THE HONORABLE RICHARD W. GOLDBERG, Judge, United States 1

Court of International Trade, sitting by designation.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 96-3462

___________

Estate of Verdon Gavin, *

*

Appellant, *

* Appeal from the United States

v. * District Court for the

* Northern District of Iowa.

United States of America, *

*

Appellee. *

___________

 Submitted: March 13, 1997

 Filed: May 8, 1997

___________

Before MAGILL and MURPHY, Circuit Judges, and GOLDBERG, Judge. 1

___________

MAGILL, Circuit Judge.

The Estate of Verdon Gavin (the Gavin estate) brought this tax refund

suit against the government, alleging that the Gavin estate is entitled to

(1) value certain farmland under the special use valuation provisions of

Internal Revenue Code (I.R.C.) § 2032A (1988 & Supp. II 1990) and (2) use

a stepped-up basis under I.R.C. § 1014 (1988 & Supp. II 1990) to calculate

taxable income from the sale of grain and livestock. The district court

granted summary judgment to the government on both claims. We affirm in

part and reverse in part.
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I.

The facts of this case are not in dispute. Verdon Gavin was a farmer

who owned two parcels of farmland (Parcel One and Parcel Two) in Jones

County, Iowa. Parcel One was approximately 200 acres, and Parcel Two was

approximately 275 acres. During Verdon’s active farming years, he farmed

the land with his son, Gary Gavin.

In 1978, Verdon entered into a crop share agreement with Gary for

Parcels One and Two. According to the terms of this agreement, Gary Gavin

was to pay his father “one-half (1⁄2) the proceeds from all sales of

livestock and crops” as well as “[o]ne-half (1⁄2) the proceeds obtained

through participation in government programs designed for crop production

or price control[.]” Farm Lease (May 17, 1978) at ¶ 2, reprinted in

Appellant’s App. at 51. Since entering into the agreement and during all

times relevant to this appeal, Gary Gavin has actively farmed both Parcels

One and Two.

Shortly after entering into the 1978 crop share agreement, Verdon

Gavin retired from active farming, leaving Gary to run the family farm.

On his federal income tax returns filed thereafter, Verdon Gavin reported

as ordinary income the crop and livestock sale proceeds that he received

from Gary. 

On January 4, 1990, Verdon and Gary Gavin signed a new lease for each

of the parcels. With respect to Parcel One, Gary agreed “to pay as rent

. . . the sum of $10,000.00 for the year commencing March 1, 1990, and

ending March 1, 1991, or to crop share said property on a 50/50 basis.”

Lease with Option to Purchase Parcel One (Jan. 4, 1990) at ¶ 1, reprinted

in Appellant’s App. at 53. As the government concedes, it is undisputed

that, under this
Because the issue is not relevant to this appeal, we do not decide whether Gary Gavin 2

had the option to purchase Parcel One for $800 per acre as specified under the lease or $1000 per

acre as specified under the will. For purposes of this appeal, it is only important that Gary had the

option to purchase Parcel One. 

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provision, Gary “had the option to rent the land for a 50 percent share of

the crops or $10,000 per year . . . .” Appellee’s Br. at 2. Under the new

arrangement, Gary also had the option to purchase Parcel One for $800 per

acre. See Lease with Option to Purchase Parcel One at ¶ 3(a), reprinted

in Appellant’s App. at 53. With respect to Parcel Two, Gary agreed to pay

his father a fixed cash rent of $10,000 for the one-year period from March

1, 1990, to March 1, 1991, and then $15,000 per year for each year

thereafter. See Lease with Option to Purchase Parcel Two (Jan. 4, 1990)

at ¶ 1, reprinted in Appellant’s App. at 56. Under the new arrangement,

Gary also had the option to purchase Parcel Two for $1000 per acre. Id.

at ¶ 3(a), reprinted in Appellant’s App. at 56.

On January 17, 1990, less than two weeks after signing the new

leases, Verdon Gavin died testate. He left Parcels One and Two to his

children and grandchildren. Under the will, Gary Gavin received a 1/7

interest in each of the parcels of farm land. Verdon’s will also granted

Gary the option to buy Parcels One and Two from the Gavin estate for $1000

per acre and provided that, if Gary exercised the option, he would have one

year to obtain financing for the purchase. See Last Will and Testament of

Verdon Gavin (Oct. 23, 1987) at § III, reprinted in Appellant’s App. at

60. 

2

Between Verdon’s death and February 28, 1990, Gary paid crop share

to the Gavin estate in the amount of 50% of the cash proceeds from all

livestock and crop sales. On March 1, 1990, Gary began
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paying cash rent to the Gavin estate in the amount of $10,000 per year for

Parcel One and $10,000 per year for Parcel Two.

On December 12, 1990, Gary signed a notice of intent to exercise his

option to purchase Parcel Two. On October 1, 1991, less than two years

after Verdon’s death, Gary bought Parcel Two. On February 4, 1992, just

over two years after Verdon’s death, Gary signed a notice of his intent to

exercise his option to purchase Parcel One. Gary continued to pay cash

rent to the Gavin estate until February 29, 1992. On March 2, 1992, Gary

made a down payment on Parcel One.

The executor of the Gavin estate filed a timely 1990 federal estate

tax return on which the executor elected to value Parcels One and Two under

the special use valuation provisions of I.R.C. § 2032A. The Internal

Revenue Service (IRS) accepted the special use valuation of Parcel Two, but

denied the special use valuation of Parcel One. The IRS consequently

assessed an additional tax of $11,040 against the Gavin estate.

In addition to the 1990 estate tax return, the executor also filed

a timely 1990 federal income tax return for the Gavin estate. On this

form, the executor claimed, pursuant to I.R.C. § 1014(a), a stepped-up

basis in the amount of $94,296 for the grain and livestock received by the

Gavin estate as rental payment from Gary Gavin. Consistent with this claim

to a stepped-up basis, the executor reported a gain of only $7990 from the

sale of the grain and livestock. 

The IRS rejected the Gavin estate’s claim to a stepped-up basis. The

IRS determined that the Gavin estate was not entitled to a stepped-up basis

because the crop and livestock sale proceeds constituted income in respect

of a decedent pursuant to I.R.C.
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§ 691 (1988) and § 1014(c). The IRS instead required the Gavin estate to

use Verdon Gavin’s basis in the grain and livestock to calculate the

taxable income from the sale proceeds. As a result, based on Verdon’s

lower cost basis, the IRS assessed an additional tax of $23,432 against the

estate from the sale of the grain and livestock.

After paying the asserted deficiencies, the Gavin estate filed claims

for refunds with the IRS. The IRS denied the Gavin estate’s claims for

refunds. After exhausting all administrative remedies, the Gavin estate

filed suit in the district court.

The Gavin estate and the government each moved for partial summary

judgment on the special use valuation claim, and then each party later

moved for summary judgment on the stepped-up basis claim. The district

court granted summary judgment to the government on both claims. The Gavin

estate appeals.

II.

The Gavin estate argues that it is entitled to value Parcel One under

the special use valuation provisions of I.R.C. § 2032A and that the IRS

therefore incorrectly assessed an additional tax of $11,040. We agree.

On appeal, we review the district court’s grant of summary judgment

to the government de novo. See McCormack v. Citibank, N.A., 100 F.3d 532,

537 (8th Cir. 1996). Summary judgment is appropriate only if the record,

viewed in the light most favorable to the nonmoving party, presents no

genuine issues of material fact and the moving party is entitled to

judgment as a matter of law. Id.; see also Fed. R. Civ. P. 56(c).
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Federal estate taxes are “generally based on the fair market value

of the taxable property transferred, valued at its highest and best use.”

LeFever v. Commissioner, 100 F.3d 778, 782 (10th Cir. 1996). Section

2032A, however, provides an exception to this general rule. If the

requirements of § 2032A are met, real property acquired from a decedent is

valued at its actual use, rather than at its highest and best use. See

I.R.C. § 2032A(a)(1). Valuing real property at its actual use will often

substantially reduce an estate’s tax burden. 

Congress intended that § 2032A would “protect the heirs of family

farms and small family businesses from being forced to sell the farms or

businesses to pay federal estate taxes.” LeFever, 100 F.3d at 782. As

explained in the 1976 House Report that accompanied the enactment of §

2032A, Congress feared that:

In some cases, the greater estate tax burden [from highest and

best use valuation] makes continuation of farming . . . not

feasible because the income potential from these activities is

insufficient to service extended tax payments or loans obtained

to pay the tax. Thus, the heirs may be forced to sell the land

for development purposes. Also, where the valuation of land

reflects speculation to such a degree that the price of the

land does not bear a reasonable relationship to its earning

capacity . . . it [is] unreasonable to require that this

“speculative value” be included in an estate with respect to

land devoted to farming . . . .

H.R. Rep. No. 94-1380, at 22 (1976), reprinted in 1976 U.S.C.C.A.N. 3356,

3376. In short, Congress intended to provide a measure of federal estate

tax relief to the heirs of small family farmers so that, when their parents

died, the heirs would not have to sell the family farm.

At the same time, however, Congress included § 2032A(c) “to foreclose

abuse of the privilege by taxpayers who would engage in
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family farming only long enough to reap the estate tax benefits and then

would convert the property to a more lucrative commercial use.” Williamson

v. Commissioner, 974 F.2d 1525, 1527 (9th Cir. 1992). Specifically, as

relevant here, § 2032A(c)(1) provides that “[i]f, within 10 years after the

decedent’s death and before the death of the qualified heir . . . (B) the

qualified heir ceases to use for the qualified use the qualified real

property . . . then, there is hereby imposed an additional estate tax.”

I.R.C. § 2032A(c)(1).

The parties agree that Gary Gavin as well as the several children and

grandchildren who inherited the proceeds of the Gavin estate were each

“qualified heirs,” see I.R.C. § 2032A(e) (defining “qualified heir”), and

that Parcel One was a “qualified real property,” see I.R.C. § 2032A(b)

(defining “qualified real property”). Moreover, the government concedes

that Gary’s 1/7 interest in Parcel One never became subject to the

additional tax imposed by § 2032A(c)(1) and that, until February 28, 1990,

when Gary stopped paying crop share and began to pay cash rent for Parcel

One, Parcel One was put to a qualified use with respect to all the

qualified heirs.

The government, however, argues that the heirs, other than Gary,

“cease[d] to use for the qualified use the qualified real property,” I.R.C.

§ 2032A(c)(1)(B), on March 1, 1991, when Gary stopped paying crop share and

began paying cash rent to the Gavin estate. According to the government,

once Gary started making cash rent payments, the heirs, with the exception

of Gary, were no longer subject to the financial risks of farming as

required by § 2032A, and consequently “cease[d] to use for the qualified

use the qualified real property . . . .” Id.
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In Minter v. United States, 19 F.3d 426 (8th Cir. 1994), this Court

recognized that the receipt of cash rent from a farming operation is

ordinarily not a qualified use for purposes of § 2032A(c)(1). Minter, 19

F.3d at 429. Nevertheless, we made clear in Minter that a qualified heir

who receives rental income does not automatically lose the benefits of

special use valuation. We explained that:

[W]hen a decedent’s children enter into a fixed cash rent

arrangement with another farmer who assumes the financial risks

of farming, the children’s rent income is not linked to the

contingencies of production and the children are mere landlords

collecting a fixed rent. Because this kind of arrangement

takes the children out of the family farming business, it also

puts them outside the scope of § 2032A. On the other hand, .

. . when a decedent’s children enter into a leasing arrangement

in which their rent income is substantially dependent on

production, the children have accepted the financial risks of

family farming and thus retain § 2032A’s benefits.

Id.; see also Schuneman v. United States, 783 F.2d 694, 698 (7th Cir. 1986)

(“[T]he qualified use requirement of § 2032A(b)(1) is satisfied if the

income from rental of the property is substantially dependent upon

production.”). Thus, to determine if the heirs ceased using Parcel One for

a qualified use under § 2032A(c)(1)(B), we must determine if the receipt

of cash rent took Verdon Gavin’s children “out of the family farming

business” and made them into “mere landlords collecting a fixed rent.”

Minter, 19 F.3d at 429.

In the present action, the qualified heirs did not enter a cash rent

arrangement with just “another farmer.” Id. Instead, they leased Parcel

One to Gary, the qualified heir whom Verdon Gavin had groomed for many

years to take over the family farm. Although not dispositive, we conclude

that the identity of the
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farmer is relevant to determining whether a decedent’s heirs were “mere

landlords collecting a fixed rent,” id., or qualified heirs engaging in a

qualified use. The weight of case law and legislative history interpreting

§ 2032A lends support to this distinction. Cf. LeFever, 100 F.3d at 783

(“Cash rental of the property to a nonfamily member is not a qualifying

use.” (emphasis added)); Brockman v. Commissioner, 903 F.2d 518, 521 (7th

Cir. 1990) (“The case law and the legislative history of Section 2032A both

make clear that the qualified use requirement is not satisfied if a

decedent’s financial stake or other involvement in land is merely that of

a landlord who collects a fixed rent from an unrelated tenant.” (emphasis

added)); H.R. Rep. No. 94-1380 (1976), at 23, reprinted in 1976

U.S.C.C.A.N. at 3377 (“The mere passive rental of property will not

qualify. However, where a related party leases the property and conducts

farming or other business activities on the property, the real property may

qualify for special use valuation. For example, if A, the decedent, owned

real property which he leased for use as a farm to the ABC partnership in

which he and his sons B and C each had a one-third interest in profits and

capital, the real property could qualify for special use valuation.”

(emphasis added)); but see Williamson, 974 F.2d at 1531 (“The legislative

history accompanying section 2032A and its amendments reconfirms the

statute’s plain language insisting that Williamson as the qualified heir

must personally use the property in its qualified use. Cash rental to a

relative will not suffice.”).

In addition to keeping the family farm within the family, Verdon’s

heirs “accepted the financial risks of family farming.” Minter, 19 F.3d

at 429. During the one-year period from March 1, 1990, to March 1, 1991,

Gary had the option, under the lease then in effect, “to pay as rent for

[Parcel One] the sum of $10,000 . . . or to crop share [Parcel One] on a

50/50 basis.” Lease With
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Option to Purchase Parcel One at ¶ 1 (emphasis added), reprinted in

Appellant’s App. at 53. Because it was Gary’s choice, by simply choosing

to pay cash rent in the amount of $10,000, Gary did not reduce the

financial risk faced by the other heirs. Had Parcel One’s crop or

livestock sales suffered because of weather, disease, or fluctuating prices

to such an extent that the value of 50% of the sale proceeds dropped to

less than $10,000, Gary could and reasonably would have exercised his

option to pay crop share rather than cash rent. As a result, the other

heirs shared the risk of farming because they were not guaranteed to

receive $10,000 in cash rent. Instead, depending on weather, disease, and

fluctuating prices, they might have earned something less than $10,000, or

nothing at all.

Indeed, Gary’s option to pay cash rent decreased the return that the

other heirs could expect. The option to pay cash rent for Parcel One

effectively capped the heirs’ income from Parcel One at $10,000, without

in any way reducing the downside potential faced by the heirs in the event

that the crop and livestock sales suffered. If a 50% crop share were worth

more than $10,000, Gary could and reasonably would have paid $10,000 in

cash rent, thereby preventing the heirs from participating in the upside

potential of an extremely profitable year. As a result, the terms of the

lease forced the heirs to accept all the downside potential of bad years

without enjoying the upside potential of good years--an arrangement

inconsistent with the heirs being “mere landlords collecting a fixed rent.”

Minter, 19 F.3d at 429.

At the conclusion of the one-year period from March 1, 1990, to March

1, 1991, the lease provided that the rent on Parcel One “for the period of

March 1, 1991, and each year thereafter shall be $10,000.00 or a crop share

lease on a 50/50 basis at the election of Verdon Gavin.” Lease With Option

to Purchase Parcel One at ¶ 1,
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reprinted in Appellant’s App. at 53. Accordingly, because the Gavin estate

had the option to demand either a cash rent or a crop share, the heirs’

rent income was still dependent on production. In profitable years, the

heirs would likely request that Gavin pay them half of the sale proceeds

whereas in difficult years the heirs would likely ask for $10,000 in rent.

While this level of dependency on production is not in and of itself

sufficient to have kept the heirs in the “family farming business,” Minter,

19 F.3d at 429, it nevertheless indicates that the qualified heirs were

more than “mere landlords collecting a fixed rent.” Id.

The qualified heirs had an additional link to the financial fortunes

of the family farm. According to the terms of Verdon Gavin’s will, Gary

had an outstanding option to buy Parcel One for $1000 per acre, which he

did not exercise until February 4, 1992. Furthermore, Verdon Gavin’s will

provided that, if Gary exercised his option to purchase Parcel One, Gary

had an additional year to obtain financing to carry out the purchase. As

a result, prior to the expiration of Gary’s option to buy and prior to the

expiration of the one-year financing period, it would have been difficult

for the Gavin estate to sell Parcel One or do anything with that parcel

other than allow Gary to farm it. Consequently, the terms of Verdon

Gavin’s will locked the heirs into an arrangement that was dependent on

Gary’s decision to purchase the family farm. Gary’s decision in turn was

at least partially dependent on the revenue he could earn from farming.

Again, while this factor is not in and of itself sufficient to have kept

the heirs in the “family farming business,” Minter, 19 F.3d at 429, it

nonetheless indicates that the qualified heirs were more than “mere

landlords . . . .” Id.

Considering the particular facts presented in this appeal, we

conclude that the combination of the foregoing factors demonstrates that

the interests held by the Gavin estate heirs were
The government also argues that, because Gary Gavin purchased Parcel One more than 3

two years after the death of his father, his purchase of Parcel One does not meet the requirements

of § 2032A(c)(7)(A)(i), a provision that offers a safe harbor from the additional tax burden

imposed by § 2032A(c)(1). Because we conclude that the qualified heirs did not cease using

Parcel One for a qualified purpose and therefore that the additional tax should never have been

imposed, we need not reach this issue.

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substantially dependent on production such that the qualified heirs did not

“cease[] to use for the qualified use the qualified real property . . . .”

I.R.C. § 2032A(c)(1)(B). Section 2032A was designed to protect family

farmers such as the Gavins. The heirs of the Gavin estate did not remove

themselves from the family farming business and did not seek to abuse the

benefits offered by § 2032A. Cf. Schuneman, 783 F.2d at 699-701 (holding

that income was substantially dependent on production where the production

history of the farmland in question indicated it was likely that a rentadjustment clause in a lease could cause a 20 percent increase or decrease

in taxpayer’s income). Instead, they chose to allow Gary, the heir

designated by Verdon Gavin to run the family farm, to continue his ongoing

farming operations until he could eventually buy out the interests of the

other heirs in Parcel One. 

Once he bought out the other heirs, Gary Gavin became the sole

qualified heir, and because he continued to actively farm Parcel One,

Parcel One has been continuously put to a qualified use by a qualified

heir. Thus, the qualified heirs of Verdon Gavin have never ceased to use

Parcel One for the qualified use of farming, and consequently the Gavin

estate has not run afoul of § 2032A(c)(1).3

III.

The Gavin estate argues that, pursuant to I.R.C. § 1014(a), it was

entitled to a stepped-up basis in the grain and livestock
Internal Revenue Code § 691, in relevant part, provides: 4

The amount of all items of gross income in respect of a decedent which are not

properly includible in respect of the taxable period in which falls the date of his

death or a prior period (including the amount of all items of gross income in

respect of a prior decedent, if the right to receive such amount was acquired by

reason of the death of the prior decedent or by bequest, devise, or inheritance from

the prior decedent) shall be included in the gross income, for the taxable year when

received, of:

(A) the estate of the decedent, if the right to receive the amount is

acquired by the decedent’s estate from the decedent . . . .

I.R.C. § 691(a)(1).

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received from Gary Gavin in satisfaction of Gary’s crop share agreement

with Verdon Gavin. The Gavin estate argues that the crop share was not

income in respect of a decedent under I.R.C. § 691 and that the Gavin

estate was therefore entitled to a stepped-up basis under § 1014(a). We

disagree.

Section 1014(a) provides generally for a stepped-up basis for

property transferred from a decedent. However, under § 1014(c), a steppedup basis is not to be applied to “property which constitutes a right to

receive an item of income in respect of a decedent under section 691.”

I.R.C. § 1014(c).4

Under I.R.C. § 61(a)(5), rent is income. I.R.C. § 61(a)(5) (1988 &

Supp. II 1990). Regardless of whether rent is paid in cash or in crops and

livestock, it is still income in respect of the person who, in exchange for

the use of real property, receives the rent. See Tatum v. Commissioner,

400 F.2d 242, 247 (5th Cir. 1968) (“Crop shares representing payment by the

tenant for the use of the land are rental income assets no less than money

paid for the same purpose.”). To determine whether income, such as rent,

is income in respect of a decedent, “[t]he focus is upon the decedent’s

right
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or entitlement to income at the time of death.” Estate of Peterson v.

Commissioner, 667 F.2d 675, 679 (8th Cir. 1981) (emphasis in original).

Accordingly, income in respect of a decedent includes any income earned in

satisfaction of a right that is fully vested at the time of the decedent’s

death such that the decedent had no obligations left to perform to earn

that income, other than to wait to receive payment. See id. at 679-81.

Here, in exchange for leasing his property to Gary, Verdon had a

right to receive one-half of the proceeds from all crop and livestock

sales. See Farm Lease (May 17, 1978) at ¶ 2(a), reprinted in Appellant’s

App. at 51. Throughout his life, Verdon had reported these sale proceeds

as ordinary income. At the time of his death, Verdon’s right to the rent

income had fully vested because, had he lived, Verdon would have only

needed to wait to receive his income. Upon Verdon’s death, his fullyvested right to receive the rent income from Gary passed to his estate.

Thus, the rent received by the Gavin estate was income in respect of a

decedent for purposes of §§ 691 and 1014(c).

IV.

For the foregoing reasons, we reverse the district court’s grant of

summary judgment denying the benefits of § 2032A to the Gavin estate with

respect to Parcel One. We further direct the district court to enter an

order requiring the government to accord special use valuation treatment

to the Gavin estate with respect to Parcel One and issue a tax refund in

the appropriate amount. Finally, we affirm the district court’s grant of

summary judgment to the government on the issue of whether the Gavin estate

is entitled to a stepped-up basis under § 1014(a).
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A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.