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relies upon Parli's view that the highest and best use of the
property is as office space rather than as a hotel.1
Respondent's contention ignores the fact that the property
was encumbered by a long-term lease. The lessee, possessing a
leasehold interest, occupies the land on which its particular
hotel is located. Such an interest reduces the value of the
partnership's interest in the land because the lessee's
contractual right to occupy the land prevents the partnership
from re-leasing the property at a higher rate or from demolishing
the hotel and using the land for another, perhaps more
profitable, purpose. The lessee, not the partnership, has the
option to use the land to construct an office building or to
sublet the property at a profit. Consequently, it is unrealistic
to contend that the value of the partnership's interest in the
land is equivalent to the value of the land at its highest and
best use as though the land were vacant. See Marks v.
Commissioner, T.C. Memo. 1985-179; Appraisal Institute, The
Appraisal of Real Estate, 280 n.5, 282 (10th ed. 1992).
Respondent's assertions fail to consider reality as it existed on
1Petitioner does not argue that it made an election pursuant
to sec. 2032A. Sec. 2032A permits an estate to elect to value
qualified real property used for farming and small business
purposes on the basis of income capitalization rather than on the
basis of highest and best use. Sec. 2032A(e)(7); Williamson v.
Commissioner, 93 T.C. 242, 244 (1989), affd. 974 F.2d 1525 (9th
Cir. 1992); Estate of Heffley v. Commissioner, 89 T.C. 265, 271
(1987), affd. 884 F.2d 279 (7th Cir. 1989).
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