Rev. Rul. 88-89

1988-2 C.B. 333, 1988-42 I.R.B. 4.

                       Internal Revenue Service

                                 Revenue Ruling

     VALUATION; ELECTION OF BOTH ALTERNATE AND SPECIAL USE; VALUATION DATE

                          Published: October 17, 1988

26 CFR 20.2032A-4: Method of valuing farm real property

(Also Section 2032; 20.2032-1.)

  Valuation; election of both alternate and special use; valuation date. Computation methods are described in applying sections 2032 and 2032A of the Code when the executor of an estate elects both alternate valuation and special use valuation.

  An individual died on July 15, 1987, owning a farm and other property. The fair market value of the individual's farmland on the date of death was $1.8 million; at that time, the section 2032A(e)(7)(A) special use value of the farmland was $1 million - a savings of $800,000. Six months later, on the section 2032(a) alternate valuation date, the fair market value of the farmland was $1.65 million; its special use valuation at that time was $950,000 - a difference of $700,000. Section 2032A(a)(2) provides that the aggregate decrease in the value of real property as a result of qualified use valuation may not exceed $750,000.

  ISSUE. The issue in this revenue ruling is which valuation date the individual's executor should use - the date of death or the alternate valuation date - when both alternate valuation and special use valuation are elected.

  HOLDING. The Service has held that if the executor elects to use both section 2032(a) alternate valuation and section 2032A special use valuation, the computation of the value of the farm property for estate tax purposes should be made as of the alternate valuation date.

  ANALYSIS. The Service noted that although Rev. Rul. 83-31, 1983- 1 C.B. 225, states that an executor may elect both alternate valuation and special use valuation, the revenue ruling does not explain how to apply both valuation methods to the same asset. Without citing any further support for its conclusion, the Service then stated that '[i]f elections under sections 2032 and 2032A of the Code are made, it is necessary to determine the special use value of the farmland as of the alternate valuation date.' Consequently, the Service applied the section 2032A(e)(7)(A) computation as of the alternate valuation date six months after the decedent's death. Computation on this later date produces a $700,000 savings that falls within the section 2032A(a)(2) limit, even though the estate's total savings is $850,000.

                                     ISSUE

  If the executor of an estate elects to use both alternate valuation under section 2032 of the Internal Revenue Code and special use valuation under section 2032A(a) in valuing a decedent's farmland, what valuation date must the executor use in making the section 2032A(e) computation and in computing the limit described in section 2032A(a)(2)?

                                     FACTS

  D died on July 15, 1987, owning a farm and other property. Because the value of property in the estate decreased after D's death, the executor of D's estate elected alternate valuation under section 2032 of the Code. The executor also elected special use valuation under section 2032A for the farmland.

  The fair market value of D's farmland at the date of D's death was $1,800,000. The fair market value of D's farmland on the alternate valuation date (January 15, 1988) was $1,650,000. The special use value of D's farmland as of July 15, 1987, based on the rental computation described in section 2032A(e)(7)(A) of the Code, was $1,000,000 and the special use value as of January 15, 1988, using the computation described in section 2032A(e)(7)(A), was $950,000.

                                LAW AND ANALYSIS

  Section 2032(a) of the Code provides that the executor may elect to determine the value of all the property included in the gross estate as of 6 months after the decedent's death. However, property distributed, sold, exchanged, or otherwise disposed of within 6 months after death must be valued as of the date of distribution, sale, exchange, or other disposition.

  Section 2032A of the Code provides that, if certain requirements are satisfied, and if the executor timely elects real property used for farming purposes may be valued at the property's value based on use as farmland rather than at its fair market value based on its highest and best use.

  Section 2032A(e)(7)(A) of the Code provides that the value of a farm for farming purposes shall be determined by dividing i) the excess of the average annual gross cash rental for comparable land used for farming purposes and located in the locality of the farm over the average annual State and local real estate taxes for such comparable land, by ii) the average annual effective interest rate for all new Federal Land Bank loans for the locality of the farmland. Further, each average annual computation shall be made on the basis of the 5 most recent calendar years ending before the date of the decedent's death. In certain situations, other methods for special use valuation are available to the executor and are described in sections 2032A(e)(7)(B) and 2032A(e)(8).

  Section 2032A(a)(2) of the Code provides that the aggregate decrease in the value of qualified real property (here, a farm) as a result of valuing the property at its value for the qualified use (here, farming), rather than at its fair market value, shall not exceed $750,000 for decedents dying after 1982.

  Rev. Rul. 83-31, 1983-1 C.B. 225, states that in valuing property in a decedent's gross estate an executor may elect alternate valuation under section 2032 of the Code and special use valuation under section 2032A. However, Rev. Rul. 83-31 does not explain how to apply both valuation methods to the same asset.

  If elections under section 2032 and 2032A of the Code are made, it is necessary to determine the special use value of the farmland as of the alternate valuation date. Therefore, the executor's calculation under the valuation method set forth in section 2032A(e)(7)(A) must be made with reference to a valuation date that is applicable under section 2032. The average annual computations described in section 2032A(e)(7)(A) must be made on the basis of the 5 most recent calendar years ending before the alternate valuation date determined under section 2032. Because the computation for special use valuation is made with reference to values relating to the alternate valuation date, the farmland's fair market value at the alternate valuation date must be used in making the computation for purposes of applying the section 2032A(a)(2) limitation.

  Accordingly, in this case, for estate tax purposes, the decrease in the value of the qualified real property (the farmland) due to special use valuation is equal to the difference between $1,650,000 (the fair market value of D's farmland on the alternate valuation date) and $950,000 (the special use value of D's farmland on the alternate valuation date). This difference equals $700,000, which is less than the maximum amount allowable under section 2032A(a)(2) of the Code. Thus, the value for the farmland that is includible in the decedent's gross estate is $950,000.

  Similarly, if the farmland is valued by the executor under section 2032A(e)(7)(B) of the Code or under section 2032A(e)(8), the special use valuation computation for the farmland must also be made with reference to values as of the alternate valuation date.

                                    HOLDING

  If the executor of an estate makes elections under both section 2032 and section 2032A of the Code, the alternate valuation date under section 2032 must be used in valuing the decedent's farmland under section 2032A. Also, in applying the limit described in section 2032A(a)(2) for the estate tax saving due to special use valuation, the limit is applicable to the difference between the fair market value and the special use valuation of the property, determined as of the alternate valuation date.

                              DRAFTING INFORMATION

  The principal author of this revenue ruling is Gerald A. Consalvi of the Individual Tax Division. For further information regarding this revenue ruling contact Richard Grosgebauer on (202) 535-9508 (not a toll-free call).

Rev. Rul. 88-89, 1988-2 C.B. 333, 1988-42 I.R.B. 4.