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Court Rejects Assembling Land for Valuation

Estate Planning Journal

In Estate of Pulling, 1 the Tax Court rejected an argument by the IRS to determine the highest and best use for three parcels of real estate owned by a decedent by assuming that the parcels would be developed together with two parcels owned by a land trust of which the decedent was one of the owners. The court found no reasonable evidence that would support valuing the three parcels on the assumption that they would be developed together with the two parcels owned by the land trust.

Facts

The decedent owned three parcels of real estate and also owned at the time of his death a 28% interest in a land trust that owned two adjacent parcels of real estate. All five parcels of real estate were contiguous and were zoned for agricultural purposes. Due to the size, boundaries, and locations of the parcels, residential development of the decedent's parcels was not economically feasible unless the parcels were developed together with the property owned by the land trust.

The appraisers for both the IRS and the estate agreed that if the estate's property could be assembled with the property owned by the land trust, then residential development of all five parcels would be the highest and best use of the parcels. The appraisers also agreed that if assemblage was not possible, then residential development of the estate's property would not be economically feasible. The IRS argued that the decedent's property should be assembled with the property owned by the land trust to determine the highest and best use of the decedent's property. The estate argued that assemblage was not appropriate under the facts of this case.

Analysis

The court began its analysis by noting that a property's fair market value may reflect not only the use to which the property is presently devoted, but also that use to which it may be readily converted. The court also recognized that if a special or higher use of the land is possible only when it is combined with other parcels, then a court may consider that special use, but only if there is a reasonable probability that the land in question will be combined in the near future. The court then analyzed whether the estate's property was reasonably likely to be combined with the property of the land trust at the time of the decedent's death.

The IRS did not present any evidence establishing that assemblage was reasonably likely. However, the IRS argued that assemblage was likely because of (1) the economic benefits of assemblage to both the estate and the land trust, and (2) the existence of close ties between the decedent and the other owners of the land trust. The estate argued that the IRS's position was not supported by the evidence because the evidence demonstrated that assemblage was unlikely. The court agreed with the estate.

The IRS's first argument was based on the premise that assemblage was reasonably likely because of the economic benefits that would be derived by the estate and the land trust from assemblage. The court stated that the fact that the greatest economic benefit for both the estate and the land trust would be derived from an assemblage of the property does not establish that such an assemblage was reasonably likely to occur. Evidence presented at trial showed that the owners of the land trust had previously rejected an offer to sell its property as part of a residential development. The court stated that this fact tends to show that the owners of the land trust were not interested in selling the property just because it would have been in their economic interest.

In addition, at trial, the appraisers for both the IRS and the estate testified that they would not recommend to a hypothetical buyer of the estate's property that he purchase the land as a possible investment because assemblage was not certain enough. Therefore, the court rejected the first argument of the IRS.
The IRS's second argument was based on the premise that assemblage was reasonably likely because the decedent held a large minority interest in the land that when combined with the interests of the other owners of the land trust would result in a majority vote enabling the land trust to combine its property with the estate's property.

However, without any evidence regarding the intent of the other owners of the land trust or details as to their relationship with the decedent, the court believed that the IRS's position essentially attributed ownership of the property of the land trust to the decedent solely on the basis of those relationships. The court found no evidence in the record to support the proposition that the other owners of the land trust would be reasonably likely to agree to combine the properties.

The court concluded that the mere fact that the other owners are related to the decedent was not enough. Therefore, the court rejected the second argument of the IRS. Having rejected both arguments of the IRS, the court held that it was not proper to combine the estate's property with that of the land trust for purposes of valuation. Instead, each parcel must be valued separately for estate tax purposes.

Conclusion

The burden of proof in this case was on the IRS because the general rule is that the use to which land is currently being put is presumed to be the highest and best use. This is a taxpayer-friendly decision since in order to prevail on an assemblage argument, the IRS must prove by the preponderance of the evidence that it is likely that the parcels are likely to be combined in the reasonably near future. That will most likely be a difficult burden to surmount except in relatively rare cases.

1 TCMemo 2015-134

Frank Baldino is an estate planning attorney who co-chairs Lerch, Early & Brewer’s Estate Planning & Probate group in Bethesda, Maryland. His focus is on protecting the assets of high net worth individuals to minimize federal and state tax liability. For more on charitable deductions, contact Frank at (301) 657-0175 or fsbaldino@lerchearly.com.

This article originally appeared in the December 2015 edition of Estate Planning, a monthly periodical directed to estate planning professionals that offers readers the newest and most innovative strategies for saving taxes, building wealth, and managing assets.

 

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