Opinion ID: 590888
Heading Depth: 2
Heading Rank: 2

Heading: Cessation of Qualified Use

Text: 29 Williamson argues that the cash lease to his nephew constitutes a qualified use of the property because a family member continues to farm the land. Section 2032A's purpose to perpetuate the family farm, Williamson continues, has thus been fulfilled in this case. Williamson stresses that the statutory definition of a cessation of qualified use focuses solely on the use to which the property is put and does not specifically designate who must be using the property in the qualified use. 26 U.S.C. § 2032A(c)(6)(A). 30 The Tax Court disagreed with Williamson, pointing out that the statute expressly provides for the triggering of the recapture tax when the qualified heir ceases to use for the qualified use the qualified property. Id. § 2032A(c)(1)(B). The Tax Court also noted that Williamson's position conflicted with the legislative history's repeated proscriptions against passive rentals. Lastly, the Tax Court explained that Williamson's reading of the statute would render the 1981 and 1988 amendments redundant. 31 We agree with the Tax Court that Williamson's proposed interpretation of section 2032A is untenable. Our starting point in the task of statutory construction is, of course, the statute's plain language. S & M Inv. Co. v. Tahoe Regional Planning Agency, 911 F.2d 324, 326 (9th Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 963, 112 L.Ed.2d 1050 (1991). In this case, the plain language of the recapture provision disproves Williamson's suggestion that farming by someone other than the qualified heir preserves the special use valuation. Section 2032A(c)(1)(B) expressly states that the recapture tax is activated when the qualified heir ceases to use for the qualified use the qualified property. (Emphasis added.) Putting aside for the time being Williamson's disposition argument, Beryl Williamson, not Harvey Williamson, is the qualified heir to Elizabeth Williamson. And Williamson admits that he has not personally used the property for farming. 5 32 Williamson counters by pointing out that the plain language of the cessation of qualified use provision does not limit its application to the qualified heir. See 26 U.S.C. § 2032A(c)(6)(A). Williamson's argument, however, misunderstands subsection (c)(6)(A). This subsection reads: 33 For purposes of paragraph (1)(B), real property shall cease to be used for the qualified use if ... such property ceases to be used for the qualified use set forth in subparagraph (A) or (B) of subsection (b)(2) [that is, for farming or a trade or business], under which the property qualified.... 34 By its language, subsection (c)(6)(A) does not stand alone in defining a cessation of qualified use. It specifically refers and incorporates into its definition subsection (c)(1)(B), the provision that requires the qualified heir to undertake the qualified use. Contrary to Williamson's assertion, then, subsection (c)(6)(A) neither modifies nor operates independently of subsection (c)(1)(B). Rather, subsection (c)(6)(A) simply clarifies that portion of the statutory language imposing on Williamson, the qualified heir, the obligation personally to conduct a qualified use of the property. 35 The plain language of the statute further counsels against Williamson's position because it reveals that, when Congress wanted to include family members in addition to the qualified heir in the statute's provisions, it expressly stated so. For example, while Congress couched the qualified use requirement in terms solely of the heir's activities, the provision's material participation requirement can be satisfied by the qualified heir or any member of [her or] his family. Compare 26 U.S.C. § 2032A(c)(1)(B) with 26 U.S.C. § 2032A(c)(6)(B)(ii). 36 More particularly, the plain language of the statute demonstrates that, when Congress intended for intra-family cash leases of the property to satisfy the qualified use requirement, it knew how to say so. In 1988, Congress added language to the special use valuation provision providing that [a] surviving spouse shall not be treated as failing to use such property in a qualified use solely because such spouse rents such property to a member of such spouse's family on a net cash basis. 26 U.S.C. § 2032A(b)(5)(A) (emphasis added). Indeed, Congress's denomination of this subsection as a special rule[ ] indicates that the absence of language in the provision authorizing other intra-family net cash leases reflects deliberate congressional line-drawing, rather than mere legislative oversight. 37 When, as here, the plain language of a statute appears to resolve a dispute, we consider the legislative history to determine only whether there is 'clearly expressed legislative intention contrary to that language.'  S & M Inv., 911 F.2d at 327 (quoting Immigration & Naturalization Serv. v. Cardoza-Fonseca, 480 U.S. 421, 432 n. 12, 107 S.Ct. 1207, 1213 n. 12, 94 L.Ed.2d 434 (1987)) (additional internal quotation omitted). 38 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. Committee reports repeatedly warn, in no uncertain terms, that the passive rental of property does not satisfy the qualified use requirement. See, e.g., H.R.Rep. No. 1380 at 23, reprinted in 1976 U.S.C.C.A.N. at 2897, 3377 (The mere passive rental of property will not qualify.); S.Rep. No. 144 at 133, reprinted in 1981 U.S.C.C.A.N. at 105, 233 ([A] qualified use [must] be an active trade or business use as opposed to a passive, or investment, use.); H.R.Rep. No. 201 at 169, reprinted in 1981-2 Cum. Bull. at 382 (same as S.Rep. No. 144); H.R.Rep. No. 795 at 590 (Cash rental of specially valued property is not a qualified use and, therefore, is treated as a recapture event.). 39 Williamson's reading of section 2032A, moreover, would render the 1981 and 1988 amendments meaningless surplusage. If section 2032A already considered intra-family cash leases to satisfy the qualified use requirement, then Congress's labors, in 1981 and 1988, to make cash leases by decedent's and their surviving spouses qualified uses were mere exercises in redundancy. Under Williamson's theory, there simply was no need for the 1988 amendment. We are not at liberty to impose upon a statute a construction that renders parts of its language nugatory. See United States v. Mehrmanesh, 689 F.2d 822, 829 (9th Cir.1982). 40 Williamson suggests that the 1981 and 1988 amendments simply clarified the original intent of Congress that intra-family cash rentals constitute a qualified use. Williamson's position, however, cannot survive a reading of the legislative history accompanying the amendments. 41 In 1981, Congress added language providing that property would still be eligible for special use valuation where the decedent had cash leased the land to a family member. 26 U.S.C. § 2032A(b)(1). The Senate report accompanying the amendment specifically labelled the expansion of eligibility a change: These changes generally expand availability of current use valuation to estates not eligible under present law. S.Rep. No. 144 at 133, reprinted in 1981 U.S.C.C.A.N. at 105, 233 (emphasis added). Congress thus legislated from the viewpoint that intra-family leases did not otherwise satisfy the qualified use criterion. See Martin v. Commissioner, 783 F.2d 81, 83 (7th Cir.1986) ([T]he qualified use must be active rather than passive; for, if passive were good enough, there would have been no reason to amend the statute to make clear that the decedent himself did not have to be working the farm at the time of his death.); see also Schuneman v. United States, 783 F.2d 694, 698 n. 2 (7th Cir.1986). 42 Similarly, Congress's 1988 liberalization of the qualified use requirement for surviving spouses worked a change in the law. The House report noted that, [u]nder present law, ... if a decedent leases the qualified real property to a member of [her or] his family and the property passes to [the] spouse, a recapture tax will be imposed under present law unless the spouse begins to use the property in a qualified use. H.R.Rep. No. 795 at 590. Amendment was necessary to effectuate Congress's belief that a surviving spouse's cash rent to a member of the spouse's family should not be a recapture event. Id. The Committee's call for change rings empty if one accepts Williamson's suggestion that the law already permitted such cash rentals. 43 Congress carefully tailored its 1981 and 1988 amendments to benefit the decedent and the decedent's spouse only. Williamson's capacious interpretation of the amendments as clarifying the propriety of all intra-family cash leases cannot be reconciled with the straitened and narrowly targeted relief actually enacted by Congress. If Congress intended to authorize a larger class of intra-family cash leases, it should have said so. Unless and until Congress amends the statute, we must decline Williamson's invitation to apply broadly that which Congress has written sparingly. 6 44 Numerous courts, we note, have confirmed that passive rentals fail the qualified use test. In Martin, the Seventh Circuit held that a cash lease by a qualified heir to a non-family member did not amount to a qualified use, regardless of the fact that the lessee farmed the land. In words that speak directly to Williamson's contention, the Seventh Circuit refused to focus solely on the use to which the land was being put: 45 We are asked to infer that all that is required to avoid recapture is that the property continue in a qualified use; the use need not be by the heir. But this interpretation is almost certainly wrong. 783 F.2d at 83. The court elaborated: 46 When the estate tax return was filed, the heirs were operating the farm through a sharecropping arrangement with one of them; that was the qualifying use and it ceased when the farm was let at a fixed rental. The House Report minces no words: The mere passive rental of property will not qualify. 47 Id. (quoting H.R.Rep. No. 1380 at 23, reprinted in 1976 U.S.C.C.A.N. at 2897, 3377); see also Brockman v. Commissioner, 903 F.2d 518, 521 (7th Cir.1990); Heffley v. Commissioner, 884 F.2d 279, 284 (7th Cir.1989) (Rentiers-heirs (i.e., heirs receiving a fixed income from their investment) forfeit the exceptionally favorable tax treatment that the statute [section 2032A] affords to those meeting its exacting requirements.... Rentiers forego the friendly tax treatment accorded to those meeting the demanding statutory requirements. There is no qualified use during the lease of a farm under a fixed-rental agreement.); Estate of Sherrod v. Commissioner, 774 F.2d 1057, 1064 (11th Cir.1985), cert. denied, 479 U.S. 814, 107 S.Ct. 66, 93 L.Ed.2d 24 (1986). 48 Williamson calls upon this court to consider the policies animating section 2032A and to interpret the statute to effectuate those ends. Congress's avowed purpose for enacting the special use valuation, Williamson notes, was to preserve the family farm. Williamson insists that his actions are fully consistent with that goal. By leasing to his nephew, Williamson has continued the use of his mother's land as a farm. 49 The difficulty with Williamson's position is twofold. First, the tax legislative process necessarily entails line-drawing. While Congress's purpose in enacting section 2032A was no doubt beneficial, that same Congress intentionally chose to circumscribe narrowly the availability of the tax benefit in the face of a competing concern for maximizing tax revenues. We must accord deference to the balance struck by Congress. See Heffley, 884 F.2d at 283 (While Congress will allow certain exceptional preferences to avoid excessive tax burdens under certain conditions, in order to achieve the congressional intent these exceptions must be narrowly applied and the corresponding exclusions broadly interpreted.); see also Corn Prods. Ref. Co. v. Commissioner, 350 U.S. 46, 52, 76 S.Ct. 20, 24, 100 L.Ed. 29 (1955); Estate of Thompson v. Commissioner, 864 F.2d 1128, 1136 (4th Cir.1989). Congress thus chose not to make the special use valuation available to all family farms, presumably because to do so would have imposed too heavy a burden on the public fisc. Congress has drawn a line, permitting cash leases by some family members and not by others. To the extent Williamson argues that this line seems arbitrary and could just as easily have been drawn to encompass his situation, he is preaching to the converted. That we might disagree with a legislative distinction Congress has made, however, does not empower us to rewrite the statute. Our task is to apply the [statute's] text, not to improve upon it. Pavelic & LeFlore v. Marvel Entertainment Group, 493 U.S. 120, 126, 110 S.Ct. 456, 460, 107 L.Ed.2d 438 (1989); see also Badaracco v. Commissioner, 464 U.S. 386, 398, 104 S.Ct. 756, 764, 78 L.Ed.2d 549 (1984) (Courts are not authorized to rewrite a statute because they might deem its effects susceptible of improvement.); Estate of Cowser v. Commissioner, 736 F.2d 1168, 1171 (7th Cir.1984) (We may not agree with where the line is drawn, but we are not in a position to move it. We may only interpret and enforce the laws Congress gives us; we may not rewrite or amend them as we see fit.). 50 Furthermore, the distinction made by Congress in this case is not as arbitrary as Williamson portrays it. Section 2032A's conceded purpose is to protect and insulate the family farmer from excessive estate taxes. Yet the person seeking section 2032A's shelter here is not engaged in family farming. The family farmer here is the nephew, a person not receiving any of section 2032A's benefits. Williamson's relationship to the land is that of a landlord and passive investor. Congress never intended such persons to reap the benefits of section 2032A. Cf. Estate of Abell v. Commissioner, 83 T.C. 696, 701 (1984). 51 Section 2032A's tax benefits serve as a carrot enticing and rewarding qualified heirs for accepting the financial risks of family farming. See Brockman, 903 F.2d at 523 (The qualified use requirement ... focuses on whether the decedent or the decedent's family incur the risks of farming.). Placing Williamson within section 2032A would effectively let him have his cake and eat it too. He would enjoy the special tax benefits of section 2032A without incurring any of family farming's concomitant costs or risks. Again, the nephew bears those. Other courts have insisted that section 2032A is a two-way street and have withheld its benefits when the qualified heir insulates herself or himself from financial risk through a fixed cash rental scheme. Id. at 526 (In this case, whether the livestock operation flourished or was wiped out by drought or disease, whether cattle prices rose or fell, whether in short, Dickison's activities were profitable or unprofitable, Donahoe's rental income was unaffected.); Heffley, 884 F.2d at 284 (Whether farm prices fluctuated or crops flourished or died their rental income would be unaffected because those heirs were rentiers throughout the lease, not farmers who risked the variables of weather and market price.); Martin, 783 F.2d at 84 (Whether farm prices rose or fell, whether the crops planted on the farm flourished or were wiped out by cold weather or disease, whether in short the farm was productive or unproductive, profitable or unprofitable, the taxpayers' rental income would be unaffected. They were thus out of the farming business, and outside the scope of [section 2032A].). Strong policy reasons thus exist for not extending section 2032A in the manner advocated by Williamson. 52 Finally, much of the emotive force behind Williamson's position is attributable to the feeling one gets, upon first look, that the IRS is making a hypertechnical distinction. The same family member farmed the land before Ms. Williamson's death and after. On the surface, nothing seems to have changed to justify the alteration in tax treatment. But upon closer examination, it becomes apparent that things have changed. Prior to Ms. Williamson's death, Harvey Williamson farmed under a crop-share rental agreement. The owner of the land thus still faced the risks of farming. After Ms. Williamson's death, the owner of the land (Beryl Williamson) is receiving a fixed cash rental for the land. The owner and person seeking to enjoy the preferential tax treatment afforded by § 2032A thus faces none of the risks of farming and, in fact, is not himself a family farmer. A sound rationale thus supports the IRS's distinction for tax purposes between the pre- and post-death uses of the Williamson property. Cf. Estate of Trueman v. United States, 6 Cl.Ct. 380, 1984-2 U.S. Tax Cas. (CCH) p 13,590, at 86,180 (1984) (Where the use made by a decedent of his property was an investment use, no hardship to decedent's heirs results from forcing them to sell the property in order to realize its full potential value as an investment. Investment properties, such as those held by the decedent, are fungible. The decedent's family rental business is not destroyed by forcing his heirs to exchange old rental properties for new ones.). 53 In sum, section 2032A's plain language, amendments, legislative history, and policies all support the Commissioner's determination that Williamson's cash lease of the farm to his nephew constituted a cessation of qualified use, triggering the recapture tax.