Bartlett v. C.I.R.

Citation937 F.2d 316
Decision Date10 September 1991
Docket NumberNo. 89-2237,89-2237
Parties91-2 USTC P 60,078 Elizabeth J. BARTLETT, as Executrix of the Estate of Charles E. Grimes, Deceased, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

A. Clay Cox, Merrick C. Hayes, Hayes, Schneider, Hammer, Miles & Cox, Bloomington, Ill., for petitioner-appellant.

Peter K. Scott, I.R.S., Gary R. Allen, Ann Belanger Durney, Laura Marie Conley O'Hanlon, Dept. of Justice, Tax Div., Appellate Section, Charles S. Casazza, U.S. Tax Court, Washington, D.C., for C.I.R.

Before CUMMINGS, FLAUM and EASTERBROOK, Circuit Judges.

CUMMINGS, Circuit Judge.

Ben Franklin once said that in this world, nothing can be said to be certain but death and taxes. This case calls for a variation on the old adage. Add some unfortunate mistakes by a well-meaning lawyer to the picture and the saying becomes: nothing can be said to be certain but death and higher taxes. Here's what happened. In April 1989 the Tax Court determined that there was a deficiency in estate taxes due from the Estate of Charles E. Grimes in the amount of $159,054. The decedent lived in Illinois and died testate on December 25, 1980. His spouse Elizabeth J. Grimes (now Elizabeth J. Bartlett) became executrix of his estate.

I. FACTS

Grimes and his wife executed their "Mutual Last Will and Testament" on September 27, 1980. Key paragraphs of that document Section 2032A is a highly articulated provision, and taxpayers electing to have farmland valued according to its actual use must satisfy a plethora of conditions. * Sections 2032A(a)(1)(B) and (d) and the implementing Treasury Regulations (Treas.Regs. on Estate Tax, Sec. 20.2032A-8(a)(3)) set forth the precise filing requirements necessary to trigger the estate tax treatment under Section 2032A. Taxpayer satisfied the first of these. On the estate tax return, an "X" was placed next to question 11 on page 2--"Do you elect the special valuation * * * ?" Although taxpayer answered Question 11 in the affirmative, the estate failed to heed the remaining requirement of Question 11, printed on the tax return. Question 11 additionally required the taxpayer to:

appear at pages 322-23 of this opinion. After her husband's death, his widow retained Robert Gammage, the attorney who prepared the will, to aid her in her capacity as executrix. On her estate tax return, the executrix, with Gammage's assistance, elected the provisions of Section 2032A of the Internal Revenue Code (26 U.S.C. Sec. 2032A) with respect to decedent's farmland. Section 2032A permits a taxpayer to declare the value of a family farm or other closely-held business according to its actual use value instead of its fair market value. The provision's rationale is to lessen the tax burden on the heirs to the estate, so that they may continue to operate the eligible property. Without Section 2032A, the estate would have to declare the value of the property according to its fair market value, the usual benchmark for placing the value on property. Since the fair market value can be expected to far exceed the use value, the payment of estate taxes might well place the executrix in a bind, forcing the heir to sell the property to pay the tax. See, e.g., Prussner v. United States, 896 F.2d 218, 220 (7th Cir.1990) (en banc ); Schuneman v. United States, 783 F.2d 694, 697 (7th Cir.1986).

attach to this return an agreement 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 agreement must be executed by all parties receiving any interest in the property being valued based on its qualified use.

The executrix and the four Grimes children signed an "Agreement to Special Valuation Under Section 2032A," known as a "recapture agreement," on September 23, 1981--two days before the due date of the estate tax return. In signing the recapture agreement, the executrix and the decedent's four children agree that the property will continue to be put to its qualified use, and, moreover, if the property is either sold to a non-family member or put to a non-qualifying use, then the estate will owe the difference between taxes paid under Section 2032A and the amount that the estate would have owed had the property been taxed at its fair market value. See Committee on Ways and Means, Estate and Gift Tax Reform Act of 1976, H.R.Rep. No. 94-1380, 94th Cong., 2d Sess. 25-27 (1976), U.S.Code Cong. & Admin.News 1976, p. 2897.

Unfortunately, Gammage, the estate's lawyer, did not give the recapture agreement to Grimes's widow when she filed the timely return through United States Mail.

                On October 7, 1981, the Internal Revenue Service received an October 5, 1981, letter from Gammage stating that the recapture agreement was "inadvertently omitted from [the] transmittal of the original return in this estate."    He enclosed the previously signed recapture agreement with his letter.  On June 22, 1984, the Commissioner of Internal Revenue asserted a deficiency in federal estate tax in part because the estate had failed to timely submit the recapture agreement
                

The Commissioner's other grounds for asserting the estate's additional tax liability arose from the executrix's claim to a marital deduction of $143,866.87 for personal property, consisting in part of stocks and bonds of $14,588.50, mortgage, notes and cash of $79,481.97, and $19,408.76 in miscellaneous property, totaling $113,479.23. As support for this deduction, taxpayer invoked Section 2056 of the Code (26 U.S.C. Sec. 2056). Congress enacted this provision to achieve the uniformity of federal estate tax between states with community property laws and those without them. Jackson v. United States, 376 U.S. 503, 505-506 & n. 4, 84 S.Ct. 869, 870-871 & n. 4, 11 L.Ed.2d 871 (construing Section 812(e) of the Internal Revenue Code of 1939 (26 U.S.C. Sec. 812(e) (1952 Ed.)), the predecessor to Section 2056). Section 2056 saves the surviving spouse from having to pay estate taxes on the property he or she inherits if that property would otherwise be included in determining the taxable portion of the gross estate. However, Section 2056 prevents the surviving spouse from benefitting from the marital deduction when the property interest at issue is terminable. Put another way, if there is a chance that the acquired property interest will fail due to the occurrence of some event or contingency, the surviving spouse may not deduct the value of the property. This limitation makes sense. If the surviving spouse's interest in the property terminates prior to or at the time of his or her death, then the property interest escapes taxation twice. Because the Commissioner viewed the claimed deduction as a life estate that terminated upon the surviving spouse's death, he disallowed the amount on the ground that it was a non-qualifying terminable interest under the will.

On December 20, 1988, the Tax Court filed a Memorandum Opinion (56 T.C.M. (CCH) 890) holding that the estate did not make a valid election under Section 2032A because it failed to timely submit the recapture agreement with the estate tax return. After the initial briefs in this case were filed, this Court decided Prussner v. United States, 896 F.2d 218 (7th Cir.1990) (en banc ), where we construed the recapture agreement in a Section 2032A election. In Prussner, we decided that the failure to file the recapture agreement "with the return" did not satisfy an unequivocal requirement of Section 2032A and that the failure by a taxpayer's lawyer to comply meant that taxpayer had not substantially complied with the regulation. Id. at 224-225 (emphasis in original). With respect to taxpayer's claimed marital deduction, the Tax Court held that under Illinois law the will constituted a joint and mutual will which limited the executrix's ability to dispose of the property, thereby imposing terminable conditions on the interest. The Tax Court construed the will as providing the widow with a life estate in the personal property with remainder to the Grimes children. Illinois law mandated this construction of the will. Therefore, as to both aspects of the Tax Court's judgment, we affirm, because the deficiency in this estate tax of $159,054 was warranted by Prussner and by Illinois law.

II. ANALYSIS
A. Untimely recapture agreement

As explained above and in this Court's Prussner decision, while property is generally valued for federal estate tax purposes on the basis of its fair market value, Congress enacted Section 2032A of the Internal Revenue Code in 1976 to provide a limited exception to this rule with respect to the valuation of certain family farms and other closely-held businesses. In the absence of Section 2032A, inherited farmland would be valued at its "highest and best use," often requiring the heirs of family farms to sell the farms in order to Section 2032A(a) requires the executrix to indicate on the estate tax return the taxpayer's intention to claim the deduction and to file the recapture agreement. The added requirement of the recapture agreement provides a written guarantee to the Commissioner that all of the parties having an interest in the property--here the other heirs to the estate--agree that the estate may be put to the qualified use. Only by continuing to put the property to use as a farm or other closely-held business may the executrix deduct the use value rather than the fair market value of the property. Prussner, 896 F.2d at 221. Moreover, the recapture agreement manifests the signatories' commitment that the estate will pay the difference if the property is sold or is no longer put to its qualified use.

pay the tax. E.g., Whalen v. United States, 826 F.2d 668, 669 (7th Cir.1987); see also H.R.Rep. No. 94-1380, 94th Cong., 2d Sess. ...

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