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submitted with the estate’s Form 706 concluded that the
unencumbered fair market value of decedent’s interest in the
Cotulla Ranch on decedent’s date of death was $1,380,000 and that
the fair market value of the Cotulla Ranch encumbered by the
postdeath lease was $1,070,000. In the notice of deficiency,
respondent determined that the fair market value of the Cotulla
Ranch on the date of decedent’s death was $1,380,000.
In addition to respondent’s determination of the fair market
value of the ranch properties at decedent’s date of death,
respondent determined in the notice of deficiency:
It is also determined that section 2703 of the Internal
Revenue Code applies to any lease or lease options
which the decedent may have had with her children on
the ranches * * *. Accordingly, the values of Schedule
A * * * should be determined without regard to such
leases or lease options, if any. Furthermore, the
leases and/or lease options were not valid under state
law. Similarly, they were not bona fide business
transactions but devices intended to avoid federal
transfer taxes. In effect the alleged leases and/or
options to lease were shams. Accordingly, the reported
value of the gross estate is increased $1,110,000.00
* * *.
OPINION
The issue presented is whether the ranch properties that
were owned by decedent at her date of death were encumbered by
oral options that extended the existing leases on the ranch
properties and, if so, whether the oral options or the existing
leases were a restriction on the sale or use of the ranch
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