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Lease of farm kills special-use valuation for estate tax.

Elizabeth Williamson owned property in Minnesota, which her grandson, Harvey Williamson, operated as a family farm under a crop-sharing agreement with his grandmother. Elizabeth died in 1983, and her son, Beryl, who lived in California, inherited the farm. Beryl elected the special-use valuation (IRC section 2032A), which more than halved the farm's value for estate tax purposes.

Beryl, who remained in California, entered into a four-year lease with Harvey (his nephew), who continued farming the land. Under the lease, Harvey promised to pay semiannual rent of about $4,000.

The IRS determined the cash lease meant the "qualified-use" requirement of the special valuation provision was not satisfied. The IRS asserted a recapture tax of $42,000.

Section 2032A special-use valuation requires, among other things, that the property pass to or be acquired by a "qualified heir' (a family member) from the decedent. Here, Beryl was the qualified heir. Harvey was not a qualified heir because he did not acquire the property from his grandmother.

If the qualified heir "disposes of" the property to another family member, the transferee becomes the qualified heir under the statute. Disposition is not defined in the statute or legislative history.

Section 2032A also provides that if the qualified heir, within 10 years after the decedent's death, stops the "qualified use" of the property (that is, active farming or other active business), a recapture tax applies. Under the legislative history of the statute, a passive rental of the property (as opposed to a crop-share arrangement or other arrangement where payments are contingent on farming revenues) is not considered a qualified use. A special rule provides that a surviving spouse may rent the property to a family member on a net cash basis without becoming subject to the recapture tax.

The qualified heir has a two-year grace period to begin using the property for farming or other qualified use.

Beryl argued his lease to Harvey was a disposition. Therefore, under Beryl's argument, Harvey became the qualified heir, and no recapture should apply since Harvey's use was qualified. The Tax Court held in favor of the IRS.

Result: For the IRS. The Ninth Circuit Court of Appeals said the lease was not a disposition, and Beryl's cash lease of the property was not a qualified use. Cash leases by family members other than a surviving spouse were not intended by Congress to be treated as qualified use. Also, the term "disposition" implies a permanent transfer of an interest, which this lease was not. Thus, the recapture tax must be paid by Beryl.

* Williamson (9th Cir., 1992).

Edited by Anne Wagenbrenner, JD, LLM, editor, AICPA client newsletters.
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Dec 1, 1992
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