Chapman Glen Ltd. v. Commissioner

CHAPMAN GLEN LIMITED, PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 29527–07L, 27479–09. Filed May 28, 2013.

In 1998, P was a foreign insurance company that elected

under I.R.C. sec. 953(d) to be treated as a domestic corpora-

tion for U.S. Federal income tax purposes. G signed the elec-

tion in G’s reported capacity as P’s secretary. P also applied

for and was granted tax-exempt status as an insurance com-

pany effective Jan. 1, 1998. For 2003, P filed a Form 990,

Return of Organization Exempt From Income Tax, that was

not signed by one of P’s officers. In 2009, three years after P

consented to R’s revocation of P’s tax-exempt status effective

Jan. 1, 2002, R determined that (1) P’s election was termi-

nated in 2002 because P was not an insurance company in

that year and (2) P was therefore deemed under I.R.C. secs.

354, 367, and 953(d)(5) to have sold its assets on Jan. 1, 2003,

in a taxable transaction. P’s primary asset on Jan. 1, 2003,

was its investment in a disregarded entity (E) that owned var-

ious pieces of real property. Held: The three-year period of

limitations under I.R.C. sec. 6501(a) remains open as to 2003

because P’s Form 990 was not a valid return in that it was

not signed by one of P’s corporate officers. Held, further, P

properly elected under I.R.C. sec. 953(d) to be treated as a

domestic corporation, and the termination of that election in

2002 resulted in P’s making a taxable exchange under I.R.C.

secs. 354, 367, and 953(d)(5) during a one-day taxable year

commencing and ending on Jan. 1, 2003. Held, further, E’s

real property is included in that taxable exchange, and the

fair market value of the real property is determined. Held,

294

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 295

further, P’s gross income does not include amounts that R

determined were ‘‘insurance premiums’’, and R may not for

the first time in R’s posttrial opening brief recharacterize the

premiums as a different type of taxable income.

Vicken Abajian and Gary Michael Slavett, for petitioner.

Najah J. Shariff, James C. Hughes, and Michael K. Park,

for respondent.

WHERRY, Judge: These cases are consolidated for purposes

of trial, briefing, and opinion. Petitioner petitioned the Court

in docket No. 29527–07L to review the Internal Revenue

Service (IRS) Office of Appeals’ determination sustaining

respondent’s proposed levy on petitioner’s property to collect

$66,539 in additions to tax for 2004. The additions to tax

relate to respondent’s determination that petitioner failed to

timely file Forms 990, Return of Organization Exempt From

Income Tax, and 990–T, Exempt Organization Business

Income Tax Return (and proxy tax under section 6033(e)), for

2004 and failed to timely pay the related tax. 1 The parties’

only dispute remaining from this petition is a computational

adjustment that turns on the amount of the deficiency for

2004.

Petitioner petitioned the Court in docket No. 27479–09 to

redetermine respondent’s determination of the following defi-

ciencies and additions to tax under section 6655:

Addition to tax

Taxable year Deficiency sec. 6655

2002 $43,719 -0-

Jan. 1–Jan. 1, 2003 10,130,454 -0-

Jan. 2–Dec. 31, 2003 113,181 $3,278

2004 111,696 3,191

Respondent alleged in an amendment to answer that the fair

market value of real property underlying the deficiency for

the one-day taxable year was $36,589,000 instead of

$28,943,229 as determined in the notice of deficiency and

that the deficiency for that year is therefore $12,806,452

1 Unless

otherwise indicated, section references are to the Internal Rev-

enue Code of 1986, as amended and in effect for the applicable years

(Code), Rule references are to the Tax Court Rules of Practice and Proce-

dure, and dollar amounts are rounded to the nearest dollar.

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296 140 UNITED STATES TAX COURT REPORTS (294)

instead of $10,130,454. 2 Respondent asserts in respondent’s

opening brief that recent concessions put the applicable value

of the real property at $34,607,500. Petitioner argues that

the fair market value of the real property is $13,711,775.

Following concessions (including petitioner’s concessions

that it is not an insurance company and that it does not

qualify as a tax-exempt organization under section 501(c)(15)

as of January 1, 2002), we are left to decide the following

issues:

1. whether respondent issued the deficiency notice to peti-

tioner before the three-year period of limitations of section

6501(a) expired as to 2003;

2. whether petitioner properly elected to be treated as a

domestic corporation under section 953(d);

3. whether the subsequent termination of petitioner’s sec-

tion 953(d) election resulted in a taxable exchange under sec-

tions 354, 367, and 953(d)(5) during the one-day taxable year

in 2003;

4. whether the real property that Enniss Family Realty I,

L.L.C. (EFR), owned was included in that taxable exchange;

5. whether the fair market value of the real property at the

time of the exchange on January 1, 2003 (valuation date),

was $34,607,500 as respondent asserts; and

6. whether petitioner’s gross income for the respective tax-

able years includes ‘‘insurance premiums’’ of $128,584, $882,

$299,178, and $298,000.

FINDINGS OF FACT

I. Preliminaries

The parties submitted stipulated facts and exhibits. We

incorporate the stipulated facts and exhibits herein. 3 Peti-

2 Most currently, on the basis of certain concessions that respondent

made after his amendment to answer, respondent alleged in his pretrial

memorandum that the deficiency for the one-day taxable year is

$12,693,052.

3 Petitioner objected on grounds of relevancy to the admission into evi-

dence of Exhibits 45–J, 46–J, and 47–J. The Court reserved ruling on

those objections at trial. We now overrule the objections and admit the ex-

hibits into evidence. See Fed. R. Evid. 401 (stating that evidence is rel-

evant if it tends to make the existence of any fact or consequence more

or less probable).

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 297

tioner’s principal office was in Lakeside, California, when its

petitions were filed.

Petitioner was formed in the British Virgin Islands as a

private international business company on August 29, 1996.

It filed Forms 990 for 2002, 2003, and 2004 (as well as for

earlier years). Later, in April 2006, petitioner submitted

Forms 1120–F, U.S. Income Tax Return of a Foreign Cor-

poration, for 2002 and 2003 to the IRS. The IRS did not

accept those Forms 1120–F.

II. Petitioner

A. Background

Petitioner was formed primarily to operate as an insurance

(including captive insurance and reinsurance) company and

to own, develop, and deal in real property, securities, and

personal property. On January 8, 1998, its initial director

resolved that all of petitioner’s stock be issued to Caesar

Cavaricci and that Adam Devone and Bruce Molnar be

appointed as petitioner’s directors. The initial director also

resolved that its contemporaneously tendered resignation as

petitioner’s initial director was accepted.

B. Section 953(d) Election

On or about November 16, 1998, petitioner delivered to the

IRS a ‘‘Foreign Insurance Company Election Under Section

953(d)’’ (section 953(d) election), stating that petitioner was

electing under section 953(d) to be treated as a domestic cor-

poration for U.S. tax purposes effective the first day of peti-

tioner’s taxable year commencing December 27, 1997.

Deanna S. Gilpin signed the election on November 16, 1998,

in her reported capacity as petitioner’s secretary and under

penalty of perjury that the statements therein were true and

complete to the best of her knowledge and belief. On or about

March 20, 2000, petitioner submitted to the IRS a Form

2848, Power of Attorney and Declaration of Representative,

designating Mr. Molnar, Mr. Cavaricci, and David B. Liptz

(an associate of Mr. Molnar’s) as petitioner’s authorized rep-

resentatives regarding the section 953(d) election and other

stated matters, as each applied to petitioner’s Federal income

tax for 1996 through 2000.

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298 140 UNITED STATES TAX COURT REPORTS (294)

III. Enniss Family

A. Family Members

The Enniss family (as relevant here) has eight members.

Arnold Reid Enniss (Reid Enniss) and his wife (now

deceased), Delpha Enniss, are two of the members. Their

children are the other six members. The children’s names are

Chad Enniss, Wade Enniss, Blake Enniss, Carolyn Sandoval,

Kelly Kufa, and Eric Enniss.

B. Enniss Family Business

The Enniss family has owned and operated a sand mine or

quarry through various entities for over five decades. The

related business mines or dredges sand, topsoil, and other

dirt products (collectively, sand) mainly (if not solely) from

riverbeds and markets and sells the mined sand. The Enniss

family also for many years has through various entities

owned and operated a general engineering and general

building contracting business and a steel fabrication and

erection, construction trucking, demolition, and grading busi-

ness. Each member of the Enniss family is involved in the

family businesses.

The Enniss family began operating the sand mine in the

early 1970s through their controlled corporation, Enniss

Enterprises, Inc. In 1987, Enniss Enterprises, Inc., applied

for a major use permit (MUP) with respect to the sand mine.

The sand mine was in Lakeside, and a significant portion of

the property was on the San Vicente Creek riverplain. On

April 5, 1990, the San Diego County Planning and Environ-

mental Review Board approved the MUP, allowing Enniss

Enterprises, Inc., for a 15-year period, to conduct a mining

operation that excavated and removed 2.2 million cubic yards

of sand and gravel and conducted related screening. 4

Eventually, from January 2002 through 2004, the sand mine

business was owned and operated by Enniss, Inc. (another

entity that the Enniss family controlled as discussed below).

The Enniss family, through their various entities, excavated

approximately 1,708,960 tons of sand (approximately

4 One cubic yard of sand generally weighs 11⁄2 tons.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 299

1,139,307 cubic yards) from the sand mine from 1990 to

2001. 5

IV. Lawsuit

In February 1998, an employee of the Enniss family busi-

ness was seriously injured while at work, and he sued some

or all of the Enniss family members both personally and

through their business. The Enniss family retained various

attorneys to defend them in the lawsuit and to structure the

family’s finances to protect their assets. The Enniss family

asked Earl Husted, an attorney, for advice on asset protec-

tion and estate planning. Mr. Husted recommended that the

Enniss family contact another attorney, Fred Turner, and

Mr. Molnar, a certified public accountant (C.P.A.). Mr.

Turner and Mr. Molnar coowned a business in Orange

County, California, named Global Advisors.

V. Petitioner’s Application for Tax Exemption

On June 17, 1999, petitioner filed with the IRS a Form

1024, Application for Recognition of Exemption Under Sec-

tion 501(a), seeking tax-exempt status under section

501(c)(15) as a tax-exempt insurance company. The applica-

tion stated that petitioner was a licensed property and cas-

ualty insurance company which had entered into reinsurance

contracts and anticipated continuing that line of business.

5 The parties stipulated that Exhibit 74–J contains the Mining Operation

Annual Reports for Enniss Enterprises, Inc., Enniss, Inc., and Commercial

Conservancy Number One (another Enniss family controlled entity d.b.a.

Enniss Enterprises) for 1991 through 2001 and 2003 through 2009. Re-

spondent in his opening brief cited this exhibit and proposed that the

Court find that approximately 1,708,960 tons of sand were excavated be-

tween 1991 and 2001. Petitioner in its answering brief admitted this pro-

posed finding. We find in Exhibit 74–J, however, that the first annual re-

port, while signed in 1991, actually reports sand that was excavated in

1990 and this sand is included in the 1,708,960 tons. We therefore find

contrary to the stipulation that the sand was excavated between 1990 and

2001. See Gerdau MacSteel, Inc. v. Commissioner, 139 T.C. 67, 144 n.55

(2012) (stating that, where justice requires, the Court may disregard a

stipulation which is clearly contrary to the record). We also note that the

annual report for 1995 lists a number that appears to be 140,000 but could

be 190,000. Respondent in his proposed finding of fact has reflected that

number as 190,000, and we do the same given petitioner’s agreement with

respondent’s proposed finding.

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300 140 UNITED STATES TAX COURT REPORTS (294)

The application stated that petitioner did not insure related

parties or reinsure any related-party insurance. The applica-

tion listed Mr. Cavaricci as petitioner’s president and

director and Vince Ambrose as petitioner’s secretary and

director. On or about September 15, 1999, petitioner sub-

mitted to the IRS a Form 2848 authorizing Mr. Molnar (as

a C.P.A.), Mr. Cavaricci (as an officer of petitioner), and Ms.

Gilpin (as a full-time employee of petitioner) to represent

petitioner as to the application and to petitioner’s Forms 990,

as each related to petitioner’s Federal income tax for 1996

through 1999.

On November 24, 1999, the IRS (through the Chief of

Exempt Organizations Technical Branch 3) notified peti-

tioner by letter that the IRS had considered the application

and determined solely on the basis of the information fur-

nished therewith that petitioner was tax exempt as an

organization described in section 501(c)(15), effective January

1, 1998. The IRS noted in the letter that petitioner had filed

its section 953(d) election. Petitioner subsequently filed its

Forms 990 for 2002, 2003, and 2004 consistent with the

status of a domestic tax-exempt entity for Federal tax pur-

poses.

VI. Enniss Family’s Asset Protection and Estate Planning

Strategies

During or before 2001, Mr. Turner and Mr. Molnar met

with the Enniss family at the family’s office in Lakeside. The

attendees discussed the previously mentioned lawsuit (which

was then pending), the Enniss family’s business operations,

and the possible benefits of a captive insurance company. 6

Mr. Turner and Mr. Molnar suggested that the Enniss family

consider using a captive insurance arrangement to protect

6 As the Court explained in Hosp. Corp. of Am. v. Commissioner, T.C.

Memo. 1997–482:

The insurance laws of some States provide for a category of limited

purpose insurance companies, popularly called captive insurance compa-

nies or captive insurers. Captive insurance company statutes generally

apply to companies that insure on a direct basis only the risks of compa-

nies related by ownership to the insurer. Because pure captive insurance

companies typically are formed for the purpose of insuring the risks of

related companies, the function of risk selection, in essence, is attained

at the onset.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 301

their assets. Later that year, the Enniss family decided to

avail themselves of the proffered benefits of a captive insur-

ance company. Global Advisors recommended that the Enniss

family purchase petitioner, an already-existing captive insur-

ance company that the then owner wanted to sell, in order

to avoid the costs of forming a new entity and to save money

on the venture. Petitioner’s stock was then wholly owned by

Mr. Cavaricci.

VII. Enniss Family Purchases Petitioner Through BC Invest-

ments, L.L.C.

From August through December 2001, the Enniss family

caused a series of transactions to be consummated to effect

the family’s purchase of all petitioner stock from Mr.

Cavaricci. Through the transactions, petitioner first relin-

quished all of its assets and liabilities and then Mr. Cavaricci

sold his petitioner stock to BC Investments, L.L.C., for

$10,000. 7 At that time, each member of the Enniss family

owned a 12.5% interest in BC Investments, L.L.C., and the

IRS had issued the Enniss family a Federal identification

number for the company.

BC Investments, L.L.C., continued to be petitioner’s sole

owner through 2004. BC Investments, L.L.C., did not file a

Form 1065, U.S. Return of Partnership Income, or a Form

1120, U.S. Corporation Income Tax Return, for any of the

years 2001 through 2004.

7 The

parties have stipulated that Exhibit 21–J is a stock purchase

agreement between Mr. Cavaricci and BC Investments, L.L.C., dated De-

cember 11, 2001, and that Exhibit 23–J is a copy of the Form 990 that pe-

titioner filed for 2002. The former exhibit states that BC Investments,

L.L.C., is a Nevis limited liability company, and the latter exhibit states

that BC Investments, L.L.C., is a California general partnership. The par-

ties also have stipulated that petitioner has not stipulated that BC Invest-

ments, L.L.C., is either a Nevis limited liability company or a California

general partnership. The record fails to indicate whether BC Investments,

L.L.C., is a Nevis limited liability company, a California general partner-

ship, or something else, and we need not and do not make a finding as

to that matter.

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302 140 UNITED STATES TAX COURT REPORTS (294)

VIII. Enniss, Inc., and EFR

A. Overview

Mr. Turner and Mr. Molnar wanted to establish an entity

(eventually, Enniss, Inc.) to operate the Enniss family’s gen-

eral engineering and general building contracting business

and another entity (eventually, EFR) to hold the Enniss fam-

ily’s real property. Mr. Turner and Mr. Molnar wanted peti-

tioner to provide insurance coverage for Enniss, Inc., and for

EFR.

B. EFR

1. Background

Effective December 31, 2001, the Enniss family formed

EFR as a California limited liability company to hold and to

manage their real property. Incident to this formation, each

Enniss family member contributed $125 to EFR in exchange

for a 12.5% interest in EFR. Each Enniss family member

later transferred his or her real property to EFR. From 2002

through 2004, EFR owned various pieces of real property and

operated primarily as a real property management company.

Reid Enniss was EFR’s general manager, and members of

the Enniss family performed in the United States activities

related to the management of EFR’s real properties. EFR did

not file a Form 1065 (or a Form 1120) for any of the years

2001 through 2004.

2. Transfers

On or about January 1, 2002, the Enniss family contrib-

uted their membership interests in EFR to BC Investments,

L.L.C. 8 BC Investments, L.L.C., then contributed those

interests to petitioner. As of January 1, 2002, petitioner

owned EFR as a ‘‘Disregarded Entity’’ for Federal tax pur-

poses. 9 Petitioner has treated EFR as its wholly owned dis-

regarded entity since January 1, 2002.

8 While Ms. Sandoval testified that she never transferred her member-

ship interest in EFR to BC Investments, L.L.C., that testimony is dis-

proved by the credible evidence in the record.

9 See secs. 301.7701–1(a)(4) (providing that ‘‘certain organizations that

have a single owner can choose to be recognized or disregarded as entities

separate from their owners’’), 301.7701–3(b)(1) (providing that a domestic

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 303

3. Specific Real Property Holdings

During 2002 and 2003, EFR owned the following nine

groups of property, as identified by Eichel, Inc., real estate

analysis and appraisers, with the following corresponding

parcels: 10

Approximate

Property group Parcel Parcel No. acreage Zoning

1—Sand mine

A: Lot 210 375–040–01–00 18.38 A70

B: Lot 209 375–040–18–00 14.50 A70

C: Lot 206 375–040–15–00 9.90 A70

D: Lot 203 375–040–14–00 10.15 A70

E: Lot 215 375–040–33–00 17.70 M58

70.63

2—Rock quarry

F: Highway 326–050–11–00 7.53 M58

67

3—Vacant in-

dustrial land

G: Lot 212 375–041–41–00 2.86 M58

H: 375–041–44–00 4.70 M58

I: Lot 1 375–190–01–00 0.88 M58

8.44

4—Vacant in-

dustrial land

J: Lot 2 375–190–02–00 1.05 M58/

A70

K: Lot 4 375–190–04–00 2.37 M58/

A70

L: Lot 10 375–190–10–00 1.14 M58

M: Lot 11 375–190–11–00 1.29 M58

N: Lot 12 375–190–12–00 3.93 M58

9.78

5—Vacant mul-

tifamily site

O: Graves 384–120–63–00 22.23 HL

P: 378–120–62–00 6.25 HL

Q: 378–120–31–00 2.99 HL

31.47

entity is ‘‘Disregarded as an entity separate from its owner if it has a sin-

gle owner’’ and does not elect otherwise), Proced. & Admin. Regs.

10 For part of this time, EFR also owned lot 8, parcel No. 375–190–08–

00, in addition to the listed parcels. That 1.08-acre parcel was sold on Oc-

tober 8, 2002, for $635,000.

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304 140 UNITED STATES TAX COURT REPORTS (294)

Approximate

Property group Parcel Parcel No. acreage Zoning

6—Single-fam-

ily dwelling

R: Lot 17 379–060–21–00 2.76 A70

7—Single-fam-

ily dwelling

S: Via Viejas 404–300–03–00 2.5 A70

8—Vacant sin-

gle-family lots

T: Utah 27–02–426–002 0.13 R

U: Utah 27–02–426–005 0.16 R

0.29

9—Vacant resi-

dential site

V: Ramona 287–031–26–00 39.24 A72

A70 zoning allows limited agricultural and commercial

uses related to agricultural or civic uses. M58 zoning reflects

high-impact industrial use (e.g., steel fabrication and contrac-

tors’ yards), and vacant land with M58 zoning provides an

additional advantage to certain businesses in that it allows

for unenclosed commercial and industrial uses having poten-

tial nuisance characteristics. HL zoning allows for limited

residential development.

4. Description of Properties

a. Property Group 1

Property group 1 is the Enniss family’s sand mine plant at

the corner of Vigilante Road and Moreno Avenue. As of the

valuation date, parcels A through D were used to mine sand

and topsoil, and parcel E, which had a few small buildings

on it, was used primarily as the sand mine’s business office

and for storage. The highest and best use of property group

1 as of the valuation date was continued mining of the prop-

erty’s mineral resources. The highest and best use for the

property after the mineral resources are depleted is indus-

trial development or outdoor storage.

b. Property Group 2

Property group 2 is vacant land north of Vigilante Road,

on State Highway 67. This property’s use is limited to source

material for a rock quarry operation. The parties agree that

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 305

the fair market value of property group 2 as of the valuation

date was $500,000.

c. Property Groups 3 and 4

Property groups 3 and 4 (which the parties refer to as the

Vigilante Industrial Lots) are vacant industrial lots across

the street from each other on Vigilante Road between prop-

erty group 1 and State Highway 67. The eight underlying

parcels are irregular in shape, they are accessible by way of

Vigilante Road, and they have available water, sewer, and

electricity service.

As of the valuation date, property groups 3 and 4 were

used for open surface and minor office buildings. The highest

and best use for these property groups was industrial usage,

open storage, or outdoor manufacturing.

d. Property Group 5

Property group 5 (which the parties refer to as the Graves

Avenue Properties) is undeveloped Rattlesnake Mountain

hillside land in Santee, California, approximately five miles

south of property groups 3 and 4. Property group 5 is located

at the terminus of Graves Avenue.

The Enniss family bought property group 5 for $300,000 in

1998. The previous owner had mined granite on the property,

leaving a decomposed granite pit with several hundred thou-

sand tons of large boulders weighing from 1 to 30 tons each.

The Enniss family purchased property group 5 to resell the

boulders for rip rap along the coast of California. Rip rap is

the rock revetment that goes along the beach to dissipate the

energy from the ocean so that it does not erode the cliffs.

The Enniss family started marketing the boulders as rip

rap during the spring of 1999, but a local sheriff ordered

them in 2001 to stop their activities on property group 5. The

property remained idle until 2002, when a lawyer for a devel-

oper, Joel Faucetta, approached the Enniss family to buy the

property as part of Mr. Faucetta’s efforts to redevelop a sur-

rounding area to the west. Graves Avenue was the proposed

development’s only access road, and Mr. Faucetta wanted

property group 5 to access his proposed development. Santee

was backing and spearheading a development of the sur-

rounding area for residential use.

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306 140 UNITED STATES TAX COURT REPORTS (294)

On August 12, 2002, EFR, as optionor, and Faucetta

Development Co. (FDC), as optionee, entered into an option

agreement that provided FDC, for a term of up to 24 months

(or, if earlier, five days after the recordation of the first final

subdivision map for the development), with the right to pur-

chase property group 5 for $5 million. 11 FDC paid EFR $1

for the option. If FDC failed to exercise the option, EFR had

11 The option agreement provided in part:

A. Optionor has offered to grant Optionee an option to purchase its fee

title interest in approximately 30 acres (plus or minus) of real property

located in the City of Santee, County of San Diego, California * * * on

the terms and conditions hereinafter set forth.

B. Optionee desires to acquire an option to purchase the Property

under the terms and conditions hereinafter set forth.

C. Optionee understands and agrees that the Property will be proc-

essed for development entitlements with other adjacent property con-

sisting of approximately 275 acres under a joint application for one Mas-

ter Project.

NOW THEREFORE, in consideration of the payment of $1.00 and the

mutual promises contained herein, the parties agree as follows:

1. Grant of Option. Optionor hereby grants to Optionee, or its As-

signee, the exclusive right and option to purchase the Property upon the

terms and conditions and for the purchase price hereinafter set forth.

* * * * * * *

6. Exercise of Option. In the event that Optionee, or its Assignee, exer-

cises this Option, such exercise shall be effected by Optionee, or its As-

signee, sending written notice to Optionor of the intent to exercise the

option. Thereafter, Optionee shall within three (3) business days of the

date of the written notice open an escrow to purchase the Property in

accordance with the terms provided herein.

In the event that Optionee does not exercise the Option provided for

herein, Optionor shall sell to Optionee an easement for ingress and

egress over the road across the Property shown on the approved ten-

tative map for the Master Project. In addition, Optionor shall grant

Optionee an easement over the land at the entrance of the Master

Project, not to exceed one-half acre, in order to erect appropriate entry

monumentation for the Master Project. In exchange for the purchase of

the easement for the road and the easement for entry monumentation

of the Master Project, Optionee shall improve the access road, the entry

monumentation area and provide stubbed underground utilities, includ-

ing sewer, water, electricity and cable to all the approved lots on the

Property and pay the sum of Two Million and No/Dollars ($2,000,000)

within five (5) business days after the approval of the first final subdivi-

sion map for the Master Project.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 307

to sell FDC two easements over property group 5 at a total

cost of $2 million and FDC had to make certain improve-

ments to the property. When the option agreement was

entered into, Reid Enniss knew that Mr. Faucetta was trying

to acquire several surrounding parcels for a larger develop-

ment. On the valuation date, property group 5 was zoned

Hillside Limited, which allowed residential development of

approximately seven to nine homes.

On August 8, 2004, FDC notified EFR that FDC was exer-

cising the option to purchase property group 5 on or before

September 12, 2004. FDC and EFR eventually agreed on

September 20, 2004, to extend the close of the sale and the

escrow until April 15, 2005, in exchange for FDC’s agreeing

to pay EFR an additional $500,000. The option was ulti-

mately assigned to Lennar Homes, a national home builder,

which purchased property group 5 on April 15, 2005, for its

Sky Ranch development project.

e. Property Group 6

Property group 6 is an older single-family dwelling in

Lakeside. The parties agree that the fair market value of

property group 6 was $367,500 as of the valuation date.

f. Property Group 7

Property group 7 is a high-end single-family dwelling in

Alpine, California. The parties agree that the fair market

value of property group 7 was $918,000 as of the valuation

date.

g. Property Group 8

Property group 8 is two adjacent single-family lots in

Sandy, Utah. The parties agree that the fair market value of

property group 8 was $126,000 as of the valuation date.

h. Property Group 9

Property Group 9 is vacant land in a remote rural area of

northeast San Diego County. The parties agree that the fair

market value of property group 9 was $145,000 as of the

valuation date.

5. Leases

From 2002 through 2004, EFR entered into leasing agree-

ments with various third parties for rental of its properties.

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308 140 UNITED STATES TAX COURT REPORTS (294)

On January 1, 2002, EFR leased parcels A through D of

property group 1 to Enniss, Inc., in exchange for a royalty

payment of $2 per ton of material processed and sold from

those parcels.

C. Enniss, Inc.

Mr. Husted incorporated Enniss, Inc., in the State of Cali-

fornia on or about December 19, 2001. Enniss, Inc., is

involved in general engineering, general building contracting,

steel fabrication and erection, construction trucking, demoli-

tion, and grading and operates the Enniss family’s sand

mine. Enniss, Inc., is controlled by the Enniss family.

Since January 1, 2002 (including on the valuation date),

Enniss, Inc., has operated the sand mine on parcels A

through D pursuant to its lease agreement with EFR. The

agreement provided that Enniss, Inc., could use the property

as its sand mining operation, materials division office, and

maintenance facilities. The parties to that lease also entered

into a second lease agreement on the same date under which

Enniss, Inc., used one acre and 4,800 feet of office space on

parcel E. As of the valuation date, Enniss, Inc., used parcel

E as the site for its offices and storage and maintenance

sheds, as well as a yard area for the stacking and processing

of materials. 12

IX. Reclamation Plan

A. Background

The Surface Mining and Reclamation Act of 1975

(SMARA), Cal. Pub. Res. secs. 2710 through 2796 (West 2001

& Supp. 2013), required that the sand mine have an

approved reclamation plan that details how the mine would

be reclaimed to a usable condition in a manner that pre-

vented or minimized adverse environmental impacts and

eliminated residual hazard to the public health and safety.

The reclamation plan for property group 1, as in effect on the

valuation date, generally required that the operator of the

sand mine reclaim the sand mine after the mining was com-

plete. Specifically, as of that time, fill had to be transported

to the pits on the property to construct various stable and

12 Minimal mining also occurred on parcel E.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 309

compacted pads. The reclamation plan also required that a

drainage channel be constructed through the two southern

parcels of the site to carry water from the lake to the existing

San Vicente Creek south of the site.

The SMARA also required a financial assurance mecha-

nism (e.g., a bond or a letter of credit) to guarantee that the

costs associated with reclaiming the land in accordance with

the approved reclamation plan would be paid if the mine

operator became financially insolvent. Regardless of the mine

operator’s financial condition, the land owner is ultimately

responsible for the cost of reclamation. As of the valuation

date, no financial assurance was in place to guarantee that

reclamation of property group 1 would occur. Property group

1, once in the 1990s, had a $40,000 bond but the bond

expired before the valuation date.

B. Fill

The primary reclamation activity is obtaining fill to refill

the mined pits. 13 Sand mine owners and operators in San

Diego County sometimes purchase fill, especially when the

fill is of a specialized material. Other times, the owners and

operators receive free fill from construction debris and other

off-site sources, or charge a $2 to $6 per ton tipping fee to

allow companies desiring to dispose of their fill to dump the

fill in the mined pits at the sand mines.

As of the valuation date, multiple mining enterprises in

the San Diego area used fill for reclamation purposes. Many

of these enterprises charged tipping fees for accepting the

fill. Development projects in downtown San Diego provided a

major source of the fill in San Diego County, and other sites

outside of the downtown area did as well. Additional fill

sources in the Lakeside area at or around that time included

concrete rubble, asphalt rubble, construction overburden, and

sand and gravel that was not suitable for processing. During

2002 and 2003, the amount of fill that these areas around

the sand mine were capable of generating was projected over

five years to comprise between 475,000 and 2 million cubic

yards.

13 Other reclamation activities included removing equipment and struc-

tures, revegetation, and certain indirect items. The costs of these other ac-

tivities were relatively minimal in relation to the cost of the fill.

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310 140 UNITED STATES TAX COURT REPORTS (294)

Enniss, Inc.’s nearby neighbor, Hanson Materials (Han-

son), had about two million cubic yards of fill dirt at that

time sitting in a large pile on the property. The Hanson site

was near property group 1 but, inter alia, a 5,700-foot con-

veyor system would have had to be constructed to transport

the fill to property group 1. Baxter owned a parcel of real

property between property group 1 and the Hanson site. The

owner of property group 1 would need Baxter’s consent to

build the conveyor on or over Baxter’s property. Baxter was

a blasting contractor and stored explosives on its land. Other

parcels of land also were between the Hanson site and prop-

erty group 1, and the owner of property group 1 also needed

the consent of those property owners to build the conveyor on

or over their properties. The Enniss family had no permis-

sion from Baxter or from any of the other property owners

to run a conveyor over their properties. The Enniss family,

however, may have then owned the other properties. 14

Beginning in 2002, Enniss, Inc., charged companies tipping

fees to dump their fill at its sand mine. The relevant data

underlying the tipping fees that Enniss, Inc., received in

2002 and 2003 is as follows:

Fill received Tipping fees Average tipping

Year (tons) collected fee per ton

2002 2,769.52 $84,128 $30.38

2003 10,483.37 144,450 13.78

C. Lakes

Property group 1 included a northerly lake. As of the valu-

ation date, no sand remained for permissible excavation in

that lake. The approved mining depth was generally 35 feet,

and the northerly lake had been overexcavated to a depth of

at least 40 feet and perhaps as deep as 75 feet. The approved

reclamation plan and the MUP called for the area to remain

a lake.

14 Although

the record is ambiguous, Chad Enniss testified that to con-

struct and to operate the proposed conveyor system Enniss, Inc., would

have needed ‘‘permission [i.e., an easement or license] from Hanson, Bax-

ter, [and] possibly a couple of the others there on Vigilante Road, but at

that time, I think that we owned all of those’’ other parcels of property.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 311

Property group 1 also included a southerly lake. As of the

valuation date, no sand remained for permissible excavation

in the southerly lake. The southerly lake had to be filled as

part of the reclamation of property group 1.

D. Condition of Mine on the Valuation Date

On the valuation date, property group 1 was in the worst

condition it had been in since the Enniss family started

mining the property. Few if any conditions of the MUP had

been met; little reclamation had taken place; and the prop-

erty had been mined out of phase, over depth, and too close

to the road. In addition, no financial assurance was in place;

existing roads were not widened; new roads were not built;

and the mines were approximately 60 to 80 feet deep from

the surface elevation.

X. Ms. Sandoval

Ms. Sandoval was petitioner’s secretary during the subject

years. She was in charge of filing and signing petitioner’s tax

returns.

XI. Petitioner’s Forms 990 and 990–T

A. Form 990 for 2002

Petitioner filed its Form 990 for 2002 on or about January

15, 2004. The return lists Chad Enniss as petitioner’s presi-

dent and Ms. Sandoval as petitioner’s secretary. The return

is signed and dated by Ms. Sandoval, and she also printed

her name and title (‘‘Secretary’’) next to her signature on the

line for those items. The return was prepared and also

signed by a representative of Molnar and Associates on

behalf of that entity in his or her capacity as the return’s

preparer. The representative’s signature is illegible.

The Form 990 for 2002 reports that EFR is a limited

liability company that petitioner wholly owned. The return

also reports that EFR is a disregarded entity. In addition,

the return reports that petitioner received tax-exempt insur-

ance premium revenue of $128,584 during 2002.

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312 140 UNITED STATES TAX COURT REPORTS (294)

B. Form 990 for 2003

Petitioner filed its Form 990 for 2003 on or about

November 19, 2004. The return lists Chad Enniss as peti-

tioner’s president and Ms. Sandoval as petitioner’s secretary.

The return was prepared and signed by a representative of

Molnar and Associates on behalf of that entity in his or her

capacity as the return’s preparer. The representative’s signa-

ture is illegible, but it appears to be that of the same indi-

vidual who signed the Form 990 for 2002 as its preparer. 15

The return was not signed by anyone other than the pre-

parer.

The Form 990 for 2003 reports that EFR is a limited

liability company that petitioner wholly owns. The return

also reports that EFR is a disregarded entity. The return

also reports that petitioner received tax-exempt insurance

premiums revenue of $300,000 during 2003.

C. Form 990 for 2004

Petitioner filed its Form 990 for 2004 on or about

November 21, 2005. The return lists Chad Enniss as peti-

tioner’s president and Ms. Sandoval as petitioner’s secretary.

The return was prepared by J. Douglass Jennings, Jr., on

behalf of his professional corporation, and was signed by him

in that capacity. The return also was signed and dated by

Ms. Sandoval in her capacity as petitioner’s secretary, and

she also printed her name and title (‘‘Secretary’’) under her

signature on the line for those items.

The Form 990 for 2004 reports that petitioner received tax-

exempt insurance premiums revenue of $298,000 during

2004.

D. Form 990–T for 2004

Petitioner filed its Form 990–T for 2004 on or about

November 15, 2005.

15 While petitioner asks the Court to find that the signature is that of

Mr. Molnar, the signature is most likely that of Mr. Liptz.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 313

XII. Respondent’s Examination

A. Tax-Exempt Status

During or about June 2005, the IRS (through its Tax-

Exempt and Government Entities Division) began an exam-

ination for petitioner’s 2002 and 2003 taxable years and most

specifically petitioner’s tax-exempt status under section

501(c)(15). The IRS ultimately determined that petitioner

was not an insurance company and did not qualify as a tax-

exempt organization described in section 501(c)(15) as of

January 1, 2002. Petitioner eventually agreed with this

determination. On April 12, 2006, Ms. Sandoval, as peti-

tioner’s secretary and treasurer, signed Form 6018–A, Con-

sent to Proposed Action, consenting to the IRS’s revocation of

petitioner’s tax exemption as of January 1, 2002.

B. Income Tax

During or around November 2005, the IRS (through its

Large and Mid-Size Business Division) began an examination

for petitioner’s income tax liabilities for 2002 and 2003. The

examination was later expanded to include 2004.

Respondent used substitute for return procedures to deter-

mine petitioner’s income tax liability for each subject year.

Respondent determined that the termination of petitioner’s

section 953(d) election caused petitioner to be a taxable cor-

poration which sold its assets to a controlled foreign corpora-

tion on January 1, 2003 (which, respondent determined, was

a one-day taxable year in and of itself). Respondent

bifurcated petitioner’s 2003 taxable year into the one-day

taxable year beginning and ended on January 1, 2003, and

a second taxable year consisting of the remainder of 2003.

For the one-day taxable year, respondent determined peti-

tioner’s income tax liability in part on the basis of the

deemed sale.

XIII. Notice of Deficiency

On August 5, 2009, respondent issued petitioner the notice

of deficiency underlying these cases.

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314 140 UNITED STATES TAX COURT REPORTS (294)

OPINION

I. Burden of Proof

With one exception, petitioner bears the burden of proving

that respondent’s determination of the deficiencies set forth

in the deficiency notice is incorrect. See Rule 142(a)(1); Welch

v. Helvering, 290 U.S. 111, 115 (1933); Baxter v. Commis-

sioner, 816 F.2d 493, 495 (9th Cir. 1987), aff ’g in part, rev’g

in part on an issue not relevant here T.C. Memo. 1985–378.

Section 7491(a) sometimes shifts to the Commissioner part or

all of the burden of proof where the taxpayer introduces cred-

ible evidence of a factual matter, but that section does not

apply where a taxpayer fails to satisfy the related require-

ments. See, e.g., sec. 7491(a)(2)(A), (B), and (C). Petitioner

has failed to establish that it meets all of those require-

ments.

The single exception is that respondent bears the burden

of proof as to the fair market value of the real property

underlying the deficiency for the one-day taxable year. These

cases are appealable to the Court of Appeals for the Ninth

Circuit (absent the parties’ stipulation to the contrary), and

this Court will follow a decision of that court which is

‘‘squarely in point’’. See Golsen v. Commissioner, 54 T.C. 742,

757 (1970), aff ’d, 445 F.2d 985 (10th Cir. 1971). The Court

of Appeals for the Ninth Circuit has indicated, on at least

three occasions, that the presumption of correctness that

attaches to a notice of deficiency is forfeited where the

Commissioner adopts a litigating position different from the

valuation stated in a deficiency notice. See Estate of Mitchell

v. Commissioner, 250 F.3d 696, 701–702 (9th Cir. 2001), aff ’g

in part, vacating in part and remanding 103 T.C. 520 (1994)

and T.C. Memo. 1997–461; Estate of Simplot v. Commis-

sioner, 249 F.3d 1191, 1193–1194 (9th Cir. 2001), rev’g and

remanding 112 T.C. 130 (1999); Morrissey v. Commissioner,

243 F.3d 1145, 1148–1149 (9th Cir. 2001), rev’g and

remanding Estate of Kaufman v. Commissioner, T.C. Memo.

1999–119. 16 Respondent’s litigating position as to the fair

16 In

each of these cases, the Commissioner determined an estate tax de-

ficiency on the basis of an increase in the fair market value over that re-

ported on the estate tax return and later submitted expert reports sup-

porting the Commissioner’s concessions that the fair market value was less

than that determined in the statutory notice. See Estate of Mitchell v.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 315

market value of the real property underlying the deficiency

in the one-day taxable year differs from the value stated in

the deficiency notice.

II. Period of Limitations

Petitioner argues that the three-year period of limitations

of section 6501(a) precludes respondent from assessing any

tax for the one-day taxable year. To that end, petitioner

asserts, it filed a Form 990 for 2003 that commenced the

period of limitations for the one-day taxable year.

Respondent argues that the period of limitations for the one-

day taxable year never began because, respondent asserts

(among other reasons), petitioner did not file a valid Form

990 for any part of 2003. We agree with respondent.

Section 6501(a) generally provides that the Commissioner

must assess any income tax for a taxable year within three

years after the return was filed. For this purpose, section

6501(g)(2) provides that ‘‘[i]f a taxpayer determines in good

faith that it is an exempt organization and files a return as

such under section 6033, and if such taxpayer is thereafter

held to be a taxable organization for the taxable year for

which the return is filed, such return shall be deemed the

return of the organization’’. Section 6033(a)(1) requires, with

limited exceptions not applicable here, that every organiza-

tion exempt from tax under section 501(a) file an annual

return listing certain information, and section 1.6033–

2(a)(2)(i), Income Tax Regs., generally states that the return

shall be filed on Form 990. Section 6062 requires that a cor-

poration’s ‘‘president, vice-president, treasurer, assistant

treasurer, chief accounting officer or any other officer duly

authorized so to act’’ sign the corporation’s income tax

return. Filing an unsigned form is not the filing of a valid

return for purposes of commencing the running of the period

of limitations. See Lucas v. Pilliod Lumber Co., 281 U.S. 245

(1930); Elliott v. Commissioner, 113 T.C. 125 (1999); see also

Richardson v. Commissioner, 72 T.C. 818, 823–824 (1979)

Commissioner, 250 F.3d 696, 698–699 (9th Cir. 2001), aff ’g in part,

vacating in part and remanding 103 T.C. 520 (1994) and T.C. Memo.

1997–461; Estate of Simplot v. Commissioner, 249 F.3d 1191, 1193–1194

(9th Cir. 2001), rev’g and remanding 112 T.C. 130 (1999); Morrissey v.

Commissioner, 243 F.3d 1145, 1149 (9th Cir. 2001), rev’g and remanding

Estate of Kaufman v. Commissioner, T.C. Memo. 1999–119.

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316 140 UNITED STATES TAX COURT REPORTS (294)

(and the cases cited thereat). This is true even where the IRS

accepts and processes the unsigned return. See Pilliod

Lumber Co., 281 U.S. at 249; Plunkett v. Commissioner, 118

F.2d 644, 650 (1st Cir. 1941), aff ’g 41 B.T.A. 700 (1940).

The parties dispute whether petitioner’s Form 990 for 2003

that was submitted to the IRS was signed by one of peti-

tioner’s officers. Petitioner asserts in its brief that the form

was signed by Ms. Sandoval but that neither petitioner nor

respondent has been able to produce a copy of the signed

form. Petitioner asserts alternatively that the return was

signed by Mr. Molnar as a director who was duly authorized

to sign the return on petitioner’s behalf. We disagree with

petitioner on both points. 17

Exhibit 24–J is a joint exhibit that was entered into evi-

dence through a stipulation that the exhibit ‘‘is a true and

correct copy of the Form 990 Return of Organization Exempt

from Income Tax filed by CGL [petitioner] for tax year 2003.’’

The form bears no signature on the line for the ‘‘signature of

officer’’. Nor does it list any date on the corresponding line

for the date, or any information on the corresponding line for

‘‘Type or print name and title’’. In the section that is labeled

‘‘Paid Preparer’s Use Only’’, a signature was reportedly

entered on November 4, 2004, by a preparer who worked for

Molnar and Associates. The preparer’s signature is illegible,

however, and the return does not otherwise identify the pre-

parer. The signature does not appear to be that of either

Chad Enniss or Ms. Sandoval, who the return reports are

petitioner’s only officers. Nor does the return contain any

other signatures.

Petitioner asks the Court to find as a fact that Ms.

Sandoval signed petitioner’s Form 990 for 2003 notwith-

standing the fact that Exhibit 24–J contains no such signa-

ture and that the parties have stipulated that the exhibit is

a true copy of petitioner’s Form 990 for 2003. To that end,

petitioner invites the Court to minimize the significance of

the stipulation by observing that Ms. Sandoval testified at

trial that ‘‘I think I signed the [2002 through 2004] returns.’’

Ms. Sandoval also testified that ‘‘I believe I did’’ sign peti-

17 Petitioner argues that the term ‘‘officer’’ in sec. 6062 naturally in-

cludes a corporation’s director even if the director is not also a corporate

officer. We need not and do not decide that issue.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 317

tioner’s returns for 2002 through 2004. We decline peti-

tioner’s invitation to make its desired finding. A stipulation

that only one of the parties thereto challenges is generally

treated as a conclusive admission to the extent of its terms,

and the party is not allowed to qualify, change, or contradict

any or all parts of a stipulation unless justice requires. 18 See

Rule 91(e); Spencer v. Commissioner, 110 T.C. 62, 81 (1998);

Modern Am. Life Ins. Co. v. Commissioner, 92 T.C. 1230,

1249 (1989); see also Bail Bonds by Marvin Nelson, Inc. v.

Commissioner, 820 F.2d 1543, 1547–1548 (9th Cir. 1987),

aff ’g T.C. Memo. 1986–23. We are not persuaded that Ms.

Sandoval’s equivocal testimony supports a conclusion that

justice requires that we disregard any part of the parties’

stipulation that Exhibit 24–J ‘‘is a true and correct copy of

the Form 990 Return of Organization Exempt from Income

Tax filed by CGL [petitioner] for tax year 2003’’.

Nor are we persuaded that the Form 990 which petitioner

submitted to respondent for 2003 was appropriately signed

by one of petitioner’s officers through the preparer’s signing

of his or her name as the return preparer. The preparer’s sig-

nature is illegible, as stated above, and the record does not

otherwise allow us to definitively find the preparer’s identity.

Even if we were to assume that the preparer’s signature on

the Form 990 for 2003 was Mr. Molnar’s, an assumption

which we do not find as a fact notwithstanding petitioner’s

request that we do so, our view would stay the same. The

preparer’s signature on that form is explicitly that of an indi-

vidual in his or her capacity as the preparer of the return;

it is not explicitly that of an officer of petitioner in his or her

capacity as such. Contrary to petitioner’s suggestion, the fact

that the preparer signed his or her name under penalties of

perjury, as was required for the corporate officer’s signature

as well, is not enough to carry the day. We conclude that

petitioner did not file a Form 990 for 2003 which commenced

18 We note that the parties’ Joint Stipulation of Facts further states

‘‘that either party may introduce other and further evidence not incon-

sistent with the facts herein stipulated unless otherwise stated as re-

served.’’ (Emphasis added.) Stipulation 27, referencing Exhibit 24–J, does

not reserve the issue as to its accuracy but does state: ‘‘The truth of asser-

tions within stipulated exhibits may be rebutted or corroborated with addi-

tional evidence.’’

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318 140 UNITED STATES TAX COURT REPORTS (294)

the period of limitations for that year and that the period

remains open. 19 See sec. 6501(c)(3).

III. Section 953(d) Election

A. Validity of Election

A foreign corporation may elect to be taxed as a domestic

entity if the corporation would qualify under the Code as an

‘‘insurance company’’ (if it were a domestic entity) and it

meets the other requirements set forth in section 953(d). The

parties dispute one of the other requirements, which the IRS

included in Notice 89–79, 1989–2 C.B. 392, as guidance for

a foreign corporation’s making a section 953(d) election. 20

See also sec. 953(d)(1)(C) and (D) (authorizing the Secretary

to prescribe rules to ensure that taxes imposed on the cor-

poration are paid and stating that the foreign corporation

must make the requisite election). The disputed requirement

is that a ‘‘responsible corporate officer’’ sign a corporation’s

election statement.

Ms. Gilpin signed petitioner’s section 953(d) election state-

ment under penalty of perjury in her stated capacity as peti-

tioner’s secretary, and she was a ‘‘responsible corporate

officer’’ if she was petitioner’s ‘‘president, vice-president,

treasurer, assistant treasurer, chief accounting officer, or any

other officer duly authorized so to act.’’ See sec. 6062; see also

Notice 89–79, supra. Ms. Gilpin’s signing of her name on the

election statement is prima facie evidence that petitioner

authorized her to make the election on its behalf. See sec.

6062.

Petitioner argues that its section 953(d) election was

invalid because, petitioner states, Ms. Gilpin was not an

officer authorized to sign the election statement. We are

unpersuaded that Ms. Gilpin lacked the requisite authority

to sign the statement. The fact that Ms. Gilpin signed the

election under penalty of perjury in her stated capacity as

petitioner’s officer and that petitioner then filed the election

19 Petitioner also argues that the period of limitations began to run in

April 2006 when it gave a Form 1120–F for 2003 to the IRS. We disagree.

The IRS never accepted that return, and the return was never filed.

20 Notice 89–79, 1989–2 C.B. 392, was modified and superseded by Rev.

Proc. 2003–47, 2003–2 C.B. 55, but that action is not effective as to the

election here.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 319

with the IRS speaks loudly as to petitioner’s and Ms. Gilpin’s

understanding that Ms. Gilpin was then an officer authorized

to make the election. The same is true as to petitioner’s later

reliance on the elected status in applying for tax-exempt

status under section 501(c)(15) and the fact that petitioner

during this proceeding has not come forward with any cred-

ible documentary or testimonial evidence directly refuting

that Ms. Gilpin was an officer who was properly authorized

on November 16, 1998, to make the election. We also bear in

mind that petitioner, after it filed the election statement

with the IRS, confirmed its understanding that the election

was valid by submitting on or about March 20, 2000, a power

of attorney that referenced the election without any dispute

as to its validity and that petitioner has repeatedly filed Fed-

eral returns consistent with its election. The mere fact that

some or all of the Forms 990 that petitioner filed with the

IRS may have failed to include a copy of petitioner’s election

statement and that Notice 89–79, supra, instructs a taxpayer

to attach its election statement to its ‘‘annual income tax

return, Form 1120PC or Form 1120L,’’ does not mean, as

petitioner concludes, that petitioner’s election is rendered

invalid ab initio. Nor do we agree with petitioner’s assertion

that respondent was on notice as to the identity of peti-

tioner’s officers so as to know, as petitioner now claims, that

Ms. Gilpin was not petitioner’s officer at the time of the elec-

tion. We conclude that petitioner’s section 953(d) election was

valid. While respondent argues alternatively that the doc-

trine of estoppel precludes petitioner from contesting the

validity of its section 953(d) election, we need not and do not

address this alternative argument. 21

21 We also need not decide respondent’s request to amend the answer to

allege an affirmative defense of equitable estoppel to petitioner’s claim that

the election was invalid for lack of signature by a corporate officer. We

note, however, that any such amendment appears unnecessary because the

petition does not allege that the election was invalid. Rule 34(b)(4) and (5)

requires that the petition contain ‘‘[c]lear and concise assignments of each

and every error which the petitioner alleges to have been committed’’ and

‘‘[c]lear and concise lettered statements of the facts on which petitioner

bases the assignments of error’’, respectively. The petition states simply

that respondent erred in determining that the election was revoked during

the subject years, thus indicating that petitioner’s view as set forth in the

petition is that the election is still in place (which, of course, is contrary

Continued

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320 140 UNITED STATES TAX COURT REPORTS (294)

B. Termination of Election

A foreign corporation’s election under section 953(d) to be

taxed as a domestic corporation applies for the year in which

the election is made and to all subsequent years, unless

terminated or revoked with the Secretary’s consent. See sec.

953(d)(2). Such an election is terminated when the corpora-

tion fails to meet the election requirements prescribed under

section 953(d)(1). See sec. 953(d)(2)(B). The termination

applies for all taxable years beginning after the year in

which the corporation failed to meet the election require-

ments prescribed under section 953(d)(1). See sec.

953(d)(2)(B).

Petitioner concedes it was not operating as an insurance

company during 2002. Petitioner therefore failed to satisfy

that requirement for maintaining the section 953(d) election

throughout 2002, see sec. 953(d)(1)(B), and its election was

thereby terminated. The termination applied to all of peti-

tioner’s taxable years after 2002. See id.

IV. Consequences of Termination

Respondent determined that the termination of petitioner’s

section 953(d) election caused petitioner to be treated as a

taxable corporation which is deemed to have sold its assets

to a controlled foreign corporation on January 1, 2003

(which, respondent determined, was a one-day taxable year

in and of itself). We agree with this determination.

Upon termination of a corporation’s election under section

953(d), the corporation is treated for purposes of section 367

as a domestic corporation which transfers all of its assets to

a foreign corporation in an exchange to which section 354

applies. See sec. 953(d)(5). The transfer is deemed to occur on

the first day of the taxable year following the revocation of

the election. See id. The ‘‘first day’’ here is January 1, 2003.

Under section 367(a)(1), a foreign corporation receiving

property in an exchange to which section 354 applies is gen-

to its claim now that the election was invalid from the beginning). We also

note that a pleading need not be amended when issues not raised by the

pleadings are tried by express or implied consent. See Rule 41(b)(1). It ap-

pears that the parties have tried the issue by express or implied consent

and that respondent’s amendment simply formalizes respondent’s position

as to petitioner’s invalid election claim raised outside of the pleadings. We

will deny respondent’s request as moot.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 321

erally not considered a corporation for purposes of deter-

mining the extent to which gain is recognized by the trans-

feror. Thus, absent an exception, the termination of a cor-

poration’s election under section 953(d) results in a deemed

transfer of the domestic corporation’s assets to a foreign cor-

poration in an exchange that is taxable to the domestic cor-

poration. After the deemed transfer on the ‘‘first day’’, the

taxpayer’s taxable year as a domestic corporation naturally

terminates as of the end of that day, given that it is no

longer taxed as a domestic corporation, and the taxable year

of the deemed transferee foreign corporation then begins and

naturally runs through the end of the transferor’s taxable

year as ascertained as if the transfer had not occurred.

Petitioner’s primary activity during 2002 was managing

the real property that its disregarded entity, EFR, owned. All

of the real property was in the United States, and the activi-

ties related to the management of these properties were per-

formed within the United States by members of the Enniss

family. As no exception was applicable at the time of the

deemed exchange on January 1, 2003, petitioner’s deemed

transfer of property is a taxable exchange for which peti-

tioner must recognize gain under section 367. Because peti-

tioner failed to file a Federal income tax return for its tax-

able year beginning and ending on January 1, 2003,

respondent determined petitioner’s income tax liability for

that one-day taxable year taking into account, inter alia, the

deemed sale.

Petitioner argues that section 367 was not intended to

apply in the setting at hand. We disagree. By its terms, sec-

tion 953(d)(5) provides that the termination of petitioner’s

section 953(d) election requires that petitioner, ‘‘[f]or pur-

poses of section 367’’, be ‘‘treated as a domestic corporation

transferring (as of the 1st day of such subsequent taxable

year) all of its property to a foreign corporation in connection

with an exchange to which section 354 applies.’’ We read

nothing in section 953, or in section 367, or in the regula-

tions under either provision, that would trump the quoted

rule of section 953(d)(5). While petitioner looks to strands of

legislative history to support its argument of a contrary legis-

lative intent, the best source of legislative intent is found in

the text of the statute. See Bedroc Ltd., L.L.C. v. United

States, 541 U.S. 176, 177 (2004); United States v. Lanier, 520

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322 140 UNITED STATES TAX COURT REPORTS (294)

U.S. 259, 267 n.6 (1997); Conn. Nat’l Bank v. Germain, 503

U.S. 249, 253–254 (1992). Absent absurd, unreasonable, or

futile results, there is ‘‘no more persuasive evidence of the

purpose of a statute than the words by which the legislature

undertook to give expression to its wishes.’’ United States v.

Am. Trucking Ass’ns, Inc., 310 U.S. 534, 543 (1940); cf.

Albertson’s, Inc. v. Commissioner, 42 F.3d 537, 545 (9th Cir.

1994), aff ’g 95 T.C. 415 (1990). Congress has specifically and

unambiguously provided in section 953(d)(5) that a termi-

nation of a section 953(d) election results in a transfer of

property within the rules of section 367, and there is nothing

that is absurd, unreasonable, or futile in applying that text

as written. We are not unmindful that unequivocal evidence

of a clear legislative intent may sometimes override the

words of a statute and lead to a different result, but that

unequivocal bar is a high one to clear. See Consumer Prod.

Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 108

(1980); Landreth v. Commissioner, 859 F.2d 643, 646 n.6 (9th

Cir. 1988), aff ’g T.C. Memo. 1986–242; Halpern v. Commis-

sioner, 96 T.C. 895, 899 (1991). The legislative history here

provides scant and unpersuasive support for a holding con-

trary to that which we reach. 22

Petitioner also argues from a factual point of view that

petitioner was not EFR’s owner. As petitioner sees it, EFR

was a limited liability company that the Enniss family owned

directly. Moreover, petitioner asserts, even if the facts for-

mally establish that petitioner was EFR’s owner, the sub-

stance of the facts trumps their form and requires a contrary

finding that the Enniss family directly owned EFR. We dis-

agree in both regards. The record establishes, and we have

so found, that petitioner owned EFR. We note in support of

this finding, but not as the sole reason for the finding, that

petitioner’s statements in its returns are admissions that

may be overcome only through cogent evidence, see Waring

v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), aff ’g per

curiam T.C. Memo. 1968–126; Estate of Hall v. Commis-

sioner, 92 T.C. 312, 337–338 (1989), and that petitioner filed

22 Petitioner argues from an equitable point of view that sec. 367 should

not apply because, petitioner states, it will be taxed on the unrealized gain

when it eventually sells the properties. We disagree that equity plays any

part in our interpretation and implementation of secs. 367 and 953(d)(5)

in the setting at hand.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 323

a Form 990 for 2002 and 2003, each of which listed petitioner

as the sole owner of EFR. 23 We also note that EFR has

never filed a partnership (or corporate) tax return with

regard to any of the subject years. 24

Nor do we believe that the substance of the facts supports

petitioner’s proposed finding. The U.S. Supreme Court ‘‘has

observed repeatedly that, while a taxpayer is free to organize

his affairs as he chooses, nevertheless, once having done so,

he must accept the tax consequences of his choice, whether

contemplated or not, * * * and may not enjoy the benefit of

some other route he might have chosen to follow but did not.’’

Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co.,

417 U.S. 134, 149 (1974) (citations omitted); see also Wilkin

v. United States, 809 F.2d 1400, 1402 (9th Cir. 1987); Lomas

Santa Fe, Inc. v. Commissioner, 693 F.2d 71, 73 (9th Cir.

1982), aff ’g 74 T.C. 662 (1980). 25 Thus, petitioner and the

Enniss family, while they were entitled at the start to struc-

ture their affairs so that the Enniss family members owned

EFR as of the relevant time, must now accept the con-

sequences of instead causing petitioner to be EFR’s sole

owner (although their actions on this point probably resulted

from questionable legal advice). EFR’s ownership as struc-

tured by its controlling owners must ‘‘be given its tax effect

in accord with what actually occurred and not in accord with

what might have occurred.’’ Commissioner v. Nat’l Alfalfa

Dehydrating & Milling Co., 417 U.S. at 148. We note in

passing, however, that we disagree with petitioner’s primary

premise for finding that the members of the Enniss family

were in substance EFR’s owners. The mere fact that peti-

tioner and the Enniss family may have treated EFR as an

23 Whilepetitioner’s Form 990 for 2003 failed to be a valid return be-

cause it was not signed by one of petitioner’s officers, petitioner’s prepara-

tion and filing of the document with the IRS expressed petitioner’s under-

standing that petitioner was the sole owner of EFR.

24 Ms. Sandoval and Reid Enniss each testified in a conclusory manner

(and without further elaboration) that they were members of EFR. We do

not accept this testimony as the credible evidence in the record disproves

it.

25 Of course, where the issue is one of law as to the proper substantive

characterization of facts, the label used by the taxpayer may not always

be determinative if it is incorrect. See Selfe v. United States, 778 F.2d 769,

774 (11th Cir. 1985); Pinson v. Commissioner, T.C. Memo. 2000–208; LDS,

Inc. v. Commissioner, T.C. Memo. 1986–293.

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324 140 UNITED STATES TAX COURT REPORTS (294)

independent entity for purposes of management and oper-

ations, as petitioner asserts, does not necessarily mean that

EFR was owned by the Enniss family rather than by peti-

tioner.

V. Subject of Exchange

Petitioner asserts that it never owned the real property

and that it may not be taxed as to any property that EFR

owned. We disagree. For Federal income tax purposes,

although petitioner may not have actually owned the real

property that EFR owned, petitioner is deemed to own EFR’s

real property because EFR’s owners chose to characterize

EFR as an entity that is disregarded as separate from its

owners. See secs. 301.7701–1(a)(4), 301.7701–3(b)(1), Proced.

& Admin. Regs.; cf. Samueli v. Commissioner, 132 T.C. 37,

39 n.3 (2009) (where a grantor trust was a disregarded entity

that owned an interest in a limited liability company, the

Court treated the grantor as the owner of that interest), aff ’d

and remanded on another issue, 661 F.3d 399 (9th Cir. 2011).

Our disregard of the entity EFR essentially means that we

view the facts as if EFR did not exist for Federal income tax

purposes and as if EFR’s sole owner, petitioner, was the sole

owner of EFR’s assets. Cf. Samueli v. Commissioner, 132

T.C. at 39 n.3.

VI. Fair Market Value of Disputed Property

A. Overview

The parties dispute the applicable fair market value of four

of the property groups. These groups are property groups 1,

3, 4, and 5. We proceed to determine those values.

A determination of fair market value is a factual inquiry

in which the trier of fact must weigh all relevant evidence of

value and draw appropriate inferences. See Commissioner v.

Scottish Am. Inv. Co., 323 U.S. 119, 123–125 (1944);

Helvering v. Nat’l Grocery Co., 304 U.S. 282, 294 (1938);

Zmuda v. Commissioner, 79 T.C. 714, 726 (1982), aff ’d, 731

F.2d 1417 (9th Cir. 1984). Fair market value is measured as

of the applicable valuation date, which in this case is

January 1, 2003. See Estate of Proios v. Commissioner, T.C.

Memo. 1994–442; Thornton v. Commissioner, T.C. Memo.

1988–479, aff ’d without published opinion, 908 F.2d 977 (9th

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 325

Cir. 1990). The willing buyer and the willing seller are hypo-

thetical persons, instead of specific individuals or entities,

and the characteristics of these hypothetical persons are not

always the same as the personal characteristics of the actual

seller or a particular buyer. See Propstra v. United States,

680 F.2d 1248, 1251–1252 (9th Cir. 1982); Estate of Bright v.

United States, 658 F.2d 999, 1005–1006 (5th Cir. 1981);

Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990).

The views of both hypothetical persons are taken into

account, and focusing too much on the view of one of these

persons, to the neglect of the view of the other, is contrary

to a determination of fair market value. See Estate of

Scanlan v. Commissioner, T.C. Memo. 1996–331, 72 T.C.M.

(CCH) 160 (1996), aff ’d without published opinion, 116 F.3d

1476 (5th Cir. 1997); Estate of Cloutier v. Commissioner, T.C.

Memo. 1996–49. Fair market value reflects the highest and

best use of the property on the valuation date, and it takes

into account special uses that are realistically available

because of the property’s adaptability to a particular busi-

ness. See Mitchell v. United States, 267 U.S. 341, 344–345

(1925); United States v. Meadow Brook Club, 259 F.2d 41, 45

(2d Cir. 1958); Stanley Works & Subs. v. Commissioner, 87

T.C. 389, 400 (1986). Property is generally valued without

regard to events occurring after the valuation date to the

extent that those subsequent events were not reasonably

foreseeable on the date of valuation. See Ithaca Trust Co. v.

United States, 279 U.S. 151 (1929); Trust Servs. of Am., Inc.

v. United States, 885 F.2d 561, 569 (9th Cir. 1989); Bergquist

v. Commissioner, 131 T.C. 8, 17 (2008); Estate of Giovacchini

v. Commissioner, T.C. Memo. 2013–27.

B. Approaches Used To Determine Fair Market Value

1. Overview

Generally, three approaches are used to determine the fair

market value of property. See United States v. 99.66 Acres of

Land, 970 F.2d 651, 655 (9th Cir. 1992). These approaches

are: (1) the market approach, (2) the income approach, and

(3) the asset-based approach. See Bank One Corp. v. Commis-

sioner, 120 T.C. 174, 306 (2003), aff ’d in part, vacated in part

and remanded on another issue sub nom. JP Morgan Chase

& Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006); Cohan

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326 140 UNITED STATES TAX COURT REPORTS (294)

v. Commissioner, T.C. Memo. 2012–8. The question of which

approach to apply in a case is a question of law. Powers v.

Commissioner, 312 U.S. 259, 260 (1941). Because neither

party relies upon the asset-based approach, and we agree

that it is not applicable in these cases, we limit our discus-

sion of that approach to a brief explanation of it.

2. Three Approaches

a. Market Approach

The market approach requires a comparison of the subject

property with similar property sold in an arm’s-length trans-

action in the same timeframe. The market approach values

the subject property by taking into account the sale prices of

the comparable property and the differences between the

comparable property and the subject property. See Estate of

Spruill v. Commissioner, 88 T.C. 1197, 1229 n.24 (1987);

Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. 1, 19–

20 (1979). The market approach measures value properly

only when the comparable property has qualities substan-

tially similar to those of the subject property. See Wolfsen

Land & Cattle Co. v. Commissioner, 72 T.C. at 19–20. Where

comparable properties are present, the market approach is

generally the best determinant of value. See Whitehouse

Hotel Ltd. P’ship v. Commissioner, 131 T.C. 112, 156 (2008),

vacated and remanded on another issue, 615 F.3d 321 (5th

Cir. 2010); Van Zelst v. Commissioner, T.C. Memo. 1995–396,

aff ’d, 100 F.3d 1259 (7th Cir. 1996). Moreover, while

unforeseeable events occurring after the valuation date are

generally not taken into account in determining a property’s

fair market value, a sale of other property within a reason-

able time after the valuation date may be a proper starting

point for the measure of the property’s fair market value. See

Estate of Scanlan v. Commissioner, 72 T.C.M. (CCH), at 162–

163 (adjustments made to redemption price to account for

passage of time and the change in the setting from the date

of the decedent’s death to the date of the later redemption);

see also Estate of Trompeter v. Commissioner, T.C. Memo.

1998–35, 75 T.C.M. (CCH) 1653, 1660–1661 (1998), vacated

and remanded on other grounds, 279 F.3d 767 (9th Cir.

2002).

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 327

b. Income Approach

The income approach relates to capitalization of income

and discounted cashflow. This approach values property by

computing the present value of the estimated future cashflow

as to that property. The estimated cashflow is ascertained by

taking the sum of the present value of the available cashflow

and the present value of the asset’s residual value.

c. Asset-Based Approach

The asset-based approach generally values property by

determining the cost to reproduce it less applicable deprecia-

tion or amortization.

C. Expert Witnesses

1. Background

Each party retained experts to value the properties at

issue. Petitioner retained and called Harry B. Holzhauer as

a real estate expert and Warren R. Coalson as a mining

expert. Respondent retained and called Norman Eichel as a

real estate expert and John A. Hecht as a mining expert.

Respondent also called Steve C. Cortner to testify in rebuttal

to a portion of Mr. Coalson’s testimony and recalled Mr.

Eichel and Mr. Hecht to testify in rebuttal to the respective

testimony of Mr. Holzhauer and Mr. Coalson. Petitioner

recalled Mr. Holzhauer and Mr. Coalson to testify in rebuttal

to the respective testimony of Mr. Eichel and Mr. Hecht.

2. Qualifications of Experts

a. Mr. Holzhauer

Petitioner retained Mr. Holzhauer to ascertain the fair

market value of the subject nine property groups. Mr.

Holzhauer has appraised real estate for over three decades,

and he holds the Appraisal Institute designation of MAI,

SRA, and SRPA. 26 He has previously testified in Federal and

State courts as an expert witness. He has taught classes on

appraisal at colleges and for professional organizations for

26 The designation of MAI is awarded to qualifying members of the

American Institute of Real Estate Appraisers, and it is the most highly

recognized appraisal designation within the appraisal community. The des-

ignations SRA (senior residential appraiser) and SRPA (senior real estate

property appraiser) are awarded to qualifying members of the Society of

Real Estate Appraisers.

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328 140 UNITED STATES TAX COURT REPORTS (294)

approximately two decades. He has developed a course for

the IRS on the uniform standards of professional appraisal

practice, and he has taught that course for the IRS to IRS

agents nationwide.

The Court recognized Mr. Holzhauer as an expert in the

field of real estate appraisals, with no objection by

respondent.

b. Mr. Coalson

Petitioner retained Mr. Coalson to ascertain the cost of

reclaiming the mined property, to help determine the value

for the mineral resources that remained on the property, and

to estimate the amount of potentially developable land that

would be created by site reclamation. Mr. Coalson is a

mining consultant with over 30 years of experience in the

mining industry, inclusive of 23 years of consulting on

mining. He has a bachelor of arts degree, with a double

major in geography and environmental reclamation, and he

has previously testified as an expert on (among other mat-

ters) property and mineral resource valuation. For approxi-

mately the last 20 years, he has been the president of a com-

pany that he founded, which provides environmental and

mine permitting services.

The Court recognized Mr. Coalson as an expert in the field

of mining, with no objection by respondent.

c. Mr. Eichel

Respondent retained Eichel, Inc., to ascertain the fair

market value of the subject nine property groups. Eichel,

Inc., is a real estate research and appraisal firm which

specializes in the valuation of real estate in the Los Angeles,

California, and surrounding areas, and in litigation con-

sulting with respect to real estate valuation matters. Eichel,

Inc.’s president is Mr. Eichel. Mr. Eichel has a bachelor of

science degree from the University of Southern California

with a major in finance, and he performed graduate work in

the field of real estate research. Mr. Eichel holds the

Appraisal Institute designation of MAI.

The Court recognized Mr. Eichel as an expert in the field

of real estate appraisals, with no objection by petitioner.

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 329

d. Mr. Hecht

Respondent retained Sespe Consulting, Inc. (Sespe), and its

president Mr. Hecht, to estimate the cost to reclaim property

group 1 as of the valuation date, among other things. Mr.

Hecht holds a bachelor of science degree in electrical

engineering from Valparaiso University and a professional

degree in geophysics from Colorado School of Mines. He has

worked professionally in the mining industry for almost

three decades, and he is a certified registered professional

engineer in the State of California and a registered environ-

mental assessor. He currently is the president of Sespe, an

environmental and engineering consulting firm, where he

devotes approximately 65% of his work to mining and

construction material projects (mainly reclamation planning,

preparing reclamation plans, and financial cost estimates) in

California.

The Court recognized Mr. Hecht as an expert in the field

of mining, with no objection by petitioner.

e. Mr. Cortner

Mr. Hecht (through his firm) retained Mr. Cortner to

determine some costs of product and materials and to assist

Mr. Hecht with the applicable reclamation standards. Mr.

Cortner has worked in the mining industry in southern Cali-

fornia, mostly in and around San Diego County, for over 35

years. The Court did not specifically recognize Mr. Cortner as

an expert but allowed him to testify as a fact witness in

rebuttal to a portion of Mr. Coalson’s testimony.

D. Applicable Standards

Each expert testified on direct examination primarily

through his expert report, see Rule 143(g)(1), which the Court

accepted into evidence. Each expert then generally testified

on cross-examination, redirect examination, and recross-

examination, through the typical question and answer

process.

We may accept or reject the findings and conclusions of the

experts, according to our own judgment. See Helvering v.

Nat’l Grocery Co., 304 U.S. at 294–295; Parker v. Commis-

sioner, 86 T.C. 547, 561–562 (1986). In addition, we may be

selective in deciding what parts (if any) of their opinions to

accept. See Parker v. Commissioner, 86 T.C. at 561–562. We

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330 140 UNITED STATES TAX COURT REPORTS (294)

also may reach a determination of value based on our own

examination of the evidence in the record. Silverman v.

Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), aff ’g T.C.

Memo. 1974–285.

E. Analysis

1. Nine Property Groups

Mr. Holzhauer and Mr. Eichel each valued the nine prop-

erty groups discussed herein. As part of his analysis, Mr.

Holzhauer reduced his total value of the nine property

groups by 15% to apply a ‘‘bulk discount’’ and then rounded

that number to reach his final total value. Mr. Eichel did not

apply a similar discount to his total value.

The parties later agreed on the applicable fair market

values of property groups 2, 6, 7, 8, and 9. The fair market

values that Mr. Holzhauer and Mr. Eichel ascertained and

the agreed amounts are as follows:

Property group Mr. Holzhauer Mr. Eichel Agreed value

1 $5,000,000 1 $15,876,000 ---

2 300,000 2,100,000 $500,000

3 3,625,000 5,425,000 ---

4 5,000,000 6,250,000 ---

5 450,000 5,000,000 ---

6 310,000 425,000 367,500

7 962,000 918,000 918,000

8 126,000 126,000 126,000

9 210,000 145,000 145,000

Total 15,983,000 36,265,000 ---

Discount 2,397,450 -0- ---

Net 13,585,550 36,265,000 ---

Rounded 13,600,000 36,265,000 ---

1 Mr. Eichel in his original written expert witness report valued this

property at $16,200,000 but revised this number in his rebuttal report to

$15,876,000 to correct for a computational error of $324,000 that he dis-

covered in his original written expert witness report and direct testimony.

We are therefore left to decide the fair market values of

the remaining property groups as well as the appropriateness

of a ‘‘bulk discount’’. In rendering our decisions, we are aided

by the testimony of each of the four experts, all of whom we

consider to be qualified in their areas of expertise. Each

expert testified in favor of the party who called him, and we

have weighed the experts’ testimony with due regard to their

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(294) CHAPMAN GLEN LTD. v. COMMISSIONER 331

qualifications, the credible evidence in the record, and our

judgment. See Estate of Christ v. Commissioner, 480 F.2d

171, 174 (9th Cir. 1973), aff ’g 54 T.C. 493 (1970); Chiu v.

Commissioner, 84 T.C. 722, 734 (1985). On some matters, we

were persuaded more by petitioner’s experts than by

respondent’s experts, while on other matters we were per-

suaded more by respondent’s experts than by petitioner’s

experts.

2. Property Group 1

a. Overview

We summarize each expert’s valuation of property group 1

as follows:

2003 2004 2005

Mr. Mr. Mr. Mr. Mr. Mr.

Holzhauer Eichel Holzhauer Eichel Holzhauer Eichel

Tonnage 188,000 148,164 188,000 193,455 188,000 122,037

Royalty rate (per

ton) $4 --- $4.14 --- $4.28 ---

Sale price --- $14.50 --- $15 --- $15.50

Sales revenue --- $2,148,378 --- $2,901,825 --- $1,891,574

Fill material fees --- $70,000 --- $130,000 --- $400,000

Gross income1 $752,000 $2,218,378 $778,320 $3,031,825 $805,561 $2,291,574

Reclamation costs --- --- --- --- --- ---

Selling costs --- --- --- --- --- ---

Real estate taxes $28,500 $53,500 $29,070 $54,570 $29,651 $55,661

Production cost --- $592,656 --- $773,820 --- $549,167

Fill material

processing --- $5,000 --- $5,000 --- $200,000

SG&A --- $200,000 --- $200,000 --- $200,000

Net operating

income $723,500 $1,367,222 $749,250 $1,998,435 $775,910 $1,286,746

Reclamation costs --- --- --- --- --- ---

Zoning action --- --- --- --- --- ---

Land sale --- --- --- --- --- ---

Permit compliance --- $250,000 --- --- --- ---

Total --- $1,117,222 --- $1,998,435 --- $1,286,746

Discount

factor2 .8811 .7763 .6839

PV NOI $637,445 $604,180 $550,948

2006 2007 2008

Mr. Mr. Mr. Mr. Mr. Mr.

Holzhauer Eichel Holzhauer Eichel Holzhauer Eichel

Tonnage 188,000 148,623 188,000 66,377 --- 26,568

Royalty rate (per

ton) $4.43 --- $4.59 --- --- ---

Sale price --- $16 --- $16 --- $14.50

Sales revenue --- $2,377,968 --- $1,062,032 --- $385,497

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332 140 UNITED STATES TAX COURT REPORTS (294)

2006 2007 2008

Mr. Mr. Mr. Mr. Mr. Mr.

Holzhauer Eichel Holzhauer Eichel Holzhauer Eichel

Fill material fees --- $1,200,000 --- $375,000 --- $250,000

Gross income1 $833,756 $3,577,968 $862,937 $1,437,032 --- $635,497

Reclamation costs --- --- --- --- $24,600,000 ---

Selling costs --- --- --- --- --- ---

Real estate taxes $30,244 $56,775 $30,849 $57,910 $31,466 $59,068

Production cost --- $743,115 --- $356,074 --- $150,211

Fill material

processing --- $600,000 --- $125,000 --- $25,000

SG&A --- $200,000 --- $200,000 --- $200,000

Net operating

income $803,511 $1,978,078 $832,088 $689,048 ($24,631,466) $201,218

Reclamation co

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