Source: https://law.justia.com/cases/federal/appellate-courts/F2/982/450/136964/
Timestamp: 2020-08-12 03:55:00
Document Index: 486139395

Matched Legal Cases: ['§ 7482', '§ 2003', '§ 2032', '§ 2032', '§ 20', '§ 20', '§ 2032', '§ 1025', '§ 2032', '§ 2032', '§ 1025', '§ 2032', '§ 2032', '§ 1421', '§ 2032', '§ 2032', '§ 1421', '§ 2032', '§ 2032', '§ 1421', '§ 1421', '§ 1421', '§ 2032', '§ 2032', '§ 1421', '§ 1421', '§ 2003', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 1421']

Estate of Loren Doherty, Deceased, Dan A. Doherty, Personalrepresentative, Petitioner-appellant, v. Commissioner of Internal Revenue, Respondent-appellee, 982 F.2d 450 (10th Cir. 1992) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Tenth Circuit › 1992 › Estate of Loren Doherty, Deceased, Dan A. Doherty, Personalrepresentative, Petitioner-appellant, v....
Estate of Loren Doherty, Deceased, Dan A. Doherty, Personalrepresentative, Petitioner-appellant, v. Commissioner of Internal Revenue, Respondent-appellee, 982 F.2d 450 (10th Cir. 1992)
US Court of Appeals for the Tenth Circuit - 982 F.2d 450 (10th Cir. 1992) Dec. 31, 1992
The case was submitted to the Tax Court upon stipulated facts, and the Tax Court upheld the position of the Commissioner that the special use valuation was not available to the estate and, after some minor adjustments which are not here in dispute, held that there was a deficiency for estate taxes due amounting to $174,936. Estate of Loren Doherty v. Commissioner, 95 T.C. 446, 452-59 (1990). Pursuant to 26 U.S.C. § 7482(a) (1) (Supp.1992), the estate seeks review in this court of the Tax Court's decision.
Doherty completed and attached Schedule N to the estate tax return, addressing all 14 items required by the Treasury regulation for a special use valuation election. He addressed these items on a separate attachment entitled "Section 2032A Election and Statement." Doherty also attached a recapture agreement. The one response on the Section 2032A attachment to Schedule N that the Commissioner later held constituted an incurable defect to a valid special use valuation election was Doherty's response to Item "VIII." This item asked for " [c]opies of written appraisals of F.M.V." To that request, Doherty responded: "There are none. Value determined by Personal Representative. See attached for comparable rental value."2
Even if the lack of a written appraisal of fair market value could be perfected, both section 2032A(d) (3) and section 1421(b) of the Tax Reform Act of 1986 require that the defect be perfected within 90 days from the date of receipt of notice from the Service. It has now been more than 90 days since your letter of March 25, 1987, responding to the letter [of] March 6, 1987, from Pamelya Herndon concerning the necessity of a written appraisal.5
The value of a decedent's gross estate is its fair market value as of the date of the decedent's death or as of six months thereafter if the alternate valuation date is selected. 26 C.F.R. 20.2031-1(b) (1992). As indicated in footnote 1, supra, as part of the Tax Reform Act of 1976, the Internal Revenue Code was amended to allow an alternate method for valuing real property used as a "farm for farming purposes, or ... use [d] in a trade or business other than the trade or business of farming." Tax Reform Act of 1976, Pub. L. No. 94-455, § 2003, 90 Stat. 1857 (codified as 26 U.S.C. § 2032A(b) (2) (1976), as amended by Deficit Reduction Act of 1984). This alternate method of valuing farmland has become known as "special use valuation." Special use valuation allows real property used for farming and ranching to be valued based upon its use as a farm or ranch, rather than based on its fair market value. H.R.Rep. No. 94-1380, 94th Cong., 2d Sess. 21-22 (1976) reprinted in 1976 U.S.C.C.A.N. 3375-76. The congressional intent behind this 1976 amendment was to grant relief to heirs of family farms and ranches who, if the property was valued at its fair market value for its highest and best use, might, in a given case, have to sell the farm to pay the tax. Id.; see also Mangels v. United States, 828 F.2d 1324, 1326 (8th Cir. 1987); Estate of Sherrod v. Commissioner, 774 F.2d 1057, 1061-62 (11th Cir.), cert. denied, 479 U.S. 814, 107 S. Ct. 66, 93 L. Ed. 2d 24 (1986).
Special use valuation is not automatic--rather, it is elective. In this regard, 26 U.S.C. § 2032A(d) (1) (Supp.1992) currently reads as follows:
Treasury regulation 26 C.F.R. § 20.2032A-8(a) (3) (1992) provides that a separate "notice of election" must be filed with an estate tax return and that the notice of election must address fourteen specific items, one of which is " [c]opies of written appraisals of the fair market value of the real property," 26 C.F.R. § 20.2032A8(a) (3) (ix) (1992). It is this particular item that generates the present controversy.
In 1984, as a part of the Deficit Reduction Act of 1984, Congress amended 26 U.S.C. § 2032A retroactively to 1977. Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 1025(b) (1), 98 Stat. 1030 (referred to as a 1984 historical and legislative note to § 2032A regarding the effective date of the 1984 amendment). The amended § 2032A provides an electing estate, that substantially complies with the Treasury regulation, time to correct technical deficiencies once notified by the IRS. Pub. L. No. 98-369, § 1025(a) (codified as 26 U.S.C. § 2032A(d) (3)). Specifically, the statute provides:
26 U.S.C. § 2032A(d) (3) (Supp.1992).
Tax Reform Act of 1986, Pub. L. No. 99-514, § 1421(a) and (b), 100 Stat. 2716 (1986).
The Tax Court held that Doherty, the personal representative, had not met the "substantial compliance" requirement of 26 U.S.C. § 2032A(d) (3) (B), Estate of Loren Doherty v. Commissioner, 95 T.C. 446, 455 (1990), and that such foreclosed "any relief under the 90-day provision" of § 2032A(d) (3), id. at 457.6 The Tax Court also held that the estate had not met the "provide substantially all" requirement of § 1421(a) (2) of the Tax Reform Act of 1986. Id. at 459. This was so because the Form 706 the estate filed was not the form the statute intended to address and the estate did not meet the substantial compliance requirement of § 2032A(d) (3) (B). Id. Given these holdings, the Tax Court did not make any findings as to whether the IRS notified Doherty of a deficiency in his purported election or whether Doherty "perfected" his deficient election within the 90-day period provided by § 2032A(d) (3).7 Id. at 457. Nor did the Tax Court address whether Doherty could perfect his election under § 1421(b) of the Tax Reform Act of 1986.8
So, the issue to be resolved by this court is whether Doherty's failure to attach to Schedule N a previously obtained appraisal of the fair market value of the property sought to be valued at its special use value precludes him from availing the estate of the provisions of § 1421(a) of the Tax Reform Act of 1986. This is a question of law, subject to de novo review. See Woodbury v. Commissioner, 900 F.2d 1457, 1459 (10th Cir. 1990).
We hold that Doherty's failure to attach to the federal estate tax return, as a part of Schedule N, a previously obtained appraisal of the subject property at its fair market value is not of such a nature to preclude Doherty from availing the estate of the provisions of § 1421(a) of the Tax Reform Act of 1986. In other words, contrary to the Commissioner's position, which was upheld by the Tax Court, Doherty in his notice of election "provided substantially all the information with respect to such election required on such return of tax." 1421(a) (2) of the Tax Reform Act of 1986 (emphasis added).
In reaching this conclusion, we are greatly persuaded by the rationale of Prussner v. United States, 896 F.2d 218 (7th Cir. 1990) (en banc). Prussner was not a case where the executor failed to attach to Schedule N a previously obtained appraisal of the property sought to be valued at its special use. Prussner was a case where the executor failed to attach to the estate tax return a "recapture agreement."10 The lawyer for the executor in Prussner did attach a letter stating "unfortunately, the agreement ... was not fully executed at the time because the heirs reside throughout the United States. I hope to send you this agreement within the next few weeks." Id. at 221. Months later the attorney filed a recapture agreement which complied with the Treasury regulation. The IRS disallowed the special use valuation election because the recapture agreement had not been attached to the estate tax return when it was filed. The executor paid the additional estate tax and brought suit in the district court for a refund. The district court held that the explanatory letter from the executor's attorney was a form of a recapture agreement and that the executor was entitled to relief under 26 U.S.C. § 2032A(d) (3).
On appeal, the Seventh Circuit, sitting en banc, held that although the executor was not entitled to relief under § 2032A(d) (3), he was entitled to relief under § 1421(a) of the Tax Reform Act of 1986 and affirmed the district court on this ground. Id. at 225. In so doing, the Seventh Circuit held that "information" within the meaning of § 1421(a) (2) did not mean information on the return AND attachments like the recapture agreement. Id. at 225-26.11 The Seventh Circuit reasoned that
" [t]here is nothing about filing a recapture agreement or for that matter a notice of election [on the tax return]. All that is required (in marked contrast to the Treasury regulation defining valid election for purposes of section 2032A) is the making of an election on the estate tax return--that is, the marking of the box for the election. The taxpayer who checks the box--that was done here--and provides substantially all the information that the return requires with respect to the election is home free."
Like the Seventh Circuit, we are not persuaded by Foss v. United States, 865 F.2d 178 (8th Cir. 1989), reh'g denied, and McDonald v. Commissioner, 853 F.2d 1494 (8th Cir. 1988), cert. denied sub nom., Cornelius v. Commissioner, 490 U.S. 1005, 109 S. Ct. 1639, 104 L. Ed. 2d 155 (1989).13
Prior to 1976, the general rule was that a decedent's real property should be valued, for estate tax purposes, at its fair market value, which meant the fair market value for its "highest and best use." H.R.Rep. No. 94-1380, 94th Cong., 2d Sess. 21 (1976) reprinted in 1976 U.S.C.C.A.N. 2897, 3356, 3375. In 1976, as a part of the Tax Reform Act of 1976, the Internal Revenue Code was amended to allow an alternate method for valuing real property used "as a farm for farming purposes, or ... use [d] in a trade or business other than the trade or business of farming." Tax Reform Act of 1976, Pub. L. No. 94-455, § 2003, 90 Stat. 1857 (codified as 26 U.S.C. § 2032A (1976), as amended by Deficit Reduction Act of 1984). The alternate method of valuation has become known as "special use valuation," which allows valuation of farm and ranch land to be based upon its use as farm or ranch land, rather than valued at its fair market value for its highest or best use, which, in a given case, might be as a subdivision or a shopping center. House Report 94-1380 21-22 reprinted in 1976 U.S.C.C.A.N. 3375-76. The reason behind this change was Congress' desire to "preserve the family farm and other family businesses." Id. at 5 reprinted in 1976 U.S.C.C.A.N. 3359
At the same time, Congress empowered the Secretary of the Treasury to promulgate rules and regulations concerning special use valuation election. 26 U.S.C. § 2032A(d) (1) (1976), as amended by Deficit Reduction Act of 1984.
The Tax Court agreed with the Commissioner that Doherty's failure to attach to Schedule N a previously obtained appraisal of the estate property at its fair market value was, in effect, an incurable defect. Based on a Conference Report, they contend that the 1984 amendment to 26 U.S.C. § 2032A(d) (3) permits the untimely filing of an appraisal at fair market value obtained prior to the filing of the estate tax return, but does not permit the untimely filing of an appraisal obtained after the filing of the estate tax return. See Estate of Loren Doherty, 95 T.C. at 456-57 (citing H.Rep. No. 98-861 (Conf.) (1984), 1984-3 C.B. (Vol. 2) 495). In this regard, Herndon's and Eagan's letters also indicate that Doherty could not submit appraisals conducted and made after the date the estate tax return was filed. As noted in the facts above, however, Doherty sent the IRS fair market value appraisals on July 24, 1987
In this regard, the Tax Court commented as follows: "The parties disagree about whether petitioner perfected its deficient election within the 90-day period provided by section 2032A(d) (3).... Petitioner's failure to establish substantial compliance with the regulations, however, forecloses any relief under the 90-day provision" of § 2032A(d) (3). Id. at 457
The estate provided, as required by 26 C.F.R. 20.2032A-8(a) (3) (1992): Loren Doherty's name; the properties' qualified use; the properties to be specially valued; fair market value of the specially valued properties; an adjusted value under 26 U.S.C. § 2032A(b) (3) (B); the personal property that was passed to qualified heirs and the qualified use of this property; the adjusted value of the gross estate as defined by 26 U.S.C. § 2032A(b) (3) (A); a statement indicating that Loren and Dan Doherty owned the special use properties 8 years prior to Loren's death; a statement that the properties were used for ranching during this period; the names, addresses, taxpayer identification numbers, and relationship to Loren Doherty of each person interested in the special use properties plus the fair market and qualified use value of property passing to each person listed; affidavits regarding material participation of the property; and a legal description of the property to be specially valued. While the estate misnumbered the items and did not provide a line item for 26 C.F.R. 20.2032A-8(a) (3) (viii), which requires information on the method used to calculate special use valuation, this item is addressed in item "IV. (b)" where the estate gives the exact calculation used to determine the special use value
26 C.F.R. 20.2032A-8(c) (1) (1992) requires an agreement signed by all parties holding an interest in the subject property sought to be valued as its special use whereby the signers consent to personal liability for an additional estate tax should there by any "early dispositions of the property or early cessation of the qualified use."
In McDonald v. Commissioner, 853 F.2d 1494, 1498 (8th Cir. 1988), cert. denied sub nom., Cornelius v. Commissioner, 490 U.S. 1005, 109 S. Ct. 1639, 104 L. Ed. 2d 155 (1989), the Eighth Circuit stated that the principal difference between the 1984 amendment and the 1986 amendment is that the former requires "substantial compliance" with the Treasury regulation whereas the latter requires an executor to provide "substantially all" the information required by the tax return and its instructions
Neither Foss or McDonald involved fair market value appraisals. In McDonald, the recapture agreement filed with the estate tax return was not signed by any person having an interest in the property in question as required by the Treasury regulation. McDonald, 853 F.2d at 1497. Such being the case, the Eighth Circuit in McDonald held that the executor could not avail the estate of the provisions of the 1984 amendment and stated further that since " [t]he Estate has not argued that the instructions followed in preparation of the return varied from the regulation requirements ... we conclude that the 1986 Amendment provides the Estate no more relief than did the 1984 Amendment." Id. at 1498. Foss involved a situation where the estate failed to attach both a recapture agreement and a notice of election as required by the tax return's instructions. Foss, 865 F.2d at 180. The panel in Foss followed McDonald's reasoning that § 1421(a) required substantially all the information on the tax return and its instructions, id. at 181, commenting merely that "one panel of this court cannot reverse another panel, even if it were inclined to do so," id