Rev. Rul. 85-66

1985-1 C.B. 324, 1985-21 I.R.B. 12.

VALUATION; FARMLAND

Published: May 28, 1985

Section 2032A.-Valuation of Certain Farm, Etc., Real Property, 26 CFR 20.2032A- 3: Material participation requirements for valuation of certain farm closely- held business real property.

  Valuation; farmland. The sale of 5 acres of farmland by 3 qualified heirs to one of the qualified heirs and that heirs spouse, followed by construction of their house thereon, did not constitute a disposition or cessation of qualified use with respect to the 5-acre parcel. The qualified heir and spouse must sign a consent agreement for personal liability for additional estate tax.

ISSUE

  Will the sale of 5 acres of farmland by three qualified heirs to another qualified heir and that heir's spouse, and the construction of a house on those 5 acres, be either a disposition of qualified property or a cessation of qualified use under section 2032A(c) of the Internal Revenue Code? If not, will the qualified heir and spouse who purchased the 5 acres of farmland be required to sign a consent agreement?

FACTS

  D died in 1982 survived by three children, A, B, and C. D's will bequeathed D's interest in 450 acres of farmland to A, B, and C in undivided one-third interests to each child. The executor of D's estate filed a timely estate tax return and elected special use valuation under section 2032A of the Code for the farmland D had owned. After D died, A, B, and C jointly managed the farm they inherited from D. No buildings existed on the farm prior to D's death. In 1983, C and C's spouse acquired title to 5 acres of the farm as joint owners, by sale from the three original qualified heirs, and built a house on those 5 acres. The five acres and the house that C and C's spouse constructed thereon are being used as a residence by C and C's spouse, and C will continue to be one of the co-owners and co-managers of the farm.

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 was used for farming purposes may be valued on the basis of its current use value rather than its fair market value.

  However, section 2023A(c)(1) of the Code, effective for the estate of a decedent who died after December 31, 1981, imposes additional estate tax if, within 10 years after the decedent's death and before the death of the qualified heir.

  (A) the qualified heir disposes of any interest in qualified real property  (other than by a disposition to a member of his family), or

  (B) the qualified heir ceases to use for the qualified use the qualified real property which was acquired (or passed) from the decedent.

  Section 2032A(e)(3) of the Code provides, in part, that in the case of real property meeting the requirements of section 2032A(b)(1)(C), residential buildings and related improvements on such real property occupied on a regular basis by the owner will be treated as real property devoted to a qualified use.

  Section 2032A(d)(2) of the Code requires that each person who has an interest in specially valued property sign a written agreement consenting to liability for additional estate tax in the event of certain early dispositions of the property or early cessation of the qualified use.

  Section 2032A(e)(1) of the Code provides that if a qualified heir disposes of any interest in qualified real property to any member of his or her family, such member shall thereafter be treated as the qualified heir with respect to such interest.

  Section 2032A(e)(2) defines 'member of the family', with respect to any individual, as

  (A) an ancestor of such individual,

  (B) the spouse of such individual,

  (C) a lineal descendant of such individual, of such individual's spouse, or of a parent of such individual, or

  (D) the spouse of any lineal descendant described in (C) above.

  In this case, the transfer of the 5-acre parcel was a transfer from 3 qualified heirs to another qualified heir and that heir's spouse. C's spouse is a member of C's family and is considered a member of A's and B's family as the spouse of a lineal descendant of the parent of A and B. Thus, section 2032A(c)(1)(A) is not applicable, since a disposition described in section 2032A(c)(1)(A) has not occurred.

  Furthermore, because a residential building was built on the 5-acre parcel and will be occupied by qualified heirs, who will continue as co-owners, the land on which the house is located meets the requirements of section 2032A(e)(3) of the Code. Thus, the 5-acre parcel and the house thereon will be treated as real property devoted to a qualified use and section 2032A(c)(1)(B) is not applicable.

  Accordingly, there has been no cessation of qualified use with respect to the 5-acre parcel, and thus there is no additional estate tax liability under section 2032A(c) of the Code.

  However, C and C's spouse must execute and sign a written agreement consenting to personal liability for additional estate tax that may arise in the event of an early disposition or early cessation of qualified use with respect to the 5-acre parcel, in order to satisfy the requirements of section 2032A(d)(2) of the Code.

HOLDING

  The sale of 5 acres of farmland from 3 qualified heirs to one of the qualified heirs and that heir's spouse, followed by construction of their house thereon, did not constitute a disposition of cessation of qualified use with respect to the 5-acre parcel. Also, the qualified heir and that heir's spouse must sign a consent agreement for personal liability for additional estate tax.