Foss v. U.S., 88-5152

• Citation: 865 F.2d 178
• Decision Date: 08 March 1989
• Docket Number: No. 88-5152,88-5152
• Parties: -1524, 89-1 USTC P 13,793 Donna R. FOSS, Personal Representative of the Estate of Gustave J. Foss, deceased, Appellee, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 178

865 F.2d 178

63 A.F.T.R.2d 89-1524, 89-1 USTC P 13,793

Donna R. FOSS, Personal Representative of the Estate of Gustave J. Foss, deceased, Appellee, v. UNITED STATES of America, Appellant.

No. 88-5152.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 16, 1988.

Decided Jan. 9, 1989.

Rehearing and Rehearing En Banc Denied March 8, 1989

Murray S. Horwitz, Washington, D.C., for appellant.

Richard M. Gaalswyk, St. Paul, Minn., for appellee.

Before HEANEY and BEAM, Circuit Judges, and STUART, ^* Senior District Judge.

STUART, Senior District Judge.

Donna R. Foss, personal representative of the Estate of Gustave J. Foss (the Estate), brought this action for a refund of federal estate taxes claiming that the Estate had made a valid election for a special use valuation of farm property under 26 U.S.C. Sec. 2032A which grants relief to the heirs of family farms who might otherwise find that valuation of inherited farm land at its "highest and best use" would produce such a large estate tax liability that it would be necessary to sell the farm to pay the tax. The matter was submitted to the district court on cross motions for summary judgment. The trial court found that a valid election had been made and denied the government's motion, granted the Estate's motion and ordered a refund of the entire amount of taxes paid, $153,329.32. The United States has appealed.

The issue before this court is whether the district court erred in holding that the estate qualified for the special use valuation of property under 26 U.S.C. Sec. 2032A even though a notice of election and a recapture agreement ¹ signed by the heirs were not attached to the estate tax return, as required.

Gustave J. Foss died August 9, 1981. The United States Estate Tax Return was filed on time. It was signed by G. Donald Foss, the estate's personal representative at that time, who was also the principal beneficiary of the farmland involved. Question 11 on the tax return, which asked: "Do you elect the special valuation explained in instruction 137," was answered "Yes." Question 11 also contained the following instructions:

If "yes" attach a statement that includes the information described in instruction 23. Also complete the schedule below.

The "schedule below" asked for the names, social security numbers, relationships and addresses "of all parties receiving any interest in the specially valued property." The schedule was complete except for the social security numbers.

The first paragraph of Instruction 13 states:

13. Special Section 2032A Valuation. If the personal representative elects the method of valuation authorized by section 2032A indicate the election in item 11 on page 2, and attach the statement and signed consent described below, the election creates a lien. Once made, the election is irrevocable. You must also attach an agreement in a form that is binding on all parties under applicable local law and that is signed by all parties holding any interest in the property to 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.

The other paragraphs of Instruction 13 explain in detail the required information and the contents and purpose of the recapture agreement.

Neither the recapture agreement nor the Notice of Election were attached to or included with the estate tax return sent by the attorney for the estate. However, the cover letter stated that an election was being made for special valuation under Section 2032A and included appraisals at fair market values and special use values.

On August 24, 1982, the examining IRS agent discovered the notice of election and recapture agreement were not attached to the return and requested these documents. On September 13, 1982 they were submitted to IRS. On July 13, 1984, the IRS issued a statutory notice of deficiency. The estate paid the alleged deficiency and filed this refund suit for the entire amount paid.

The district court, relying on amendments to Section 2032A contained in the Tax Reform Act of 1986, determined that substantial compliance was sufficient to qualify for a special use valuation and that there had been substantial compliance in this case stating:

The heirs had reached an agreement to make the election, the principal heir had filed for the election and the required agreement was submitted after the IRS requested it. The recent amendments to 2032A, liberalizing the requirements for a valid election, lead to the conclusion that under these facts a valid election was made.

After the briefs had been filed on appeal, this court handed down an opinion in McDonald v. Commissioner of Internal Revenue, 853 F.2d 1494 (8th Cir.1988) in which the question of substantial compliance sufficient to constitute a valid election was considered. Briefs discussing McDonald were requested.

In McDonald, the notice of election and the recapture agreement were attached to the Federal Estate Tax Return filed October 7, 1981. They were signed by the spouse of the decedent who would have become the owner of the farmland involved either as a joint tenant or as beneficiary under decedent's will. She was...