896 F.2d 218 (7th Cir. 1990), 88-1933, Prussner v. United States

Docket Nº:88-1933.
Citation:896 F.2d 218
Party Name:Lucille PRUSSNER, as executrix of the estate of Aileen E. Pfeifer, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
Case Date:February 15, 1990
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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896 F.2d 218 (7th Cir. 1990)

Lucille PRUSSNER, as executrix of the estate of Aileen E.

Pfeifer, Plaintiff-Appellee,


UNITED STATES of America, Defendant-Appellant.

No. 88-1933.

United States Court of Appeals, Seventh Circuit

February 15, 1990

Argued Nov. 30, 1988.

Argued En Banc Dec. 6, 1989.

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[Copyrighted Material Omitted]

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David J. Duez (argued), McDermott, Will & Emery, Chicago, Ill., Robert M. Bellatti, Bellatti & Barton, Springfield, Ill., for plaintiff-appellee.

Jeffrey N. Kaplan, Dept. of Justice, Tax Div., Teresa McLaughlin (argued), Dept. of Justice, Tax Div., Appellate Section, Washington, D.C., Frances C. Hulin, Asst. U.S. Atty., Danville, Ill., Gary R. Allen, William S. Rose, Jr., Asst. Atty. Gen., Dept. of Justice, Tax Div., Appellate Section, David E. Carmack, Dept. of Justice, Tax Div., Washington, D.C., for defendant-appellant.


POSNER, Circuit Judge.

Since 1976, heirs to family farms and other family businesses have been permitted, for purposes of the estate tax, to elect to value the assets of the farm or business in their current use, rather than being required, like other heirs, to value the assets at their commercially most lucrative use. 26 U.S.C. Sec. 2032A; Martin v. Commissioner, 783 F.2d 81 (7th Cir.1986). The requirements for electing this "qualified use" or "special use" or "current use" valuation (all three terms are in circulation) are complex. The Internal Revenue Service, regarding lenient treatment of family businesses as a giveaway, construes these requirements strictly. Estate of Gunland v. Commissioner, 88 T.C. 1453 (1987); Estate of Grimes v. Commissioner, 56 T.C.M. 890 (1988) (appeal to this court pending). Twice, after complaints from taxpayers who were denied qualified-use valuation because of failure to comply with all the technical requirements for a valid election, Congress has passed statutes designed to ameliorate the consequences for the taxpayer who complies substantially although not completely. Sec. 2032A(d)(3) of the Internal Revenue Code, 26 U.S.C. Sec. 2032A(d)(3), added by the Deficit Reduction Act of 1984, P.L. 98-369, 98 Stat. 1030; Sec. 1421 of the Tax Reform Act of 1986, P.L. 99-514, 100 Stat. 2716. This appeal requires us to interpret these statutes and a judge-made doctrine of substantial compliance. Because of doubts about the soundness of the position taken by the only other court of appeals to have interpreted the statutes, McDonald v. Commissioner, 853 F.2d 1494 (8th Cir.1988); Foss v. United States, 865 F.2d 178 (8th Cir.1989), and

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because the issue of their meaning is a recurrent one (as evidenced by the pending appeal in Grimes ), we decided to hear the case en banc in advance of issuing a panel decision. 7th Cir.R. 40(f).

Aileen Pfeifer died on March 12, 1981. On December 14, her executrix, Lucille Prussner, filed a timely estate tax return together with a notice of election under section 2032A. The return valued 200 acres owned by the estate as farmland worth $119,000, rather than at its market value of $375,000. Although the notice of election contained all the information that the applicable Treasury regulation requires, 26 C.F.R. Sec. 20.2032A-8(a)(3), the regulation also provides that "an election under this section is made by attaching to a timely filed estate tax return" not only the notice of election but also a recapture agreement; the requirement is repeated on the estate tax return that Prussner filed (Form 706, as revised in January 1979). The statute itself requires the filing of a recapture agreement as a condition of a valid election, although it does not specify when the agreement must be filed. Sec. 2032A(a)(1)(B). The agreement, described both in the statute, Sec. 2032A(d)(2), and in the regulation, Sec. 20.2032A-8(c), is required to be signed by everyone having a vested or contingent interest in the estate, to express consent to the collection of any additional estate tax which may later be imposed if the property is put to uses other than qualified ones, 26 U.S.C. Sec. 2032A(c)(5), and to designate an agent to act for the signators in dealing with the Internal Revenue Service. By identifying the heirs, determining that the executor is speaking for them in electing to maintain the assets of the estate in the qualified use (here, as farmland), consenting to the imposition of additional tax, and designating a single agent for the heirs' dealings with the Internal Revenue Service, the recapture agreement simplifies the collection of such tax if and when it becomes due.

Prussner's lawyer failed to attach a recapture agreement to the estate tax return, instead attaching a letter which stated that "unfortunately, the agreement ... was not fully executed at the time because the heirs reside throughout the United States. I hope to send this agreement to you within the next few weeks." Four months later he filed an agreement that complied fully with all the requirements of the regulation--other than timeliness. In October 1984, almost three years after the return had been filed, the Internal Revenue Service disallowed Prussner's election of qualified-use valuation because the recapture agreement had not been filed with the estate tax return, and revaluing the farmland at its most valuable commercial use assessed an additional tax of $118,000. Prussner paid, and brought this suit for refund. The district judge, holding that the letter from Prussner's lawyer that we have quoted was a recapture agreement, albeit a defective one, held that since Prussner had cured its deficiencies before the Service audited the return, she was entitled to relief under section 2032A(d)(3). 87-2 U.S.T.C. p 13,739, 1987 WL 47915 (C.D.Ill.1987). (Although enacted after the death of Prussner's decedent, the statute was explicitly made retroactive to 1976. P.L. 98-369, Sec. 1025(b), 98 Stat. 1030.) The judge did not consider whether the election might also be valid under either section 1421 or the judicial doctrine of substantial compliance, but Prussner urges these as alternative grounds for upholding the judgment.

Section 2032A(d)(3) requires the Treasury to

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 [of the Treasury] 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 [recapture agreement] are not included on the agreement as filed, or the agreement

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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.

Paragraph (1) of subsection (d) provides that the election "shall be made in such manner as the Secretary shall by regulations prescribe." The regulations require the filing of a notice of election and a recapture agreement as attachments to the estate tax return. Prussner sensibly does not question the validity of the regulations. Estate of Gunland, supra, 88 T.C. at 1456-58. By "agreements" in the last line the statute evidently means an additional copy or additional copies of the agreement, containing the missing signatures.

The statute can be read to mean that if the taxpayer substantially complies with the various requirements for election but has either left required information off the notice of election or omitted required signatures from the recapture agreement, the election nevertheless is valid. The question then would be whether the failure to file the recapture agreement with the return was consistent with substantial compliance. And failure it was. We cannot agree with the district judge that a letter in which Prussner's lawyer stated that he was not filing a recapture agreement can be regarded as a recapture agreement. That would be like regarding a letter in which the taxpayer explains why he is not filing a tax return as a tax return. Yet failure to file the recapture agreement is not fatal if the statute is read to permit substantial compliance (as distinct from requiring complete compliance) not only with the requirements for a valid election that are expressly made curable by sections 2032A(d)(3)(B)(i) and (ii), but with any of the other requirements for a valid election as well.

To this reading it can be objected that it leaves the key term in the statute, "substantially complies," completely undefined. An alternative reading is to confine permissible noncompliance to the specific instances made curable in subsections (B)(i) and (B)(ii). On this reading, Prussner's failure to file a recapture agreement with the return was inexcusable, because it was not a form of noncompliance that the statute specifies can be cured within ninety days after the Internal Revenue Service notifies the taxpayer. The Treasury regulation defines a valid election as the filing of a return accompanied by a notice of election and a recapture agreement, but does not deal with the case in which the notice or the agreement is defective. The Internal Revenue Service had taken the hard line that any defect invalidated the election. Congress responded with section 2032A(d)(3), reversing the hard line. But a notice and an agreement still must be filed with the return, and the agreement was not filed with the return here.

This interpretation may seem to have the weird consequence that while a failure to supply essential information is forgivable for up to ninety days after the Internal Revenue Service discovers the omission and notifies the taxpayer, the...

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