My name is Bob Furleigh from Route 2, Clear Lake, Iowa. I am a farmer from north central Iowa and I'm here to describe the effect of a recent administrative regulation by the Internal Revenue Service regarding valuation of estates for Federal Estate Tax purposes.

My father, Bob Furleigh Sr., died in February of this year at the age of 87 and owning about 265 acres of farm and pasture land which had a Federal Land Bank martgage. There was not much cash in his estate, so there is no money in the estate to pay the Federal Estate Tax, the State Inheritance Taxes, or the Administrative costs.

This comes at a time when my lender is advising me to start aiming toward debt reduction because of the current high interest rates and my high debt load. He's offering this same advice to many farmers in our area this year.

Perhaps we farmers are not often very good estate planners, but we had worked some with our attorney and had a copy of Dr. Neil Harl's book on Farm Estate and Business Planning. We know there is a unified credit against Federal Estate Tax and we also knew there was a "use" valuation procedure which applied to family farms and small businesses. By utilizing the use valuation as described in Dr. Harl's book, we had assumed we might be able to borrow enough more money against the farm to pay the Federal Estate Taxes, State Inheritance Taxes and administrative and legal expense.

When we contacted our attorney after our father's death, we were shocked to discover that since our edition of Dr. Harl's book, there had been an administrative regulation from the I. R. S. which seemed to disqualify us from the use valuation approach because we had been paying cash rent for his farm. We found out at this time that this regulation was affecting or would affect many of our attorney's clients in the same way it was affecting us.

At this point we began inquiring as to the purpose of this administrative regulation and were told that it was to keep big city investors from swooping in to buy farmland for tax shelters, thereby not only avoiding taxes, but artificially inflating the price of farmland.

There has been a general increase in the use of cash rent for farmland in my area in the last 20 years and I'm pretty sure this is true for the entire states of Iowa and Illinois, however not probably the case now in our neighbor Kansas.

There are logical reasons for this trend. For retired farmers, it removes much of the management headaches and provides a constant dependable income. When my father considered retiring, we went to the local Social Security office where he was advised that if he rented his farm on crop or livestock share basis, they didn't want to get word of his doing any work on that farm after retirement. Since it was important to him to be able to help around the farm and also since he was already over 68 years of age and not wanting to jeopardise his social security benefits any further, he rented me his farm for cash rent.

It was explained to me that congress in enacting the 1976 Internal Revenue Code wanted to help preserve the family farm or small business by providing for "use" valuation to a limited extent where a commitment is made be all the heirs to the family farm or small business to a continued operation of that farm by the family for at least 15 years. As you probably know better than I, there is an extended list of conditions or tests surrounding the use valuation including a 15 year tax lein against the property in case the farm is sold by the family or rented to someone outside the family during that 15 years. If it were not continued as a family farm, there would not only be a recapture of whatever estate tax might have been saved, but in case of a later sale, whatever gain might be experienced would be computed on the lower basis of the use valuation. I think there is an obvious double penalty for early disposition.

As we understand it, 25% of the estate must be real estate, and 50% must be farm or business property in general. The farm must have been operated (material participation) by the decedant or a member of his family during 5 of the last 8 years prior to his death. The farm or small business valuation cannot be reduced by more than $ 500,000.00.

The use valuation provides for capitalizing a typical cash rent for similar property after having deducted the annual property tax. Since farmland doesn't usually"make interest"these days, dividing the net cash rent by an interest specified by the I. R. S. would usually result in a valuation lower than current market value at highest & best use.

I haven't tried to describe all the provisions in precise legal terms or even list all the conditions and procedure because I'm only a farmer, not a lawyer.

I have a copy of Section 2032 A of the I. R. C. in which it refers repeatedly to material participation by the decedant or members of the family. I am totally unable to see from this material why there should be an administrative regulation by which the use of cash rent within the family disqualifies the estate from use valuation. It's ironical that cash rentals for similar properties is often capitalized to determine the special use valuation. Again, I admit to being probably the least qualified person in this room to read and understand Legislation.

If, indeed, it was the purpose of congress to help preserve the family farm or business by instituting the use valuation of the farm or small business estate, this recent administrative regulation which came along almost 4 years after the legislation, in my opinion, runs counter to the desired effect. I refer to Treasury Regulation 20.2032 A-3(b)(1), 1980.

In the very matter of electing the use valuation, our attorney cautioned us strongly that we must be sincere about continuing the family farm since the penalties for not continuing after the election are too severe to otherwise take the chance.

Some law firms in out area won't even use the options under 2032 A because of the stringent conditions.

It's probably important to this testimony that it be established whether or not my fathers farm was a family farm and whether he was a family farmer or that big outside investor only recently arrived to shelter his income by taking advantage of the use valuation.

I can only testify about this farm covering the most recent seventy one years since my grandfather, Dick Furleigh, bought the original 200 acres of the farm in 1910. He lived and worked that farm from that time until soon before his death at 84 in 1947. No one outside the family farmed (materially participated) and he had no other occupation during that thirty seven year period.

My father, Bob Furleigh, came to work with his father in 1927 and had no other occupation and lived no where but on that farm from that time until he was unable to care for himself at age 85. He had added the additional acres in 1949.

My sister and I grew up in that same farm home which had been built by my grandfather in 1911 and in which three generations of our family lived at the time. If the cattle got through the fence we all helped get them back. We all knew it when a farm mortgage payment was met barely in time to save the farm from foreclosure in the 1930's.

My wife and I rented the farm from my parents in 1962 after having worked for them since 1958. We contunue farming this farm until this day.

1910.

Our mother preceeded dad in death in 1973.

There has never been anyone but our family farming that farm since

Except for the fact he lost his left leg and a few fingers at age 19, you couldn't find a more typical family farmer than my father.

I can tell you that when I was born in the northeast bedroom of that farm home, I had no prior knowledge of tax shelters or even of I. R. S. rulings.

I'll have to leave it to the subcommittee whether or not this is a family farm.

It's probably also important to this testimony to establish whether this ruling contributes toward carrying out the intent of congress in preserving the family farm in this case.

Our attorney prepared for us some very preliminary estimates of how being unable to utilize use valuation will affect our estate tax. It appears that it could make a difference of at least $82,000.00 in Fed. Estate Tax. I don't know how we'll be able to pay this additional amount besides the amounts we originally had hoped to borrow.

I respectfully propose, Senators, that this ruling is not consistant with the intent of your legislation and that you try to eliminate its effect some way as it applies to the Section 2032 A.

Special use valuation of farms is working in those areas of the country in which farm land is commonly rented for cash. In many areas land is rented under other arrangements, and 2032A is not working effectively there.

Estates should be allowed to use the cash rent method of paragraph (7) when there is cash rent data available to document the valuation for the cropland and bulk of the property. They should not be required to attempt to locate rental information of miscellaneous portions of the farm that are more logically valued at fair market

value.

Congress should instruct the Treasury Department to use the same Federal Land Bank interest rate as the capitalization rate in paragraph (8) as set forth in paragraph (7) in order to treat all of the nation's family farms equally. Use of any other rate will distort the relation

ship of income to special use value from one paragraph

to the other.

By way of introduction, I am a farm appraiser in central Indiana, and part owner of Duff Farm Management Service, Inc. We are a seven man office providing professional farm management, farm appraisal, brokerage and consultation services to the public. I am a member of the American Society of Farm Managers and Rural Appraisers, and represent that organization here today. I have experience writing special use value appraisals.

I would like to compliment Mr. Hartley and his staff on at least two sections of the regulations under discussion. The first is the statement "retention of a professional farm manager will not by itself prevent satisfaction of the material participation requirement...". This is a fair and equitable statement that provides farm management clients the same treatment as other farm owners, and that is good. The second is the definition of comparable real property, which lists ten factors to be considered in determining comparability. That section is easily understood and accepted by competent appraisers in the field.