Martin v. Comm'r of Internal Revenue, Docket Nos. 10122-82

• Decision Date: 02 April 1985
• Docket Number: 10740-82.,Docket Nos. 10122-82
• Parties: MARY JEAN MARTIN, INDIVIDUALLY AND DOROTHY FISCHER, BY HER GUARDIAN, MARY JEAN MARTIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentJOHN R. FISCHER, RICHARD J. FISCHER, WILBURN H. FISCHER, FRANCIS J. FISCHER, AND PATRICIA ANN NORMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

84 T.C. 620

84 T.C. No. 40

MARY JEAN MARTIN, INDIVIDUALLY AND DOROTHY FISCHER, BY HER GUARDIAN, MARY JEAN MARTIN, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, RespondentJOHN R. FISCHER, RICHARD J. FISCHER, WILBURN H. FISCHER, FRANCIS J. FISCHER, AND PATRICIA ANN NORMAN, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 10122-82

10740-82.

United States Tax Court

Filed April 2, 1985

P's are the seven heirs of the estate of John A. Fischer. At his death on January 29, 1978, decedent devised to such heirs, as tenants in common, a 209 acre crop-producing family farm. The farm was leased on a sharecrop basis to the son-in-law of decedent at the time of his death. The estate properly elected, qualified for and received a special use valuation pursuant to sec. 2032A. At the instigation of the personal representative, who was an heir, and over the opposition of two of the heirs, a one-year cash lease of the entire tillable portion of the farm was executed in August of 1979, and the lease was approved by the local probate court.

HELD, the cash lease of the farm constituted a cessation of qualified use of the farm by a ‘qualified heir,‘ calling for the imposition of an additional or recapture estate tax pursuant to sec. 2032A(c)(1)(B). JACK N. VAN STONE, for the petitioners in docket No. 10122-82. EDWARD W. JOHNSON, for the petitioners in docket No. 10740-82. FREDERICK W. KRIEG, for the respondent.

KORNER, JUDGE:

Respondent determined deficiencies in estate tax against each of the foregoing seven petitioners in the amount of $95,088.14. ¹ Respondent has conceded $81,504.12 of each such deficiency, leaving deficiency determinations in the amount of $13,584.02 in issue as to each petitioner. ²

After concessions, the sole issue remaining for our decision is whether the seven heirs of the decedent, John A. Fischer, ceased to use qualified real property for a qualified use, so that they are liable for an additional estate tax pursuant to section 2032A(c). ³

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulations of facts and exhibits attached thereto are incorporated herein by this reference.

At the time their petitions were filed, petitioners John R. Fischer (‘John R. ‘), Richard J. Fischer (‘Richard‘), Francis J. Fischer (‘Francis‘), and Patricia Ann Norman (‘Patricia‘) resided at Mount Vernon, Indiana; petitioner Wilburn H. Fischer (‘Wilburn‘) resided at Corpus Christi, Texas; and petitioners Mary Jean Martin (‘Mary‘) and Dorothy Fischer (‘Dorothy‘), by her guardian, Mary Jean Martin, resided at Poseyville, Indiana.

John A. Fischer (‘the decedent‘) and his wife, Florence Fischer (‘Florence ‘) were citizens of the United States and resided in Posey County, Indiana, for virtually all of their lives. The decedent and Florence owned, as tenants by the entirety, certain real estate in Posey County, Indiana, consisting of a total of 209 acres, and comprised of approximately 166 acres of farm land, 23 to 26 acres of unproductive and unmanaged woodland of little value, 17 to 20 acres of woods and creeks and a residence (hereinafter referred to, collectively, as ‘the farm‘). At all times here pertinent, the farm produced various types of crops.

Decedent and Florence Fischer had seven children, namely: John R., Richard, Wilburn, Francis, Dorothy, Patricia, and Mary.

The principal occupation of decedent and Florence Fischer was farming and they personally farmed the foregoing acreage until approximately 1970, when they were unable to do so as a result of advancing age and poor health. At such time, they entered into an oral sharecrop arrangement with Mary's husband, Anthony Martin (‘Anthony‘), whereby he would farm approximately 95 acres of the farm on a sharecrop basis, with one-third of the net proceeds therefrom going to the lessors and the remainder going to Anthony. In 1974, the lease was modified to include the entire farm.

At an undisclosed time prior to 1978, Patricia became the guardian of decedent and Florence Fischer. During 1977, a typewritten lease of the farm was entered into between Patricia, in her guardian capacity, and Anthony, continuing the one-third, two-thirds split between the landlords and the tenant.

On or about March 29, 1977, Florence died, and the farm passed to her husband by operation of law. On January 29, 1978, decedent died.

By the will of the decedent, which was probated, his seven children received the farm as tenants in common. John R. qualified as the personal representative of the estate of his father, and an estate administration was opened in the Posey Circuit Court in Indiana.

From January 29, 1978 until August 1979, the farm continued to be farmed on a sharecrop basis by the decedent's son-in-law, Anthony Martin, pursuant to automatic extensions of the 1977 lease.

On September 29, 1978, John R. caused to be filed with the Internal Revenue Service, a United States Estate Tax Return, Form 706, on which the estate properly elected to value the farm pursuant to section 2032A. The return was accepted as filed and a closing letter was issued by respondent on June 16, 1980. The seven qualified heirs each executed a document styled Agreement to Remain Liable For Additional Estate Tax For the Estate of John A. Fischer, Deceased. John R. was appointed the active agent for the qualified heirs.

As filed, the estate tax return showed a total estate tax of $11,473.02. Had the parties not elected the special use valuation for the farm, the estate would have owed an additional $95,088.14 in estate taxes at the time the return was filed. However, the requirements of section 2032A were complied with, and the estate was entitled to and properly received a special valuation for the farm under section 2032A.

By 1978, Dorothy had become mentally incompetent, and on April 13, 1978, Mary was appointed as her guardian, and continued in that capacity at all times here pertinent.

Subsequent to filing the estate tax return, John R. determined that Anthony should not continue farming the property. Accordingly, on February 15, 1979 John R. caused to be sent to Anthony a notice to terminate the typewritten 1977 lease agreement. The notice of termination was to be effective on August 15, 1979, and provided that Anthony was not to thereafter plant any crops to be harvested after that date, and was to have all of his crops off of the farm prior to that date, but Anthony was permitted to remove any crops, already planted, which would not mature until after August 15, 1979.

In July or early August of 1979, John R. advertised for bids to lease the farm for a one-year period on a pure cash rental basis. Several sealed bids were submitted, each of which was based on a fixed dollar amount. When the sealed bids were opened in August 1979, the highest bid was submitted by Droege Farms, which submitted a cash rental bid of $21,060. On August 17, 1979, a cash lease of the farm was entered into by and between the personal representative and Edmund Droege, acting for Droege Farms as lessee. Edmund Droege was a third party, who was not related to the decedent or Florence. The contract provided for payment of ten percent of the total rent on or before September 1 of the year in which the lease was signed, with the remainder due on or before the last day of January 1981.

On August 24, 1979, John R., as personal representative, petitioned the Posey Circuit Court to approve the lease to Droege Farms. At least in part as a result of concern over losing the advantages of the special use valuation under section 2032A, two of the heirs, Mary in her individual capacity, and Mary as guardian of Dorothy, filed written objections to the lease. Over such objections, on October 16, 1979, the Posey Circuit Court approved the lease.

The rental specified in the cash lease, $21,060, was based upon $117 per acre multiplied by 180 tillable acres. The initial 10 percent payment specified in the lease, or $2,106, was paid in the Spring of 1980, after which time it was determined that there were only 165.9 tillable acres. Accordingly, the final lease payment was adjusted to $17,304.30, computed as the product of 165.9 acres and $117, less the $2,106 initial payment. The rental was not based upon the level of crop production from the farm.

On September 12, 1979, Mary, acting individually and as guardian for Dorothy, filed with the Posey Circuit Court a petition for partition of the farm.

In or about October of 1979, Anthony, the prior lessee, was permitted to and did enter the farm to remove his crops. Between August 17, 1979 and October of 1979, while Anthony's crops were still in the field, and prior to approval of the cash lease by the Posey Circuit Court, Droege Farms did not plant. In November of 1979, however, Droege Farms planted winter wheat, and it likewise was permitted to and did remove its crops in or about October of 1980. Droege Farms thereafter sold the crop, and made the final rental payment under the August 17, 1979 cash lease on December 29, 1980. On August 17, 1980, the one-year cash lease to Droege Farms ended.

During the cash lease of the farm, the farming operation was conducted by Droege Farms, which used its own chisel plow, moldboard plow, grader blade, disc, culti-mulchers, planters, drill, tractor and combine. The estate owned no farm equipment.

During the cash lease term, Richard and John R. participated in maintenance and operation of the farm by performing a number of duties, including clearing approximately 1/2 mile of fence rows, repairing field tile and a washed-out culvert and filling so-called ‘sinkholes‘ on the farm. In addition, John R. regularly conferred with Edmund Droege, providing advice to the lessee concerning the location for planting crops, plowing and fertilizing methods, crop rotation, seed selection, disking, control of Johnson grass and other weeds, and rototilling.

At the termination of the one-year cash lease, a sharecrop lease...