Estate of Killion v. Commissioner

MEMORANDUM OPINION

STERRETT, Chief Judge:^* By notice of deficiency dated October 9, 1984, respondent determined a deficiency of $ 567,073.00 in petitioner's Federal estate tax. After concessions, the issues for decision are: 1) whether *272 petitioner may claim Special Use Values pursuant to section 2032A¹ with respect to four tracts of farmland; and 2) whether petitioner must include in the decedent's gross estate certain stock of the Federal Land Bank Association.

The parties submitted this case on fully stipulated facts pursuant to Rule 122. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

Petitioner is the estate of decedent, Lillian DeLisle Killion, who died testate on January 21, 1981. The executor of decedent's estate, James R. Killion, resided in Portageville, Missouri, at the time the petition was filed. On October 21, 1981, petitioner filed a Form 706, United States Estate Tax Return, with the Office of the Internal Revenue Service in Kansas city, Missouri. On that return, petitioner valued four tracts of farmland owned by decedent at her *273 death at a "Special Use Value," as defined under section 2032A, of $ 748,305. The four tracts otherwise had an aggregate fair market value of $ 1,439,306.

When filing the estate tax return, petitioner checked the appropriate box on the return to indicate petitioner's intent to value the four tracts at their Special Use Values. However, petitioner provided almost none of the information specified in the instructions on the return ^{2*274 *275} and listed only the names of James R. Killion and Mary Ann Wilson, decedent's son and daughter, as the persons having an interest in the estate when, in reality, decedent's granchildren, under testamentary trust provisions in decedent's will, had interests in the farmland. ^{3*276 *277}

On September 9, 1983, almost 2 years after filing the original estate tax return, petitioner filed a "First Amendment to Special Use Election" that included most of the information specified under the rules and regulations for section 2032A elections. ^4*278 Subsequently, on or about October 30, 1986, petitioner provided respondent with appraisals of the fair market value of the decedent's farmland.

Additionally, although decedent owed $ 374,789 at her death to the Federal Land Bank of Caruthersville, she owned stock in the bank that otherwise would reduce her indebtedness, at retirement, by the face value ($ 18,050) of the stock. On decedent's estate tax return, however, the executor reduced the value of decedent's estate by the full amount of her indebtedness without taking into account the offsetting face value of the stock. ⁵

In his notice of deficiency, respondent determined that petitioner could not claim Special Use Values pursuant to section 2032A because petitioner failed to include with its estate tax return either the necessary *279 information or a "Personal Liability Agreement" signed by al potential devisees of the farmland, pursuant to the rules and regulations for section 2032A elections. Respondent also determined that petitioner, in valuing decedent's gross estate, failed to take into account the face value of the Federal Land Bank stock and, accordingly, undervalued the estate by $ 18,050) of the stock. On decedent's estate tax return, however, the executor reduced the value of decedent's estate by the full amount of her indebtedness without taking into account the offsetting face value of the stock.

Petitioner has challenged these determinations in its petition and hence the issues are framed.

Section 2032A. We have noted that respondent contends that petitioner may not claim Special Use Values under section 2032A because it failed to file a notice of election in substantial complaince with the rules and regulations for section 2032A elections or in accordance with the instructions on petitioner's estate tax return. Petitioner, on the other hand, argues that it manifested sufficient intent on the return to elect Special Use Values and that, considering certain local customs and other equitable considerations, *280 it properly claimed, or must be allowed to claim, Special Use Values for the farmland. ⁶ For the reasons discussed below, however, we hold for respondent on this issue.

In general, under section 2032A, estates may value certain qualifying farms and other real property used in a trade or business according to the property's actual use at the time of a decedent's death, rather than according to the property's fair market value based upon its highest and best use. See sec. 2032A(e)(7); see generally Estate of Geiger v. Commissioner,80 T.C. 484, 487-488 (1983). In the present case, respondent argues that, although petitioner otherwise was eligible to elect Special Use Values, ⁷ it did not file a valid notice of election and therefore cannot claim Special Use Values. In this regard, section 2032A(d)(1) specifies that a valid Special Use Value election "shall be made on the return * * *281 * in such manner as the Secretary shall by regulations prescribe." Correspondingly, the regulations specify the informational reporting requirements for making the election by requiring taxpayers to attach a notice of election that includes various items of information ³ to their otherwise timely filed estate tax returns. Sec. 2023A(d)(1); sec. 20.2032A-8(a)(3), Estate Tax Regs.

In order to claim Special Use Values, the estate must meet the specific requirements of section 2023A. Estate of Clinard v. Commissioner,86 T.C. 1180, 1184 (1986); see also Estate of Cowser v. Commissioner,736 F.2d 1168 (7th Cir. 1984), affg. 80 T.C. 783 (1983); Estate of Abell v. Commissioner, 83 T.C, 696*282 (1984). ⁹ Petitioner apparently does not challenge that one such requirement concerns the informational reporting requirements of section 2032A(d) and the corresponding regulations. In the present case, petitioner provided almost none of the requisite information on its original return and did not, therefore, make a valid section 2032A election. McDonald v. Commissioner,89 T.C. 293, 304-305 (1987); see also Estate of Geiger v. Commissioner, supra at 488; cf. Estate of Abell v. Commissioner, supra at 699.

Petitioner, however, points to its filing on September 9, 1983, of a "First Amendment to Special Use Election." Indeed, that document, as respondent concedes on brief, contains substantially all the information that petitioner omitted from its original return. However, we previously have addressed analogous situations where taxpayers submitted the necessary information in an untimely manner, and we have found their submissions insufficient *283 to cure the original defects in their returns. Estate of Gunland v. Commissioner,88 T.C. 1453 (1987); see McDonald v. Commissioner, supra.Similarly, we find that petitioner, by filing a "First Amendment to Special Use Election" almost 2 years after filing its original tax return, did not sufficiently cure the defects in its original filing.

Petitioner also argues that Congress, by amending section 2032A in Tax Reform Act of 1986 (the "1986 Act"), allowed estates to cure certain defects in their elections in certain cases of decedents dying before January 1, 1986. See the 1986 Act, Pub. L. 99-514, sec. 1421(a), 100 Stat. 2717. Apparently, petitioner argues thereby that under section 2032A(d)(3) and the 1986 Act amendments, it is entitled to 90 days additional time in which to cure any defects in its election. ^10*285 However, the legislative history to the 1986 Act indicates that Congress acted specifically to compensate for incomplete instructions in one particular edition of Form 706. H. Rept. 99-841, (Conf.) at 770-771 (1986) (to accompany H.R. 3838), 1986-3 C.B. (Vol.4) 770-771. In the present case, petitioner does not contend, and the record contains no evidence, that petitioner *284 used the particular edition of Form 706 targeted by the 1986 Act. In addition, section 1421 of the 1986 Act provides relief only in situations involving taxpayers who provided substantially all the required information with their original returns. See the 1986 Act, supra; McDonald v. Commissioner, supra at 306-308. In this regard, Congress added section 2032A(d)(3) in the Deficit Reduction Act of 1984 (the "1984 Act") to permit taxpayers to perfect, effectuate or correct their section 2032A elections "only in cases where the estate tax return, as filed, evidences substantial compliance with the requirements of the Treasury regulations." H. Rept. 98-861 (1984), 1984-3 C.B. (Vol. 2) 495.

In the present case,k and as discussed above, petitioner included almost none of the requisite information with its original return and, therefore, did not substantially comply with the requirements of section 2032A(d)(1) and its regulations. Thus, the 1986 Act amendments do not provide relief in the present case and, similarly, petitioner is not entitled to additional time under section 2032A(d)(3) within which to perfect its purported section 2032A election.

Petitioner also argues that by checking the appropriate questionnaire box on its estate tax return, it manifested sufficient intent to claim Special Use Values for the farmland. Having manifested that intent, petitioner, citing Prussner v. United States, an unpublished order ( C.D. Ill. 1987, 87-2 USTC par. 13,739), and the aforementioned addition of section 2032A(d)(3) by the 1984 Act, apparently argues that it may cure an *286 otherwise defective election by filing a document such as its "First Amendment to Special Use Election." However, both the order in Prussner v. United States, supra, and the 1984 Act amendments address situations in which taxpayers have complied substantially with the informational reporting requirements of section 2032A(d)(1) and the regulations thereunder and may, therefore, cure the otherwise minor defects in their original filings. See sec. 2032A(d)(3)(B); Prussner v. United States, supra. The facts herein are otherwise.

Petitioner presents other arguments on brief to the effect that "The practical procedure of the Special Use Valuation depends to a large extent on the indivudal personality and attitude of the examiner and his reviewer," and reasons thereby that it should be allowed 90 additional days to comply with the information reporting requirements. However, we find no evidence in the record to support petitioner's contentions with respect to the alleged actions of the examining agents, ^11*287 or to support petitioner's related arguments concerning the alleged local practices and practical procedures*of Special Use Value elections in petitioner's particular jurisdiction.

Accordingly, we hold that petitioner may not claim Special Use Values with respect to decedent's farmland. ¹²

Federal Land Bank Stock. Respondent argues that petitioner must include the full face value ($ 18,050) of the Federal Land Bank Association stock in decedent's gross estate because the stock operates, dollar for dollar, to reduce that indebtedness *288 at retirement and that, by contrast, petitioner deducted the full amount of the indebtedness from decedent's gross estate without taking the stock into consideration. ¹³

Petitioner, on the other hand, asserts that because the bank reduced the initial loan proceeds to decedent by the face value of the stock, the stock merely increased the effective interest rate to decedent and not the value of her gross estate. In addition, petitioner, despite citing no authority for its proposition, contends that the face value of the stock, if includable in decedent's gross estate, somehow should be discounted. Petitioner's assertions apparently address respondent's argument that because decedent secured her loan with the stock, that the full face value of the stock is includable in her gross estate. ¹⁴ Notwithstanding these arguments, we hold for respondent on this issue for the following reasons.

Petitioner must include the value *289 of all property, real or personal, tangible or intangible and owned by decedent on the date of her death, in her gross estate. Sec. 2031 and 2033. Although decedent, as respondent concedes on brief, could not sell or transfer her stock independently of her indebtedness to the bank, we agree with respondent that relative to her outstanding indebtedness, her stock had a value of $ 18,050. Conversely, however, petitioner contends on brief that "It is self-evident that 'property' which cannot be sold and produces no income does not have a market value," and that, at a minimum, the face value of the stock must somehow be discounted. Indeed, respondent concedes that decedent could not sell her stock and that it produced no income. However, petitioner presents no evidence and cites no authority relating to the amount or the extent tot which it may discount the stock. Quite simply, petitioner has failed to establish a value for the stock differing from the full face value that reduced, dollar for dollar, decedent's corresponding liability to the bank.

Accordingly, we find that the stock had a value of $ 18,050 to the estate and hold, therefore, that the stock properly is includable in *290 decedent's gross estate at the full face value.

To reflect the concessions ¹⁵ and the foregoing,

Decision will be entered under Rule 155.