322.

the stock Id.

Id.

.

The aparties agree that the value of the entire Rancho .Aguila propert is included in the value of the gross« estate² The partie stipulated that the sfair market "value of the Rancho Aguila property on the adate Adler died was $6,390,000.

Ass discus ed 'above, we find thatuno discount* is appropriate bècause Adler oontrolled the disãosition of 'the entire Rancho Aguila propert y and to apply a discount in this situation would value the property accordings to tlie number of' recipients.

Thus the Value included in the value of the gross estate is $6, 390, 000 the Rancho Aguilas property ' s f air marke t Value las : of June 20 , 2004, the date Adler Idied.

T r f lect the foregoir c Decision will be entered under Rule 155 .