Rev. Rul. 89-22
1989-1 C.B. 276, 1989-8 I.R.B. 5.
Internal Revenue Service
Revenue Ruling
VALUATION; SPECIAL USE; DISPOSITION BY QUALIFIED HEIR
Published: February 21, 1989
26 CFR 20.2032A-8: Election and agreement to have certain property valued under section 2032A for estate tax purposes.
Valuation; special use; disposition by qualified heir. A qualified heir's disposition of specially valued property to a transferee who is not a member of the qualified heir's family results in the imposition of the additional estate tax under section 2032A(c)(1) of the Code even though the transferee is a member of the decedent's family.
An individual died in 1984 and devised farmland to a nephew, a qualified heir of the decedent. The decedent's estate properly elected section 2032A special use valuation for the farmland. In 1987, the nephew sold the farmland to a cousin, who had also been a nephew of the decedent.
ISSUE. At issue is whether the qualified heir's sale of specially valued property to his cousin, who would have been a qualified heir of the decedent, but who is not a member of the devisee's family, causes the devisee to be liable for additional estate tax under section 2032A(c)(1).
HOLDING. The Service has ruled that the sale will result in additional estate tax liability for the qualified heir who received the property under the decedent's will because the cousin buying the property was not a member of the qualified heir's family.
ANALYSIS. The issue in this ruling boiled down to which family was intended to be covered by the statement in section 2032A(e)(2) that a qualified heir may dispose of qualified property to any 'member of his family,' without incurring additional estate tax. Under section 2032A(e)(2), the Service said, 'member of the family' means, with respect to any individual, 'only (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 a parent of such individual, or (D) the spouse of any lineal descendant described in (C).'
The Service concluded that, while the devisee under the decedent's will qualified as a lineal descendant of the decedent's parent, 'member of his family' refers to the qualified heir's family, not the decedent's family. Therefore, even though the individual who bought the farmland from the devisee could have received the property from the decedent as a qualified heir, his receipt of the property from the devisee does not qualify under section 2032A.
For further information on Rev. Rul. 89-22, contact Deborah Ryan of the Office of Chief Counsel (Passthroughs and Special Industries) at (202) 535- 9511.
ISSUE
If a qualified heir, as defined in section 2032A(e)(1) of the Internal Revenue Code, disposes of specially valued property to a transferee who is a member of the decedent's family, but who is not a member of the qualified heir's family, does the exception to the additional estate tax imposed by section 2032A(c)(1), on the early disposition of specially valued property, apply?
FACTS
The decedent, who died in 1984, devised farmland to A, a child of the decedent's older sibling. The property was qualified real property for purposes of section 2032A(b) of the Code. On the federal estate tax return filed for the decedent's estate, the executor elected under section 2032A to value the farmland at its qualified use value. The election, in all material respects, complied with the provisions of section 2032A and section 20.2032A-8 of the Estate Tax Regulations. In the agreement attached to the return, A consented to personal liability for any additional estate tax imposed in the event of an early disposition of the farmland. In 1987, A sold the farmland to B, a child of another sibling of the decedent.
LAW AND ANALYSIS
Section 2032A(a) of the Code provides that, if the executor elects the application of section 2032A and files the agreement referred to in section 2032A(d)(2), the value of qualified real property shall be its qualified use value rather than its fair market value.
Section 2032A(c)(1) of the Code provides, for estates of decedents dying after December 31, 1981, that if, within 10 years after the decedent's death and before the death of the qualified heir, the qualified heir disposes of any interest in qualified real property, other than by a disposition to a 'member of his family,' there is imposed an additional estate tax.
Section 2032A(e)(1) of the Code provides, for estates of decedents dying after December 31, 1981, that the term 'qualified heir' means, with respect to any property, a member of the decedent's family who acquired such property (or to whom such property passed) from the decedent. If a qualified heir disposes of any interest in qualified real property to any 'member of his family,' such member shall thereafter be treated as the qualified heir with respect to such interest.
Section 2032A(e)(2) of the Code provides that the term 'member of the family' means, with respect to any individual, only (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).
Under section 2032A(c)(1) of the Code, a qualified heir's transfer of specially valued farm property during the ten year period after the decedent's death generally results in the imposition of an additional estate tax. Section 2032A(c)(1)(A) provides an exception from the additional tax for a transfer by a qualified heir to a 'member of his family.'
In this case, B is a member of the decedent's family under section 2032A(e)(2)(C), as a lineal descendant of the decedent's parent. However, the phrase 'member of his family' in section 2032A(c)(1)(A) refers to the qualified heir's family, not the decedent's family. Thus, property can only be disposed of during the recapture period without imposition of a recapture tax if the the transfer is to a member of the qualified heir's family. See S. Rep. No. 176 (Conf. Rep.), 97th Cong., 1st Sess. 253 (1981). Notwithstanding B's relationship to A (as a cousin), B is not a member of A's family under the definition provided in section 2032A(e)(2). Therefore, the sale of the farmland by A to B is subject to the additional estate tax imposed by section 2032A(c)(1).
HOLDING
If a qualified heir disposes of specially valued property to a transferee who is a member of the decedent's family, but who is not a member of the qualified heir's family, the exception to the additional estate tax imposed by section 2032A(c)(1), on the early disposition of specially valued property, does not apply.
DRAFTING INFORMATION
The principal author of this revenue ruling is Deborah Ryan of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Ms. Ryan on (202) 535-9511 (not a toll-free call).