Rev. Rul. 89-30

1989-1 C.B. 274, 1989-9 I.R.B. 31.

                       Internal Revenue Service

                                 Revenue Ruling

                  VALUATION; SPECIAL USE; METHOD OF VALUATION

                          Published: February 27, 1989

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

  Valuation; special use; method of valuation. An executor electing to value foram property under section 2032A(e)(8) of the Code must apply all of the factors stated in section 2032A(e)(8) that are relevant in that particular valuation.

  An individual died in 1987 owning a farm. On the decedent's estate tax return, the executor elected special-use valuation for the farm property. The executor elected to value the farm under section 2032A(e)(8), rather than using the method provided in section 2032A(e)(7)(A). The executor stated a farm use value that was based exclusively on the assessed land value factor, one of the five factors listed in section 2032A(e)(8), rather than using all five factors.

  ISSUE. In specially valuing farm property under section 2032A, may an executor select one of the five factors provided in section 2032A(e)(8) as the exclusive basis for farm valuation?

  HOLDING. The Service has held that an executor may not use one of the five valuation factors provided in section 2032A(e)(8) as the exclusive basis for farm valuation, but must apply all five of the listed factors when they are relevant in making the valuation.

  ANALYSIS. The Service looked to the statutory language of section 2032A(e)(8) and noted that the valuation method is based on the application of five valuation factors and the subsection uses the conjunction 'and' to connect such factors. The Service also found that the legislative history supports its position. Accordingly, the Service concluded that an executor who elects to use section 2032A(e)(8) to specially value farmland must use all five factors listed when they are relevant in making the valuation.

ISSUE

  In specially valuing farm property under section 2032A of the Internal Revenue Code, may an executor select one of the five valuation factors provided in section 2032A(e)(8) as the exclusive basis for the farm valuation?

FACTS

  D died in 1987 owning a farm. On the federal estate tax return filed for D's estate, the executor elected to value the farm as qualified real property under section 2032A of the Code. In addition, the executor elected under section 2032A(e)(7)(C) to value the farm, for farming purposes, using the method provided in section 2032A(e)(8), rather than using the method provided in section 2032A(e)(7)(A). The executor stated a farm use value that was based exclusively on the assessed land value factor, one of the five valuation factors provided in section 2032A(e)(8).

  Upon the Service's examination of the federal estate tax return, the executor contended that section 2032A(e)(8) provides an election with respect to the prescribed valuation factors to be used in valuing farm property. Further, having selected the assessed land value as the sole valuation factor for D's farm, the executor contended that none of the other section 2032A(e)(8) factors was applicable.

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.

  Section 2032A(e)(7)(A) of the Code provides that, with certain exceptions, 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 such 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.

  Section 2032A(e)(7)(C) of the Code provides that the formula in section 2032A(e)(7)(A) shall not be used where the executor elects to have the value of the farm for farming purposes determined under section 2032A(e)(8).

  Section 2032A(e)(8) of the Code provides that, in any case to which section 2032A(e)(7)(A) does not apply, the following factors shall apply in determining the value of any qualified real property:

    (A) The capitalization of income that the property can be expected to yield for farming purposes over a reasonable period of time under prudent management using traditional cropping patterns for the area, taking into account soil capacity, terrain configuration, and similar factors,

    (B) The capitalization of the fair rental value of the land for farmland purposes,

    (C) Assessed land values in a state that provides a differential or use value assessment law for farmland,

    (D) Comparable sales of other farmland in the same geographical area far enough removed from a metropolitan or resort area so that nonagricultural use is not a significant factor in the sales price, and

    (E) Any other factor that fairly values the farm value of the property.

  In addition to the initial election to value farm property, based on its use for farming purposes, as qualified real property under section 2032A(a) of the Code, section 2032A provides another election under which the executor may choose to value the farm property in accordance with either the method provided for in section 2032A(e)(7)(A) or the method provided in section 2032A(e)(8). Rev. Rul. 83-115, 1983-2 C.B. 155. The section 2032A(e)(7)(A) method of valuation is based, in part, on information on rental of comparable property and the application of a formula. Rev. Rul. 83-115 at 156.

  The section 2032A(e)(8) method is based on the application of five valuation factors. That section expressly states that such 'factors' shall apply and uses the conjunction 'and' to interconnect such factors. This statutory language is further explained by the accompanying legislative history which provides that all the relevant factors prescribed in section 2032A(e)(8) are taken into account when the multiple factor method of valuation in section 2032A(e)(8) is elected. See S. Rep. No. 938 (Part 2), 94th Cong., 2d Sess. 15 (1976), 1976-3 (Vol. 3) C.B. 643, 657; H.R. Rep. No. 1380, 94th Cong. 2d Sess. 24, 1976-3 (Vol. 3) C.B. 758. However, in each case, only those factors that are relevant are applied in the respective valuation and, depending upon the circumstances, certain factors may carry more weight than others. See Rev. Rul. 59-60 (Sec. 5), 1959-1 C.B. 237. Consequently, section 2032A(e)(8) does not allow an executor to elect one valuation factor to the exclusion of the other valuation factors provided.

  In this case, because the executor elected to value D's farm using the method provided for in section 2032A(e)(8), the farm was to be valued based upon the multiple factors therein. Therefore, notwithstanding the executor's selection of the assessed land value as the exclusive basis for the farm value stated on the federal estate tax return, the other valuation factors provided for in section 2032A(e)(8) are applicable to determine the value of the farm used for farming purposes.

HOLDING

  In specially valuing farm property under section 2032A of the Cod, an executor may not select one of the five valuation factors provided in section 2032A(e)(8) as the exclusive basis for the farm valuation.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Deborah Ryan of the Office of The 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).

Rev. Rul. 89-30, 1989-1 C.B. 274, 1989-9 I.R.B. 31.