Estate of Geiger v. Comm'r of Internal Revenue, Docket No. 7354-81.

• Decision Date: 07 March 1983
• Docket Number: Docket No. 7354-81.
• Citation: 80 T.C. 484
• Parties: ESTATE of WALTER H. GEIGER, RONALD R. GEIGER and NELLIE P. GEIGER, PERSONAL REPRESENTATIVES, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

80 T.C. 484

ESTATE of WALTER H. GEIGER, RONALD R. GEIGER and NELLIE P. GEIGER, PERSONAL REPRESENTATIVES, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 7354-81.

United States Tax Court

Filed March 7, 1983.

Decedent's estate included personal property used in a hardware business and real and personal property used in farming operations. The value of the farm property comprised 42 percent of the adjusted value of the gross estate, and, when combined with the hardware, personal property comprised 53 percent of the adjusted value of the gross estate. Held, the properties of the separate businesses could not be aggregated in determining whether the estate qualified for special use valuation of the farm real property under sec. 2032A, I.R.C. 1954. Robert H. Reinhart, for the petitioners.

Daniel J. Wiles, for the respondent.

OPINION

COHEN , Judge:

This case has been submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts is incorporated herein by this reference. Walter H. Geiger (decedent) died a resident of Allegany County, Md., on May 7, 1977. Petitioners are the duly appointed and qualifying personal representatives of the estate of decedent and resided at LaVale, Md., at the time the petition herein was filed.

Petitioners filed an estate tax return for the estate of decedent with the Philadelphia Service Center on February 7, 1978. On that return, petitioners elected to specially value, under the provisions of section 2032A,¹ a piece of real property consisting of 646.5 acres of ground in Allegany County, Md. (the Geiger Farm). By notice of deficiency dated January 15, 1981, respondent determined a deficiency in estate taxes in the amount of $43,924.80. The said deficiency resulted from certain adjustments not now in dispute and disallowance of the special use valuation elected by petitioners with respect to the Geiger Farm. The fair market value of the Geiger Farm real property (without consideration of special use valuation) was $329,037.50 at decedent's death. The “special use value” of that real property was $59,520, and the executor elected to use that value for tax purposes and filed and agreement as required by section 2032A(d).

The Geiger Farm was purchased by decedent in 1951 and at the time of his death had been used by him and members of his family continually since 1951 for a farming operation, principally for the production of cows and calves. Personal property associated with the Geiger Farm at the time of decedent's death included livestock and farm equipment having a total combined value of $14,885. The Geiger Farm, including both real and personal property, passed from decedent to a qualified heir (as defined in sec. 2032A(e)).

From 1972 until the time of his death, decedent owned and operated as a sole proprietorship a wholesale hardware business in Cumberland, Md. The hardware business was on real property rented from an unrelated third party and included no real property owned by decedent. The personal property of the hardware business as of the date of decedent's death had a fair market value of $93,571.36. The hardware business was liquidated by the estate shortly after decedent's death, and the proceeds were used for general administrative purposes and in distributions to trusts created under the will of decedent.

The total value of the gross estate of decedent at the time of death was $810,518.27. The combined value of the Geiger Farm and the hardware business was $437,493.86, or 53 percent of the adjusted value of the gross estate. The value of the Geiger Farm, including real and personal property, was $343,922.50, or 42 percent of the adjusted value of the gross estate.

The sole issue for decision is whether petitioners are entitled to value the farm real property under the following provisions of section 2032A effective as of the date of decedent's death:²

SEC. 2032A(a). VALUE BASED ON USE UNDER WHICH PROPERTY QUALIFIES .—-

(1) GENERAL RULE .—-If—-

(A) the decedent was (at the time of his death) a citizen or resident of the United States, and

(B) the executor elects the application of this section and files the agreement referred to in subsection (d)(2),

then, for purposes of this chapter, the value of qualified real property shall be its value for the use under which it qualifies, under subsection (b), as qualified real property. *ss

(b) QUALIFIED REAL PROPERTY .—-

(1) IN GENERAL .—-For purposes of this section, the term “qualified real property” means real property located in the United States which was acquired from or passed from the decedent to a qualified heir of the decedent and which, on the date of the decedent's death, was being used for a qualified use by the decedent or a member of the decedent's family, but only if—-

(A) 50 percent or more of the adjusted value of the gross estate consists of the adjusted value of real or personal property which—-

(i) on the date of the decedent's death, was being used for a qualified use by the decedent or a member of the decedent's family, and

(ii) was acquired from or passed from the decedent to a qualified heir of the decedent.

(B) 25 percent or more of the adjusted value of the gross estate consists of the adjusted value of real property which meets the requirements of subparagraphs (A)(ii) and (C),

(C) during the 8-year period ending on the date of the decedent's death there have been periods aggregating 5 years or more during which—-

(i) such real property was owned by the decedent or a member of the decedent's family and used for a qualified use by the decedent or a member of the decedent's family, and

(ii) there was material participation by the decedent or a member of the decedent's family in the operation of the farm or other business, and

(D) such real property is designated in the agreement referred to in subsection (d)(2).

(2) QUALIFIED USE .—-For purposes of this section, the term “qualified use” means the devotion of the property to any of the following:

(A) use as a farm for farming purposes, or

(B) use in a trade or business other than the trade or business of farming.

Petitioners contend that the values of the hardware business and of the Geiger Farm may be aggregated to determine whether the 50-percent test of section 2032A(b)(1)(A) has been met, and that Congress' failure to expressly deny such aggregation supports petitioners' interpretation of the statute. Respondent contends that only the Geiger Farm assets may be considered in determining whether the 50-percent test has been met and the value of personal property used in an unrelated business cannot be considered. In support, respondent argues that the “unitary use” theory of interpretation, which provides a single, integrated meaning of “real or personal property,” is proper; such interpretation restricts the “personal property” that is within the qualified use provisions of the statute to personal property connected to the real property eligible for special use valuation. Respondent further argues that the hardware business personal property cannot be considered because it did not pass to a “qualified heir” as defined in section 2032A(e).

This is apparently a case of first impression. There appears to be no authority supporting petitioners' position, and the language and legislative history of section 2032A support respondent's determination, at least insofar as petitioners seek to include assets of a business consisting solely of personal property in the 50-percent test computation. It is not necessary to determine whether the hardware business personal property passed to a qualified heir of decedent, and we do not make any determination with respect to that issue. Nor do we decide whether the values of two separate farms and/or businesses could be aggregated if each involved qualified real property.

The pertinent provisions of section 2032A were adopted as a part of the Tax Reform Act of 1976, sec. 2003(a), Pub. L. 94-455, 90 Stat. 1856, in order to encourage the continued use of property for farming and other small business purposes by reducing the tax burden upon such property. H. Rept. 94-1380 (1976), 1976-3 C.B. (Vol. 3) 755, 756; S. Rept. 94-938 (Part 2) (1976), 1976-3 C.B. (Vol. 3) 657. The perceived unfortunate tax consequence resulted from valuing real property at its highest and best use rather than at its then-existing family use. This result occurred because the real property was in effect valued separate and apart from the going business or farm. See D. Kelley & D. Ludtke, Estate Planning for Farmers and Ranchers, 642-643 (1980). The thrust of the 1976 statute is to allow taxes on estate property to be computed on an income capitalization method of valuation of “qualified” real property, rather than the traditional “fair market value” based on its highest and best use.

The tax relief provided by the statute, however, is limited in several ways. The decedent must have been a resident or citizen of the United States, and the subject real property must be located in the United States. The real property must have been used as a farm or in a trade or business by the decedent or a member of the decedent's family, with material participation in the operation of the farm or the business by the decedent or a member of the decedent's family. Real property qualifies for special use valuation only if it passes to “a qualified heir,” who must be a member of the decedent's family. The ownership and use requirements must continue for 10 years after the decedent's death to avoid recapture of part of the tax savings resulting from special use valuation. Sec. 2032A(c). These requirements all express the intent of Congress to limit this particular form of tax relief to what would generally be regarded...