Heffley v. Comm'r of Internal Revenue (In re Estate of Heffley)

• Decision Date: 11 August 1987
• Docket Number: Docket No. 3201-85
• Citation: 89 T.C. 265,89 T.C. No. 23
• Parties: ESTATE OF OPAL P. HEFFLEY, DECEASED, TIMOTHY S. HEFFLEY, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

89 T.C. 265

89 T.C. No. 23

ESTATE OF OPAL P. HEFFLEY, DECEASED, TIMOTHY S. HEFFLEY, EXECUTOR, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3201-85

United States Tax Court

Filed August 11, 1987.

From 1976 until D's death in 1981, D's farm was leased to individuals who were not members of her family. The income received by D was fixed under such leases and was not dependent on crop production on the farm. Such leases did not call for D, or anyone acting on her behalf, to render services, and D was not involved in the management decisions associated with the operation of the farm.

HELD: (1) The farm was not being used for a qualified use within the meaning of sec. 2032A(b)(2), I.R.C. 1954, and neither D nor a member of her family materially participated in the operation of the farm; therefore, P is not entitled to value such farm by use of the special use valuation provisions of sec. 2032A, I.R.C. 1954.

(2) Under the circumstances of this case, we have no jurisdiction to allow P to pay interest on its deficiency in Federal estate tax at the reduced rate provided by sec. 6601(j), I.R.C. 1954. Stephen J. Williams, for the petitioner.

Russell D. Pinkerton, for the respondent.

SIMPSON, JUDGE:

The Commissioner determined a deficiency of $84,373.4 in the petitioner's Federal estate tax. After concessions, the issues for our decision are: (1) Whether the petitioner is entitled to value real property in which the decedent held an interest at her death by use of the special use valuation provisions of section 2032A, Internal Revenue Code of 1954 ¹; and (2) whether the petitioner is entitled to pay interest on any deficiency in Federal estate tax at the reduced rate provided in section 6601(j).

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The decedent, Opal P. Heffley (Opal), died on September 23, 1981. The executor of her estate, Timothy S. Heffley (Timothy), resided in Auburn, Indiana, at the time the petition was filed in this case. The estate filed its Federal estate tax return with the Internal Revenue Service Center in Memphis, Tennessee.

Opal was born in Indiana on February 4, 1914. She married Max Heffley (Max) on March 23, 1954. One son, Timothy, was born of this marriage on December 22, 1957. Opal also had a daughter, Joy Shuff, by a prior marriage.

On October 5, 1966, the Heffleys purchased the farm real estate at issue from Max's mother. Such real estate had been pieced together by Max's parents through a series of purchases beginning in 1922. The farm real estate included the house in which the Heffleys resided, several outbuildings, and 296.37 acres of land. Approximately 280 acres of the land was tillable and was regularly planted with soybeans, corn, and wheat. The remainder of the land consisted of woods, open ditches, utility rights-of-way, and the buildings' site.

Max was actively engaged in the business of farming throughout his life. In addition to the acreage that he owned with his wife, Max farmed land which he rented from others. Immediately prior to his death, Max had approximately 1,000 acres of farmland under cultivation. He was assisted in farming such land by his brother, Wayne Heffley (Wayne). Wayne resided with his wife, Beth, on a farm approximately 1- 1/2 miles from Max's farm.

Max died on May 26, 1972. Around the time of Max's death, Opal assumed the responsibility of managing and operating the farm for the 1972 crop year. With the assistance of relatives and neighbors, Opal supervised the spring planting. She also arranged for Wayne to conduct the summer tilling of the land and to harvest the crops. Opal received the crop proceeds and paid the crop expenses. She paid Wayne a fixed fee for his services in 1972.

After 1972, Opal entered into a sharecropping arrangement with Wayne. In time, Opal became uncomfortable with the risk involved in sharecropping and decided to lease the farmland on a cash rent basis. Consequently, on October 24, 1976, Opal entered into a ‘Farm Rental Contract‘ with Wayne. Under such contract, Opal leased 288 acres of tillable land to Wayne until February 28, 1977. ² In exchange, Wayne agreed to pay rent for such land of $35 per acre or a total of $10,080. The lease provided that interest would be charged for any unpaid rent at a rate of 6 percent per year.

Under the lease, Wayne had full responsibility for the operation of the farm. He chose the brand of seed, fertilizer, and herbicide to be used and determined the appropriate time for planting, tilling, and harvesting crops. The lease did not call for any performance from Opal or by anyone acting on her behalf, nor was she to share in the proceeds from the crops produced on the land. On occasion, Timothy helped Wayne on the farm. He received compensation directly from Wayne for such activities. Although Opal and Wayne did not re-execute the lease in subsequent years, they continued to abide by its terms until the end of the 1980 farming season.

On September 26, 1978, Opal executed a warranty deed which conveyed her interest in the farm real estate to Timothy, as trustee. On the same day, she executed the ‘Opal P. Heffley Land Trust Agreement Effective on January 1, 1981 ‘ (the land trust). The trust document named Opal the sole income beneficiary of the land trust. The trust document did not provide for the disposition of the farm real estate upon termination of the land trust.

On April 23, 1981, Opal executed a ‘Revocable Trust Agreement‘ (the revocable trust) and named Timothy the trustee of such trust. In such document, she transferred to the revocable trust any interest which she had in the farm real estate held by the land trust. In addition, she directed that the farm real estate be distributed to Timothy upon her death. Timothy, as trustee first of the land trust and then of the revocable trust, held title to the farm real estate from September 26, 1978, through the date of Opal's death.

On February 11, 1981, Timothy, as trustee of the land trust, entered into a farmland rental agreement with a cousin, Jerry Heffley (Jerry). In such agreement, the land trust rented approximately 186 acres of tillable farm land and the use of two outbuildings for a period of one year. In exchange, Jerry agreed to pay $30 and to deliver 12 bushels of corn and 3 bushels of soybeans for each of the 186 acres. The agreement released the land trust from any expenses of operating the farm except for the cost of applying limestone to the soil, if needed. The agreement did not call for any performance on the part of the land trust or of any party acting on behalf of the land trust.

Timothy was 14 years of age at the time of his father's death. Throughout high school, he helped his uncle, Wayne, farm the land. After graduating from high school, Timothy became a full-time student at Indiana University in Bloomington, Indiana. Although Bloomington is approximately 210 miles from the farm, he returned home frequently on weekends and on school holidays. He also spent all but one summer on the farm during his college years. Timothy transferred to the Fort Wayne, Indiana, campus of Indiana University for his final year of college. During such year, he established his permanent residence on the farm. Timothy received a Baccalaureate degree in philosophy and political science from Indiana University in May 1981.

After graduating from college, Timothy married and began working at a series of jobs away from the farm. He worked in a warehouse and a furniture factory and as a fundraiser for a citizen's lobbying group. He also sold solar heating equipment. Timothy's wife also worked away from the farm.

In 1981, Timothy purchased a tractor and other farm equipment and cultivated soybeans on approximately 15 acres of the farm real estate. He also planted approximately 3,000 trees on a 3-acre plot on the farm. He intended such trees to produce a marketable timber crop. He did not pay any rent to either the land trust or the revocable trust for the use of such land.

Opal filed Federal income tax returns for the years 1973 through 1980. Such returns were prepared on her behalf by professional tax return preparers. Opal's farm income for 1973 was reported on Form 4835, which states that it is ‘designed to report farm rental income based on crops or livestock produced by the tenant, where the landowner * * * does not materially participate in the operation or management of the farm.‘ For the years 1974 through 1979, Opal's farm income was reported as ‘cash rent of farm‘ or ‘farm rent.‘ Opal's farm income for 1980 was reported as ‘rent.‘ She did not pay any self-employment tax on her farm income for the years 1973 through 1980.

Opal was hospitalized in August 1975. During her hospital stay, it was determined that she had sustained a stroke and suffered from arterial sclerosis. Although the stroke did not affect her mental functions, it caused her to become partially paralyzed and ultimately resulted in her inability to write. Opal was disabled at all times subsequent to the 1975 grain farming season. Opal resided on the farm real estate, except for periods of hospitalization, until 1980. In 1980, her health deteriorated, and she moved to a senior citizen's apartment complex. She died in a nursing home on September 23, 1981.

On its Federal estate tax return, the petitioner elected to use the special use valuation provisions of section 2032A and valued the farm real estate at $90,339.50. The petitioner attached an appraisal to such return, which indicated that the fair market value of the farm real estate was $463,000.00 at the time of the decedent's death. There is no dispute between the parties as to the special use value or the fair market value of the farm real estate. The petitioner did not make an election under section 6166(a) or a protective election under section 20.6166-1(d), Estate Tax Regs., to pay part or all of the Federal estate tax due on such return...