Miller v. US

• Decision Date: 09 March 1988
• Docket Number: No. 86-3245.,86-3245.
• Citation: 680 F. Supp. 1269
• Parties: Merle S. MILLER and Marjorie Lee Anderson, as Executors of the Estate of Esther E. Miller, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Central District of Illinois

680 F. Supp. 1269

Merle S. MILLER and Marjorie Lee Anderson, as Executors of the Estate of Esther E. Miller, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 86-3245.

United States District Court, C.D. Illinois, Springfield Division.

March 9, 1988.

David J. Duez, Robert M. Bellatti, Springfield, Ill., for plaintiffs.

Richard N. Cox, Asst. U.S. Atty., Springfield, Ill., Seth G. Heald, Trial Atty., Tax Div. U.S. Dept. of Justice, Washington, D.C., for defendant.

OPINION

RICHARD MILLS, District Judge:

A tax case.

The family farm.

The issue presented here is one of first impression and one on which little authority exists to guide our decision.

In this tax matter, we are asked to decide the validity of Treasury Regulation § 20.2032A-8(a)(2), which concerns the special use valuation election under Internal Revenue Code of 1986 § 2032A.

This cause is before the Court on the parties' cross motions for summary judgment which is appropriate where there is no genuine issue of material fact, and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56. As the parties have stipulated to the facts involved, this is such a case.

For the following reasons, we believe the Plaintiffs are correct and the Government is in error.

I

The agreed facts are these. Plaintiffs, Merle S. Miller and Marjorie Lee Anderson, are the duly appointed and currently acting executors of the will of their deceased mother, Esther E. Miller. The decedent died a resident of Clinton, Illinois, on August 14, 1983. On November 6, 1985, the Internal Revenue Service (IRS) issued a statutory notice of deficiency determining that additional estate taxes were due from the estate in the amount of $19,365.98. In addition to having paid the undisputed federal estate tax, Plaintiffs have paid this additional tax determined by the IRS in its notice of deficiency. Plaintiffs subsequently filed a timely claim for refund of taxes paid in the amount of $17,795.60 plus interest. The IRS has neither allowed nor disallowed Plaintiffs' claim for refund in whole or in part.

The issue disputed by the parties is whether Plaintiffs made a valid special use valuation election on a tract of farmland located in DeWitt County, Illinois. The Government agrees that the subject farmland qualifies for special use valuation in all respects and that Plaintiffs' election of special use valuation is complete and effective except for the question whether a special use valuation election can be made with respect to real estate which has an adjusted value which is less than 25% of the adjusted value of the gross estate as defined by Internal Revenue Code § 2032A(b)(3)(A). The special use valuation election by Plaintiffs described herein was an election with respect to real estate having an adjusted value of 23.83% of the adjusted value of the gross estate. Although other real estate in the decedent's estate qualified for special use valuation, Plaintiffs sought to elect special use valuation only with respect to the farmland in DeWitt County described above.

II

Under § 2032A of the Code, certain farm property can be "specially valued" whereby, for estate tax purposes, the farmland is valued at its actual use value as opposed to its highest or best use value. The Seventh Circuit has described the purpose of this section as follows:

The purpose of § 2032A was to encourage the continued operation of family farms and other small family businesses by permitting real property used for the farm or business to be valued upon its present use, rather than upon its highest and best use. Thus, § 2032A relieves taxpayers from having to sell an eligible family farm or business when the income from its present use is insufficient to pay the tax calculated upon its highest and best use.

Schuneman v. United States, 783 F.2d 694, 697 (7th Cir.1986).

Under subparagraph (b)(1)(B) of Code § 2032A, a decedent's real estate can qualify to be "specially valued" only if: "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)...." 26 U.S.C. § 2032A(b)(1)(B). Section 2032A does not apply automatically. Rather, an estate must elect to value property under this section on the estate tax return. 26 U.S.C. § 2032A(a)(1)(B). Section 2032A(d)(1) states: "Such election shall be made in such manner as the Secretary shall by regulations prescribe." In furtherance of this mandate, the Secretary promulgated the following regulation: "An election under section 2032A need not include all real property included in an estate which is eligible for special use valuation, but sufficient property to satisfy the threshold requirements of section 2032A(b)(1)(B) must be specially valued under the election."¹ 26 C.F.R. § 20.2032A-8(a)(2).

In other words, Code § 2032A(b)(1)(B) provides that for any property to qualify for special use valuation, at least 25% of the adjusted value of the decedent's gross estate must meet certain requirements. Regulation § 20.2032A-8(a)(2) provides that, while an estate need not elect special use valuation with respect to all qualifying property, the estate must elect special use valuation with respect to at least 25% of the adjusted value of the gross estate.

In this case, it is undisputed that the estate met the test of Code § 2032A(b)(1)(B), and it is also undisputed that the estate failed to meet the requirement of regulation § 20.2032A-8(a)(2). Thus, while the estate contained sufficient qualifying real property to satisfy the 25% requirement of the Code, the estate sought to elect special use valuation only with respect to a portion of that qualifying property, which portion amounted to 23.83% of the adjusted value of the gross estate. Hence, the estate's election failed by 1.17% to meet the 25% requirement of the regulations.

Plaintiffs argue that their election of only 23.83% was proper because the Code does not require a 25% election; thus, the treasury regulation at issue is invalid as an attempt to add an additional requirement to qualify for special use valuation which is not found in the underlying statute or its legislative history. On the other hand, the Government argues that the disputed regulation was promulgated pursuant to the Commissioner's express statutory authority under Code § 2032A(d)(1), that it is a "legislative regulation," and that the rule of deference to the regulations, see Commissioner v. Portland Cement Co. of Utah, 450 U.S. 156, 169, 101 S.Ct. 1037, 1045, 67 L.Ed.2d 140 (1981), requires that this Court find the regulation to be valid.

We agree with Plaintiffs.

III

The Supreme Court has stated: "Treasury Regulations `must be sustained unless unreasonable and plainly inconsistent with the revenue statutes.'" Commissioner v. Portland Cement Co. of Utah, 450 U.S. 156, 169, 101 S.Ct. 1037, 1045, 67 L.Ed.2d 140 (1981) (quoting Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501, 68 S.Ct. 695, 698, 92 L.Ed. 831 (1948)). However, where the regulation is promulgated under the "general authority to `prescribe all needful rules and regulations,' 26 U.S.C. § 7805(a) ... `we owe the interpretation less deference than a regulation issued under a specific grant of authority to define a statutory term or prescribe a method of executing a statutory provision.'" United States v. Vogel Fertilizer Co., 455 U.S. 16, 24, 102 S.Ct. 821, 827, 70 L.Ed.2d 792 (1982) (quoting Rowan Cos. v. United States, 452 U.S. 247, 253, 101 S.Ct. 2288, 2292, 68 L.Ed.2d 814 (1981)). Thus, we must first decide whether the disputed regulation is a legislative one (promulgated pursuant to a specific grant of authority) or an interpretive one (promulgated pursuant to the general rule making power of § 7805(a)). Naturally, Plaintiffs argue that this is an interpretive regulation, whereas the Government argues it is legislative.

The Government contends that Regulation § 20.2032A-8(a)(2) was promulgated pursuant to the authority granted at 26 U.S.C. § 2032A(d)(1) which states: "Such special use valuation election shall be made in such manner as the Secretary shall by regulations prescribe." (Emphasis added.) As such, the Government argues that the pertinent portion of the disputed regulation is a legislative regulation rather than an interpretive regulation. In opposing this view, Plaintiffs argue that the disputed regulation could not have been validly promulgated under § 2032A(d)(1) because the regulation oversteps the authority granted in § 2032A(d)(1), and, therefore, must have been promulgated under the general rule making power of § 7805(a) — making it an interpretive regulation. Plaintiffs assert that the authority to promulgate regulations granted in Code § 2032A(d)(1) pertains only to regulations governing the procedure by which an election should be made and does not authorize the Secretary to add substantive requirements to the election qualifications prescribed in Code § 2032A. The Government argues that the regulation simply "requires estates desiring to elect special use valuation to make the election with respect to a specified minimum amount of property. Clearly, this is a regulation `as to the manner of making' the election."

We disagree with the Government. Obviously, the regulation adds a substantive requirement to the option of making an election. It is not merely procedural. Procedural regulations deal with how a taxpayer is to proceed in making an election (what forms to use, what information to supply, etc.). Whereas a substantive regulation deals with whether the taxpayer qualifies to make the election. As the disputed regulation fits the latter case, it must be called substantive. Thus, we must decide whether Code § 2032A(d)(1) authorizes only procedural regulations or whether substantive, as well as procedural, rules may be promulgated under it.

First, "manner" is defined as: "A way, mode, method of doing anything, or...