Sale of development easement.

• Author: Barton, Peter C.
• Position: Taxation

In Estate of Gibbs, 12/1/98, the Third Circuit ruled that the sale of a development (conservation) easement was a prohibited"disposition of any interest" under Sec. 2032A, thereby triggering the recapture of estate tax. This case is important not only in applying Sec. 2032A, but also for the recently enacted Sec. 2057 family-owned business deduction, which contains similar language.

Generally, real property must be included in the gross estate at its fair market value on the date of the decedent's death. Sec. 2032A, enacted in 1976, provides an exception for certain family farms and other closely held businesses. If the estate makes a Sec. 2032A election, such property is valued based on its actual use, rather than on its highest and best use. Under Sec. 2032A(a)(2) and (3), the maximum reduction in value is $750,000, adjusted for inflation for decedents dying after 1998. The purpose of Sec. 2032A is to provide relief to heirs who might otherwise need to sell family businesses to pay estate taxes.

Although an estate must satisfy many conditions to elect Sec. 2032A, only the recapture tax provisions were at issue in Estate of Gibbs. Additional estate tax is imposed if, within 10 years after the decedent's death and before the death of the qualified heir, the latter either "disposes of any interest" in the qualified real property or ceases to use the property for the qualified use that allowed the reduction in valuation (Sec. 2032A(c)(1)). However, dispositions to a member of the qualified heir's family are allowed, as are charitable contributions of a qualified conservation easement restricting the property's use (Sec. 2032A(c)(1) and (8)).

In Estate of Gibbs, James Gibbs, Sr. owned and operated a dairy farm at his death in 1984. At that time, the property had a value of $988,000 based on its highest and best use. However, if it were used only for farming, its value would be $349,770. James Gibbs, Jr. (Gibbs) was the executor of his father's estate and its sole heir. He made a Sec. 2032A election and valued the farm at $349,770 on the estate tax return.

In December 1993, nine years after his father's death and while the property was still being used as a farm, Gibbs deeded a development easement in the farmland to the state of New Jersey under a state statute enacted to preserve farmland. New Jersey paid Gibbs $1,433,494 for the easement. The Deed of Easement specified that any development of the property for nonagricultural uses was...