* Judge Irving L. Goldberg was a member of this panel when

counsel presented arguments to the court, but he died before the

opinion was written and circulated. The case is therefore being

decided by a quorum. 28 U.S.C. § 46(d).

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 94-40211

ESTATE OF HARRY M. HUDGINS,

Deceased, LEE C. HUDGINS and

HARRY HUDGINS II, Co-Independent

Executors,

Petitioners-Appellees,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellant.

Appeal from the United States Tax Court

(No. 5506-91)

(June 28, 1995)

Before JOLLY and WIENER, Circuit Judges. *

WIENER, Circuit Judge.

In this federal est ate tax case, implicating "special use

valuation" of several tracts of farm or ranch property owned by

Harry M. Hudgins (Decedent) at the time of his death, the1 As Decedent died after December 31, 1981, the issue of

special use valuation in his estate is governed by the provisions

of the Econ omic Recovery Tax Act of 1981. Economic Recovery Tax

Act of 1981, Pub. L. No. 97-34, § 421(k)(3), 95 Stat. 172, 313

(1981).

2 Commissioner of Internal Revenue (Commissioner) appeals the adverse

decision of the United States Tax Court (Tax Court). The

C ommissioner questions the Tax Court's holding that, when filing

Decedent's federal estate tax return (706), the ind ependent coexecutors of Decedent's estate (Estate) "substantially complied"

with the requirements of the Intern al Revenue Code (Code) and

applicable Treasury Regulations (Regs.) for electing a special use

valuation of the Estate property, thereby entitling the Estate to

perfect its election within ninety days following notice from the

IRS that the Estate's election was defective. Concluding that the

Tax Court's substantial compliance ruling was erroneous, we reverse

and remand for further proceedings consistent with this opinion.

I

FACTS AND PROCEEDINGS

Decedent was a Texas ranche r who died testate in 1987. 1 In

his Last Will and Testament (the Will), Decedent left several

tracts of ranch property to various combinations of five grandsons.

The Will's SECTION 5.

, which applied to each legacy of ranch

property that resulted in two or more of Decedent's gr andsons

becoming "joint owners," imposed several ten year restrictions on

the legatees and the property thus bequeathed: (1) No such jointly

owned tract could be mortgaged or partitioned; (2) any joint owner

of an interest in one tract could sell his interest to another2 SECTION 9. directed that in each business in which Decedent

may be engaged at his death "whether in individual, partnership,

corporate or other form, shall be discontinued and liquidated as

soon as reasonably possible" following the death of Decedent.

Neither the Tax Court nor any of the parties contend that the

provisions of SECTION 9. affect the use of the subject property.

3 joint owner of that tract but not to any other person; and (3) any

joint owner could rent or lease his interest to another joint owner

but not to any other person. [Neither S ECTION 5. nor any other

provision of the Will expressly required that the land actively be

used for ranch purposes, expressly prohibited any other use of the

property, expressly required the grandsons to partici pate in

qualifying activities, or expressly imposed any penalties, such as

reversion, re vocation, forfeiture or other loss of ownership

interests, in the event of an actual or attempted alienation in

violation of the restriction.] 2

The Will appointed Decedent's son, Lee C. Hudgins, grandson,

Harry Hudgins II, and long-time attorney and scrivener of the Will,

Joe A. Keith, to serve as Independent Co-Executors (Executors).

The Will specified that Mr. Keith's service as a co-executor would

not preclude his being compensated "for also being attorney for my

estate." Although not expressed in the Will, Mr. Hudgins

apparently expected the Estate to retain Mr. Keith as its attorney,

which it did.

Mr. Keith was an experienced attorney who had represented Mr.

Hudgins for over forty years, had also represented other prominent

ranching families in that part of North Texas, and had prepared and

filed a number of federal estate tax returns, including some in4

which special use valuation elect ions were made. The record

reflects that Mr. Keith was incapacitated at the time this action

was commenced in the Tax Court and has since died.

Mr. Keith prepared and timely filed the 706 for the Estate.

In the portion of the 706 that asks if the estate intends to elect

special use valuation on any of its property, the "Yes" box was

checked. In compliance with instructions in the 706, the Estate

c ompleted and affixed a Schedule N, together with require d

attachments to that schedule. A "Notice of Election" was also

attached to the 706, but it contained only nine of the fourteen

i tems required by the instructions and the Regs. The Notice of

Election contains a statement, presumably affixed by Mr. Keith, to

the effect that "[i]t is considered that all requirements exist for

special valua tion of the qualified real property." Although the

Notice of Election contains signature lines for all five grandsons,

only three of the fiv e had signed that instrument by the time it

was filed with the 706. This is at least partially explained in a

"Memorandum" typed at the bottom of the Notice of Election and

signed by Mr. Keith, which states that one of the grandsons had not

signed "because he is in military service" and that another had not

signed be cause he was "not presently available." The Memorandum

concludes with the following statement:

"To remedy that situation , the undersigned preparer of

this Form 706 will undertake to obtain the signatures of

[the two grandsons who had not signed] on a counterpart

hereof, which when available will be transmitted to the

office of the Internal Revenue Service at Austin, Texas."

The record does not reflect that any steps were taken to effectuate3 The parties stipulated at the redetermination hearing that

the appropriate increase to the gross estate was $403,345, not

$487,790.

5 the promised "remedy" until after the IRS audited the 706 and

notified the Estate that its special use valuation election was

defective due to the incomplete Notice of Election and the failure

to attach an executed Recapture Agreement.

Within ninety days after receiving that notice from the IRS,

the Estate submitted all previously missing information,

documentation, and signatures. The Commissioner nevertheless

denied the special use valuation claimed by the Estate, contending

that, as the Estate's initial election was not "in substantial

compliance" with the requirements of the Regs., the Estate was

precluded from perfecting its election post hoc. The Commissioner

assessed the subject properties at their fair market values,

thereby increasing the value of the gross estate by $487,790 SQ the

excess of the aggregate fair market value of the subject tracts

over their aggregate special use valuations. 3 As a result of this

adjustment the Commissioner issued a deficiency notice to the

Estate for underpayment of taxes in the amount of $149,622.

The Estate petitioned the Tax Court for a redetermination of

the deficiency. Following a trial on mostly stipulated facts, the

Tax Court held that the Estate was indeed entitled to the special

use valuation, thus there was no deficiency in estate taxes. The

court's conclusion that the Estate was entitled to special use

valuation was grounded in its determination that the Estate's

initial election substantially complied with the election4 P ark v. Commissioner

, 25 F.3d 1289, 1291 (5th Cir. 1994)

(citing McKnight v. Commissioner

, 7 F.3d 447, 450 (5th Cir. 1993)),

cert. denied , 115 S.Ct. 673 (1994).

5 United States v. United States Gypsum Co.

, 333 U.S. 364, 395

(1948).

6 requirements, entitling the Estate to perfect its election within

the statutory period followin g notice of the defective election.

This review followed the Commissioner's timely filing of a notice

of appeal.

II

ANALYSIS

The Tax Court's holding for the Estate apparently served as a

wake-up call for the Commissioner, for his brief to this court

presents both a comprehensive explanation of the law applicable to

s pecial use valuation elections and an application of that le gal

framework to the pertinent facts. We therefore borrow extensively

from the Commissioner's brief in the analysis that follows.

A. Standard of Review

In reviewing decisions of the Tax Court we apply the same

standards used in re viewing a decision of the district court:

Questions of law are reviewed de novo; findings of fact are

reviewed for clear error. 4 We will not find a ruling to be clearly

erroneous unless we are left with the definite and firm conviction

that a mistake has been made. 5

In the instant case the discrete facts, as noted, are

stipulated for the most part and otherwise are essentially

undisputed. That the belated efforts of the Estate to perfect the6 U nited States v. Cartwright , 411 U.S. 546, 550-51 (1973);

Treas. Reg. § 20.2031-1(b).

7 S ee Tax Reform Act of 1976, Pub. L. No. 94-455, § 2003(a),

90 Stat. 1520, 1856 (1976); I.R.C. § 2032A.

7 election were substantively adequate is not disputed; thus the sole

issue presented is whether the Estate 's initial effort was

sufficient to constitute "substantial compliance," thereby

entitling the Estate to perfect its election within ninety days

following not ice from the IRS that the original election was

defective. Even though the parties assumed that this issue

presented a factual question, i.e., whether the facts of the case

constitute "substantial compliance" SQ a term of art in Cod e

§ 2032A (d)(3) SQ

w e believe that, despite the fact that in other

contexts issues of substantial compliance, like substantial

completion, are indeed questions of fact , the question here

presented is one of law. Resolution of this fact/law dichotomy is

not important in this appeal, however, as we conclude that,

irrespective of whether we review the issue de novo or for clear

error, the Tax Court erred reversibly in determining that the

Estate's initial filing w as in substantial compliance with the

requirements for a valid special use election.

B. Special Use Valuation

Generally, property subject to federal estate tax is returned

at its fair market value. 6 One limited exception to that

generality is found in § 2032A of the Code, which provides an

alternative, more "taxpayer friendly" method for valuing some

family farms and closely held businesses. 7 Courts have recognized8 S ee

, e.g.

, McAlpine v. Commissi oner , 968 F.2d 459, 460

(5th Cir. 1992) (noting that purpose of exception is to grant

relief to heirs); Estate of Thompson v. Commissioner

, 864 F.2d

1128, 1133 (4th Cir. 1989) (same); see H.R. Conf. Rep. No. 94-1380,

94th Cong., 2d Sess. 21-22 (1976).

9 McAlpine , 968 F.2d at 460.

1 0 S ee

, e.g.

, Martin v. Commissioner

, 783 F.2d 81, 83-84 (7th

Cir. 1986) (construing strictly "qualified use" provision of

§ 2032A); Estate of Sherrod v. Commissioner

, 774 F.2d 1057, 1062-67

(11th Cir. 1985) (construing strictly "material participation" and

"qualified use" tests of § 2032A), cert. denied

, 479 U.S. 814

(1986); Estate of Cowser v. Commissioner

, 736 F.2d 1168, 1171 (7th

Cir. 1984) (adhering to precise l anguage of § 2032A defining

"qualified heir"). C f. Corn Products Ref. Co. v. Commissioner

, 350

U .S. 46, 52 (1955) (construing narrowly term "capital assets" in

§ 117).

8 that, in enacting § 2032A, Congress sought to provide relief to

those who, when inheriting family farms, might otherwise be forced

t o sell them to pay estate taxes calculated on "highest and best

use" values, which often exceed significantly the land's value for

farming purposes. 8 In the hope of avoiding such a result and

helping to preserve family farms and other closely held businesses,

Congress allows qualifying property to be returned for estate tax

purposes at its actual (farm) use value rather than its fair market

value based on its highest and best use. 9 As permission to elect

this so-called "special use valuation" constitutes an act of grace

or a special dispensation by Congress, the courts have strictly

construed § 2032A and its requirements. 10

Briefly summarized, the conditions that must be met to qualify

for special use valuation are: The decedent must have been a

citizen or resident of the United States at the time of his death;

the property must be located in the United States; the value of the1 1 W halen v. United States

, 826 F.2d 668, 669 (7th Cir. 1987);

Schuneman v. United States , 783 F.2d 694, 697 (7th Cir. 1986).

12 I.R.C. § 2032A(c).

13 I.R.C. § 2032A(c) and (d)(2). S ee

, e.g.

, McAlpine

, 968 F.2d at 460 (noting that heirs must continue to use property as family farm or business for ten year period to avoid recapture of

tax savings); Bartlett v. Commissioner

, 937 F.2d 316, 320 (7th Cir.

1991) (same); Prussner v. United States

, 896 F.2d 218, 221 (7th

Cir. 1990) (discussing requirement that recapture agreement must be

filed for valid election).

9 property must exceed specified percentages of the decedent's gross

estate and adjusted estate; the prope rty must devolve to a

"qualified heir," who must be a member of the decedent's family;

and the decedent or a member of the decedent's fami ly must have

been materially participating in the operation of the far m or

business at the time of the decedent's death and for five of the

eight years preceding his death. 11

Although not as initial eligibility requirements, the Code

imposes two continuing conditions if the estate is to avoid

subsequent recapture of the tax savings produced by special use

valuation: The property's ownership must remain in the family and

must be used for the qualified use for at least ten years following

the decedent's death. 12 The qualified successors must agree

contractually

, at the time that the special use valuation election

is made, to keep the property in the family and to operate it for

the qualified use for the specified period. 13 That contract must

be executed and filed with the estate tax return; and to ensure the

Commissioner's ability to acc omplish recapture if necessary, the

heirs must bind themselves therein to be responsible personally for14 I.R.C. § 2032A(d)(1); Treas. Reg. § 20.2032A-8(a)(3).

1 5 I.R.C. § 2032A(a)(1)(B) and (d); Treas. Reg. § 20.2032A8(a)(3) and (c).

10 additional tax in the event of premature disposition of the

property or cessation of qualified use. This contract, which must

b e enforceable by the Commissioner under state law, is generally

referred to as a "Recapture Agreement."

The benefits of § 2032A do not appertain automatically just

because all prerequisites happen to coalesce: The estate must act

affirmatively to elect such treatment. Important to the instant

case are the mechanics of electing special use valuation, principal

among which are (1) check ing the appropriate box or blank on the

estate tax return and completing Schedule N, thereby evidencing the

intention to make such an election, (2) completing and attaching to

the return a Notice of Election containing the info rmation

specified in § 2032A and the applicable R egs., 14 and (3) as just

discussed, attaching a Recapture Agreement that has been signed by

all parties with interests in the property to be specially valued,

expressly consenting to the imposition of the additional tax and to

be personally liable to pay i t in the event of a premature

disposition of the property or cessation of its qualified use. 15

Thus a Notice of Election and a Recapture Agreement, validly and

completely executed and filed contemporaneously with the estate tax

return, are essential prerequisites if an estate that elects

special use valuation is to be in f ull compliance with § 2032A.

Not even the Executors contend that the Estate was in full1 6 H. R. Conf. Rep. No. 94-1380, 94th Cong., 2d Sess. 27

(1976).

17 See Bartlett

, 937 F.2d at 320; Prussner , 896 F.2d at 222;

McDonald v. Commissioner

, 853 F.2d 1494, 1495 (8th Cir. 1988),

cert. denied sub nom. Cornelius v. Commissioner

, 490 U.S. 1005

(1989); Treas. Reg. §§ 20.2032A-8(a)(3) and (c)(1).

11 compliance when the 706 was filed; thus the need to determine if

the Estate was in substantial compliance.

Recapture Agreement

The 706 was not accompanied by any in strument labeled or

purporting to be a Recapture Agreement. Yet § 2032A(b)(1)(B) of

the Code makes abundantly clear that the Recapture Agreement, i.e.,

"the agreement described in subsection (d)(2)" is an integral and

indispensa ble element of a special use valuation election. The

legislative history of § 2032A confirms the essential nature of the

Recapture Agreement:

One of the requirements for making a valid

election is the filing with the estate tax

return [of] a written [recapture] agreement

signed by each person in being who has an

interest in any qualified real property with

respect to which the special use valuation is

elected. The [recapture] agreement must

evidence the consent of each of those parties

to the application of the recapture tax

provisions to the property. 16

That the filing of a valid Recapture Agreement is indispensable has

also been recognized by the courts and in the Regs. 17

The contents required for a valid Recapture Ag reement are

specified in § 2032A(d)(2):

The agreement referred to in this paragraph is

a written agreement signed by each person in

being who has an interest (whether or not in

possession) in any property designated in such18 I.R.C. § 2032A(d)(2).

19 Rev. Proc. 81-14, 1981-1 C.B. 669.

20 Treas. Reg. § 20.2032A-8(c).

12 agreement consenting to the application of

subsection (c) [imposition of the additional

estate tax] with respect to such property. 18

By making the heirs personally responsible for any additional tax,

which is triggered either by a disposition of the property or

cessation of its qualified use within the statutory period, the

Recapture Agreement provides considerable assurance to the

Commissioner of collectibility. Treas. Reg. § 20.2032A-8(c) sets

forth the required contents of the Recapture Agreement in greater

detail than does the Code. Indeed, a model form of such an

agreement is available for those who care to avail themselves of

it. 19 Among other things, the Recapture Agreement (1) must express

the consent of the heirs to be liable personally under Code

§ 2032A(c) in the e vent of early disposition of the property or

early cessation of qualified use; (2) must be binding under local

law on all parties with an interest in the property; and (3) must

designate an agent for the parties and endow such agent with

authority to act for all parties to the agreement in dealing with

the IRS. 20

In addition to the in personam security obtained by the

Commissioner through the Recapture Agreement, in re m security is

garnered through the provisions of § 6324B of the Code, which

create a statutory lien on the subject property. This lien

attaches automatically at the time an election is filed under21 I.R.C.§ 6324B; McAlpine , 968 F.2d at 464.

2 2 M cDonald v. Commiss ioner , 89 T.C. 293, 305 n. 31 (1987),

aff'd in part and rev'd in part , 853 F.2d 1494 (8th Cir.), cert.

denied sub nom. Cornelius v. Commissioner , 490 U.S. 1005 (1989).

13 § 2032A, regardless of the enforceability or timeliness of filing

the Recapture Agreement. 21

Obviously, the comprehensive statutory and regulatory scheme

just described envisions the combination of in personam of the

heirs and in rem responsibility of the property, not merely as

security for the collection of additional taxes but also to

constrain at least ten years of qualified ownership and qualified

use of the property. Personal liability of the heirs enhances the

likelihood that the prope rty will be kept in the family and used

for qualified purposes, and that the Commissioner would be able to

recover the defaulted tax benefit if, by the time recapture is

triggered, the value of the property shall have so declined that

the § 6324B lien is then wholly or partially worthless. It is

beyond the authority of the courts, then, t o say that alone the

lien would suffice: The heirs' agreement to be personally liable

for the tax consequences is equally indispensable, for "without the

heirs' signatures, the election on the original return may not

effectively bind the heirs." 22

Notice of Election

The Notice of Election is the other document that must

accompany a timely filed estate tax return in which a special use

valuation election is made. Unlike the Recapture Agreement, which

here was omitted entirely, a Notice of Election did accompany14

Decedent's 706. All concede, however, that several of the required

contents of and attachments t o this document were missing S Q five

out of fourteen, to be more precise.

Schedule N of the est ate tax return S Q yet another document

required to be completed and included in connection with a special

use valuation election SQ contains instructions which provide, inter

alia, that the return preparer must complete and attach the Notice

of Election. Those instructions are derived from Reg. § 20.2032A8(a)(3), which lists the fourteen specific item s required for a

valid Notice of Election. The five items omitted from the instant

Notice of Election are: (1) information supporting the special

use values listed in the return, (2) written appraisals of the fair

market values of the properties, (3) the name, address, taxpayer

identification number, and relationship to the Decedent of each

person succeeding to an int erest in the subject properties,

(4) value of the property interests being received by each such

successor, based on both fair market value and qualified use, and

(5) affidavits setting forth the activities constituting material

participation and identity of the participants in the qualified use

of the properties.

The Estate's Notice of Election was also deficient in regard

to the requirement that the signatures of all successors be

affixed: As noted earlier, only three of the five grandsons signed

the Notice; one did not sign by virtue of military service and

another s imply did not sign, the Estate offering no explanation

other than that he was "not presently available." As a matter of2 3 We respectfully but firmly disagree with the Tax Court's

characterization of these omissions as "technicalities."

15 law, the Estate's cryptic, conclusionary statement on its Notice of

Election that "All requirements exist for special v aluation of

qualified real property" adds nothing to the substantiality S Q or

lack thereof SQ

of the Estate's compliance with the requirements for

making a valid election. Neither does Mr. Keith's signed statement

that he would undertake to obtain the missing signatures,

particularly given the fact that neither of the missing signatures

nor any of the other items missing from the Notice of Election were

submitted to the IRS between the time that the return was filed and

the time that the notice of deficiency disallowing special use

valuation was sent by the IRS and received by the Estate.

The record does not reflect the reason or reasons for the

Estate's omissions of so many of the substantive requirements 23 for

a complete Notice of Election. Beyond the statement "explaining"

the missing signatures, the Estate offers nothing to justify the

omission of appraisals, affidavits, and other supporting

documentation in addition to the omit t ed Recapture Agreement;

neither does the Estate explain why nothing was done to supply the

missing pieces of the puzzle, as promised, until after the notice

of disallowance was received from the IRS. Whatever the

explanation for the omissions might be, it matters not; we deal

only with the facts directly affecting less-t han-full compliance

with the election requirements, not with th e excuses therefor,

particularly when, as here, none have been proffered except as to24 I.R.C. § 2032A(d)(3).

25 Deficit Reduction Act of 1984, Pub. L. No. 98-369,

§ 1025(a), 98 Stat. 494 (1984).

16 the signature of the grandson who was serving in the military at

the time SQ for whatever that might be worth.

Substantial Compliance

It is undisputed that here the Notice of Election filed with

the 706 was incomplete, both as to content and signature, and that

no separate Recapture Agreement was filed with the 706. Clearly,

then, the Estate did not initially comply fully with the

requirements for electing special use valuation. As there was no

full compliance, then, whatever compliance was made must be found

to have been "substantial" under the applicable Regs. when the 706

was filed if the Estate is to be held entitled to perfect its

defective election. 24 This case thus turns on the issue of

substantial compliance.

We have noted that when Congress adopted § 2032(A) as part of

the Tax Reform Act of 1976, it provided a special dispensation or

act of grace to a define d class of heirs and legatees who

gratuitously acquire family farms and some other closely-held

businesses under specified conditions a nd circumstances. In a

further act of grace Congress added subsection (d)(3) to Code

§ 2032(A) (effective retroactively to estates of decedents dying

after December 31, 1976) when it adopted the Deficit Reduction Act

(DEFRA) in 1984. 25 Labeled "Modification of Election and Agreement

to be Permitted," subsection (d)(3) requires the Secretary of the26 I.R.C. § 2032(A)(d)(3).

17 Treasury to promulgate procedures that would allow execut ors and

administrators a reasonable time SQ not to exceed ninety days S Q to

bring flawed special use valuation elections into full compliance

if a timely election has been made and if it

substantially complies with the regulations

prescribed by the Secretary with respect to

such election, but SQ

(i) the notice of election, as filed, does not

contain all required information, or

(ii) signatures of 1 or more persons required

to enter into the [recapture] agreement

. . . . are not included on the agreement as

filed, or the agreement does not contain all

required information [.] 26

As thus modified, the Code section itself, at least by strong

implication, requires that a Not ice of Election and a Recapture

Agreement signed by at least one of the parties acquiring an

interest in the property must have been filed with the estate tax

return, and that a considerable amount of the required information

must have been included in or with those instruments.

"Substantial compliance" is n ot a defined term in § 2032A;

indeed, defining that term with precision would be a tall order for

the legislative draftsmen. We are, however, the beneficiaries of

some congress ional guidance in the relevant legislative history

that accompanied DEFRA, reflecting the sense of Congress that any

permissible deficiencies in compliance with the requirements of a

valid election had to be minor :

The conferees wish to reiterate that, as under

the Senate amendment, perfection of notices of

election and of [recapture] agreements to2 7 H.R. Conf. Rep. No. 98-861, 98 Cong., 2d Sess. 1240-41

(1984). (emphasis added).

28 Id. at 1241 (emphasis added).

18 current use valuation elections is to be

permitted only in cases where the estate tax

return, as filed, evidences substantial

compliance with the requirements of the

Treasury Regulations. For example, merely

checking the applicable box on the federal

estate tax return that an ele ction is being

made is not sufficient action by the estate to

secure the benefits of the current use

valuation provision. B oth a notice of

election and [a recapture] agreement that

themselves evidence substantial compliance

with the requirements of the Regulations must

be included with the estate t ax return, as

filed, if the estate is to be permitt ed to

perfect its election

. 27

That same conference report goes on to explain by example just how

minor the deficiencies must be to permit subsequent correction:

Illustrations of the type of information that

may be suppl ied after the initial filing of

the notice of election are omitted Social

Security numbers and addresses of qualified

heirs and copies of written appraisals of the

property to be specially valued

. . . . T o be

eli gible for perfection, the [recapture]

agreement as originally filed must at a

minim u m be valid under state law and must

include the signatures of all parties having a

present interest or a remainder interest other

than an interest having a relatively small

value

. The right to perfect agreements is

intended to be limited to cas es where, for

example, a parent of a minor remainderman,

rather than a guardian a d litem as required

under State law, signs the agreement.

Similarly, failure to designate an agent in

the agreement as filed may be corrected under

this provision. 28

The significance of the quoted language, expressing the intent

of Congress t o allow correction only for such hypertechnical29 968 F.2d 459 (5th Cir. 1992).

19 glitches as the signing of the Recapture Agreement for a minor by

a parent when a guardian ad litem was required, is discussed below

when we address the "common sense" approach that we advocated under

simil ar circumstances in M cAlpine v. Commissioner

. 29 More

significant to the present discussion, however, is the emphasized

portion of the foregoing quotation, explaining what is required if

a Recapture Agreement is to be susceptible of perfection under the

substantia l compliance rubric: (1) validity and enforceability

under state law, and (2) signatures of all parties with a present

or remainder interest other than those of relatively small value.

Implicit beyond cavil is the obvious requirement that the original,

timely filed estate tax return in which the election is made must

be accompanied by an instrument SQ any instrument, regardless of

label SQ that c onstitutes an enforceable contract under state law,

executed by those successors in interest who must be bound.

Demonstra ting an admirable but unavailing bit of ingenuity,

counsel for the Estate would have us deem the agglomeration of

(1) a few designated provisions of the Will, (2) the incomplete

Notice of Election, and (3) his proffered interpretation of Texas

law, to be the legal equivalent of a Recapture Agreement sufficient

for purposes of substantial compliance. We must, however, reject

out of hand that speciou s bit of legal legerdemain. Neither in

form nor in substance, singly or in combination with the Will and

the Estate's (and t he Tax Court's) version of the Texas law of

descent a nd distribution, can the instant Notice of Election be30 130 Cong. Rec. S8,700 (1984).

31 Id.

20 stretched to constitute an "agreement . . . valid under state law

. . . ." And if that were not enough, the Notice of Election,

which was filed with the 706, does not even bear the signatures of

"all parties having a present int erest or remainder interest

. . ." SQ

a requirement for a Recapture Agreement to be eligible for

post hoc perfection. Assuming, arguendo, that the absence of the

signature of the grandson who was in military service were excused,

there still remains the unexcused omission of the signature of

another of the five grandsons.

Even if we could agree with the Tax Court's overly generous

characterization of the subject omissions as "technicalities," we

perceive them to be far more substantial than the "sl ightest

technicality" referred to by Senator Dixon of Illinois, 30 which he

illustrated with two hypothetical examples: One featured a mother

who signed a Reca pture Agreement for her minor children without

first having been appointed their guardian by a court; the second

featured a Recapture Agreement that had been signed by the mother

of a newly born infant but had not been signed by a duly appointed

legal guardian for that infant SQ who als o had an interest in the

property SQ for the simple reason that the executors were unaware of

the birth of that child. These were examples of defects that

Senator Dixon characterized as the kind of "simple technical flaws"

that should not destroy the election. 3 1 Similar explanations and

examples of "technical" defects were provided by the staff of the3 2 S ee Staff of Joint Comm. on Taxation, 98th Cong., 2d Sess.,

General Explanation of the Revenue Provisio ns of the Deficit

Reduction Act of 1984 1123-25. (Jt. Comm. Print 1984).

3 3 853 F.2d 1494 (8th Cir. 1988), c ert. denied sub nom.

Cornelius v. Commissioner , 490 U.S. 1005 (1989).

21 Joint Committee on Taxation. 32

Presupposed in the legisl ative history of § 2032A(d)(3) was

the timely filing of some agreement, bin ding under state law,

actually signed by or on behalf of all parties at interest (albeit

possibly by someone without technically sufficient credentials),

purporting to bind those parties personally to liabil ity for

additional tax in the event of the occurrence of a disqualifying

event. In stark contrast, the only supporting document (other than

the Schedule N which was filed by the Estate with the 706) was the

Notice of Election, itself signed by only sixty percent in number

of the qualified heirs, lacking significantly in required (although

possibly curable) contents, but in no way implicating recapture and

in no way constituting a contract enforceable under state law.

In addition to the legislative history and the plain wording

of the Code and the Regs., the applicable jurispr udence strongly

supports the Commissioner's position while furnishing no

justifiable comfort to the Estate. We find three federal appellate

decisions especially instructive.

In the first of these, McDonald v . Commissioner

, 33 a widow's

state law disclaimers of farm land, one relating back to her

husband's death and another relating to property that would pass to

her children if she were to have predeceased her husband, made her34 Id. at 1497-98.

35 Id. at 1498.

22 children's participation in the election necessary as a matter of

law. But in the Notice of Election and the Recapture Agreement S Q

both fi led timely with the Estate Tax Return S Q the widow was

erroneously identified as being the sole heir; and she alone signed

as such. Thus, despite the timely filed and properly executed

estate tax return, and despite the accompanim ent of an otherwise

complete and legally sufficient Notice of Election and a similarly

qualified Recapture Agreement, the election was flawed by the

omission of the names and sign atures of the widow's children.

Under circumstances considerably less blatant than those we

consider today, the attempt of the estate in McDonald to cure its

defective election under a claim of substantial compliance was

disallowed by the Eighth Circuit which held that, under the

statutory language, signatures could not subsequently be added to

an agreement that did not already bind "all parties taking an

interest in the prope rty." 3 4 The M cDonald court, relying on the

language of the statute as well as the above noted legislative

history, found no substantial compliance, as neither the name nor

the signature of anyone with an interest in the property, was

affixed. The court concluded that "[t]he omission from the

recapture agreement of the signatures of all persons with an

interest in the property is not the type of slight technicality

envisioned by Congress when the 1984 amendment was enacted." 35 We

are satisfied that the Eighth Circuit would have needed even less3 6 This is not mere speculation on our part: Shortly after

deciding McDonald

, the Eight Circuit decided Foss v. United States

, 865 F.2d 178 (8th Cir. 1989) and considered a situation almost

identical to that before us: The estate tax return reflected a

special use valuation election but was file d without either a

recapture agreement or a notice of election. In denying the estate

the right to correct these deficiencies u nder the "substantial

compliance" provisions of I.R .C. § 2032A(d)(3), the F oss court

concluded that there was no eligibility for perfection when

"nothing was filed with the return containing the substance of the

recapture agreement or the prin cipal beneficiary's consent to be

personally liable for the recapture tax." Id. at 181.

37 968 F.2d 459 (5th Cir. 1992).

3 8 S ee id. at 464 ("We must give the statute a common sense

interpretation, with an eye towards protecting the family farm and

business as Congress intended.") (citing E state of Thompson v.

Commissioner , 864 F.2d 1128, 1134 (4th Cir. 1989)).

23 time and fewer words to reach that conclusion under the facts

before us today: In M cDonald

, there was at least a n otherwise

complete and timely filed Recapture Agreement that th e court

nev ertheless found to be ineligible for retroactive perfection

because n one of the persons with an interest in the property had

signed it. Here, n o Recapture Agreement (or any combination of

instruments and legal principles tha t could, by any stretch, be

deemed to suffice for a Recapture Agr eement) was filed

con temporaneously with the 706 in which the election was made. 3 6

The second special use valuation "substantial compliance" case

of recent vintage that we find instructive is our own McAlpine v.

Commissioner

. 37 The Estate urges us to apply the kind of "common

sense" flexibility here that we enunciated in McAlpine

. 38 Although

that "dog won't hunt" under the instant circumstances, which are so

distinguishable from those in McAlpine that they constitute a

material difference a nd are thus inapposite, M cAlpine presents a24

case of life imitating art, in th e incarnation of one of the

hypothetical illustrations described by Senator Dixon in the

legislative history of subsection (d)(3). The testator in M cAlpine

bequeathed all of his interest in the eligible property to three

separate trusts, one for the benefit of each of three

g randchildren, one of whom was a minor. The mother of those

grandchildren was the trustee, and in each trust she was vested

w ith the discretionary power to distribute both income an d

principal. In making a timely special use valuation election, the

return preparer dutifully attached a Recapture Agreement which was

binding under state law but was signed only by the beneficiaries'

mother as trustee. The Commissioner asserted the legal

position SQ later proved to be correct SQ tha t the two major

beneficiaries and a court-appointed represe ntative of the minor

beneficiary, not the mother as trustee, should have signed the

Recapture Agreement. Within ninety days following notice of these

defects, an amended Recapture Agreement was filed, signed by the

two major trust beneficiaries and by the minor benefi ciary's

mother SQ

not as trustee this time but as the minor's duly appointed

guardian ad litem.

In rejecting the Commissioner's continued disallowance of the

election after it was timely perfected, we fa ctually and legally

distinguished the McAlpine situation from the facts considered in

prior jurisprudence in which compliance was not found to be

substantial because the timely filed Recapture Agreements had not

been signed by the rig ht persons. In those earlier cases the3 9 I d. (distinguishing Prussner v. United States

, 896 F.2d 218

(7th Cir. 1990), McDonald v. Commissioner

, 853 F.2d 1494 (8th Cir.

1988), Estate of Doherty v. Commissioner

, 95 T.C. 446 (1990) rev'd

by 982 F.2d 450 (10th Cir. 1992), and Estate of Strickland v.

Commissioner , 92 T.C. 16 (1989)).

40 Id.

25 courts had reasoned that, as the taxpayers "did not have

reasonable, good faith arguments that the regulations did not

require what was omitted, their compliance with the Regs. was not

substantial and thus could not be per fected." 3 9 In contrast, we

concluded that under the trust situation of McAlpine the law was

less than pellucid that the major beneficiaries and the legally

appointed representative of the minor beneficiary SQ rather than the

trustee SQ

were the parties who were required to sign the Recapture

Agreement. We emphasized that the Regs. mentioned "trustees" when

referring to persons with interes ts in the property who were

required to sign, but did not mention trust beneficiaries. We

recognized the existence of a good faith argument under state law

that the signatures of beneficiaries were not required and that the

signature of the trustee alone would be sufficient. Even though we

held that the legal misunderstanding in McAlpine pres ented a

reasonable basis for permitting perfection under the substantial

compliance exception, we cautioned that we were also relying on the

absence of "evidence of fraud or dilatory or slipshod preparation

of the necessary documentation." 40

We clearly viewed the McAlpine facts as presenting a close

call, yet the facts we analyzed under the good fai th or "common

sense" approach there were much more favorable to the taxpayer than41 896 F.2d 218 (7th Cir. 1990) ( en banc ).

26 those now before us: The McAlpine Recapture Agreement was timely

filed as an attachment to the estate tax return; classic per se

fiduciary relationships were involved; a party with legal authority

over all qualified property executed the Recapture Agreement,

thereby both assuming personal liability and signing de facto for

the beneficial owners of the property; and a serious, good faith

legal disagreement existed as to the identity of the party or

parties who were required to sign the Recapture Agreement. When

those characteristics are compared to the facts of instant case,

the distinguishing di fferences are obvious. Indeed, M cAlpine 's

"common sense" approach to statutory interpretation (not to factual

analysis) cuts against rather than in favor of a conclusion of

substantial compliance in the insta nt case. Furthermore, even

though there is not the first hint of fraud or intentional delay

here, the same cannot be said about "slipshod preparation of the

necessary documentation." Far from substantial compliance, the

documentation supporting the election in the instant case was at

most a lick and a promise ; and even the "promise" remained

unfulfilled until after the Estate's hand was called by the IRS's

deficiency notice disallowing the election.

T he third opinion we find persuasive was rendered by our

colleagues on the Seventh Circuit, sitting en banc. It provides

perhaps the b est analysis of the instant problem under facts

closely analogous to those we are now considering. In P russner v.

United St ates

, 41 post hoc perfection of a defective special use42 Id. at 223.

27

valuation election was sought under the "substantial comp liance"

provisions of § 2032A(d)(3). A duly executed estate tax return had

been timely filed; it was accompanied by a Notice of Election but,

as here, was devoi d of a Recapture Agreement. Not unlike the

statement affixed to the Hudgins' 706 by Mr. Keith, a cover letter

accompanying the estate tax return in P russner advised that a

Recapture Agreement would be submitted subsequently when signed by

the geographically scattered heirs. Unlike the "promise" in the

case sub judice, the Prussner promise was fulfilled a mere four

months later by the supplemental filing of a fully executed,

legally binding Recapture Agreeme nt before the estate tax return

was ever audited. Construing the facts liberally in favor of the

taxpayer, the trial court treated the cover letter as a Recapture

Agreement, a holding reversed on appeal when the en banc Seventh

Circuit determined that the estate was ineligible for post-filing

perfection, irrespective of the cover letter. The Prussner court

t reated the date of filing the timely estate tax return as the

"d eadline" for filing a Schedule N, a Notice of Election, and a

Recapture Agreement, observing that cou rts have no authority to

vary deadlines fixed by Congress or by agencies exercising

delegated legislative powers. 42 The court cautioned against

expansive, loose treatment of substantial compliance in the context

of § 2032A. After noting that little comfort or guidance could be

gained from prior Tax Court decisions on the subject of substantial

compliance, the Seventh Circuit admonished that:43 Id. at 224-25. (emphasis added).

28 The common law doctrine of substantial

compliance should not be allowed to spread

beyond cases in which the taxpayer had a good

excuse (though not a legal justification) for

failing to comply with either an unimportant

requirement or one unclearly or confusingly

stated in the regulations or the statute. So

conceived the doctrine is broader in scope, but less forgiving, than section 2032A(d)(3).

It is not limited to the specific requirements

made curable by subsection (B)(i) and (B)(ii),

but the re must be a showing that the

requirement is either unimportant or unclearly

or confusingly stated; no such showing is

required by those subsections . . . .

In this case a regulation the validity of

which is not challenged unequivocally required

the filing of a recapture agr eement w ith the

return. The taxpayer's lawyer made no effort

to comply, and given his alternative remedies

SQ m ost simply, a request for an extension of

time in whic h to file the return S Q he had no

excuse for the failure

. . . . T he Internal

Revenue Service cannot allow qual ified-use

valuation until a recapture agreement is filed

because . . . the statute makes the filing of

suc h an agreement a condition of a valid

election

. Until it is filed, the return is in

limbo. Failure to comply with the regulations

may also create confusion about the

irrevocability of the election. "Such an

election, once made, shall be irrevocable."

26 U.S.C. § 2032A(d)(1). When is it made, if

no recapture agreement is filed? 43

We discern an obvious lesson from McDonald

, Prussner and

McAlpine . During the decade since subsection (d)(3) was added to

§ 2032A by DEFRA, in not one case in which no Recapture Agreement

(or other contractually sufficient substitute, personally binding

the qualified heirs and enf orceable under state law) had been

submitted contemporaneously with the estate tax return has

substantial compliance been found and post-filing perfection4 4 M cAlpine

, 968 F.2d at 464 (citing Estate of Thompson v.

Commissioner , 864 F.2d 1128, 1134 (4th Cir. 1989)).

4 5 A nderson v. City of Bessemer City, N.C.

, 470 U.S. 564, 573

(1985) ( quoting United States v. United States Gypsum Co

, 333 U.S.

364, 395 (1948)).

29 permitted. At least no such case has been cited to us by the

parties and we have found none independently. Consistent with that

history, we hold today that a special use valuation election can

never be in substantial compliance with the requirements of § 2032A

if the estate tax return in which the election is made is not

accompanied by a Recapture Agreement or some reasonable facsimile

thereof, signed by the holders of al l interests (other than de

minimis) in t he qualified assets, and personally binding the

interest holders under state law to be liable for tax deficiencies

in the event of disqualifying use or disposition of the property

during the statutory period.

C. The Tax Court Opinion

The Tax Court, in its "speaking opinion" from the bench, may

well have had in mind our admonition in M cAlpine that "[w]e must

give the statute a common sense interpretation, with an eye towards

protecting the family farm and business as Congress intended." 4 4

If so, the court read that a dmonition far too expansively. For

whether we here review the Tax Court's handling of the substantial

compliance issue de novo as an issue of law or for clear error as

a question of fact, we ar e "left with a firm and definite

conviction that a mistake has bee n committed." 4 5 The Tax Court's

approach may best be analogized to a bankruptcy court's fashioning4 6 S ee, e.g.

, Matter of Oxford Management, Inc.

, 4 F.3d 1329,

1334 (5th Cir. 1993) ("The `statute does not auth orize the

bankruptcy courts to create substantive rights that are otherwise

unavailable under applicable law, or constitute a roving commission

to do equity.'") (quoting United States v. Sutton , 786 F.2d 1305,

1308 (5th Cir. 1986)).

4 7 S ee Estate of Strickland v. Commissioner , 92 T.C. 16, 28

(1989).

30 unauthorized remedies under the banner of equity. 46 Confronted here

with a McAlpine -proscribed "slipshod preparation of the necessary

documentation," the Tax Court faced what we have now demonstrated

to have been an impossible task if it were to find substantial

compliance despite the total absence of a Recapture Agreement.

For, as recognized by consistent jurisprudence, failure timely to

f ile a Recapture Agreement bars a finding of substantial

compliance. That bar looms even more impenetrable here in light of

the Estate's additional omissions of such proportion as appraisals

o f the property and substantiation of the method us ed for

determining special value based on qualified use. 47

Neither can the Tax Court's holding be sustained by its

reliance on those portions of the Will to which that court adverts.

The Tax Court's conclusion that particular Will provisions "provide

adequate assurances" to the Commissioner is simply wrong. Indeed,

they provide the Comm issioner no l egal assurance whatsoever. In

the total absence of a Recapture Agreement and in the fac e of an

otherwise substantially defective election, we can conceive of no

way for the Will to afford the Commissioner the ability to recover

from the heir s personally in the event of a breach. Equally

u navailing is the Tax Court's expressed but unsupported,4 8 We do not imply that there must be a separate, freestanding contract, labele d "Recapture Agreement"; indeed, we can

envision inter alia a single instrument serving as both the Notice

of Election and the Recapture Agreement, as long as the substantive

contents and legal requirements for both are present.

31 conclusional "belief" that:

Texas law would recognize the testator's intent in that

regard [non-alienation and affirmative ranch use for ten

years] and hold and bind the beneficiaries to those

provisions . . . and on the totality of the evidence in

this case, establishes effectively a constructive

agreement and legally binding commitment among the

beneficiaries that they will comply with the requirements

of the special-use valuation statutes . . . .

We are not convinced; and neither the Estate nor the Tax Court has

cited us to Texas authority in support of such a proposition.

III

CONCLUSION

We follow constant jurisprudence, as reflected by the

decisions of every court that has directly addressed the issue, in

holding that there can be no substantial co mpliance with the

requirements of Code § 2032A without, inter alia, the

contemporaneous filing of a Recapture Agreement or its equivalent. 48

Thus we hold that the Tax Court rev ersibly erred in finding that

the Estate's special use value electi on was in substantial

compliance with the requirements of the Code and the Regs. and

allowing perfection of the flawed election. We therefore reverse

the Tax Court and remand this case to it for the limited purpose of

entering a judgment in favor of the Commissioner, rejecting the

Estate's petition for redetermination, and reinstating the

deficiency assessed by the Commissioner, modified to any extent32

necessary to reflect precisely the correct values and the

appropriate estate taxes and interest due.

REVERSED and REMANDED.