Opinion ID: 590888
Heading Depth: 2
Heading Rank: 3

Heading: Disposition of the Property

Text: 54 Williamson argues alternatively that, when he leased the property to his nephew, Harvey Williamson, Harvey stepped into Beryl's shoes and became the new qualified heir of the property. Harvey's farming of the land, Williamson urges, therefore satisfies the statutory requirement that a qualified heir actively farm the property. 55 The Tax Court found Williamson's contention unavailing. The Tax Court reasoned that a lease was not the type of disposition that Congress intended to effect a change in the qualified heir. 56 We join the Tax Court in rejecting Williamson's argument. Section 2032A(e)(1) provides: 57 If a qualified heir disposes of any interest in qualified real property to any member of [her or] his family, such member shall thereafter be treated as the qualified heir with respect to such interest. 58 Williamson insists that the phrase of any interest necessarily encompasses a leasehold interest. In so arguing, however, Williamson ignores the preceding condition that the interest be dispose[d] of. The import of the word dispose is a permanent loss or renunciation of an interest. A lease, by contrast, entails only the temporary transfer of a property interest. 59 While not speaking directly to the issue, the legislative history accompanying the recapture tax provision uses the word dispose in conjunction only with permanent losses or transfers of an interest in the qualified property. 60 Since a sale, exchange, or other disposition (such as a gift) by one qualified heir to another qualified heir is not treated as a recapture event, the bill provides that the second qualified heir is to be treated as if he had received the property from the decedent. Thus, the second qualified heir steps into the shoes of the first heir and becomes liable for the recapture tax.... 61 H.R.Rep. No. 1380 at 26, reprinted in 1976 U.S.C.C.A.N. at 2897, 3380; see also id., H.R.Rep. No. 1380 at 25, 1976 U.S.C.C.A.N. at 3379 (disposition discussed in the context of a sale, involuntary conversion, rollover, or similar transaction). 62 That the recipient of the disposed interest assumes liability for the recapture tax further indicates that a disposition occurs only when a transfer of legal responsibility for the interest is fully accomplished. Because leases generally transfer only partial legal rights to a lessee, treating a lease as a disposition would create a legal limbo where the lessee and lessor share the responsibilities of a qualified heir. Nothing in the statute's language or legislative history suggests that Congress envisioned or intended such a result. Similarly, the Treasury Regulation requiring persons with certain interests in qualified property to enter into an agreement to pay the recapture tax, should the qualified use cease, contains no indication that legal responsibility attaches to a leasehold interest. See 26 C.F.R. § 20.2032A-8(c)(2). 63 Moreover, Williamson's suggestion that a lease constitutes a disposition inaugurating a new qualified heir, like his qualified use argument, renders superfluous Congress's 1988 amendment authorizing cash leases by surviving spouses. 26 U.S.C. § 2032A(b)(5)(A). If an intra-family cash lease already accomplished a change in the qualified heir pursuant to section 2032A(e)(1), Congress would have had no need to act to protect surviving spouses. Spouses' cash leases to family members would have continued the qualified use simply by changing the qualified heir. Congress thus legislated in 1988 from the viewpoint that cash leases did not constitute dispositions already protected from the recapture tax by subsection (e)(1). Indeed, implicit in the 1988 amendment is the conclusion that the lessor/surviving spouse remains the qualified heir despite the transfer of a leasehold interest to another family member. 64 Williamson responds by citing a portion of the 1976 report of the Joint Committee on Taxation, which reads: 65 The cessation of qualified use which constitutes a disposition occurs if (1) the qualified property ceases to be used for the qualified use under which the property qualified for special use valuation.... 66 Staff of Joint Committee on Taxation Report, 94th Cong., 2d Sess. 542 (1976) (emphasis added). Williamson contends that this language equates a cessation of qualified use with a disposition under subsection (e)(1). 67 We find this argument untenable. The Committee's language does not suggest that all cessations of qualified use constitute a disposition. Nor is Williamson's interpretation of the Committee's language consistent with the statute's plain terms. Section 2032A provides for two distinct events to trigger the recapture tax--either the disposition of the property to a non-family member, 26 U.S.C. § 2032(c)(1)(A), or the cessation of qualified use, Id. § 2032A(c)(1)(B). If Congress intended to treat dispositions and cessations of qualified use synonymously, it would not have written section 2032A(c)(1) in the disjunctive. 68 Williamson also argues that the Commissioner's and Tax Court's interpretation of dispose in his case is inconsistent with the position taken by the Commissioner in a Technical Advice Memorandum. In Technical Advice Memorandum 8731001 (March 19, 1987), the Commissioner stated that the grant of an easement was a disposition. Williamson argues that no reasonable distinction can be made between leaseholds and easements for purposes of defining a disposition under section 2032A. 69 We disagree. In fact, contrary to Williamson's position, Technical Advice Memorandum 8731001 actually strengthens the Commissioners' position. Generally, the grant of an easement, unlike a leasehold, permanently conveys a property interest to another person. The grantor retains no supervisory regulatory control over the property interest conveyed by the easement. See R. Cunningham, W. Stoebuck, D. Whitman, The Law of Property § 8.1 (1984). The Commissioner's conclusion in Technical Advice Memorandum 8731001 thus reinforces our holding that a section 2032A disposition occurs when an interest has been permanently, not temporarily, surrendered by the qualified heir. 7 70 In sum, Williamson cannot salvage the special use valuation for his property on the ground that he dispose[d] of an interest to his nephew, making his nephew the new qualified heir. Such a short-term transfer of a limited property interest does not amount to a disposition, within the meaning of section 2032A(e)(1).