First Victoria Nat. Bank v. U.S.

• Decision Date: 09 July 1980
• Docket Number: No. 78-1596,78-1596
• Citation: 620 F.2d 1096
• Parties: 80-2 USTC P 13,363 FIRST VICTORIA NATIONAL BANK, Independent Executor under the Will of T. J. Babb, Deceased, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1096

620 F.2d 1096

80-2 USTC P 13,363

FIRST VICTORIA NATIONAL BANK, Independent Executor under the Will of T. J. Babb, Deceased, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 78-1596.

United States Court of Appeals Fifth Circuit.

July 9, 1980.

M. Carr Ferguson, Asst. Atty. Gen., Ann Belanger Durney, Gilbert E. Andrews, Act. Chief, John F. Murray, William S. Estabrook, III, U.S. Dept. of Justice, Tax. Div., Washington, D. C., for defendant-appellant.

Guitard & Henderson, Joseph P. Kelly, Richard Henderson, Victoria, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before WISDOM, GOLDBERG and HENDERSON, Circuit Judges.

GOLDBERG, Circuit Judge:

This case presents a question of first impression: whether "rice history acreage" interests under the system of rice allotments established by sections 351 to 356 of the Agricultural Adjustment Act of 1938, 52 Stat. 31 (codified as 7 U.S.C.A. §§ 1351-1356 (West 1973)) ("the Act") constitute "property" includable in a decedent's gross estate under sections 2031 and 2033 of the Internal Revenue Code of 1954. ¹ Because an understanding of the rice allotment system is necessary to a full understanding of the facts of this case, we will first discuss the rice allotment program and the interests which exist thereunder.

I. The Rice Allotment Program

The rice allotment program, as it was structured until 1975 ² from its inception in 1938, was a fairly complicated statutory and regulatory scheme. The Secretary of Agriculture is empowered to set a national acreage allotment for rice for each calendar year. See 7 U.S.C.A. § 1352 (West 1973) (since amended). ³ The national allotment is then apportioned among the rice-producing states, 7 U.S.C.A. § 1353(a) (West 1973) (operation currently suspended, see n. 2 supra ), and each state in turn apportions its quota among the farmers of that state as provided in Section 1353(b).

Section 1353(b) authorizes two different methods of allocating a state's acreage among its farmers. These methods are called "producer" allotments and "farm" allotments. The "producer" method was employed in Texas during the years relevant to this case. ⁴ Under this method, a state's acreage is apportioned to "farms owned or operated by persons who have produced rice in the (s)tate in any one of the five calendar years immediately preceding the year for which such apportionment is made on the basis of past production of rice in the (s)tate by the producer on the farm taking into consideration the acreage allotments previously established in the (s)tate for such owners or operators; abnormal conditions affecting acreage, land, labor, and equipment available for the production of rice, crop rotation practices, and the soil and other physical factors affecting the production of rice . . .." 7 U.S.C.A. § 1353(b) (West 1973) (suspended). ⁵

The Secretary of Agriculture is authorized by Section 1354(a) to determine whether the total supply of rice in a marketing year will exceed the normal supply for that year. When he makes this determination, marketing quotas go into effect for the calendar year unless more than one-third of the farmers engaged in the production of the prior year's crop oppose the quotas in a national referendum conducted by the Secretary by secret ballot. See 7 U.S.C.A. § 1354(b) (West 1973) (suspended). The marketing quota for a farm is the "actual production of rice on a farm less the normal production of the acreage planted to rice on the farm in excess of the farm acreage allotment." 7 U.S.C.A. § 1355 (West 1973) (suspended). The excess of rice produced is called "farm marketing excess," id., and is subject to a penalty of 65 percent of the parity price per pound for rice as of June 15 of the calendar year in which the crop is produced. See 7 U.S.C.A. § 1356(a) (West 1973) (suspended). The result of these provisions is that in any year in which the Secretary of Agriculture determines that a surplus of rice exists and two-thirds of the nation's rice farmers concur, the possessor of a rice allotment may market a quantity of rice free from a substantial tax levy.

The statutory scheme also created an interest which is referred to as "history of rice production" or "rice history acreage." ⁶ See 7 U.S.C.A. § 1353(f) (West 1973) (suspended). This interest gives its owner the right to be apportioned rice acreage as if the owner himself had produced in prior years the rice that was produced in those years by the transferor of the interest.

The statutory scheme provides for the transfer of this interest. When a rice producer in a "producer" state dies, the transfer of his "history of rice production" is governed by 7 U.S.C.A. § 1353(f)(1) (added by Act of March 6, 1962, Pub.L.No. 87-412, 76 Stat. 20) (currently suspended), which provides:

If a producer in a (s)tate in which farm rice acreage allotments are determined on the basis of past production of rice by the producer on the farm, dies, his history of rice production shall be apportioned in whole or in part among his heirs or devisees according to the extent to which they may continue, or have continued, his farming operations, if satisfactory proof of such succession of farming operations is furnished the Secretary.

If a rice producer in a producer state wishes to transfer his "rice history acreage" to another, subsections 1353(f)(2) and (3) govern. ⁷ A producer may transfer his interest to other members of his family with relative ease, see id., subsection (f)(2), but more stringent conditions apply when the transferee is not a member of the transferor's family. In this case, the transferor must permanently withdraw from rice production; and the transferee must have prior rice-producing experience, must acquire the entire farming operation pertaining to rice, except for land and irrigation equipment permanently attached to the land, and must actually plant at least 90 percent of his total producer rice acreage allotment in at least three of the four years following the transfer. See id., subsection (f)(3).

It must be understood that a "producer rice allotment" is an interest entirely different from "rice history acreage." A "producer rice allotment" for a year gives a rice producer the right to grow and market in that year a number of acres of rice free from payment of the penalty levied by Section 1356. This right only relates to the year of the allotment. "Rice history acreage," in contrast, is an interest that entitles its owner to receive "producer rice allotments" each year that the rice allotment program is in operation. At least ninety-seven percent of a state's acreage allotment for a year must be apportioned to farms operated by persons who produced rice in the state in at least one of the five prior years. See 7 U.S.C.A. § 1353(b), supra. Thus, possession of "rice history acreage," although not an absolute statutory prerequisite to the receipt of "producer rice allotments," substantially increases the likelihood of receiving "producer rice allotments" each year.

The statutory scheme appears to require that a national acreage allotment be set and then apportioned in each year. See 7 U.S.C.A. §§ 1352 & 1353, supra. However, in years in which farm marketing quotas are not in effect, the allotment program has no effect because there is no penalty for growing rice without allotments in those years. Since the administrative costs of apportioning the allotments in such a year would serve no useful purpose, it is likely that no allotments would be issued in a year in which marketing quotas were not in operation. ⁸

Although the statutory scheme makes no provision for the transfer of "producer rice allotments," it does contemplate and provide for the transfer of "rice history acreage." See slip op. pp. ---- - ----, p. ---- - ----, supra. The regulations promulgated by the Department of Agriculture which were in effect in 1973, however, permit the transfer of producer rice allotments. ⁹ They contain no separate provisions for the transfer of "rice history acreage; " however, they contemplate that a producer's rice acreage history will always be transferred along with the producer's rice allotments. See 7 C.F.R. § 730.76, n.9 supra. The regulations create a "season" for trading in rice allotments which runs from the issuance of the allotments (allotments appear to have ordinarily been issued on approximately January 1) until the end of March. See 7 C.F.R. §§ 730.72 & 730.76, supra. For a transfer of an allotment to be effective, a number of conditions must be met, one of which is that certain information must be furnished the county committee by April 1. See 7 C.F.R. § 730.76(a)(2), supra. The April 1 date can be extended, but only if certain fairly stringent conditions are met. See id. § 730.76(a)(3), § 730.72(b). Ordinarily, the allotments must be allocated to the producer's farms by May 1 or they will not be taken into consideration in the establishment of the marketing quota for each farm, although the May 1 date will also be waived under certain circumstances. See id. § 730.72(b).

II. Facts and Proceedings Below

With the statutory and regulatory framework in mind, we turn to the facts and procedural history of this case. The facts are undisputed. The decedent, T. J. Babb, died on July 4, 1973. He had been engaged for many years in the production of rice, and had annually been granted rice allotments under the Act since at least 1958. By notices dated December 1, 1972, and May 1, 1973, Babb was issued producer rice allotments of 1208.3 acres. Prior to the deadline of May 1, 1973, in compliance with the applicable regulations, Babb allocated his 1973 allotment to farms on which he intended to produce rice for the crop year 1973.

At the time of his death, no producer rice allotment for 1974 had been determined for or issued to Babb. After Babb's death, by notice dated March 28,...