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Estate planning/taxation.

Tax Facts Q: 532. How does the executor's election of the alternate valuation method affect the valuation of property for federal estate tax purposes?

Carolyn Finfrock v. United States, No. 3:11-cv-03052

An Illinois court recently held that Treasury Regulation 20.2032A-8(a)(2) was invalid because it conflicted with the provisions of IRC Section 2032A, which governs the valuation of certain real property for estate tax purposes.

Typically, the value of real property included in an estate is determined by using the fair market value of the property, which means the price that a willing buyer would pay a willing seller for the property as of the date of the decedent's death. This method takes the "highest and best use" of the property into consideration, which may lead to a valuation that does not accurately reflect the property's current use.

Because of this, IRC Section 2032A provides an alternate valuation method if the decedent or the decedent's family operates the real property in question as a farm or other closely-held business. This method allows the executor to take the actual use of the property, rather than its highest and best use, into consideration when determining the value includable in the estate.

Reg. Section 20.2032A-8(a)(2) provides that the real property selected for special use valuation must constitute at least 25 percent of the value of the entire adjusted gross estate.

In this case, the decedent owned four separate parcels of land that were operated as a closely-held family farming business. While the total value of all four parcels equaled approximately 68 percent of the adjusted gross estate, the estate elected to apply the rule to only one of the parcels, which represented 15 percent of the adjusted gross estate, because it was the only parcel that would continue to be operated as a farm. The 1RS filed a notice of deficiency because the parcel selected for special use valuation did not meet the 25 percent threshold.

The court ruled against the 1RS, and found the regulation invalid because Section 2032A requires only that at least 25 percent of the entire estate consist of property that is qualified for special use valuation. The regulation, on the other hand, applied the 25 percent requirement to the property actually chosen for special use valuation.

Because the statute was unambiguous, and the regulation directly conflicted with its requirements, the statute was held to control and the regulation was deemed invalid.

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Title Annotation:Monthly Round-up
Publication:Tax Facts Intelligence
Date:May 1, 2012
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