Rev. Rul. 83-32

1983-1 C.B. 226, 1983-8 I.R.B. 8.

                       Internal Revenue Service
                                 Revenue Ruling

     SPECIAL USE VALUATION;  FARMS;  MATERIAL PARTICIPATION; SELF-EMPLOYMENT
                                      TAX

                            Published: Feb. 22, 1983

SECTION 2032A. VALUATION OF CERTAIN FARM, ETC., REAL PROPERTY, 26 CFR 20.2032A- 3: Marital participation requirements for valuation of certain farm and closely-held business real property

(Also Sections 2053, 6501; 20.2053-4, 301.6501(a)-1.)

  Special use valuation;  farms;  material participation; self-employment tax.  For purposes of satisfying the material participation requirements for special use valuation under section 20.2032A-3(e) of the regulations, whereby all self- employment taxes determined to be due must be paid, the taxes required to be paid include only those that are not barred by the statute of limitations.

ISSUE

  For purposes of satisfying the material participation requirements for special use valuation under section 2032A of the Internal Revenue Code when the participant is self-employed with respect to the farm or business, does the requirement contained in section 20.2032A-3(e) of the Estate Tax Regulations that all self-employment taxes (including interest and penalties) determined to be due must be paid include those taxes for which assessment is barred by the statute of limitations?

FACTS

  D, the decedent died in 1981 owning a farm.  D had not been directly involved in the operation of the farm after 1975.

  D had timely filed Form 1040, U.S. Individual Income Tax Return, for the years 1976 through 1980 and fully reported all income from the farm.  However, none of the farm income was reported as self-employment income subject to the tax under section 1401.

  On the federal estate tax return filed for D's estate, the executor elected under section 2032A of the Code to value the farm based on its special use value.  In establishing that D's activities satisfied the material participation requirements of section 2032A(b)(1), the executor provided information demonstrating that 1) during the 5 years preceding death, D actively participated, to a material degree, in the management of the production of the farm commodities, 2) D was self-employed with respect to the farm, and 3) D had a sufficient reason for not paying the self-employment tax due for the years in question.  In an effort to pay all self-employment tax due, as required by section 20.2032A-3(e) of the Estate Tax Regulations, the executor filed amended income tax returns with the Internal Revenue Service and paid 10x dollars, the amount of self-employment tax that D should have paid for the years 1978 through 1980, and interest.  At the time the 10x dollars was paid, the period of limitations for assessing the self-employment tax for 1976 through 1977 had expired.  See Rev. Rul. 82-185, 1982-44 I.R.B. 8.  The executor timely filed D's federal income tax return for 1981 and paid the self- employment tax due for that year.

LAW AND ANALYSIS

  Section 2032A of the Code provides that if certain requirements are satisfied, the executor may elect to value real property used for farming purposes, as qualified real property (based on the property's value as a farm) rather than at its fair market value.  Under section 2032A(b), one of the requirements to be satisfied is that 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 there was material participation by the decedent or a member of the decedent's family in the operation of the farm.

  Section 2032A(e)(6) provides that material participation shall be determined in a manner similar to the manner used for purposes of paragraph (1) of section 1402(a) (relating to net earnings from self-employment).

  Section 20.2032A-3(e) of the regulations provides criteria for determining whether a participant's activities are equivalent to material participation. Under section 20.2032A-3(e), if the participant is self-employed with respect to the farm, and no self-employment taxes have been paid, material participation is presumed not to have occurred unless the executor demonstrates to the satisfaction of the Internal Revenue Service that material participation did in fact occur and informs the Service of the reason no such tax was paid. In addition, all such taxes (including interest and penalties) determined to be due must be paid.

  Section 6501(a) of the Code provides that, in general, tax must be assessed within 3 years after the return was filed.

  Section 6401(a) of the Code provides that the term "overpayment" includes that amount of the payment of any tax which is assessed or collected after the expiration of the period of limitation properly applicable thereto.

  Under Rev. Rul. 82-185, if a federal income tax return, Form 1040, was properly filed by a taxpayer and all income was reported, the period of limitations during which the tax on self-employment income, that should have been reported on that return, may be assessed is generally limited to the 3 years after the date the Form 1040 was filed, or the due date of the return, whichever is later.

  Because section 6501(a) of the Code provides for a period of limitations for assessment when a return has been filed, the amount of unreported self- employment tax that is due, for purposes of section 20.2032A-3(e) of the regulations, is determined by the limitations of section 6501(a).  Rev. Rul. 74-580, 1974-2 C.B. 400, holds that voluntary payments of tax, made after the expiration of the period of limitations for assessment, do not "waive" that statute.  Therefore, any payment that is assessed and paid after the expiration of the period of limitations on assessment, as provided in section 6501(a), is an overpayment subject to refund or credit.  In this situation, because the executor's payment of the unpaid 1976 and 1977 self-employment taxes would have resulted in an overpayment, the unpaid self-employment taxes for those years cannot be considered "taxes determined to be due" within the meaning of section 20.2032A-3(e) of the regulations.  Therefore, the amounts of self-employment tax due when the executor paid the 10x dollars, for purposes of section 20.2032A-3(e), were limited to those amounts that could be assessed for 1978, 1979 and 1980.  Further, such amounts actually paid by the executor are deductible under section 2053(a)(3) of the Code.

HOLDING

  For purposes of satisfying the material participation requirements for special use valuation under section 2032A of the Internal Revenue Code when the participant is self-employed with respect to the farm or business, the requirement contained in section 20.2032A-3(e) of the regulations that all self-employment taxes (including interest and penalties) determined to be due must be paid includes only those self-employment taxes that can be assessed at the time of the determination.

Rev. Rul. 83-32, 1983-1 C.B. 226, 1983-8 I.R.B. 8.