Source: http://openjurist.org/97/f3d/1401/estate-of-lucas-lucas-v-united-states
Timestamp: 2013-12-05 18:48:49
Document Index: 763023922

Matched Legal Cases: ['§ 2032', '§ 2032', '§ 1421', '§ 1014', '§ 20', '§ 2032', '§ 20', '§ 2032', '§ 2032', '§ 2031', '§ 20', '§ 2003', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 20', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 2032', '§ 1025', '§ 2032', '§ 1421', '§ 1014']

97 F3d 1401 Estate of Lucas Lucas v. United States | OpenJurist
97 F. 3d 1401 - Estate of Lucas Lucas v. United States	Home97 f3d 1401 estate of lucas lucas v. united states
97 F3d 1401 Estate of Lucas Lucas v. United States 97 F.3d 1401
78 A.F.T.R.2d 96-6911, 96-2 USTC P 60,247
In re ESTATE OF Charles R. LUCAS, Deceased, Plaintiff.Roy H. LUCAS; Howard C. Lucas, Co-Personal Representativesof the Estate of Charles R. Lucas, Plaintiffs-Appellants,v.UNITED STATES of America, Defendant-Appellee.
No. 95-2370.
James David Pobjecky, Winter Haven, FL, for Plaintiffs-Appellants.
Gary R. Allen, Alice L. Ronk, Pat Bowman, Mark E. Matthews, Richard Farber, Tax Division, Dept. of Justice, Washington, D.C., for Defendant-Appellee.
Before HATCHETT, Circuit Judge, ANDERSON, Circuit Judge, and WOOD*, Senior Circuit Judge.
In this federal estate tax case, the government determined that the Estate of Charles R. Lucas (the Estate) was not entitled to "special use valuation" of certain family farm property pursuant to section 2032A of the Internal Revenue Code. See 26 U.S.C. § 2032A. The first issue on appeal is whether the Estate's initial effort to elect special use valuation was sufficient to constitute "substantial compliance" with the applicable regulations, thereby entitling the Estate to perfect its election upon notice from the I.R.S. that the original election was deficient. See 26 U.S.C. § 2032A(d)(3). A related issue is also presented: whether the Estate provided "substantially all the information" required on the estate tax return with respect to the election for special use valuation, such that the I.R.S. should have allowed the Estate to perfect its previously deficient election. See Tax Reform Act of 1986, Pub.L. No. 99-514, § 1421, 100 Stat. 2085, 2716, as amended by the Technical and Miscellaneous Revenue Act of 1988, Pub.L. No. 100-647, § 1014(f), 102 Stat. 3342, 3562. We find that the Estate's election for special use valuation did not substantially comply with the applicable regulations, nor did it provide substantially all the information required on the tax return. Accordingly, we affirm the district court's entry of judgment in favor of the government.
Charles R. Lucas (decedent) died testate on December 15, 1985. Howard C. Lucas and Roy H. Lucas are the decedent's sons and the co-personal representatives of his estate. Under their father's will, they are also the only legatees to certain Polk County, Florida farm land, the valuation of which is at issue in this case.
After receiving an extension from the I.R.S., the Estate filed a timely federal estate tax return on October 16, 1986. The Estate used the March 1985 version of Form 706. On line 2 of page 2 of the form, in response to the question, "Do you elect special use valuation?," the Estate failed to check either the "yes" or "no" box. Immediately below the question, Form 706 instructs that, "If 'Yes,' complete and attach Schedule N and the agreements required by the instructions to Schedule N."
Despite its failure to check the "Yes" box on page 2 of the return, the Estate completed a Schedule N. Schedule N of Form 706 (March 1985), entitled "Section 2032A Valuation," directs the taxpayer: "Enter the requested information for each party who received any interest in the specially valued property. Also complete and attach the required agreements described in the instructions."1 The Estate's Schedule N lists Roy H. Lucas and Howard C. Lucas, the decedent's two sons, as the parties with an interest in the specially valued property. Under the preprinted headings "Fair market value" and "Special use value," the amounts $187,500 and $40,000, respectively, are listed for Roy Lucas. The same amounts are listed for Howard Lucas.2
The Estate attached to its return a document entitled "Affidavit from Personal Representatives," which purported to serve as the Estate's notice of election. This document contained most, but not all, of the fourteen items of information required by the applicable Treasury regulations to be included in the notice of election. See 26 C.F.R. § 20.2032A-8(a)(3).3 Significantly, the Estate did not attach an "agreement to special valuation by persons with an interest in property," also called a recapture agreement, to its return. See 26 U.S.C. § 2032A(a)(1)(B) and (d)(2); 26 C.F.R. § 20.2032A-8(a)(3) and (c).
On audit of the estate tax return, the I.R.S. advised the Estate that the attempted election for special use valuation was defective, the primary reason being the Estate's failure to attach a recapture agreement. Subsequently, and within ninety days following the notice from the I.R.S. about the defective election, the Estate submitted a recapture agreement that fully complied with the requirements of the regulations. Nevertheless, the I.R.S. denied special use valuation for the properties in question. The I.R.S. took the position that the Estate's initial submission did not substantially comply with the applicable regulations, and the Estate therefore was not eligible subsequently to perfect its defective election under § 2032A(d)(3). The I.R.S. increased the amount of the gross estate, based on the excess of the fair market value of the real property in question over its value as farm land, and assessed a tax deficiency in the amount of $87,131.
The Estate paid the assessment, filed a claim for a refund, and when the claim was denied by the I.R.S., filed a complaint in federal district court. A jury trial was conducted. At the close of the evidence, the district court awarded judgment to the government as a matter of law, without sending the case to the jury. This appeal followed.
A. Introduction: Special Use Valuation Under Internal Revenue Code § 2032A
For purposes of calculating the federal estate tax, the value of real property included in the gross estate of a decedent is generally its fair market value. See 26 U.S.C. § 2031(a); 26 C.F.R. § 20.2031-1(b). In 1976, however, Congress authorized an alternate valuation method, "special use valuation," for certain family farms and other family businesses. Tax Reform Act of 1976, Pub.L. No. 94-455, § 2003, 90 Stat. 1520, 1856-62 (codified, as amended, at 26 U.S.C. § 2032A). Special use valuation allows qualified real property to be valued according to its actual use (e.g., as a farm), rather than at its fair market value based on its highest and best use (e.g., as a housing development or a shopping mall). The rationale underlying § 2032A is to reduce the tax burden on the estate's heirs, so that they are not forced to sell the family farm or business in order to pay the high estate taxes that would result if the property were taxed at its fair market value. Estate of Sherrod v. Commissioner, 774 F.2d 1057, 1061-62 (11th Cir.1985), cert. denied, 479 U.S. 814, 107 S.Ct. 66, 93 L.Ed.2d 24 (1986); Estate of Doherty v. Commissioner, 982 F.2d 450, 453 (10th Cir.1992); H.R.Rep. No. 94-1380, 94th Cong., 2d Sess., 21-22 (1976), reprinted in 1976 U.S.Code Cong. & Admin.News 2897, 3356, 3375-76.
To qualify for special use valuation, the estate must satisfy several substantive conditions. The decedent must have been a citizen or resident of the United States at the time of his or her death, 26 U.S.C. § 2032A(a)(1)(A); the property must be located in the United States, id. § 2032A(b)(1); the value of the property must exceed specified percentages of the decedent's gross estate and adjusted estate, id.; the property must devolve to a "qualified heir," who must be a member of the decedent's family, id., id. § 2032A(e)(1), (2); and the decedent or a member of the decedent's family must have materially participated in the operation of the farm or business at the time of the decedent's death and for five of the eight years preceding the decedent's death, id. § 2032A(b)(1).
Additionally, in order to avoid subsequent recapture of the tax savings produced by special use valuation, the property must remain in the ownership of the family and must be used for the qualified use for at least ten years following the decedent's death. 26 U.S.C. § 2032A(c). At the time of the election for special use valuation, the qualified heirs who inherited the property ("qualified heirs") must agree to keep the specially valued property in the family and to operate it for the qualified use for ten years. Id. § 2032A(c) and (d)(2). The contract expressing such agreement by the qualified heirs, commonly called a "recapture agreement," must be executed and filed contemporaneously with the estate tax return. Id. § 2032A(a)(1). In this recapture agreement, the qualified heirs must bind themselves under state law to be personally liable to the government for a recapture tax in the event of a premature disposition of the property or an early cessation of the qualified use. 26 C.F.R. § 20.2032A-8(c).
Special use valuation of qualified real property does not occur just because the Estate satisfies all of the substantive conditions; rather, the Estate must affirmatively elect such treatment on the estate tax return. 26 U.S.C. § 2032A(a)(1)(B). The principal requirements for a valid election are (1) checking the appropriate box on the estate tax return and completing the Schedule N; (2) completing and attaching to the return a notice of election, which contains all of the information specified in § 2032A and the applicable regulations; and (3) attaching a recapture agreement that has been signed by all parties with interests in the specially valued property, expressly consenting to personal liability for the recapture tax in the event of a premature disposition of the property or an early cessation of its qualified use. "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 full compliance with § 2032A." Estate of Hudgins v. Commissioner, 57 F.3d 1393, 1397 (5th Cir.1995).
Treating Congress' allowance of special use valuation as an act of legislative grace, the I.R.S. and the courts have strictly construed § 2032A and its requirements. See Prussner v. United States, 896 F.2d 218, 220 (7th Cir.1990) (en banc). In response to complaints from taxpayers who were denied special use valuation because of their failure to comply fully with all of the procedural requirements for a valid election, Congress passed two statutes designed to block the I.R.S. from seizing upon slight technical defects, which would prevent otherwise qualified taxpayers from taking advantage of special use valuation. See McAlpine v. Commissioner, 968 F.2d 459, 461 (5th Cir.1992). Under 26 U.S.C. § 2032A(d)(3), added by the Deficit Reduction Act of 1984, Pub.L. No. 98-369, § 1025, 98 Stat. 494, 1030-31, an estate whose initial election for special use valuation "substantially complies" with the applicable regulations may subsequently correct technical deficiencies within a reasonable period (not to exceed ninety days) following notice from the I.R.S. Section 1421 of the Tax Reform Act of 1986 provides similar relief to certain taxpayers who elected § 2032A treatment on the estate tax return and provided "substantially all the information with respect to such election required on such return of tax." Tax Reform Act of 1986, Pub.L. No. 99-514, § 1421(a)(2), 100 Stat. 2085, 2716, as amended by the Technical and Miscellaneous Revenue Act of 1988, Pub.L. No. 100-647, § 1014(f), 102 Stat. 3343, 3562.
In the instant case, the Estate concedes that its election for special use valuation did not fully comply with the applicable regulations. However, the Estate argues that its initial effort to e