# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

140 T.C. No. 15

UNITED STATES TAX COURT

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 corporation for U.S.
Federal income tax purposes. G signed the election in G's reported
capacity as P's secretary. P also applied for and was granted taxexempt status as an insurance company effective Jan. 1, 1998. For
2003, P filed a Form 990, Return of Organization hempt 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 ^
terminated in 2002 because P was not an insurance company in that
year and (2) P was therefo're deemed ùnder 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 Jian. 1, 2003, was its investment in a
disregarded entity (E) that owned ¼arious 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.

SERVED HAY 2 8 2013

-2-

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, 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

-3failed to timely pay the related tai.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 deficiencies and additions to tax under
section 6655:

Taxable Year

.

Deficiency

2002
$43,719
Jan. 1 through Jan. 1, 2003
- 10,130,454
Jan. 2 through Dec. 31, 2003
113,181
2004
111,696

Addition to tax
sec. 6655

-0-0$3,278
3,191

Respondent alleged in an amendment to answer that the faif 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 he notice of deficiency and that the .
deficiency for that year is therefore $12,806,452 instead of $10,130,454.2
Respondent asserts in respondent's opening brief that recent concessions put the
'Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended and in effect for the applicable years (Code), Rule
.
references are to the Tax Court Rules of Practice and Procedure, and dollar
amounts are rounded to the nearest dollar.
2Most 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.

-4applicable 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 petitioner 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 section 953(d) election
resulted in a taxable exchange under sections 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 incoine for the respective taxable years

includes "insurance premiums" of $128,584, $882, $299,178, and $298,000.
FINDINGS OF FACT
I. Preliminaries

.

The párties submitted stipulated facts and exhibits. We incorporate the
stipulated facts and exhibits herein

Petitioner'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 Corporation, for 2002 and

2003 to the IRS. The IRS did not accept:those Forms 1120-F

3Petitioner objected on grounds of relevancy to the admission into evidence
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 exhibits into evidence. See
Fed. R. Evid. 401 (stating that evidence is relevant if it tends to make the existence
of any fact or consequence more or less probable).

-6II. 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
corporation for U.S. tax purposes effective the first day of petitioner'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,

-7designating Mr. Molnar, Mr. Cavaricci, ånd David B. Liptz (an associate of Mr.

Molnar's) as petitioner's authorized repr sentatives regarding the section 953(d)
election and other stated matters, as each applied to petitioner's Federal income tax

for 1996 through 2000.
III. Enniss Family
A. Family Members
The Enniss family (as relevant here) has eight members. Arnold Reid
Enniss (Reid Eñniss) 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 (collectiv ly, sand) mainly (if not solely) from

042

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,

-8construction trucking, demolition, and grading business. 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 Environmental 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 1,139,307 cubic

yards) from the sand mine from 1990 to 2001.5
4One cubic yard of sand generally weighs 1-1/2 tons.
5The 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. Respondent in his
opening brief cited this exhibit and proposed that the Court find that approximately

(continued...)

9-

IV. Lawsuit

. .

.

In February 1998, an employee of the Enniss family business was seriously
injured while at work, and he.sued some or all of the Enniss family members both
personally and through their business. T:he Enniss family retained various
I

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 protection and estate planning. Mr. Husted recommended that the Enniss

family contact another attorney, Fred Tuïner, 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. : 042
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 Section 501(a), seeking tax-exempt status under

(...continued)
1,708,960 tons of sand were excavated between 1991 and 2001. Petitioner in its
answering brief admitted this proposed f nding. We find in Exhibit 74-J, however,
that the first annual report, 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 sdnd was excavated between 1990 and
2001. See Gerdau MacSteel, Inc. v. Conimissioner, 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.

- 10 section 501(c)(15) as a tax-exempt insurance company. The application stated that
petitioner was a licensed property and casualty insurance company which had
entered into reinsurance contracts and anticipated continuing that line of business.
The application stated that petitioner did not insure related parties or reinsure any
related-party insurance. The application 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 submitted 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 Organization
Technical Branch 3) notified petitioner by letter that the IRS had considered the
application and determined solely on the basis of the information furnished
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 purposes.

- 11 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 their assets. Later that year, the Enniss family
decided to avail themselves of the proffe ed benefits of a captive insurance
company. Global Advisors recommended that the Enniss family purchase

petitioner, an already-existing'captive insurance 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.

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 companies or captive insurers.. Captive insurance company
statutes generally apply to companies·that insure on a direct basis only
the risks of companies related by ownership to the insurer. Because
pure captive insurance companies typically are formed for the purpose
of insuring the risks of related con panies, the function of risk
selection, in essence, is attained at the onset.

.

- 12 VII. Enniss Family Purchases Petitioner Through BC Investments, 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 relinquishe'd
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
ofthe years 2001 through2004.

7The parties have stipulated that Exhibit 21-J is a stock purchase agreement
between Mr. Cavaricci and BC Investments, L.L.C., dated December 11, 2001, and
that Exhibit 23-J is a copy of the Form 990 that petitioner 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 Califo'rnia
general partnership. The parties also have stipulated that petitioner has not
stipulated that BC Investments, 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
partnership, or something else, and we need not and do not make a finding as to
that matter.

-.13 -

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 general engineering and general building
contracting business and another entity (eventually, EFR) to hold the Ennissfamily's real property. Mr. Turner and Mr. Mplnar tvanted petitioner to pro9ide

insurance coverage for Enniss, Inc., and or 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 E*nniss was EFR's general manager, and members of the Enniss family
performed in the United States activities ielated 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.

-142. Transfers
On or about January 1, 2002, the Enniss family contributed 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 purposes.9 Petitioner has
treated EFR as its wholly owned disregarded entity since January 1, 2002.

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:1°

.

042

8While Ms. Sandoval testified that she tiever transferred her membership
interest in EFR to BC Investments, L.L.C., that testimony is disproved by the
credible evidence in the record.
9See 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 entity is "Disregarded
as an entity separate from its owner if it has a single owner" and does not elect
otherwise), Proced. & Admin. Regs.
1°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 October 8, 2002,
for $635,000.

- 15 Property group

Parcel

1--Sand mine

Approximate
acreage

Parcel number

Zoning

A: Lot 210
B: Lot 209
C: Lot 206
D: Lot 203
E: Lot 215

75-040-01-00
375-040-18-00
375-040-15-00
375-040-14-00
375-040-33-00

18.38
14.50
9.90
10.15
17.70
70.63

A70
A70
A70
042 .A70
M58

F: Highway 67

326-050-11-00

7.53

M58

.

2--Rock quarry

3--Vacant industrial
land

.

.

G: Lot 2.12
H:
I: Lot 1

375-041-4.1-00 .
375-041-44-00
375-190-01-00

2.86
4.70
0.88
8.44

M58
M58
M58

J: Lot 2
K: Lot 4
L: Lot 10
M: Lot 11
N: Lot 12

375-190-02-00
375-190-04-00
375-190-10-00
375-190-11-00
375-190-12-00

1.05
2.37
1.14
1.29
3.93
9.78

M58/A70
M58/A70
M58
M58
M58

O: Graves
P:
Q:
'

384-120-63-00
378-120-62-00
378-120-31-00

22.23
6.25
2.99
31.47

HL
HL
HL

R: Lot 17

379-060-21-00

2.76

A70

2 5

A70

4--Vacant industrial
land

5--Vacant multifamily
site

6--Single-family
dwelling

7--Single-family
dwelling

-

S: Via Viejas

40 -300-03-00

.

- 16 8--Vacant single-family
lots

T: Utah
U: Utah

27-02-426-002
27-02-426-005

0.13
0.16
0.29

R
R

V: Ramona

287-031-26-00

39.24

A72

9--Vacant residential
site

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 contractors' 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 potential 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 property's mineral resources. The highest and best use for

_dl7 the property after the mineral resources a e depleted is industrial development or

outdoor storage.

.
b. Property Group 2

.,

'

.

Property groùp 2 is vacant land north of Vigilante Road, on State Highway
67. This property's use is limited to sour e material for a rock quarry operation.
The parties agree that the fair market value of property group 2 as of the valuation
date was $500,000.

.

c.· Property .Groups 3 ànd 4+
Property groups 3 and 4 (which the parties refer to as the Vigilante Industrial

Lots) äre vacant industrial lots across,the street from each other on Vigilante Road

between property 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 g oups 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...

I

- 18 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 thousand 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
developer, Joel Faucetta, approached the Enniss family to buy the property as part
of Mr. Faucetta's efforts to redevelop a surrounding 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 surrounding area for residential use.

- 119 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 purchase property

group 5 for $5 million." FDC paid EFR $1 for the option. If FDC failed

"The option agreement provided i 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 condi ions hereinafter set forth.

,

C.
Optionee understands and agrees that the.Property will
be processed for development entitlements with other adjacent
property consisting of approximately 275 acres under a joint
application for one Master Project.

NOW THEREFORE, in consideration of the payment of $1.00
and the mutual promises contained 1 erein, the parties agree as 042
follows:
1.
Grant of Option. Optionor hereby grants to Optionee, or
its Assignee, the exclusive right and option to purchase the Property
upon the terms and conditions and fbr the purchase price hereinafter
set forth.

(continued...)

- 20 to exercise the option, EFR had to sell FDC two easements over property group 5
at a total cost of $2 million and FDC had to make certain improvements 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

development. 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 exercising the option
to purchase property group 5 on or before September 12, 2004. FDC and EFR
"(...continued)
6.
Exercise of Option. In the event that Optionee, or its
Assignee, exercises this Option, such exercise shall be effected by
Optionee, or its Assignee, 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 tentative 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, including 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 subdivision map for the Master Project.

- 21 eventually agreed on September 20, 200 , to extend the close of the sale and the

escrow until April·l5, 2005, in exchange for FDC's agreeing to pay EFR an
additional $500,000. The option was ultiniately assigned to Lennar Homes, a

national home builder, which purchased roperty 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 propert 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 sinigle 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.

.

. ,

- 22 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 agreements with various

third parties for rental of its properties. 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 California on or about
December 19, 2001. Enniss, Inc., is involved in general engineering, general

building contracting, steel fabrication and erection, construction trucking,
demolition, 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

- 23 parties to that lease also entered into a second lease agreement on the same date
under which Enniss, Inc., used one acre and 4,8.00 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."

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 d tails how the mine would be reclaimed
to a usable condition in a manner that prevented 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 complete. Specifically, as of that time, fill had to be
transported to the pits on the property to construct various stable and compacted
pads. The reclamation plan also required that.a drainage channel be constructed

Minimal mining also occurred on arcel E.

- 24 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 mechanism (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."
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.

"Other reclamation activities included removing equipment and structures,
revegetation, and certain indirect items. The costs of these other activities were
relatively minimal in relation to the cost of the fill.

As of the valuation date, multiple rnining 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 Couñty, 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.
Enniss, Inc.'s nearby neighbor, Hanlson Materials (Hanson), had about 2

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 conveyor
system would have had to be constructed t 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. Öther parcels of laiid also were between the Hanson site
and property group 1, and the owner of property group 1 also needed the consent

- 26 of those property owners to build the conveyor on or over their properties. The

Enniss family had no permission 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.
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:

Year

Fill received
(tons)

Tipping fees
collected

Average tipping
fee per ton

2002
2003

2,769.52
10,483.37

$84,128
144,450

$30.38
13.78

C. Lakes
Property group 1 included a northerly lake. As of the valuation 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.

Although the record is ambiguous, Chad Enniss testified that to construct
and to operate the proposed conveyor system Enniss Inc., would have needed
"permission [i.e., an easement or license] from Hanson, Baxter, [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.

- 27 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 reclam tion 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 property 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
I

Ms. Sandoval was petitioner's secretary during the subject years. She was in
charge of filing and signing petitioner's ta 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 president and Ms. Sandoval as petitioner's
secretary. The return is signed and dated by Ms. Sandoval, and she also printed her

- 28 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 insurance
premium revenue of $128,584 during 2002.

B. Form 990 for 2003
Petitioner filed its Form 990 for 2003 on or about November 19, 2004. The
return lists Chad Enniss as petitioner'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 signature is illegible, but it appears to be that of the same
individual who signed the Form 990 for 2002 as its preparer.15 The return was not
signed by anyone other than the preparer.

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.
15While petitioner asks the Court to find that the signature is that of Mr.
Molnar, the signature is most likely that of Mr. Liptz.

- 29 The return also reports that petitioner received tax-exempt insurance premiums

revenue of $300,000 during 2003.

C. Form 990 for 2004
Petiti.oner filed its Form 990 for 2004 on or about Nòvember 21, 2005. The
return lists Chad Enniss as petitioner's president and Ms. Sandoval as petitioner's
secretary. The returri was prepared by J. IDouglass Jennings, Jr., on behalf of his
professional corporation, and was signed by hirn 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.
XII. Respondent's Examination
A. Tax-Exempt Status

During or about June 2005, theïIRS (through its Tax-Exempt and
Government Entities Division) began an examination for petitioner's 2002 and
2003 taxable years and most specifically petitioner's tax-exempt status under

- 30 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 petitioner's secretary and
treasurer, signed Form 6018-A, Consent 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 determine 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
corporation which sold its assets to.a controlled foi.eign corporation 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 rernainder of 2003. For the one-day taxable year, respondent determined
petitioner's income tax liability in part on the basis of the deemed sale.

- 31 XIII. Notice of Deficiency
On August 5, 20093 respondent issued petitioner the notice of deficiency ,; ;
underlying these cases.

.

e

OP;INION
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 notiée is incorrect. See

Rule 142(a)(1); Welch v. Helvering, 290 U S. 111, 115 (1933); Baxter v.
Commissioner, 816 F.2d 493, 495 (9th Ci . 1987), aff'g in part, rev'g in part on
issue not relevant here T.C. 1Memo. 1985-378. Section 7491(a) sometimes shifts to
the Commissioner part or all of the.burden of proof where the taxpayer introduces
credible evidence of a factual matter, but that section does not apply where a ,
taxpayer fails to satisfy the related requireinents. See, e.g., sec. 7491(a)(2)(A), (B), .
and (C). Petitioner has failed to establish that it meets all of those requirements.
The single exception is that respondent bears the burdeñ oÉproof as to the

fair market value of the re 1 property urid rlying the deficiency for the oiie"-day
taxable year These cases afe appealable t t e Court òf Appeals for the Ninth
Circuit (absent the parties' stipulatíon to the conti·årÿ), and this Court will follov a
decision of that court which is "squarely-in point". See Golsen v. Commissioner,

- 32 -

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. 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, 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 market value of the real property
underlying the deficiency in the one-day taxable year differs from the value.stated
in the deficiency notice.

16In each of these cases, the Commissioner determined an estate tax
deficiency on the basis of an increase in the fair market value over that reported on
the estate tax return and later submitted expert reports supporting the
Commissioner's concessions that the fair market value was less than ihat
determined in the statutory notice. See Estate of Mitchell v. 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.

--33 II. Period of Limitations

Petitioner argues that the three-yea 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 organization exempt from tax under section 501(a) file an annual
return listing certain information, and see ion 1.6033-2(a)(2)(i), Proced. & Admin.
Regs., generally states that the return shall be filed on Form 990. Section 6062
requires that a corporation's "president, vice-president, treasurer, assistant

- 34 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) (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 petitioner'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 thàt 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.

17Petitioner argues that the term "officer" in sec. 6062 naturally includes a
corporation's director even if the director is not also a corporate officer. We need
not and do not decide that issue.

- 3|5-Exhibit 24-J is a joint exhibit that vias entered into evidence through a ·
stipulation that the exhibit "is a true and correct copy of the Form 990 Return of
Organization Exempt from Income Tax fi.ed by CGL [petitioner] for tax year

2003." The form bears no signature on th: 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 fór "Type or.print name and title". In the section that is .
labeled "Paid Preparer's Use~Only", a signature was feportedly entered on
November 4, 2004, by a preparer who wo ked for Molnar and Associates. The
preparer's signature is illegible, however, and the return does not otherwise

identify the preparer. The signature doesaot 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 signaturos.

Petitioner asks the Court to find as a fact that Ms. Sandoval signed
petitioner's Form 990 for 2003 notwithstanding the fact that Exhibit 24-J contains
no such signature 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 stjpulation by observing that Ms. Sandoval
testified at trial that "I think I signed the [2002 througlf2004] returñs." Ms.
Sandoval also testified that "I believe I did" sign petitioner's returns for 2002

- 36 through 2004. We decline petitioner.'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 signature is illegible, as stated above, and the record does not otherwise
18We note that the parties' Joint Stipulation of Facts further states "that
either party may introduce other and further evidence not inconsistent with the
facts herein stipulated unless otherwise stated as reserved." (Emphasis added.)
Stipulation 27, referencing Exhibit 24-J, does not reserve the issue as to its
accuracy but does state: "The truth of assertions within stipulated exhibits may be
rebutted or corroborated with additional evidence."

- 37.allow us to definitively find the preparer's identity. Even if we were to a 541sume
that
the preparer's signature on the Form 990 or 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 individual 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 urider 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 the period of limitations for that
year and that the period remains open." 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

"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.

- 38 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 corporation 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 statement under

penalty of perjury in her stated capacity as petitioner'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

20Notice 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.

-39perjury in her stated capacity as petitionefs officer and that petitioner then filed
the election 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 credible 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 Federal 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 elec ion is rendered invalid ab initio. Nor do
we agree with petitioner's assertion that respondent was on notice as to the identity
of petitioner's officers so as to know, as petitioner now claims, that Ms. Gilpin was

.

- 40 not petitioner's officer at the time of the election. We conclude that petitioner's

section 953(d) election was valid. While respondent argues alternatively that the
doctrine of estoppel precludes petitioner from contesting the validity of its section
953(d) election, we need not and do not address this alternative argument."
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 corporation fails to meet
the election requirements prescribed under section 953(d)(1). See sec.

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 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 appears 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.

-41 953(d)(2)(B). The termination applies for all taxable-years beginning after the year
in which the corporation failed to meet the election requirements 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 satisf 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 petitioner'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 vvith
this determination.

042

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

- 42 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 generally not considered a corporation for
purposes of determining the extent to which gain is recognized by the transferor.
Thus, absent an exception, the termination of a corporation's election under section

953(d) results in a deemed transfer of the domestic corporation's assets to a foreign
corporation in an exchange that is taxable to the domestic corporation. 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 activities related to the management of these properties were
performed 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 petitioner

- 43 . must recognize gain under section 367.k Because petitioner failed to file a Federal

income tax return for its'tàxable year begi miiig and ending on January 1, 2003,
respondent determined petitioner's income tax liability for that one-day taxable
year taking into acòount, inter alia, the deemed sale.
Petitioner argues that section:367:was not intended to apply in.the settiñg at
hand. We disagreef By its terms, section 953(d)(5) provides that the termination
of petitioner's section 953(d) election requires that petitioner, "[fjor.purposes of
section 367", be "treated as a domestic co poration-transferring (as of the 1st day
of such subsequeht taxåblé 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 sectiorí 367, or in the regulations under either prov_ision, 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 legislative 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 U.S. 259, 267 n.6 (1997); Conn: Nat'l Bank v: Germain, 503 U.S. 249.,
253-254 (1992). Absent absurd, unreaso able, or futile results, there is "no more

persuasive evidence of the purpose of a statute than the words by which the
le islature undertook to give expressi'on t itÑ wishes."^Úñifed Státes v. Am:

- 44 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
termination 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. 1986242; Halpern v. Commissioner, 96 T.C. 895, 899 (1991). The legislative history
here provides scant and unpersuasive support for a holding contrary 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

formally establish that petitioner was EFR's owner, the substance of the facts

22Petitioner 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.

- 45 trumps their form and requires a.contrary finding that the Enniss family directly .
owned EFR. We disagree 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, s_ee Waring v.

Commissioner, 412 F.2d 800,:801 (3d.Cir. 1969), aff'g per curiam T.C. Memo.
1968-126; Estate of Hall v. Commissioner, 92 T.C. 312, 337-338 (1989), and that
petitioner filed a Form 990 for 2002 and 2003, each of which listed petitioner as .

the sole owner of EFR." We also note that EFR has never filed a partnership (or
corporate) tax return with regard to any;of the subject years.44

Nor do we believe that the substance.of the facts supports petitioner's

proposed finding. The U.S. Supreme Co rt "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 consegue ces of his choice, whether contemplated
or not, * * * and may not enjoy the benefit of some other route he might have

"While petitioner's Form 990 for 2003 failed to be a valid return because it
was not signed by one of petitioner's officers, petitioner's preparation and filing of
the document with the IRS expressed petitioner's understanding that petitioner was
the sole owner of EFR.
24Ms. Sandoval and Reid Enniss ea7h 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.

- 46 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)." Thus,
petitioner and the Enniss family, while they were entitled at the start to structure

their affairs so that the Enniss family members owned EFR as of the relevant time,
must now accept the consequences 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 structured 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 petitioner and the Enniss
family may have treated EFR as an independent entity for purposes of management

"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 (1lth

Cir. 1985); Pinson v. Commissioner, T.C. Memo. 2000-208; LDS, Inc. v.
Commissioner, T.C. Memo. 1986-293.

- 47 and operations, as petitioner asserts, does not necessarily·mean that EFR was
owned by the Enniss family rather than by petitioner.

V. Subject of Exchange
Petitioner asserts that it never owned the real property and that it may not be

taxed as to any pròperty 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 3FR'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 m.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. 201 ). 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. ;

- 48 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
Januai·y 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 Cir. 1990). The willing buyer and the willing seller are
hypothetical 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.

- 49 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: Cornmissioner, T.C. Memo. 1996-331, 72 T.C.M.
(CCH) 160 (1996), aff'd without published opinion, 116 F.3d41476 (5th Cir. 1997);
Estate of Cloutier v. Commissioner, T.C. Memo. 1996-49. Fair market value

reflects the highest and best use of the pr perty on the valuation date, and it takes
into account special uses that are realistically available because of the property's
adaptability to a particular business. .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). 042 '
Property is generally valued without regard to events occurring after the valuation
date to the extent that those subsequent e ents 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.

.

.

.

- 50 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, 9'70 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. Commissioner, 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 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 is not ápplicable in these cases, we limit our discussion 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 transactión 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

- 51 and the subject property. See Estate of Spruill v. Commissioner, 88 T.C. 1197,

1229 n.24 (1987); Wolfsen Land & Cattle Co..vcCommissioner, 72 T.C. 1, 19-20
(1979). The market approach measures value properly only when the comparable
property has qualities substantially simila 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 reasonable 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. Commissianer, 72 T.C.M. (CCH), at 162-163
(adjustments made to redemption price to account for passage of time ánd 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).

- 52 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 takiñg 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 depreciation 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.

- 53'-Coalson to testify in rebuttal to the respe tive 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 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.

26The designation of MAI is award d to qualifying members of the
American Institute of Real Estate Apprais rs, and it is the most highly recognized
appraisal designation within the appraisal community. The designations SRA
(senior residential appraiser) and SRPA (senior real estate property appraiser) are
.awarded to qualifying members of the Society of Real Estate Appraisers.

- 54 .

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 matters) property and mineral resource valuation. For approximately the last
20 years, he has been the president of a company 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 consulting with respect to real estate
valuation matters. Eichel, Inc.'s president is Mr. Eichel. Mr. Eichel has a bachelor

- 55 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 desig ation of MAI.
The Court recognized Mr. Eichel as an expert in the field of real estate
appraisals, with no obje'etion by petitioner.

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 environmental.assessor. He

currently is the president of Sespe, an environmental and engmeering 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.

- 56 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.California,
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 recrossexamination, 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. Commissioner, 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 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.

-S7E. Analysis
1. Nine Property Groups

Mr. Holzhauer and Mr. Eichel eac valued the nine property 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 alues that.Mr. Holzhauer and Mr..Eichel

ascertained and the agreed amounts are as follows:
Property group

1
2
3
4
5
6
7
8
9

Mr. Holzhauer

$5,000,000
300,000
3,625,000
5,000,000
450,000
310,000
962,000
126,000
210,000
Total
15,983,000
Discount 2,397,450
Net
13,585,550
Rounded 13,600,000

Mr. Eichel 042 Agreed value

l$15,876,000
2,100,000
5,425,000
6,250,000
5,000,000
425,000
918,000
126,000
145,000
36,265,000
.
-036,265,000
36,265,000

--$500,000
------367,500
918,000
126,000
145,000
---------

Mr. Eichel in his original wr tten expert witness report valued
this property at $16,200,000 but revised this number in his rebuttal

- 58 report to $15,876,000 to correct for a computational error of $324,000
that he. discovered 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 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 persuaded more by
respondent's experts than by petitioner's experts.

- 592. Property Group 1
a. Overview
We summarize each expert's valuation of property group 1 as follows:
2003
Mr. Holzhauer Mr. Eichel
Tonnage
Royalty rate (per ton)
Sale price
sales revenue,
Fill material fees
Gross income'
Reclamation costs
Selling costs
Real estate taxes
Production cost
Fill material processing
SG&A
Net operating income
Reclamation costs

" 2004
2005
Mr. Holzhauer Mr. Eichel Mr. Holzhhuer Mr. Eichel

188,000
$4
------$752,000
----$28,500
;---$723,500
--- .

148,164
--$14.50
$2,148,378
$70,000
$2,218,378
----$53,500
$592,656
$5,000
$200,000
$1,367,222
---

188,000
$4.14
-.---$778,320
----$29,070
--- .
----$749,250
---

193,455
--$15
$2,901,825
$130,000
$3,031,825
----$54,570
$773,820
$5,000
$200,000
$1,998,435
--'

188,000
$4.28
------- '
$805,561
----$29,651
------$775,910
---

Land sale

---

---

---

---

---

---

Permit compliance

---

.$250,000

---

---

---

---

Total
Discount factof
PV NOI

--.8811
$637,445

$1,117,222

--.7763
$604,180

$1,998,435

--.6839
$550,948

$1,286,746

Zoning action

---

---

---

.

---

---

122,037
--$15.50
$1,891,574
$400,000
$2,291,574
----$55,661
$549,167
$200,000
$200,000
$1,286,746
---

---

. .

- 60 2006
Mr. Holzhauer Mr. Eichel
Tonnage
Royalty rate (per ton)
Sale price
Sales revenue
Fill material fees
Gross income'
Reclarnation costs
Selling costs

188,000
$4.43
--·
--$833,756
---

148,623
--$16
$2,377,968
$1,200,000
$3,577,968
---

Real estate taxes
Production cost

$30,244
---

Fill material processing
SG&A
Net operating income
Reclamation costs
Zoning action
Land sale
Permit compliance
Total

$803,511
-------

$56,775
$743,115
$600,000
$200,000
$1,978,078
--------$1,978,078

Discount facto?

PV NOI

.

---

2007

.6026

$502,407
2009
Mr. Holzhauer
Mr. Eichel

Tonnage
Royalty rate (per ton)
Sale price
Sales revenue ,
Fill material fees .
Gross income
Reclamation costs
Selling costs
Real estate taxes
Production cost
Fill material processing
SG&A
Net operating income
Reclamation costs
Zoning action
Land sale
Parcel A-D
Parcel E
Total
Discount factor
PV NOI
NPV @l4%
Rounded

66,377

---

$4.59

---

---

---

--$16
--. $1,062,032
--$375,000
$862,937
$1,437,032
---

--------$24,600,000

$14.50
$385,497
$250,000
$635,497
---

$30,849
------$832,088

$57,910
$356,074
$125,000
.$200,000
$689,048

$31,466
----($24,631,466)

$59,068
$150,211
$25,000
$200,000
$201,218

---

$34,000

---

$33,000

--.5309
$458,142

$655,048

2010
Mr. Eichel

Total
Mr. Holzhauer

---

29,126

---

--$14
$407,764
$250,000
$657,764
----$60,250
$164,562
$25,000
$200,000
$207,952.
--$33,000

---

----$174,952

--- 042
$125,000
$125,000
--· $61,455
--$25,000
$38,545
$2,547,529
--$18,220,000
$15,188,500
$30,899,516
--$15,876,320
$15,876,000

26,568

$168,218
.4678
($11,522,600)

---

----.4121
$13,779,967

Mr. Eichel

188,000

--------.
$34,505,673
--$1,035,170
$32,096
----$33,438,407
-----

.

2008

Mr. Holzhauer Mr. Eichel Mr. Holzhauer

--------------------$5,040,211
--$5,000,000

1For each year 2005 through 2007, the gross income shown in Mr.
Holzhauer's columns is slightly different from the product of his royalty rate

- 61 shown for the year, and 188,000. Mr. Holzhauer first.calculated the gross income
for 2003 and then calculated the gross income for each year 2004 through 2007
by increasing the previous year's gross in ome by 3.5%. Mr. Holzhauer then
backed into his royalty rates by dividing the income for the year by 188,000, and '
rounding the quotient to the nearest cent.
2For each year 2003 through 2007, the PV NOI shown in this chart is
slightly different from the product of the het operating income shown for the year
and the discount factor shown for the year. Mr. Holzhauer rounded his discount
factors shown in this chart to the nearest en-thousandths, but he apparently did
not round the factors when performing his calculations. For 2003, Mr. Holzhauer
multiplied his discount factor by net operating income to arrive at his PV NOI.
For each of the other years 2004 through 2007, Mr. Holzhauer multiplied his' discount factor by gross income to arrive at his PV NOI.

With a single exception, we find that Mr. Holzhauer's analysis underlying
his $5 million value is a better measure of roperty group l's fair market value

than Mr. Eichel's analysis underlying his $15,876,000 value, notwithstanding that
Mr. Holzhauer's analysis sometimes appears to be outcome driven. While both

Mr. Holzhauer and.Mr. Eichel generally ascertained their values as the sum of the
present value of the remaining mineable sànd on the property plus the present
value of the residuary interest in the property, only Mr. Holzhauer adequately
recognized as of the valuation date that the property was primarily in poor

condition, out of compliance with the MUP, and zoned primarily for agricultural
use; that the property's value stemmed ma nly from the underlying real property;
and that the mining operation was conduc ed by Enniss, Inc., not petitioner. Mr.
Holzhauer also opined most persuasively t at the highest and best use of property
group 1 was to extract the remaining sand, then perform reclamation, and then to

- 62 redevelop or to sell the land; and that the value of the remaining sand was best
derived on the basis of the net income from röyalties that a third party would pay
for extracting the sand, see, e.g., Terrene Inys., Ltd. v. Commissioner, T.C. Memo.
2007-218 (the Court used a royalty-based income capitalization method to value a
tract of land with sand and gravel deposits), as opposed to, as Mr. Eichel
concluded, an extraction of,the sand by the land owner.".The single exception is
that Mr. Holzhauer, in contrast to Mr. Eichel, improperly minimized the value that

inhered in .the tipping fees that the owner of property group 1 would receive as to
the property. We turn to discuss some specifics of Mr. Holzhauer's valuation and
L

our discussion of the tipping fees.
b. Value of Remaining Mineable Sand
i. Background

Mr. Holzhauer ascertained his value of the remaining mineable sand by

relying upon Mr. Coalson's opinion of the volume of the remaining sand, the rate
of extraction, and the per-ton value for the remaining material.

"Mr. Eichel also considered various sales of property that occurred in 2007
to ascertain the fair market value of property group 1 (and property groups 3 and
4). .We disagree with his use of those sales which occurred too far after the
valuation date.

- 63 -

ii. Mineable Sand
Mr. Coalson calculated the volume of extractable sand on the basis of:a
review of the site of and MUP conditions of parcels A through D as of the f '
valuation date. · He concluded that no matdrial remainéd·for excavation in the lake
portions of property group 1 and estimate the:recoverable material as the product
of: (1) the undisturbed acreage on parcels B, Cpand D (taking intoraccount certain
setbacks as required under the MUP); (2) an assumed excavation depth in .

confoi·mity with the MUP; and (3) a conversion factor for cubic yards per
acre/foot. He arrived at án estimated volume of 625,000 cubic yards of remaining
sand and applied the appropriate conversion factor of 1.5 tons per cubic yardito
reasonably calculate that 940,000 tons of recoverable salable sand rem'ained on the
premises. The then-current market price for washed sand was $14.50 per ton in
2003, a total value in place at 2003 prices of $13;640,000.28 He likewise

.

reasonably assumed that the remaining sand would be mined at the same
approximate rate that it was·previously mined (plus or minus .200,000 tons a year)
and reasonably concluded that the mine life was five years given that the mine was
five years from depletion as of the valuation date. He conservatively ascertained

8There appears to be a rounding or

$9.50 = $13,630,000).

ath error of $10,000 (i.e., 940,000 x

- 64 that the remaining sand would be extracted at an even rate over the five-year period
(in other wordsr at 188,000 tons (940,000/5) per year).29
Mr. Coalson opined credibly that as of the valuation date there was a high

demand in San Diego County for 940,000 tons of sand. He valued the remaining
sand under two sceñarios: (1) the property owner mines the sand and (2) a third
party mines·the sand and pays the property owner a royalty for the sand. As to the
first scenario, i.e., the owner mines the sand, Mr. Coalson explained that the owner
would first have to acquire a permit to mine the sand and that the permit process .
had previously taken 18 years in the case of one site in San Diego County. As to
the second scenario, i.e., a third party mines the sand and pays a royalty for the
sand, Mr. Coalson explained that royalty arrangements were common in
circumstances where the owner did not want to develop a mining plan, hire
consultants, and get the requisite permit. He opined that an owner of a sand mine

in San Diego County would likely enter into a royalty agreement with a mining
company rather than mine the property itself. .He estimated a "very generous
royalty rate" of $4 per ton for sand mined by the third party, explaining that his

29Mr. EiChel, on the other hand, estimated that the remaining sand was
734,368 tons and that this sand would be extracted over a seven-year period at
rates that he improperly ascertained through his consideration of data that was not
reasonably foreseeable as of the valuation date. In line with this estimate, Mr.
Eichel also unpersuasively concluded that property group 1 would be sold in 2010.

- 65 estimate was derived from two royalty agreements that his company aggressively

negotiated in Lakeside during 2002, and opined reasonably that the owner would
expect a 3.5% annual increase in that rate to take into account inflation. Mr.
Holzhauer concluded that the real property owner would pay the real estate taxes
and the reclamation costs.
Mr. Holzhauer projected that $24.6 million of reclamation costs would be
owed in 2008, the year after the sand was :xcavated. Mr. Coalson had estimated
that the reclamation costs would total $24,913,003, using unadjusted 2003 price
data to estimate that amount, and Mr. Holzhauer first rounded that amount to $25

million and then ultimately concluded that reclamation costs would total $24.6
million. Mr. Holzhauer did not explain why he ultimately reduced the $25 million

to $24.6 million.
As Mr. Coalson saw it, as of the valuation date, the volume of fill required to
reclaim the mining pits in the sand.mine was 1,982,500 cubic yards determined as

follows:3°
3°Mr. Hecht opined that no filltneed be added to the northerly lake or to a
portion of the southerly excavation area. We disagree. Mr. Coalson testified
persuasively that the northerly lake had to be filled, noting among other things that
the sand in the lake was very permeable, as contrasted with the compacted sand
found in the pits, and that fill-had to be added to the lake to raise the bottom of the
lake to its required depth. As to the south rly extracted area, Mr. Hecht opined that
this area need not be filled because nothin was extracted from that area during
(continued...)

- 66 Fill area

Northerly Lake
Southerly Lake
Remaining southerly extraction area
Total volume backfill required

Cubic yards

.

372,500
985,000
. 625,000
1,982,500

Mr. Coalson logically determined these amounts by multiplying the area that was
required to be filled by the depth of the area. Mr. Coalson determined on the basis
of his review of the market that the fill would cost $9.50 per cubic yard, or

$18,833,750 in total (1,982,500 x $9.50), which takes into account both the price to
purchase specialized fill and to transport the fill to the site. Mr. Coalson also took
into account various other secondary costs relating to the property's reclamation
and arrived at a total reclamation cost of $24,913,003 (which, as previously
mentioned, Mr. Holzhauer rounded down to $24.6 million).
Mr. Holzhauer concluded that the owner of the sand mine would receive no
income from the acceptance of fill because, Mr. Holzhauer stated, this income does
"(...continued)
2003. Mr. Coalson opined, however, that the sand on property group 1 would be
extracted over a five-year period. Mr. Hecht acknowledged in his testimony that
the 625,000 cubic yards of fill would appropriately be taken into account if the
amount of sand was extracted in 2003 but that applicable financial standards do not
take this amount into account because the extraction is after one year. . We do not
believe that the referenced one-year rule is an appropriate guide to ascertaining the
fair market value of property group 1. Instead, we believe that the hypothetical
willing buyer and the hypothetical willing seller would take into account all costs
associated with the property, whether the anticipated costs are to be incurred before
one year or afterwards.

- 6T/ not relate to the real property value. Mr. Holzhauer rationalized that income
generated from tipping fees had "nothing t do" with the owner of the land into

which the fill was deposited. Mr; Coalson (and thus Mr. Holzhauer) did not
consider whether the owner of property gr up 1 could receive free fill from the .

Hanson site because he believed that Hanson desired a buyer for its fill and would
not give its fill to a competitor for free. M . Coalson also opined that Hanson's.

excess fill was dedicated to fill one of its own projects and was unavailable to fill
property group 1. Mr. Coalson also assert d, without further elaboration, that

accepting free fill was contrary to "state policy" because its availability at the time
of need could not be foreseen with any cer ainty.

We disagree with Mr. Holzhauer that the ability to receive tipping fees with
respect to property group 1 has nothing to do with the owner of.the property or,

more importantly, with a determination of the fair market value of property group
1. Mr. Eichel persuasively opined that these fees belong to the owner of the
property, and he took the fees into account in-his analysis. Moreover, as we see it,
a hypothetical willing buyer arid a hypoth tical willing seller would both take into

account the ability to receive tipping fees from property group 1 when agreeing on

the purchase price of that property. The ability to receive income as to property is
an important attribute of the property and factors into its value. To say the least,

- 68 net-income-producing property is certainly worth more than the exact same
property that does not produce net income.
That said, we believe that a hypothetical purchaser would not assume, as of
the valuation date, that it could receive the relevant industry minimum $2 per ton
tipping fee or benefit from free fill over the next five years of the sand mine
operation plus any additional time required to complete the land reclamation
project. Tipping fees and free fill are factually speculative, depending on
time-sensitive nearby demand and nearby supply, and could be achieved only as
long as San Diego County and the California Department of Conservation

permitted the sand mine operation and/or reclamation activities to continue. Any
such continuation was speculative, as of the valuation date, in view of the
uncontradicted testimony that SMARA, Cal. Pub. Rec. secs..2710 and 2773,
required an appropriate financial assurance mechanism to ensure that adequate
funds to complete all required reclamation work are available when mining ends."
The sand mine was out of compliance with that provision given that an appropriate
reclamation financial assurance plan was not then in place. The original 1990s

See generally People ex rel. Dept. of Conservation v. El Dorado County,
116 P.3d 567 (Cal. 2005), as to procedural enforcement matters and People ex rel.
Connell v. Ferreira, 2003 WL 22022032 (Cal. Ct. App. 2003), and McCain v.
County of Lassen, 2003 WL 123065 (Cal. Ct. App. 2003), as to fines and penalties.

- 69 financial plan was obsolete because significant mining had occurred since then and

the posted $40,000 bond for that plan had expired."

.

Other serious major problems with ;he MUP and with the reclamation plan
were present as of the valuation date.. The-MUP set numerous requirements that

were not met. The MUP required the con truction of certain roads, but those roads
were not then built. Sand had been mined too close to the roadways to allow an

acceptable slope on the sides of the pits. Sand was mined in large quantities far
below the permitted:maximum mining depth. Reclamation and channel work were

far behind schedule. The approved mining plan regulating which areas were to be
mined first and in which order, known as the mining phases, had been ignored on
account of flooding and the lack of channel work. Consequently, the sand mine's

entire operation.was at significant risk that the underlying business could, and

"In 2005, San Diego County pursued the matter further and Enniss, Inc.,
after several meetings, persuaded the county to accept a $2.9 million letter of credit
coupled with Hanson's representation that Enniss, Inc., could use fill available on
the Hanson site to reclaim Enniss, Inc.'s sand mine. Whether Enniss, Inc., could
have actually used the Hanson fill, however, was questionable because Hanson
also was considering using some or all of that fill for other projects. Moreover,
even if Hanson allowed Enniss, Inc., to use the fill, there was no certainty that the
required conveyor system which would require at least an easement over the
nearby properties could be constructed to transport the fill between the two sites.
Absent the Hanson fill, the necessary but tËen-absent bond or letter of credit to
keep the sand mine open would have had to be in the amount of approximately $20
million as the county had indicated that the bond or letter of credit would have to
reflect the cost of 2 million cubic yards of fill at $9.50 per cubic yard.

- 70 would, be fined and/or shut down by San Diego County and/or by the California
Department of Conservation and the required reclamation work.demanded
immediately.
Should that have occurred, there would be no further revenue from sand

sales or tipping fees until, if ever, government authorities approved a new MUP
and reclamation plan. Even worse, a shutdown would force use of the Hanson fill
if still available and permission for the conveyor system could be obtained, or if

not, suitable fill material would have to be purchased on the open market to
reclaim the land at great cost. These facts would be of great concern to a
hypothetical purchaser and would significantly temper its thinking regarding the
purchase price and any offsetting consideration of potential tipping fees and free

fill.
Still, sand mine owners and operators in San Diego County routinely

received tipping fees in exchange for allowing others to dump debris in the pits at
their mines. We fail to see why a hypothetical owner of property group 1, to the
extent that it could, would not chárge a tipping fee to do the same at that site."
While Mr. Coalson testified that specialized fill had to be used to reclaim property
group 1, we are unpersuaded that this is the case as to all of the property. In fact,

"Tipping fees are inversely related to hauling costs.

- 71 -as Mr. Hecht pointed out, environmental documents for property group. I state
specifically that construction debris can be used to;fill the pits.
Fill for dumping was available as o the valuation date, yet Mr. Coalson
improperly:minimized the receipt of the ti ping,fees when,ascertaining his value of
property'group 1." The record does not allow us to find with precision the portion

of the 1,982,500 cubic yards of fill that th hypothetical owner of property group 1
would have to pay $9.50 for vis-a-vis the ortion that the owner would pay nothing
for but instead would receivé tipping fees. We believe it reasonable to reduce Mr.

Holzhauer's calculation that the owner would pay $9.50 for each of the 1,982,500
cubic yards of fill by a stated amount in tipping fees and then apply the net amount

to the 1,982,500. .
To the extent that Mr. Coalson asse ted;that State policy for determining an

appropriate financial assurance plan prohibits the receipt of fill for free would also
apply to receiving fill and a tipping fee, we are unpersuaded that any.such policy is

"The record does not allow us to find as of the valuation date the exact
amount of fill that could be received either for free or with a tipping fee. We note,
however, that on November 9, 2004, ChaË Enniss informed the Department of
Planning and Land Use that fivè nearbyvnËmed "truckers and dirt brokers" had
3,721,000 cubic yards of fill available for umping within a.one-year period and
that these truckers and brokers had expres ed a desire to dump their product at the a
sand mine. He also named 20 other dirt a d rubble producers in the county and .
stated that the 25 total producers were "ju t a small list of company's that haul,
dump, or produce dirt or rubble".

- 72 as cut and driedaas Mr. Coalson stated. Mr. Coalson did not explain or otherwise

elaborate on his asserted policy, and the record establishes apart from.the
determination and approval of financial assurance plans that in the real operating
world sand mines regularly received tipping fees during the relevant period. At the
same time, we are unpersuaded that the hypothetical buyer and the hypothetical
seller would have concluded, as of the valuation date, that fill for property group 1

could be obtained and economically transported from the Hanson site.
Valuation is an inexact science which does not call for scientific precision,

see, e.g., Frazee v. Commissioner, 98 T.C. 554, 577 (1992), and we believe that
simply reducing the $9.50 cost by three-fourths of the minimal but customary $2
per ton in tipping fees (i.e., by $1.50 per ton) is the best measure for the overall
cost of the fill related to property group 1 to adequately consider the risk of a
government·shutdown and to blend the amount of fill that.would be purchased visa-vis the amount of fill that would be accepted for a fee. The parties should factor
these tipping fees into Mr. Holzhauer's calculation in their Rule 155

_

.

computation(s)."
"As a point of clarification, Mr. Holzhauer's $24.6 million of reclamation

costs in 2008 should be reduced by $4,460,625 in tipping fees (i.e.,.$1.50 per ton x
the 1.5 tons per cubic yard conversion rate x 1,9823500 cubic yards). We recognize
that each cubic yard of fill received with a tipping fee will likewise produce a
savings of $9.50 per cubic yard and have blended that.savings into our
(continued...)

- 73 c. Residuary Interest in Property
Mr. Holzhauer calculated a value for the reclaimed sand mine on the basis of

his valuation of the underlying individual barcels. His calculation assumed a
highest and best use of each lot primarily ás storage. He reviewed 12 real property
sales as part of his analysis. The sites of t e properties underlying these sales were
as follows:

Sale 1
Sale 2

12566 Vigilante Rd;, Lakeside CA
9120 Jamacha Rd., Spring Valley CA

Sale 3
Sale 4
Sale 5
Sale 6
Sale 7
Sale 8
Sale 9
Sale 10
Sale 11
Sale 12

Woodside Ave. and Wheatlands Rd., Santee CA
ES Rockville St., Santee CA
SWC Jamacha IËlvd. and Folex Way, Spring'Valley CA
1596 North Joh son Ave.., El Cajon CA
10007 Riverford Rd., Lakeside CA
Woodside Ave., North of Marilla Dr., Lakeside CA
Woodside Ave. and Hartley Rd., Santee CA
11322 North W odside Ave., Santee CA
SEC Riverford Ild. & Riverside Dr., Lakeside CA
NWC Mapleview St. & Channel Rd., Lakeside, CA

'

The pertinent information underlying the ales (as adjusted to reflect additional
costs to the buyers for items such as required fill or grading and adjustments for
size to reflect actual useable land) is as follows:36

"(...continued)
$1.50-per-ton calculation.
36M54 and IG zoning is general industrial use. IL zoning is light industrial

use. S88 zoning is limited industrial use.

- 74 sale # sale date sale price Acreage

1
2
3
4
5
6
7
8
9
10
11
12

Oct 02
May 02
May 02
Apr 01
Apr 03
Mar 04
Apr 02
Aug 03
Jul 03
sep 04
Feb 00
Jun 04

$635,094
650,000
681,507
750,000
1,310,000
1,277,000
1,335,000
1,218,500
2,251,177
2,200,000
2,711,500
2,140,000

1.08
1.09
1.39
1.50
2.36
3.81
3.86
4.78
5.44
7.29
8.00
20.06

square
feet'

Price/sF

Zoning

47,045
47,480
60,548
65,340
102,802
165,964
168,142
208,217
236,966
317,552
348.480
873,814

$13.50
13.69
11.26
11.48
12.74
7.69
7.94
5.85
9.50
6.93
7.78
2.45

M58
M54
IL
IL
M58
M
s88
s88
IL
IG
s88
s88

Use

Industrial development; outdoor storage
Industrial development; outdoor storage
Industrial development
Church parking
To build ministorage
Industrial development; outdoor storage2
Industrial development
Industrial development
Industrial development
Industrial development; outdoor storage'
Industrial development
Preservation

One acre equals 43,560 square feet.
2The use for outdoor storage depends on a conditional permit.

Mr. Eichel's comparable sales, by contrast, involved many properties which were
sold in 2007 and other properties which were not actually comparable to the

properties underlying property group 1.
Mr. Holzhauer considered sales 1, 2, 6, and 10 to be the most relevant to his
analysis because they each were actually used or going to be used for outdoor
storage. He reasonably concluded that sale 1 was the most relevant sale because

the underlying parcel was on Vigilante Road and had been purchased primarily for
outdoor storage. He.also reasonably considered sales 2, 6, and 10 to ascertain the
square-foot value of the reclaimed land because the reclaimed land was much

larger than the property underlying sale 1. He concluded from these four
comparable sales that the sand mine parcels, when.fully reclaimed, had an average
value as of the valuation date of $8 per square foot (or approximately $24.5 million
in total). He then applied a real estate appreciation factor of 5% per year to arrive

- 75 -

.

at a future residuary value of $34,505,673 in 2009 for the fully reclaimed .
properties and reduced that value by selling-expenses of·approximately 3%
($1,035,170) to be incurred when the reclaimed þroperty was sold in 2009. Costs
included annual real estate taxes of 1.5% f the market value of the property,.with

a 2% annual increase ($32,096 per year b 2009).
d. Applicable Discou t Rate

.

,;

: .

Mr. Holzhauer applied.a 13.5% dis ount rate to capitalize cashflows arising

from property group 1 to arrive at a final resent valûe for the property of
$5,040,211 before consideration of the co t to comply;with certain MUPs and the
value of real property improvements (e.g., a 4,300-square-foot office building on
parcel E). After considering these items, 330,000 and $400,000, respectively, he
arrived at a value of $4,995,000, which h rounded to $5 million. He opined that
this rate was appropriate because an inves ment in royalties from a sand mine
carried a high risk, given the regulatory ri k, reclamation risks, and the risk of
demand and pricing for sand. He reviewe the yield rates listed in a reliable survey
of real property economic indicators and hose 13.5% as a rate that was slightly
less than the mean rate for higher risk properties.
We agree that Mr. Holzhauer's 13.5% rate is a reasonable rate to apply in the
setting at hand and in conjunction with ou resolution of the fill dirt costs.

- 76 Discount rates are generally set at the rates of return that property buyers in the
marketplace will demand to invest in property, see, e.g., Terrene Inys., Ltd. v.
Commissioner, T.C. Memo. 2007-218, and the rate to apply in a given case must
reflect an adequate return on investment with due respect to the attendant risks in
the investment. As of the valuation date, an investment in property group 1 was a

high risk, given among other things that the property was in poor condition and
many of the MUP and reclamation plan conditions were.not met. The 13.5% rate,
which falls within the lower half of the high risk rates included in the referenced
survey, is reasonable in that it reflects a sensible return on investment as of January

1, 2003, when considering the attendant risks in investing in property group 1.

- 77 3. Property Groups 3 and 4
These property groups include eigh parcels on either side of Vigilante Road.
Mr. Holzhauer opined that the applicable fair market value of property groups 3
and 4 were $3,625,000 and $5 million, respectively." He arrived at·those values
by applying a sales comparison approach nd by.comparing the attribütes of the
parcels underlying property groups 3 and

and the comparable properties. Mr.

Eichel ascertained that the rounded respec ive values were $5,425,000 and
$6,250,000 using a comparative sales analysis that reviewed the same properties he
reviewed to value the residuary interest in property group 1. Äs was similarly true
in the case of property group 1, the properties underlying Mr. Eichel's comparable

37He broke down these amounts as follows:
Property

G
H
I
Total
Total (as rounded)

K
L
M
N
Total
Total (as rounded)

Ac es

Value/SF

Value

2.86
4.7p
.8Å

$10
9
14

$1,245,816
1,842,588 '
536,659
3,625,063
3,625,000

1.ÿ5
2.37
1. I4
1.E9
3.Õ3

13
12
14
13.50
10

594,594
1,238,846
695,218
75 540,597
1,711,908
4,999,163
5,000,000

- 78 sales were for the most part not comparable to the parcels in property groups 3 and
4 or the sales were too far removed from the valuation date.
We find Mr. Holzhauer's analysis underlying his values to be more

.

persuasive than Mr. Eichel's analysis underlying his values. Mr. Holzhauer
determined the highest and best use for property groups 3 and 4 to be continued
use for open storage or outdoor.manufacturing. He valued property groups 3 and 4
using 11 of the 12 comparable sales he analyzed in valuing the reclaimed land in
property group 1 (he concluded that the remaining sale was not pertinent to·this

valuation). He ascertained that the mean of the 11 sales was $9.77 per square foot
and noted that the sales price per square foot tended to decrease for those sales as
the size of the property increased.
Mr. Holzhauer reasonably concluded that sale 1, the underlying parc'el of
which was the smallest parcel in the 11 sales, was a good benchmark in valuing the

smallest parcels in property groups 3 and 4 because the property underlying sale 1
was on the same block as the properties underlying property groups 3 and 4. He
also reasonably concluded that sales 7, 8, and 9 provided guidance on the impact of

size on value. He acknowledged that group 3 property was sold in 2007, but here
where the sale was more than four years later he properly minimized or

- 79 disregarded that sale either because the value of industrial properties had surged
since 2004 or the sale date was too far removed from the valuation date.38
4. Property Group 5
Mr. Holzhauer opined that the appl: cable fair market value of property group

5 was $450,000. Mr. Eichel ascertained that the applicable value .was $5 million.
We find that the value was $3,975,000 (01, as explained below, $5 million as
adjusted to reflect an average 1% per month appreciation in the property from the

valuation date to.the original option exere se date of August 12, 2004).
Mr. Eichel noted that.property group 5 was under option as of the valuation

date for purchase at a price of-$5 million. He noted that the property was later sold.
to a national builder of homes and opined that a key element of the.value of .
property group 5 v/as the option purchase price. He analyzed other sales of similar

residential development land in the surrounding area and concluded that the $5
million option price for property group 5 vas significantly lower than the other

38Actual sales of the same property within a reasonable period after the
valuation date are relevant and admissible. See Estate of Giovacchini v.
Commissioner, T.C. Memo. 2013-27, at *50-*58 (and cases cited thereat). That
said, where relevant events materially affécting value ivere not reasonably
foreseeable on the valuation date, the pric: effect of those events should be
discounted or adjusted in determining value as of the valuation date, or the entire

subsequent sale should be disregarded.

- 80 sale prices but that a reasonable purchaser would pay no more than $5 million for

property group 5.
Mr. Holzhauer minimized the fact that Santee was driving a development of
the property surrounding property group 5 and determined that the highest and best
use for property group 5 was mining with a remote possibility of future residential
development. He ascertained his $450,000 fair market value for property group 5
by first determining a trended value for the property on the basis of the price that
petitioner paid for the property approximately 54 months before the valuation date.
He then applied an appreciation rate of approximately 1% per month to reflect the

appreciation of industrial land. He concluded that the option agreement was
irrelevant to his valuation of property group 5 because, he stated, the rules of
valuation require that the property be valued as if it were for sale."free and clear"
of the option.
We disagree with Mr: Holzhauer's analysis as to property group 5. Contrary
to his belief, the option agreement was not irrelevant in valuing property group 5.
In addition, contrary to petitioner's statements in its brief, we do not ignore the

option agreement in valuing property group 5 or otherwise value that property as if
it were for sale free and clear of the option. The fact that property group 5 was
subject to the option agreement on the valuation date and that our hypothetical

- 81 buyer and hypothetical seller are considered to know the same are important facts
that must be taken into account when valu ng-that property. In other words, the
hypothetical buyer and the hypothetical seller in buying and selling the property
would know that the optiòn agreement, as it 'existed on the valuation date, had to.be
consummated by August 12, 2004 (20-1/2 months after the valuation .date). This
agreement further provided that the owner of the property immediately before

.

consummation of the option would either sell property group 5 to the optionee for

$5 million, or if it did not, the owner, petitioner, would sell the optionee the
referenced easements for $2 million, in w ich case the optionee-at its cost would
improve the access road and stub utilities át the access.road to.all other approved
property lots.3° While the initial optionee may have been a strategic buyer as Mr.

39PetitiOner invites the Court to find as a fact that the optionee had both an
option to purchase property group 5 for $5 million and an option to purchase the ~
easements for $2 million. We decline to do so. As we read the option agreement,
and as we ultimately find in consideration of the record as a whole, the option
applies only to the purchase of property g oup 5 for $5 million. To be sure, the
option agreement explicitly distinguishes the option from the mandatory sale of the
easements. The option agreement states iÊ part:
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 tentative map for the Master Project * * * [and that]
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 monumenta ion for the Master Project.

- 82 Holzhauer opined, this does not mean, as Mr. Holzhauer concluded, that a s ..
hypothetical willing buyer and a hypothetical willing seller would ignore the fact
that the optionee was contemplating buying the property at a future date for $5

million. Nor would the hypothetical willing buyer and.the hypothetical willing
seller ignore the fact that the optionee was obligated to pay $2 million to the owner
of the property for easements on the property, make road improvements, and stub
utilities if the optionee did not exercise the option.
As we see it, forgetting for the moment any appreciation in property group 5
between the valuation date and the date that the option is consummated, that
property.was worth at least approximately $2 million on the valuation date given
that the optionee, at a minimum, was going to pay $2 million for easements on the
property approximately 20-1/2 months later.4° The question, therefore, is how
much more than $2 million was it worth? Petitioner argues that the exercise of the
option~was "very speculative" as of the valuation date and should be given no
weight. We disagree.
The optionee was committed to pay $2 million for the easements alone
(exclusive of the additional cost of the improvements), and we do not consider it
unreasonable to conclude that the optionee would pay the extra $3 million (or less,
4°We say "approximately" because the optionee also had to make certain
improvements to the property in return for the easements.

- 83 when taking into account the improvement cost) to acquire the full bundle of the

property rights included in the 31.47 acres of property group 5. This is especially
true given that Santee was spearheading the development of the nearby. property as
a residential development, and the record eads to the conclusion that a
hypothetical buyer and a hypothetical seller would böth anticipate that the option
was going to be exercised at the $5 million strike price ©,To be sure, we doubt that

sophisticated longtime businessmen such as the members of the Enniss family
would encumber their property with the two-year option in return for a single
dollar and the permanent easement sale fo $2 million were they not confident that

the option was.likely to be exercised.
Mr. Eichel analyzed various similar properties and concluded that the fair
market value of property group 5 was at least $5 million. Respondent invites the
Court to set the applicable value at $5 million. We decline to.do so. We believe
that the $5 million option price is.a reliable guide to the fair,market value'of
property group 5. as of the exercise date but that the price must be adjusted to take
into account the time value of money (als appreciation in property group 5)
between'August 12, 2004',.and the valuati n date. See Estate of Trompeter v.
"The fact that the parties to the option agreement expected the development
to go through is also seen in part by obser ing that the option agreement provided
that FDC would pay EFR $2 million for the easements after the first final
subdivision map for the master project was approved.

,

- 84 Commissioner, T.C:Memo. 1998-35; Estate of Scanlan v-.'Commissioner, T.C.
Memo. 1996-331. Similar property,in the area was appreciating at the rate of 1%
per month, and we believe it appropriate to discount the $5 million option price by
20-1/2% to reflect (primarily but among other things) the passage of time from the
valuation date to August 12, 2004.

- .·

,

While, theoretically speaking, the fair market value of property group 5
should also take into account the risk that the optionee would not have the funds to
pay $5 million to exercise the option, the fact that Santee was pushing the
developnient of the nearby property and that we apply the 1% rate for each of the
20-1/2 months persuades us that this calculation best establishes the fair market
value of property group 5 as of the valuation date. We hold that the applicable fair

market value of property group 5 was $3,9.75,000 (i.e., $5 million x (1 - .205)).
5. Bulk Sale Discount
Mr. Holzhauer applied a bulk sale discount of 15% to the total value of the
nine property groups. Petitioner argues that-the discount is appropriate to reflect
the fact that the nine groups of property are valued as if they were sold as of the
same time. While petitioner calls this discount a "bulk

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Abe78623a5041d744. Public record. Not legal advice.