Court Opinion

ID: 4486508
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:29.197847+00
Date Added: 2024-06-11T14:53:54.659211
License: Public Domain

OPINION DRENNEN, Judge: This case was submitted fully stipulated and the facts as stipulated are so found. Respondent determined a deficiency in the estate tax of the Estate of Malcolm McAlpine, Jr., in the amount of $333,363.24, subject to credits for payments of State death taxes. Petitioner is the Estate of Malcolm McAlpine, Jr., deceased. Geraldine McAlpine and Jocelyn McAlpine Greeman are co-independent executrixes. Malcolm McAlpine, Jr. (hereinafter referred to as decedent), died testate on February 25, 1984. He was a citizen of the United States and a resident of Texas at the time of his death. His will was dated July 28, 1982; a codicil thereto was executed February 24, 1984. Geraldine McAlpine and Jocelyn McAlpine Greeman were named and duly appointed co-independent executrixes of the will. Geraldine resided in Toyak, Texas, and Jocelyn resided in Denning, New Mexico, at the time the petition was filed in this case. A timely Federal estate tax return was filed for the estate on November 20, 1984, in Austin, Texas, reporting a net taxable estate of $602,693 and a net estate tax of $83,389. Decedent owned 8,815.42 acres out of a total of 13,280 acres of a ranch located in Huerfano County, Colorado, at the date of his death. The issue in this case is whether petitioner is entitled to a special use valuation of decedent’s interest in the ranch under section 2032A for estate tax purposes.1  Petitioner’s interest in the ranch (referred to hereafter as the ranch) was reported at item 5 of Schedule A of the estate tax return. On page 2 of the return petitioner elected special use valuation for the ranch pursuant to section 2032A. The appropriate Schedule N to elect special use valuation was properly completed and included with decedent’s estate tax return, Form 706. Except with respect to the portion of the definition of “qualified real property” referring to the agreement under section 2032A(b)(l)(D), the parties agree that pursuant to section 6324B a valid lien was imposed on the ranch at the time the notice of election was filed with the Form 706. A separate notice of election to specially value the ranch required by section 2032A(d)(l) was properly completed, complied with the requirements of section 20.2032A-8(a)(3), Estate Tax Regs., and was attached to decedent’s Form 706. The agreement required by section 2032A(d)(2) (hereinafter referred to as the recapture agreement) was filed with decedent’s Form 706 and was executed by “Jocelyn McAlpine Greeman, Trustee” as qualified heir and “Jocelyn McAlpine Greeman” as an other interested party. Except for the signatures, the agreement was properly completed and complied with the requirements of the applicable Treasury regulations. Decedent’s will was duly probated in Taylor County, Texas. In addition to Geraldine, his wife, and Jocelyn, his daughter, decedent was survived by three grandchildren, whose names and ages were as follows: Ages as of Name Feb. 25, 1984 Walter Greeman. 22 Adelia Greeman ... 20 Tammy Jo Greeman. 9 All of decedent’s title and interest in the ranch passed at his death to a trust, according to section V of the will. Section V(a) of the will divided the trust into a separate trust for each of the grandchildren according to the terms thereof. Section V(b) of the will provided for distribution of income and principal in accordance with the terms therein. Section V(c) generally provided conditions for termination of each trust, subject to the provisions of section V(d) of the will. Section V(e) contains a “spendthrift” clause that denies a right or power of any beneficiary to anticipate by assignment or otherwise any income or principal given to such beneficiary by the will and prohibits a transfer, assignment, sale, pledge, encumbrance, or change in any manner, by a beneficiary of the beneficiary’s interest in the trust; nor shall a beneficiary’s share of income or principal of the trust be subjected to or applied to the payment of such beneficiary’s debts. Section V(h) of the will generally vested the management powers of the trust in the trustees, according to the terms stated therein and in accordance with the Texas Trust Act, as amended by the Texas Trust Code. Section V(l) of the will creates a special power of appointment in Jocelyn as to each of the trusts’ corpora according to the terms stated therein. The ranch was valued at the following special use values and fair market values by the parties in the exhibits so identified: Special Fair Item use value market value Exhibit II a. Per 706 $416,667 $1,166,667.00 2-B b. Per notice of — deficiency 1,327,602.25 1-A The parties agree that the proper fair market value of the ranch at the date of decedent’s death was $1,327,602.25. The parties also agree that if petitioner qualifies for special use valuation, the value of decedent’s interest in the ranch and includable in the estate should be the following total value: Item Amount Fair market value, as stipulated. $1,327,602.25 Less special use value per return. (276,408.00) Difference. 1,015,194.25 Less maximum sec. 2032A deduction. (750,000.00) Excess fair market value. 301,194.25 Plus special use value. 276,408.00 Total value. 577,602.25 On or about September 11, 1985, respondent’s agent commenced an examination of petitioner’s estate tax return. On the same date respondent advised petitioner that the special use value election was invalid because the agreement attached to the election was signed only by Jocelyn McAlpine Greeman, Trustee, and was not signed by decedent’s grandchildren, the individual trust beneficiaries. On December 10, 1985, petitioner filed an amended notice of election under section 2032A and an amended agreement to special use valuation under section 2032A, dated December 5, 1985. These two documents were received by respondent within 90 days of respondent’s notice to petitioner. The amended agreement was signed by all of the trust beneficiaries, individually, except for Tammy Jo Greeman, whose signature was made by Jocelyn, as Guardian Ad Litem for Tammy Jo Greeman, pursuant to a court order. The amended agreement was similar to the agreement filed with the estate tax return and complied with all requirements of the Form 706 instructions, section 2032A(d)(2), and the Treasury regulations pertaining thereto. A notice of deficiency in estate tax was mailed to petitioner on May 12, 1987, and was issued by an officer of the Internal Revenue Service at Dallas, Texas. The notice determined that there was a deficiency in the estate tax due by the estate of $403,684.86, less $68,321.62 of additional State death tax credit, if substantiated. The principal adjustment in the value of the gross estate, and the only one at issue here, was explained as based on the determination that decedent’s interest in the ranch did not qualify for special use valuation under section 2032A. Consequently, it was determined that the fair market value at the date of decedent’s death for the ranch real property in which decedent owned both whole and fractional interests was $1,327,602.25 instead of the $416,667 value reported on the estate tax return, thereby increasing the value of the taxable estate by $910,935.25. An estate tax deficiency of $403,684.86 was determined. The remaining 4,464.48 acres of the ranch is owned outright by Jocelyn. The ranch had been owned and operated by decedent’s family for over 45 years and decedent was actively engaged in the trade or business of cattle and horse ranching, utilizing the ranch up until his death as he had been during his entire life. The parties agree that the ranch was “qualified real property” as described in section 2032A(b). Respondent admits that, except for the omission of individual signatures of the grandchildren as trust beneficiaries, the agreement required by section 2032A(d)(2), as originally filed with the estate tax return, “was complete, valid and complied with all requirements of section 2032A, and that petitioner qualifies for Special Use Valuation pursuant to section 2032A.” Several other agreements and concessions made by the parties in the stipulation of facts are accepted and should be reflected in the final computation of the estate tax due from the estate. The only issue for our decision is whether decedent’s interest in the ranch at the time of his death is includable in his gross estate at its fair market value or at its special use value under section 2032A. The parties are in agreement on the value to be used in either event. More specifically the issue is whether the failure to have the trust beneficiaries themselves sign the notice of election and recapture agreements that were attached to the original estate tax return was such a failure that precluded the executor from taking advantage of the grace period provided by section 2032A(d)(3)(B) of the Code and section 20.2032A-8, Estate Tax Regs. Normally the value of property includable in the decedent’s gross estate is its fair market value at the time of decedent’s death unless the executor elects the alternative valuation method under section 2032. Sec. 20.2031-l(b), Estate Tax Regs. However, in 1976 Congress enacted section 2032A(a)(l), which provides that if the decedent (at the time of his death) was a citizen or resident of the United States and the executor elects the application of that section and files the agreement referred to in subsection (d)(2), then the value of qualified real property shall be its value for the use under which it qualifies, under subsection (b), as qualified real property (commonly referred to as special use value). Subsection (b) provides, for purposes of this section, that qualified real property means real property located in the United States which was acquired from or passed from the decedent to a qualified heir of the decedent and which, on the date of decedent’s death, was being used for a qualified use, by the decedent or a member of decedent’s family if certain specified requirements are met; These provisions were enacted by Congress primarily to permit the families of small family farmers and businessmen to continue using the property for that purpose without having to sell it to pay the greater estate taxes that would probably result if the property was taxed at its fair market value or its highest and best use value. See explanation of Senate Floor Amendment to the Tax Reform Act of 1984, Pub. L. 98-369, 7/18/84, by Mr. Dixon. Par. 120,328.1, P-H Federal Estate and Gift Taxes. See Estate of Maddox v. Commissioner, 93 T.C. 228 (1989). But Congress obviously wanted to limit the relief to those who actually used the property for the protected purpose, by attaching rather stringent requirements on those who elected to use it. As might have been expected, this required rather complex legislation which has opened the door to many diverse arguments as to whether a specific transaction complied with all the requirements of the law and regulations. The IRS, possibly fearing that taxpayers would attempt to take undue advantage of the relief provision, ruled time and again that a taxpayer estate did not qualify for special use valuation because of its technical failure to comply with all the requirements of the law and regulations. See list of adverse letter rulings in P-H Federal Estate and Gift Taxes, par. 120,329.3 (1989). On the other hand, Congress has emphasized its intent to grant the relief where it was deserved by amending the law from time to time to ease the legal requirements and the method of complying therewith. Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 494; Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085; Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342. It seems obvious that Congress intended to make these relief provisions available to deserving estates. The specific provisions of the law and regulations with which we are concerned here are those which determine whether the executrix made a valid election of special use valuation and, if not, whether it could be supplemented or perfected to meet all the requirements. Section 2032A(b)(2) defines “qualified use,” for purposes of this section, as the devotion of the property to any of the following: (A) use as a farm for farming purposes, or (B) use in a trade or business other than the trade or business of farming. There is no question that the ranch was being used for a qualified purpose at the time of decedent’s death. However, section 2032A(a)(l)(B) requires that in order to take advantage of this relief provision the executor must file an election to have the section applied and must file the agreement referred to in subsection (d)(2). Subsection (d)(1) provides that the election under this section shall be made on the return of the tax imposed by section 2001 in such manner as the Secretary by regulations prescribes and the election, once made, shall be irrevocable. Subsection (d)(2) provides that the agreement referred to in this paragraph is a written agreement signed by each person in being who has an interest (whether or not in possession) in any property designated in such agreement consenting to the application of subsection (c) with respect to such property. Section 2032A(c)(l) provides that if, within 10 years after the decedent’s death, and before the death of the qualified heir, (A) the qualified heir disposes of any interest in qualified real property (other than by a disposition to a member of his family), or (B) the qualified heir ceases to use for the qualified use the qualified real property which was acquired (or passed) from the decedent, then there is imposed an additional estate tax. The qualified heir shall be personally hable for the additional tax imposed with respect to his interest unless the heir has furnished bond which meets the requirements of section 2032A(e)(ll). Section 20.2032A-8(a)(3), Estate Tax Regs., provides that an election under section 2032A is made by áttaching to a timely filed estate tax return the agreement described in paragraph (c)(1) of this section and a notice of election which contains the information thereinafter listed. The provision with which we are directly concerned is subparagraph (xii), which requires giving the name, address, taxpayer identification number, and relationship to the decedent of each person taking an interest in each item of specially valued property, and the value of the property interests passing to each person based on both fair market value and qualified use. Here Jocelyn checked the box on the timely filed estate tax return that indicated an election of special use valuation. A Schedule N was also attached with the names, addresses, and relationship to decedent of each of the three grandchildren as persons receiving an interest in each item of specially valued property, and also the fair market value and special use value of the interests of each in the specially valued property. An “agreement to special valuation under section 2032A” was also attached which was signed by Jocelyn Me Alpine Greeman, Trustee, for the three trusts for the three grandchildren established under the terms of the will and specifically agreeing and consenting to personal liability under subsection 2032A for the additional tax imposed by that subsection with respect to the interests of the grandchildren in the event of the early disposition of their interests in the property. Petitioner also filed an amended estate tax return within 90 days after respondent’s agent notified petitioner that the special use election was invalid because the recapture agreement did not have the signatures of the three grandchildren who are trust beneficiaries. The amended return elected special use valuation for the ranch and also had attached to it an amended recapture agreement signed by or for all the trust beneficiaries. Petitioner made a rather extended argument on brief that under local law the . trustee of the trust was the interested party required to sign the election and recapture agreement, and the grandchildren, as trust beneficiaries, did not take a vested interest in any of the specially valued property and consequently did not have to be listed as interested parties in the election nor required to execute the agreement required under section 2032A(a)(l)(B) and (d)(1) and (2). Since we find that the election and the agreement were amended within the permitted time to include the grandchildren, and they all signed the documents, or had their names signed for them, and that such amended documents meet all the requirements for special use valuation, we do not find it necessary to consider petitioner’s argument on this point. Respondent argues that the election was not valid because neither it nor the recapture agreement contained all the information required by the regulations, referring primarily to naming all persons taking an interest in each item of the specially valued property and the value of the property interests passing to each such person. We disagree. All of the “information” required by the regulations was provided on the original return. Only the signatures of the trust beneficiaries were missing. As noted above, the box on the return indicating election of special use valuation was checked. A Schedule N — -Section 2032A Valuation — listing the names of the three grandchildren, their addresses, their relationship to decedent, and both the fair market value and special use value of the interests in the property each was to receive was attached to the original return. And a notice of election containing the information required by section 20.2032A-8(a)(3), Estate Tax Regs., except the names of the trust beneficiaries, was also attached. In addition a “recapture” agreement was attached, executed by Jocelyn Me Alpine Greeman, as trustee for the qualified heirs and as an other party having an interest in the special use property, was also attached. This recapture agreement attached to the original return did list the names and addresses of each of the trust beneficiaries and the value of the interests in the special use property of each of the beneficiaries. The only thing missing was an agreement signed by the qualified heirs agreeing to the election and agreeing to be bound thereby. This was filed within 90 days after respondent notified petitioner that the election of special use valuation was invalid, and respondent agrees that if the estate tax return can be perfected in this manner, the estate qualifies for special use valuation. The law itself does not specifically require the beneficiaries to sign the election or the agreement when the return is filed. In fact subparagraph (B)(ii) of section 2032A(d)(3) does mention signatures and would appear to specifically give relief under circumstances such as here present. Section 2032A(d)(3) provides: (3) Modification of election and agreement to be permitted.-^ The Secretary shall prescribe procedures which provide that in any case in which— (A) the executor makes an election under paragraph (1) within the time prescribed for filing such election; and (B) substantially complies with the regulations prescribed by the Secretary with respect to such election, but— (i) the notice of election, as filed, does not contain all required information, or (ii) signatures of 1 or more persons required to enter into the agreement described in paragraph (2) are not included on the agreement as filed, or the agreement does not contain all required information, the executor will have a reasonable period of time (not exceeding 90 days) after notification of such failures to provide such information or agreements. Section 20.2032A-8(a), Estate Tax Regs., provides: (1) In general. An election under section 2032A is made as prescribed in paragraph (a)(3) of this section and on Form 706, United States Estate Tax Return. * * * [[Image here]] (3) Time and manner of making election. An election under this section is made by attaching to a timely filed estate tax return the agreement described in paragraph (c)(1) of this section and a notice of election which contains the following information: * * * Section 20.2032A-8(c), Estate Tax Regs., provides: (1) In general. The agreement required under section 2032A(a)(l)(B) and (d)(2) must be executed by all parties who have any interest in the property being valued based on its qualified use as of the date of the decedent’s death. In the case of a qualified heir, the agreement must express consent to personal liability under section 2032A(c) in the event of certain early dispositions of the property or early cessation of the qualified use. * * * In this case an election was made on the estate tax return and a recapture agreement was also attached to the return. The only problem was that the agreement was signed by the executrix-trustee rather than the heirs. However, an amended agreement was filed within 90 days after notification by respondent’s agent which not only contained all the information required by the regulations but also was signed by all of the interested parties (the heirs). This would appear to qualify the election as valid under section 2032A(d)(3) and section 20.2032A-8, Estate Tax Regs. The fact that the regulation does not contain a provision permitting perfection within 90 days does not, and cannot, nullify the provision permitting perfection in section 2032A(d)(3). Section 1421 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2716, provides further support for this conclusion. Section 1421 of the Tax Reform Act of 1986 is quite similar to section 2032A(d)(3) and provides that “In the case of any decedent dying before January 1, 1986, if the executor — -(1) made an election under 2032A of the Internal Revenue Code of 1954 on the return of tax imposed by section 2001 of such Code within the time prescribed for filing such return, * * * and (2) provided substantially all the information with respect to such election required of such return of tax, such election shall be a valid election for purposes of section 2032A of such Code.” The statute says nothing about filing a recapture agreement or for that matter a notice of election; all that is required is the making of an election on the estate tax return and providing all the information that the return requires. The conference report on the legislation said the statute was intended precisely for the benefit of taxpayers who had failed to file a recapture agreement on time. This Court held in Estate of Gunland v. Commissioner, 88 T.C. 1453 (1987), that the taxpayer’s failure to attach a recapture agreement to its original return defeated its attempted election of special use valuation. In doing so we also concluded that “substantial compliance” with the requirements of the law and regulations was insufficient to receive the benefits of special use valuation. Section 1421 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2716, was neither argued nor cited in the opinion, although the Court will take judicial notice that section 1421 was argued on a motion for reconsideration, which was denied in an order concluding that section 1421 did not apply to the facts of that case. Estate of Gunland is factually distinguishable from the case at hand because the recapture agreement was not attached to the original return and was not filed within 90 days after the estate tax return was filed. In McDonald v. Commissioner, 89 T.C. 293 (1987), affd. as to this issue 853 F.2d 1494 (8th Cir. 1988), this Court considered a similar case. In that case, the widow of decedent, who would have taken the entire property under decedent’s will, disclaimed her interest in the property, which left it to decedent’s three children. A timely estate tax return was filed electing special use valuation. A notice of election and recapture agreement were both filed with the original return but were signed only by the widow and the personal representative of the estate. About 4 months later an amended estate tax return was filed for the estate attached to which was an amended agreement relating to special use valuation which was signed by decedent’s three children and three of his grandchildren. The Court held that the election made in the original return did not meet the requirements of the regulations because not executed by all (or any) persons having an interest in the property (the widow who did execute the election and agreement had disclaimed all interest in the property) and that the amended return, containing the signatures of the qualified heirs, filed outside the time limit, would not serve to retroactively cure the insufficiencies of the original return.2 Thus the election was invalid and the estate did not qualify for special use valuation. On appeal (McDonald v. Commissioner, 853 F.2d 1494 (10th Cir. 1988)), the Eighth Circuit affirmed the Tax Court holding that before a recapture agreement may be corrected by the addition of signatures, the agreement as filed with the original return must substantially comply with section 20.2032A-8, Estate Tax Regs., which requires that the agreement be in a form that is binding on all persons having an interest in the property. Noting that the recapture agreement filed with the original return was not executed by any of the parties with an interest in the property, since the children did not sign and the widow renounced her interest, it was not in substantial compliance with the requirement of the regulations and could not be perfected by an amended agreement filed out of time. McDonald is factually distinguishable from this case. In McDonald the notice of election and recapture agreement attached to the original estate tax returns were not executed by anyone who had an interest in the property (the widow having renounced her interest and none of the children having signed) and were not executed by the persons having an interest in the property until 4 months after the return was filed. The Court of Appeals, in affirming the Tax Court, stated “it is difficult to conclude that the original election was in substantial compliance * * * when it contained neither the name nor the signature of anyone with an interest in the property as of the date of Decedent’s death.” 853 F.2d at 1497. In this case the original documents did contain the names of all interested parties. The only thing lacking was their signatures. Quite recently in Prussner v. United States, 896 F.2d 218 (7th Cir. 1990), the Seventh Circuit was faced with the issues here involved. That case was considered by this Court in Estate of Merwin v. Commissioner, 95 T.C. 168 (1990) (Court reviewed). We declined to follow the Seventh Circuit with regard to section 1421(a)(2) of the Tax Reform Act of 1986. We will not discuss it here. This Court has been faced with the same issue we have here in several other recent cases, in each of which it held the election invalid. In Estate of Johnson v. Commissioner, 89 T.C. 127 (1987), the estate tax return upon which the election was made was untimely filed. In Estate of Strickland v. Commissioner, 92 T.C. 16 (1989), the Court found that the estate had not substantially complied with the regulations under section 2032A in attempting to value the property. In Estate of Merwin v. Commissioner, supra, neither a notice of election nor a recapture agreement was attached to the original return and a recapture agreement was not filed within the 90-day notice received from the agent. No reference was made to the fair market value of the property involved and various other items of required information were not provided. These cases are all distinguishable from the case before us and are not controlling. After reviewing the legislative history of section 2032A and section 1421 of the Tax Reform Act of 1986, it is clear that they were enacted to provide relief for the taxpayers who failed to specifically meet all the requirements for electing special use value with the filing of the estate tax return. We therefore think the statutes and regulations pertaining thereto should be interpreted and applied in a manner that will accomplish that objective without opening the door to abuses of the law. This is particularly true in cases like this one where it is not entirely clear what the law requires. In this case there certainly could have been some uncertainty as to whether the individual trust beneficiaries had a present interest in the property such as to require their signatures on the election and recapture agreements filed with the return. The land here involved had been used for years as farmland by decedent and his family, and we assume that it will continue to be so used; otherwise the additional estate tax may be imposed. All of the persons in being who have an interest in the land have now joined in the election and recapture agreement and we assume are bound thereby. The amended return was filed within a reasonable time after the original return was filed and it is unlikely that respondent has suffered any loss simply because of that timing. Furthermore, the Government fisc is protected by the agreement now on file and the hen imposed on the ranch. We conclude that the election of special use valuation and the recapture agreement signed by all interested parties were valid and that petitioner is entitled to use the special use valuation in computing the estate tax due. Decision will be entered under Rule 155. Reviewed by the Court. Chabot, Clapp, Swift, Jacobs, Wright, Parr, WELLS, RUWE, and COLVIN, JJ., agree with the majority.   Unless otherwise indicated, section references are to the Internal Revenue Code of 1954 as amended and in effect at the date of decedent’s death. All Rule references are to the Tax Court Rules of Practice and Procedure.    See Estate of Johnson v. Commissioner, 89 T.C. 127 (1987).