Rev. Rul. 83-96

1983-2 C.B. 156.

                       Internal Revenue Service
                                 Revenue Ruling

                   SPECIAL USE VALUATION;  COMMUNITY PROPERTY

                            Published: July 11, 1983

26 CFR 20.2032A-8: Election and agreement to have certain property valued under section 2032A for estate tax purposes

  Special use valuation;  community property.  Where an executor elects special use valuation under section 2032A of the Code, the full limitation imposed by section 2032A(e)(2) applies to the decedent's qualified community property interest if the decedent was a noncontributory spouse.  The result is the same regardless of the extent to which the decedent contributed towards the purchase of the property.

ISSUE

  Where an executor elects special use valuation under section 2032A of the Internal Revenue Code, what portion of the limitation imposed by section 2032A(a)(2) applies to the decedent's community property interest if the decedent made no contribution towards the purchase of the property?

FACTS

  D died in 1980, a resident of State X, a community property state.  D's gross estate included D's community interest in a farm located in X, and D's executor elected to value the farmland under section 2032A of the Code.  D had not produced any of the income of the community during the period of marriage.

LAW AND ANALYSIS

  Section 2032A of the Code provides that, if certain conditions are satisfied, real property includible in a decedent's gross estate that is used for farming or other closely held business purposes may be valued on the basis of its current use rather than its fair market value.  Section 2032A(a)(2) limits the aggregate decrease in the value of qualified real property allowable under section 2032A to $500,000 for decedents dying in 1980.  In the case of decedents dying in 1981, 1982, and 1983 and thereafter, the limit is $600,000, $700,000, and $750,000, respectively.

  Section 2032A(e)(10) of the Code provides that, if the decedent and the decedent's spouse held qualified real property as community property, the interest of the surviving spouse in such property shall be taken into account to the extent necessary to provide a result under section 2032A which is consistent with the result which would have obtained if such property had not been community property.  The legislative history of section 2032A(e)(10) indicates that the purpose of the section is to ensure the same special use valuation treatment for qualified community property as is accorded qualified property owned in a common law jurisdiction.  To achieve this result, a decedent's community property interest is to be treated as if owned by the decedent as an individual.  See S.Rep. No. 95-745, 95th Cong., 2d Sess. 84 (1978).  Thus, under section 2032A(e)(10) the decedent's community property interest is to be treated in the same manner as a comparable common law interest.

  For federal estate tax purposes, a type of common law ownership that approximates community property ownership is the tenancy in common form because, in both forms of ownership, each spouse owns an undivided one-half interest in the property, there is no right of survivorship, and for federal estate tax purposes the amount contributed by each spouse towards the purchase of the property is not relevant in determining the amount includible in the gross estate.

  In the present case, if D held the qualified real property as a tenant in common with D's spouse, one-half of the total value of the property would be includible in D's gross estate, regardless of D's contribution, and the full $500,000 limitation imposed by section 2032A(a)(2) of the Code would apply.  As discussed above, the application of section 2032A should be the same where, as in the present case, the property was held as community property.  Thus, the full $500,000 limitation for 1980 applies to D's estate.

  An alternative rationale is that D's community property interest is more closely analogous to a common law tenancy by the entirety (or joint tenancy) where equal contribution is presumed. The common law tenancy by the entirety, like the community property form of ownership, is based on the special nature of the marriage relationship.  Further, where equal contribution is presumed, one-half the value of the property is includible in the gross estate.  See section 2040(a) prior to amendment by the Economic Recovery Tax Act of 1981. Under either rationale, the full limitation under section 2032A(a)(2) applies.

  Further, the result would be the same if D died after December 31, 1981, the effective date of the Economic Recovery Tax Act of 1981.  Thus, in the present case, had D died in 1982, the full $700,000 limitation applicable to D's estate for that year would be applied to D's one-half community interest.

HOLDING

  Where an executor elects the special use valuation of section 2032A of the Code, the full limitation imposed by section 2032A(e)(2) applies to the decedent's qualified community property interest if the decedent was a noncontributory spouse.  The result is the same regardless of the extent to which the decedent contributed towards the purchase of the property.

Rev. Rul. 83-96, 1983-2 C.B. 156.