Court Opinion

ID: 9478556
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:51:59.857892+00
Date Added: 2024-06-11T17:46:29.565876
License: Public Domain

WILKINSON, Circuit Judge,
dissenting:
As to the general purposes of I.R.C. § 2032A, I have no quarrel with the majority. Congress clearly intended that the family farm not be encumbered by a federal estate tax calculated on the farm property’s fair market value. The question here, however, is what method of valuation Congress intended when the family farm no longer retains its family character. The majority would apply favorable tax treatment under § 2032A even when a part of the family farm is left in the form of a beneficial or income interest to non-family members.
I disagree. I do so, however, with an appreciation for the fact that this case is an appealing one: the decedent’s two daughters each received a thirty percent interest in the farming operation, while the non-qualified heir, Mary Brittingham, was limited to the lesser of two percent, or $2,000. Because I fear that a de minimis exception here will mature into a principle quite at odds with the congressional purpose of limiting special use valuation to farms and businesses which remain within the family, I respectfully dissent.1
*1137I.
Real property is generally valued for estate tax purposes on the basis of its fair market value at the time of death. Section 2032A of the Internal Revenue Code provides an exception to the usual method of inheritance valuation. Qualifying property under this section is valued according to its actual use rather than its ideal fair market use, a valuation that generally results in substantial tax savings. The statute establishes a clear rule to define when this exception should apply. If “qualified real property,” the family farm or closely held business, is “passed from the decedent to a qualified heir of the decedent,” it is entitled to special use valuation. I.R.C. § 2032A. The obvious corollary is that if qualified use property is left to unqualified heirs it does not qualify for special use valuation.
The purpose of special use valuation is to permit family farms to continue in operation from one generation to the next. Without special valuation provisions, Congress feared family farms would have to be sold simply to pay off the federal estate tax. Mangels v. U.S., 828 F.2d 1324, 1326 (8th Cir.1987). Congress did not intend, however, that protective provisions for family farms extend to the devise of income interests in the farm to non-family members or institutions. In particular, Congress made no provision which would allow income from the family farm to be bequeathed, in part, to non-qualified heirs, while still allowing special use valuation for the property.
Surely this omission was not one of oversight. The statute here is highly articulated. It carefully defines the character of qualifying property both before and after the decedent’s death. The statute also delimits with precision the categories of qualifying heirs. 26 U.S.C. § 2032A(e)(1) & (2). Had Congress wished to provide special use valuation for property from which the profits had been proportionally devised to non-family members or institutions, it could have done so. Instead, it limited favorable tax treatment to real property “passed from the decedent to a qualified heir of the decedent,” 26 U.S.C. § 2032A(b)(1); a qualified heir being defined in turn as “a member of the decedent’s family. . . .” 26 U.S. C. § 2032A(e)(1). The reason for this limitation was apparent. As non-family income interests in the farming property are created, the operation takes on less the character of a family farm and more the flavor of an agricultural consortium.
Certainly, under Treasury Regulation 26 C.F.R. § 20.2032A-8(a)(2), qualified heirs may choose to elect special use valuation for only a portion of the qualified property, creating the option of selling a portion of the farm for financial reasons. However, with special use valuation afforded now to property in which a non-qualifying heir retains an income interest, the majority converts a congressional purpose to protect true family farms into a more general tax preference for real property devised for agricultural purposes.
The majority would address this problem by holding that only proportional interests in farm income passing to qualified heirs will receive special use valuation. In so doing, the majority has effectively amended the statute. Congress was quite capable of addressing problems of proportionality when it chose to do so. In fact, Congress created just such a pro rata provision when it adopted the recapture tax, yet it felt no need to amend the special use valuation to allow similar flexibility. 26 U.S.C. § 2032A(c)(1). Under the provisions of the recapture tax, if the heir disposes of any interest in qualified property for which special use valuation was elected or if he ceases to use such property for a qualified use within ten years of the decedent’s death, the estate tax savings accrued from the election of the special use valuation is recaptured. The heir is personally liable for any tax recaptured on his interest in the property. If the heir sells a portion of the qualified property, the recapture is pro rata. The amount to be recaptured is de*1138termined by first calculating the tax savings attributable to the special use valuation. This savings is allocated to the individual interests in proportion to their respective reductions in value resulting from the special use valuation. § 2032A(c)(2).
Similarly, Congress provided in 26 U.S.C. § 2032A(b)(1)(A) that fifty percent or more of the value of the gross estate had to consist of property which at the time of decedent’s death was for a qualified use. Further, Congress provided that twenty-five percent or more of the value of the qualifying property had to be owned and materially operated by the decedent or a member of the family.
The meticulous provision for proportionality in these particulars of the statute makes more glaring the absence of any provision for proportional devises to non-qualifying heirs. The majority’s analysis, however, has imputed to Congress an intent to permit, for example, a forty percent income interest in a family farm to be left to non-family members or institutions without risk to special valuation for the remainder. Indeed, the majority would not even require that the forty percent be used for farming purposes since the threat of a later recapture tax is only directed at that portion of the property which initially received the special use valuation. I regret how far astray from the congressional purpose of keeping family farms intact the majority’s analysis has led us.
The legislative history supports this construction of § 2032A’s requirements. Congress, in the Deficit Reduction Act of 1984, while relaxing the requirements for perfecting an election of special use valuation, specifically stated that all parties with an interest in specially valued property are still required to be qualified heirs.
The conferees are aware that the current use valuation provision requires that, when successive interests or concurrent interests are created in specially valued property, all parties with any interest in the property must be qualified heirs and all such parties must enter into the agreement to the election, regardless of the relative value of their interests. The de minimis rule established in this provision is intended to apply solely as a guideline in determining whether perfection of an agreement is to be permitted. The guideline is not intended to give rise to an inference that parties having an interest in specially valued property which has a relatively small value are not required to enter into the agreement or that such persons need not be qualified heirs.
H.R.Conf.Rep. No. 98-861, 98th Cong. 2d Sess. at 1241 n. 1, reprinted in 1984 U.S. Code Cong. & Ad.News 1445, 1929. (emphasis added).
The majority argues that because the first sentence was modified to exclude the words “concurrent interest,” the passage no longer applies. However, the modification of the first sentence does not affect the last, which specifically states that even those with a relatively small interest in specially valued property must be qualified heirs. If it had been the intent of the conferees to exclude concurrent interests from the requirement that all persons must be qualified heirs, the conferees would surely have limited the last sentence to those with successive interests. Instead, the deletion of the phrase “concurrent interests” from the first sentence was done for the sake of clarity. This section concerned a recapture tax; therefore successive interests were the most directly affected. Finally, Congress was quite clear that even those with a small interest must sign the recapture agreement and be qualified heirs.
When Congress has chosen to expand the availability of special use valuation, it has chosen to vary the forms of inheritance which are eligible for the exception, not the requirement that all heirs must be qualified. In allowing property passing to a discretionary trust to be specially valued, Congress specifically stated that all potential beneficiaries must be qualified heirs. The House Conference Report states that
property meeting the other requirements for current use valuation can be specially valued if it passes to a discretionary trust in which no beneficiary has a *1139present interest ... because of the discretion in the trustee to determine the amount to be received by any individual beneficiary so long as all potential beneficiaries of the trust are qualified heirs.
H.R.Con.Rep. No. 97-215, 97th Cong., 1st Sess. at 252, reprinted in 1981 U.S.Code Cong. & Ad.News 285, 341. (emphasis added). The import of this language is evident. The relaxation of requirements for specially valued property held in trust was accompanied by a reaffirmation of the requirement that those with interest in that property must be qualified heirs. Here Brittingham was not a qualified heir, and the devise runs afoul of the special valuation statute.
II.
The majority would avoid these problems of statutory construction by implying what is, in effect, a limited de minimis exception to the statute, conferred because Mary Brittingham had received only a two percent income interest in the property. Thus the majority states that the property “is eligible for the special use valuation regardless if other minor interests in the property are passed to and held by non-qualified heirs.” The majority does not define what is meant by a minor interest. Its reference to Whalen v. United States, 826 F.2d 668 (7th Cir.1987), would imply that, at the very least, the majority would classify a twenty-five percent interest as minor. This implied de minimis exception is an open invitation for courts to decide these cases, not on the basis of the statutory requirements, but on their own views of the equities.2
The statutory rule is a straightforward one: property does not qualify for special use valuation when income interests in that property pass from the decedent to non-qualified heirs. In reaching its result, the majority contravenes not only the language but the customary canons of statutory construction. No deference is accorded the administrative interpretation of the statute. See Chevron v. Natural Resources Defense Council, 467 U.S. 837, 844, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984). Nor has this statute, as a special relief measure, been strictly construed. Israel-British Bank (London), Ltd. v. Fed. Dep. Ins. Corp., 536 F.2d 509, 513 (2nd Cir.1976). Little consideration is given to the fact that the field of estate planning and estate taxation depends upon clear and settled rules, not upon de minimis exceptions which require further litigation for definition. The canons of construction are, of course, not ends in themselves, but aids in determining the intent of Congress. Because I believe the majority has erred on this basic score, I respectfully dissent and would affirm the judgment of the Tax Court.

. I agree with the majority that Mary Britting-ham's two percent share in the profits of the farm is a statutory interest. 26 C.F.R. 20.-2032A-8(c)(2). Because Mary Brittingham received $18,000 in payment for this interest, she rendered her disclaimer ineffective for purposes *1137of the federal estate tax. Under 26 U.S.C. § 2518(b)(3) a disclaimer is effective only if the person making the disclaimer has not accepted the interest or any of its benefits. See also 26 C.F.R. § 25.2518-2(e).

. Whalen did not address the issue here. The Whalen case concerned whether the denial, by the IRS, of special use valuation to a stepchild of the decedent was correct. The answer to this question required the Whalen court to determine whether, before the 1978 amendment to the statute which added the specific requirement concerning qualified heirs, Congress intended that only qualified heirs should receive the special use valuation. As the majority notes, the court in Whalen was not faced with the question of whether or not the statute intended that all heirs be qualified; therefore it is not surprising that the Whalen court did not reach the issue in the instant case.