## Facts

- Louis F. Bonner, Sr. died in 1989 owning undivided fractional interests in: (1) a 62.5% interest in a Texas ranch, (2) a 50% interest in New Mexico real property, and (3) a 50% interest in a pleasure boat.
- The remaining interests in each asset were owned by a trust created under his predeceased wife’s will, for which her estate had elected QTIP treatment and claimed a marital deduction under I.R.C. § 2056(b)(7).
- Under I.R.C. § 2044, the trust’s QTIP interests were included in Bonner’s gross estate; Bonner’s own interests were included under I.R.C. § 2033.
- The parties stipulated to the fair market value of 100% ownership of each asset on the date of death: ranch $1.8 million; New Mexico property $175,000; boat $30,000.
- The estate’s return valued Bonner’s undivided interests using fractional-interest discounts (including a 45% discount applied to the ranch interest) based on lack of control and marketability.
- The IRS disallowed the discounts, asserting that because Bonner’s estate included both his interests and the QTIP interests, the combined interests should be valued as 100% ownership without discount.
- The estate paid the additional assessed estate tax and sued for a refund.

## Issues

1. Whether § 2044 inclusion of QTIP property in a decedent’s gross estate requires valuing combined interests as an undiscounted 100% fee interest, thereby disallowing fractional-interest discounts on the decedent’s own undivided interests.
2. Whether, under the willing-buyer/willing-seller fair market value standard, the decedent’s undivided interests must be valued as separate, discounted interests despite tax inclusion of related QTIP interests.

## Decision

- The Fifth Circuit reversed summary judgment for the government and remanded.
- The court held the estate was entitled to fractional-interest discounts in valuing Bonner’s undivided interests in the ranch, New Mexico property, and boat.
- The court rejected the government’s theory that tax inclusion under § 2044 “merges” separate ownership interests into a single 100% interest for valuation purposes.

## Legal Principles

- I.R.C. § 2033 requires valuing the decedent’s property based on the interest actually owned at death.
- I.R.C. § 2044 is an inclusion rule for QTIP property; it does not alter state-law property rights or convert multiple legal interests into a single unified interest for valuation.
- Estate-tax valuation applies the willing-buyer/willing-seller fair market value standard to the specific interest transferred, permitting discounts for minority or undivided fractional interests based on lack of control and reduced marketability.
- Absent a specific statutory valuation rule, inclusion of QTIP property in the gross estate does not negate standard valuation discounts applicable to the decedent’s separately owned fractional interests.

## Conclusion

The Fifth Circuit held that a surviving spouse’s gross-estate inclusion of QTIP property under § 2044 does not require valuing the property as a single undiscounted 100% interest; the decedent’s undivided interests remain separately valued at fair market value, including appropriate fractional-interest discounts.


Estate of Bonner v. United States, 84 F.3d 196 (5th Cir. 1996)