Special Use Valuation in Estates With Declining Land Values-part Ii
| Jurisdiction | United States,Federal |
| Citation | Vol. 12 No. 1991 Pg. 2513 |
| Pages | 2513 |
| Publication year | 1991 |
1991, December, Pg. 2513. Special Use Valuation in Estates with Declining Land Values-Part II
This article is the second of a two-part series reviewing recent developments in special use valuation under Internal Revenue Code ("Code") § 2032A. The first article examined who may participate in an election agreement and defined "qualified use" property. This article defines who may be a "qualified heir" and what constitutes "material participation."
According to Code § 2032A(e)(1), a qualified heir is a member of the decedent's family who inherits the property to be valued under § 2032A. Code § 2032A(e)(2) was added by the Economic Recovery Tax Act of 1981(fn1) to define family members as ancestors, the spouse, the lineal descendants of the individual or spouse, the lineal descendants of the individual's parents and spouses of these lineal descendants. Legally adopted children are considered qualified family members and, thus, their descendants are considered lineal.(fn2) With the death of a key family member, certain heirs can lose their status as family members.
The limits of who is considered a family member were tested in a 1988 U.S. Tax Court case, LaVerne Smoot v. Commissioner.(fn3) Under the decedent's will, the spouse received a life estate in the estate property with a testamentary power of appointment as to the remain-der. The estate elected § 2032A valuation for the property. The testamentary power allowed the spouse to devise the remainder to any party except himself. Further, should the spouse not validly exercise his power, the land would pass, on his death, to a trust benefiting the decedent's descendants. If these descendants were not living, one-half of the property would pass to the decedent's heirs and one-half to the spouse's heirs.
The Internal Revenue Service ("IRS") considered the plan in Smoot not to be in compliance with Code § 2032A(e)(2) because there was a remote possibility that the property could pass to nonqualified heirs. However, the court concluded that the § 2032A election was valid. The court took the position that reasonable estate planning strategies should not be put aside just because the IRS fears the possibility of a disposition of the property to a nonqualified person. Further, the court noted that the IRS can recapture taxes if the spouse devises the property to nonqualified parties within ten years of the decedent's death.
The Fourth Circuit Court of Appeals went one step further in Estate of James U. Thompson v. Commissioner.(fn4) The decedent had specified how the net income from family farming operations were to be distributed. Two percent, or $2,000, was to be received by an unrelated individual until death or remarriage. For this reason, the IRS disqualified the § 2032A election. The court reversed the decision, arguing that legislative history does not support an overly...
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