Moffett v. Comm'r of Internal Revenue (In re Estate of Clinard)
| Decision Date | 11 June 1986 |
| Docket Number | Docket No. 6345-84. |
| Citation | 86 T.C. 1180,86 T.C. No. 68 |
| Parties | ESTATE OF CARITA M. CLINARD, DECEASED, THOMAS H. MOFFETT, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Decedent bequeathed her interest in farmland as follows: life income interest to each of 2 children; life income interest to each child's spouse if married to and living with decedent's child at date of his or her death; life income interest to each of 3 grandchildren with a special power of appointment to each grandchild over his or her beneficial remainder interest; gift over to a university and others if the grandchildren fail to exercise their special powers of appointment and die without decendents.
HELD, decedent's interest in the farmland passed to qualified heirs for purposes of electing sec. 2032A, I.R.C. 1954, special valuation. Arthur N. Laudeman, for the petitioner.
Michael W. Bitner, for the respondent.
Respondent, by statutory notice dated December 13, 1983, determined a deficiency of $309,171.87 in Federal estate tax due from the estate of Carita M. Clinard. The sole issue for our consideration 1 is whether farmland owned by decedent at the date of her death can be specially valued pursuant to section 2032A,2 where a testamentary special power of appointment is given to a ‘qualified heir‘ over the remainder interest.
This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and attached exhibits are incorporated herein by reference.
Carita M. Clinard (decedent), a citizen of the United States and domiciliary of the State of Illinois, died on March 28, 1980. She was survived by Thomas H. Moffett (son), Elizabeth C. Moffett (daughter- in-law), Anthony T. Moffett (grandson), Eloise M. Harper (daughter), H. Thomas Harper (son-in-law), Jeffrey T. Harper (grandson), Jill Harper Lenk Baker (granddaughter) and Jessica E. Baker (great- granddaughter). Thomas H. Moffett (petitioner) was duly appointed executor of decedent's estate and resided in McLean, Illinois, at the time the petition herein was filed.
At her death, decedent was the beneficial owner of 749.54 of 804 total units of an Illinois land trust, the corpus of which consisted of 804.73 acres of farmland located in Logan County, Illinois. Petitioner timely filed an estate tax return with the Internal Revenue Service Center, Kansas City, Missouri; on which he elected section 2032A special use valuation of the farmland herein involved. Respondent determined that decedent's estate was not entitled to specially value the farmland at $460,141.91 because of the possibility (remote as it may be) that all of the successive interests in the farmland would not pass to ‘qualified heirs.‘ 3 Thus, respondent contends that the farmland must be included in decedent's estate at the fair market value on the date of decedent's death. 4 Respondent agrees that decedent's interest in the farmland meets all of the other statutory and regulatory requirements.
Decedent's interest in the farmland passed pursuant to her Will and First Codicil, in equal shares to two trusts, Trust A and Trust B. Under the terms of Trust A the following interests were created: A life income interest to Thomas H. Moffett; upon his death, a life income interest to his wife, Elizabeth C. Moffett, should she survive him and be married to, or living with him at the time of his death; upon Elizabeth's death (if she qualifies), a life income interest to decedent's grandson, Anthony T. Moffett (Anthony). Upon Anthony's death the trust will terminate and the property is to be distributed, as Anthony directs in his will, to any organization or person other than his estate, his creditors, or creditors of his estate. Should Anthony fail to exercise his power of appointment, the property will pass to (a) his then-living descendants, in equal shares per stirpes or, in default of such descendants, (b) in two equal parts: one-half to the then-living descendants of Glen L. Carl 5 in equal shares per stirpes (unqualified persons) and one-half to Trust B.
Under the terms of Trust B, decedent created the following interests: A life income interest to Eloise M. Harper, decedent's daughter; upon her death, a life income interest to her husband, H. Thomas Harper, should he survive Eloise and be married to and living with her at the time of her death; upon his death (if he qualifies), a life income interest in one-half of the trust corpus to each of decedent's grandchildren, Jill Harper Lenk Baker and Jeffrey T. Harper. Each one-half interest is to be held in separate trusts, Trust C and Trust D, which will terminate upon the death of the beneficiary. Upon termination of the trusts, the property is to be distributed as the beneficiary's will directs, to any organization or person other than his estate, his creditors, or creditors of his estate. Should the beneficiaries fail to exercise the powers of appointment granted to them, the property will pass to their then- living descendants per stirpes. If neither Jeffrey nor Jill have surviving descendants, one-half of the property will pass to Ann Huff 6 or her descendants per stirpes (unqualified persons), and the other half to Trust A.
Decedent's will further provided that if, at the termination of any trust created pursuant to her will, none of the other trusts exist to which property so designated can be distributed and there is no remainder beneficiary of the terminating trust, any property which might otherwise be distributed pursuant to her will shall be distributed to the University of Illinois 7 (an unqualified person). The parties have agreed that the actuarial probabilities that Anthony, Jeffrey or Jill will exercise their special powers of appointment in favor of either ‘qualified heirs‘ or unqualified persons are not susceptible of computation. 8
Section 2032A is a rather detailed self-contained relief provision. It permits valuing, for estate tax purposes, real property used for ‘farming purposes‘ on the basis of actual use rather than at the traditional fair market value. 9 This ‘special use valuation‘ usually results in an amount which is less than the traditional fair market value, thereby facilitating the reduction of estate tax to an amount more commensurate with the purposes for which the realty is being used.
Section 2032A statutory relief may be elected by an estate only if specific requirements are met.10 The parties agree that all of the requirements have been met, except the requirement that the property ‘was acquired from or passed from the decedent to a qualified heir of the decedent.‘ Sec. 2032A(b)(1). Section 2032A(e)(9)(C) is silent regarding the acquisition of real property by means of successive interests. 11
Respondent argues that the special powers of appointment granted to decedent's three grandchildren enable them to pass the property to an unqualified person of their choice; consequently, all of decedent's interest did not pass to a qualified heir as required by section 20.2032A-8(a)(2), Estate Tax-Regs. Respondent also contends that the remote possibility of a gift over to Ann Huff, her descendants, or the University of Illinois disqualifies section 2032A valuation. Petitioner, on the other hand, contends that decedent's interest has passed only to qualified heirs, therefore the remote possibility of any interest passing to an unqualified person should not be permitted to defeat decedent's dispositive scheme which, in all other respects, fits within the intent of Congress.
We agree with petitioner. Section 2032A does not directly address this point, and the farm herein clearly fits within the category of farms Congress intended to assist. Under these facts, to the extent that this result is prohibited by section 20.2032-8(a)(2), Estate Tax Regs., we find it to be invalid. The congressional purpose in enacting section 2032A was to aid the preservation of family farms, allowing them to pass from one generation to another. Should we adopt respondent's inflexible approach, the intended relief will not occur and decedent's heirs may be forced into the undesirable position of valuing the farm at its highest and best use, rather than its actual and existing family use. This is exactly what Congress sought to prevent by enacting section 2032A.
Congressional concern for the effect of estate tax upon family farms 12 prompted the enactment of section 2032A. 13 Congress was aware that some estates would seek the tax relief afforded by the statute and then discontinue the family farm either by disposing of it or changing the use of the land. Such a windfall was curtailed through the enactment of a recapture provision. 14 Congress initially chose a 15-year period 15 in which to require the operation of the family farm, during which time the farm could not be disposed of without adverse tax consequences. 16
The promulgators of the regulations, in an attempt to expand upon the meaning of the phrase ‘passed from decedent to a qualified heir,‘ however, have restricted the relief to unconditional owners in fee simple absolute or its equivalence. 17 Estate Tax Regs. section 20.2032A-8(a)(2) states that where successive interests are in the heirs, remainder interests must not be contingent upon surviving a nonfamily member or vested subject to divestment in favor of a nonfamily member. 18 Respondent, through the ruling and briefs herein, interprets this regulation as disallowing special use valuation where a qualified heir possesses a life estate with a special power of appointment.
Respondent relies on Rev. Rul. 82-140, 1982-2 C.B. 208. Under the facts of the ruling, decedent bequeathed a life estate in his farm to his child, a qualified heir. The child was also given a testamentary special power of appointment over the remainder interest. Under the terms of the will, the property would pass to decedent's...
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