Lapas attēli



Mr. Henry Eschwege


To prevent nonfarm investors from ab us ing the tax loan privileges, restrictions would have to be imposed. There is no reason to assume that such restrictions would ease the administrative and eligibility problems currently associated with the special use valuation law.


If the special use valuation law remains in existence, it should be changed such that it provides for a siaple exclusion of a fraction of the value of the farm estate.

The Department has reservations regarding this recommendation but finds it preferable to recommendation A. This proposal would clearly simplify a law which is extremely complex. More farm owners could take advantage of the law. In addition, since the exclusion would be applied to the farm estate, holdings in the forms of equipment, livestock, and machinery would be considered in distributing tax savings. This would be particularly helpful to those who rent the land they farm. Incentives to distort capital investment would also be reduced. While some fara estates would receive potentially smaller tax reductions, more farms would be able to use the provisions. Administrative and compliance costs would be significantly reduced and Congressional intent would be better served.

Thus, this proposal would improve the special use valuation law. This proposal would be even more equitable if implemented in the form of a credit, thus yielding similar benefits to all farms regardless of size.

However, assigning a fixed fraction of the estate's fair market value as its taxab le base would not generate a "use" value. Rather, a pure preferentiallyapplied value would be used. It is questionable whether the current law creates a use value or some value lower than fair market value. The GAC proposal would strip the law of its intent to determine a true value for farmland by replacing the mathematically derived value with an arbitrary preferential treatment.

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GAO response

The Department of Agriculture states that the study did not measure the extent to which land has been kept in farming. We believe that preferential treatment reduces the chance of farm estate shrinkage due to the tax. It is less successful as a land use planning device. The sale and conversion of farmland for alternative use is the result of many other pertinent factors, not necessarily because of the Federal estate tax. Our major objective was to study the liquidity situation of a farm family at the time of death and the effectiveness of special estate tax provisions in relieving any liquidity problems that could threaten continuation of the family farming business.

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Thank you for the opportunity to review the General
Accounting Office draft report entitled "The Effects of
Special Estate Tax Provisions on Family Owned Parms."

We would like to make a general observation and two specific points with respect to the draft report. However, before proceeding, we wish to compliment you and your staff on an excellent, thorough and thoughtful analysis of this difficult area.

Our general observation concerns the summary of Congressional intent behind section 2032A. The draft report separates this intent into two parts: a concern with the highest and best use measurement of value, and a concern with speculation" in general. ( See pages 3-2, 3-10.)

We believe the Congress was concerned only with the problems created by the highest and best use measurement, not with other, nondefined factors leading to speculative value. The legislative history (H.R. Rep. No. 94-1380, 94th Cong., 28 Sess. 21, incorporated by H.R. Rep. No. 94-1515, 94th Cong., 2d sess. 607 (statement of managers) (1976)) refers to speculation, but we believe this reference is to the speculation inherent in applying a highest and best use neasurement, that is, speculation as to other uses for the property. Speculative value in general is not addressed in the legislative history, and we find no indication of what it could have been intended to mean. If the references in the draft report are to speculation reflecting increases in value due to inflation, then the analysis would apply equally well to a number of nonfarm assets such as jewels and paintings. Since the focus of section 2032A was to relieve valuation pressures on family farms and real property in closelyheld businesses, and the specific problem addressed was speculation" as to highest and best use, we conclude that only the highest and best use issue is addressed by the statute.

Our two specific points relate to statements in the draft report.

First, at page 2-10, the report indicates that congress did not define what is meant by material participation. This




is not entirely accurate. Section 2032A(e) (6) provides that naterial participation shall be determined in a banner sinilar to the nanner used for purposes of paragraph (1) of section 1402(a) (relating to net earnings from self enploynent.)" The final regulations under this section follow this instruction and, we believe, provide substantial guidance in applying this requirement.

Second, the report indicates at page 4-10 that where it is uncommon for fars to be rented for cash, these farms are 'often unable to elect special use valuation." This statenent should be modified to indicate that where there are no conparable cash rents, fari8 are unable to use the formula or farı nethod. Such farns are, however, eligible to use the nultiple factor nethod in section 2032A(e) (8) if the other requirenents of section 2032A have been neet.

Because the administration of the tax laws is exclusively within the jurisdiction of the Internal Revenue Service, we have no comment with respect to the draft report's observations as to problems in administering section 2032A.

Finally, we have not had an opportunity to fully consider the recomendations for legislative change nade by the draft report, but they are tinely since we are currently engaged in a review of the entire estate tax area.



John B. Chapotog
Assistant Secretary

(Tax Policy)

Mr. Willian J. Anderson
General Government Division
General Accounting Office
Washington, D. C. 20548



GAO response

The Department of the Treasury believes that "the Congress was concerned only with the problems created by the highest and best use measurement, not with other, nondefined factors leading to speculative value." The legislative history includes the report of the Staff of the Joint Committee on Taxation, "General Explanation of the Tax Reform Act of 1976," (H.R. 10612, 94th Cong., P.L. 94-455) (1976). On page 537, the report states that "where the valuation of land reflects speculation to such a degree that the price of the land does not bear a reasonable relationship to its earning capacity, the Congress believed it unreasonable to require that this "speculative value" be included in an estate with respect to land devoted to farming or closely held businesses.

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