853 F.2d 1494 (8th Cir. 1988), 87-2389, McDonald v. C.I.R.

Docket Nº:87-2389.
Citation:853 F.2d 1494
Party Name:Gladys L. McDONALD, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ESTATE OF John McDONALD, Deceased, C.F. Cornelius, Personal Representative, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
Case Date:August 17, 1988
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
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Page 1494

853 F.2d 1494 (8th Cir. 1988)

Gladys L. McDONALD, Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Appellee.

ESTATE OF John McDONALD, Deceased, C.F. Cornelius, Personal

Representative, Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 87-2389.

United States Court of Appeals, Eighth Circuit

August 17, 1988

Submitted May 11, 1988.

Rehearing Denied Sept. 15, 1988.

Garry A. Pearson, Grand Forks, N.D., for appellant.

Teresa E. McLaughlin, Washington, D.C., for appellee.

Before FAGG and WOLLMAN, Circuit Judges, and RE [*], Chief Judge.

Page 1495

WOLLMAN, Circuit Judge.

The Estate of John McDonald (Estate) appeals from a tax court order upholding the Commissioner's determination that certain estate property did not qualify for special use valuation under section 2032A of the Internal Revenue Code. 1 In a consolidated appeal, Gladys L. McDonald (Gladys) appeals from a tax court order upholding a determination by the Commissioner that her disclaimer of the survivorship interest in jointly-held property was a taxable transfer because such disclaimer was not made within the time period prescribed by 26 C.F.R. Sec. 25.2511-1(c). McDonald v. Comm'r, 89 T.C. 293 (1987). We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

I.

John McDonald (Decedent), a resident of North Dakota, died testate on January 16, 1981, survived by his widow, Gladys, four children and three grandchildren. Except for some small specific bequests, the will provided that Gladys was to inherit all of Decedent's property. In addition, Decedent and Gladys had owned certain property, including several parcels of farmland, as joint tenants with right of survivorship.

On September 23, 1981, Gladys disclaimed her interest in the farmland she stood to inherit under the terms of Decedent's will, as well as the survivorship interest in most of the farmland the couple had owned in joint tenancy. As a result of the disclaimer, this property passed to three of Decedent's children, Virlyn McDonald, Dorothy Spicer, and Gladys Jean Cox, in equal shares.

The federal estate tax return for Decedent's estate was timely filed with the Internal Revenue Service on October 7, 1981. Included in this return was a "Notice Of Election Of Special Use Valuation As Authorized By Section 2032A" and an "Agreement Relating To Special Use Valuation Under Section 2032A Of The 1976 Tax Reform Act." Both were signed by Gladys and C.F. Cornelius, the personal representative of the Estate, and listed Gladys as the only person with an interest in the farmland on which special use valuation was elected.

On February 26, 1982, an amended federal estate tax return was filed for Decedent's estate. This return contained an amended "Agreement Relating To Special Use Valuation Under Section 2032A Of The 1976 Tax Reform Act," signed by Virlyn McDonald, Dorothy Spicer, Gladys Jean Cox, and three of Decedent's grandchildren.

Based on the stipulated facts, the tax court upheld the Commissioner's refusal to permit special use valuation of the farmland, holding that by omitting the children's names and signatures on the original notice of election and agreement, the Estate had not complied with the election requirements under 26 C.F.R. Sec. 20.2032A-8. The tax court also upheld the Commissioner's determination that Gladys's disclaimer of the survivorship interest was a taxable gift, holding that she had not made the disclaimer within the time period prescribed by 26 C.F.R. Sec. 25.2511-1(c). The parties having stipulated to the facts below, we review the tax court's application of the law to the facts de novo. Mangels v. United States, 828 F.2d 1324, 1326 (8th Cir.1987).

II.

An election for a special use valuation is made by attaching a notice of election and a recapture agreement to a timely filed federal estate tax return. 26 U.S.C. Sec. 2032A(d)(1); 2 26 C.F.R.

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Sec. 20.2032A-8(a)(3). 3 The notice of election must contain fourteen specific items, including "(xii) The name, address, taxpayer identification number, and relationship to the decedent of each person taking an interest in each item of specially valued property * * *." 26 C.F.R. Sec. 20.2032A-8(a)(3). An interest in the property is one "which, as of the date of decedent's death, can be asserted under applicable local law so as to affect the disposition of the specially valued property of the estate." 26 C.F.R. Sec. 20.2032A-8(c)(2).

If the property subject to special use valuation is disposed of or otherwise ceases to be qualified use property within fifteen years after a decedent's death, an additional estate tax, referred to as recapture tax, is imposed, for which the qualified heir is personally liable. 26 U.S.C. Sec. 2032A(c). To ensure payment, all parties with an interest in the property must expressly consent to personal liability for the recapture tax in a binding agreement attached to a timely filed estate tax return. 26 C.F.R. Sec. 2032A-8(c)(1). 4

The parties have stipulated that Gladys effectively disclaimed her interest in the property for which the special use valuation is sought pursuant to N.D.Cent.Code Secs. 30.1-10-01 and 47-11.1-01. Moreover, the Estate agrees that under North Dakota statute disclaimers relate back to the date of the Decedent's death and that the disclaimed property devolves as though the disclaiming party had predeceased the Decedent. Thus, as of the date of Decedent's death, those taking an interest in the disclaimed property were Virlyn McDonald, Dorothy Spicer, and Gladys Jean Cox.

The Estate argues that the relation-back doctrine is a legal fiction that should be ignored for the purpose of this election. We disagree. Those taking an interest in specially valued property are those whose interests can be asserted under applicable local law to affect an estate's disposition of such property. 26 C.F.R. Sec. 20.2032A-8(c)(2). By virtue of the disclaimer, Gladys had no such interest under North Dakota laws. Accordingly, we conclude that the notice of election and recapture agreement filed with the original estate tax return did not satisfy the requirements of 26 C.F.R. Sec. 20.2032A-8.

In 1984, section 2032A was amended as follows to permit correction of certain imperfections in special use elections and recapture agreements:

(a) IN GENERAL.--Section 2032A(d) (relating to election and agreement) is amended by adding at the end thereof the following new paragraph:

"(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

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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."

Deficit Reduction Act of 1984, Pub.L. No. 98-369, Sec. 1025(a), 98 Stat. 494, 1030-31 (1984) (codified as amended at 26 U.S.C. Sec. 2032A(d)(3)) (1984 Amendment).

The Estate argues that even if the notice of election and recapture agreement filed with the original estate tax return did not comply with the literal requirements of 26 C.F.R. Sec. 20.2032A-8, they...

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