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amount that may be due from the insurance company. The notice of
deficiency contained the following explanation for disallowing
the $122,400 adjustment: “It is determined that the estate took
a $855,573 deduction for outstanding monies owed to the
contractors. Since the insurance was to pay for the entire cost
of rebuilding, the estate cannot deduct more than it returns as
an asset.” In effect, respondent’s approach results in a net
amount of $1,032,000 being included in the gross estate with
respect to the partially completed residence.
We disagree with the approach utilized by both parties. We
do not question the legal principles relied upon by either party,
but question their interpretation and application of those
principles to the facts. We first review the legal principles.
For Federal estate tax purposes, assets are includable in a
decedent’s gross estate at fair market value determined at the
date of death. See sec. 2031(a);5 sec. 20.2031-1(b), Estate Tax
Regs. Fair market value is “‘the price at which the property
would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or to sell and both
having reasonable knowledge of relevant facts.’” United States
v. Cartwright, 411 U.S. 546, 551 (1973) (quoting sec. 20.2031-
5 All section references are to the Internal Revenue Code in
effect as of the date of decedent’s death, and all Rule
references are to the Tax Court Rules of Practice and Procedure,
unless otherwise indicated.
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