Application of In some parts of our country special use valuation appears to be achieving its goal of relieving some of the estate tax burden from the family farm. Those areas in which it is working are those in which renting farms for cash is common and there is adequate comparable rental data available. 2032A is not without problems even when the data is available. Considerable extra work is required of everybody connected with the estate except the decedent; and even he had to put forth the effort to materially participate before his death. ever, areas of the country in which farmland is not typically rented for cash are apparently having difficulty in utilizing 2032A. How The first of the two points I wish to make today is that in the final regulations, under 20.2032A-4(b) (2) "Special rules (i) Documentation required of executor. The executor must identify to the Internal Revenue Service actual comparable property for all specially valued property and cash rentals from that property if the decedent's real property is valued under section 2032A (e) (7). If the executor does not identify such property and cash rentals, all specially valued real property must be valued under the rules of section 2032A (e) (8) if special use valuation has been elected." The words "for all specially valued property" apparently only appear in the final regulations. Agents in the field sometimes find it to their advantage to interpret "all specially valued property" to mean every little bit of miscellaneous land on the farm. They then require the executor to attempt to find cash rentals of such things as a four acre woods at the back of the farm; or a two acre old farmstead which includes a house with the roof falling in and an old obsolete barn. These parts of the farm are of little value and rentals of such property do not exist. The agents then ask the executor to value all qualifying real property under 2032A (e) (8). In this situation the estate should be allowed to value under (e) (7) the bulk of the land, which is typically crop land and perhaps pasture, for which cash rentals are available, use (e) (8) on the remaining qualified property, and use the fair market value on the other miscellaneous portions of the farm. There should be no problem with allowing the estate to pay tax based upon the fair market value of portions of the property, and allowing election of special use value on the bulk of the farm; recognizing that the thresholds to qualify for special use value would have to be met. I know that such partial elections have been made in some estates, but there is evidence that I.R.S. is attempting to interpret paragraph (7) to be so restrictive that the estate is forced to go to paragraph (8). Paragraph (8) is a section of the law for which (to my knowledge) proposed regulations have not yet been published. Apparently the I.R.S. agents feel that paragraph (8) will not provide the tax relief that paragraph (7) holds. At this point in time operating under paragraph (8) almost puts the I.R.S. agent on his own to negotiate with the estate, since there are no regulations to guide either the agent or the Although we are discussing the final regulations as published here today, this committee should recognize the relationship between paragraph (7) and paragraph (8); and perhaps point out to the Treasury Department the need for the two paragraphs to contain some consistency. Apparently the I.R.S. interprets the wording in the law that says "the formula provided by subparagraph (A) shall not be used (i) where it is established that there is no comparable land from which the average annual gross cash rental may be determined, or (ii) where the executor elects to have the value of the farm for farming purposes determined under paragraph (8)". The I.R.S. apparently interprets that to mean that neither the top nor bottom half of the formula is to be used. In other words the capitalization rate taken from the Federal Land Bank interest data as used in paragraph (7) would not apply in (8). This is my second point: If you want paragraph (7) and paragraph (8) to be similar and therefore have somewhat uniform impact upon farm estates in various parts of the nation, then you need to see that the same Federal Land Bank interest rate is used as the capitalization rate in paragraph (8) sections A and B. Agriculture is a big, wonderful and diverse industry. It has many farm rental arrangements that have evolved in various areas through the years. There is considerable renting for cash in central Indiana, while in central Illinois nearly all rentals are share arrangements. Wisconsin dairy farms use share arrangements, while Kentucky tobacco farms with their tobacco barns typically rent for cash. All of the various rental arrangements come down to the same thing: MONEY. It matters not whether the land owner rents his land for one-third of the crop and pays only real estate taxes, or receives one-half of the crop and pays one-half of the seed, fertilizer and chemicals; or rents his pasture for so many dollars per animal unit for the year; or rents his crop land for so many dollars per acre. The land owner converts all of that to money; and so can any competent appraiser. Since all rental arrangements reduce themselves to money, it is only fair and equitable to use the same capitalization rate to convert income into value in the Special Use Value section of the Tax Reform Act of 1976. Don't let the capitalization rate change from paragraph (7) to paragraph (8). Treat all of the family farms in the nation the same way. Thank you Mr. Chairman for this opportunity to speak. I would like to offer any additional help that you might need from the members of the American Society of Farm Managers and Rural Appraisers. We have knowledgeable people in the areas of farm management and rural real estate valuation throughout the nation. We would be happy to provide information for anybody on the committee, or others who might need it. SUMMARY OF COMMENTS ON $2032A USE VALUE Philip Ridenour Ridenour And Knobbe General Comments In The regulations under $2032A contain numerous quirks, without basis in the statute or the legislative history, apparently intended to discourage election by farm estates of the provisions of $2032A valuation and to complicate perfection of the election. On the local level, (Kansas District) examiners erect road blocks to frustrate the use of $2032A. short, the National Office and the local level take the position that $2032A affords the farm estate an "unfair" advantage over the estates of non-farmers, and therefore it is their "duty" to restrict the application of $2032A. The following provisions set forth by the regulations which must be met in order to elect to value real estate pursuant to §2032A are unsupported by the statute and legislative history: 1. 2. 3. 4. 5. 6. Cash Leases. Regulations require that only cash leases, not crop share leases, be used to determine annual cash rent. Lease Studies. Regulations prohibit use of independently compiled "area-wide Present Interest: A "discretionary trust" for the benefit of children or others, Corporate Arrangements. Even if a decedent is the sole shareholder, officer, Guidance. To date, over 30 private letter rulings, which may not be cited or relied on as precedent, have been issued, and public published rulings have been issued only defining the average annual Federal Land Bank interest rates. Specific Comments: Local Interpretation (Kansas District) 1. 2. 3. Comparable Real Estate. "Comparable" is interpreted to mean "identical": Oral Comments. Despite requests on nine use value and protective use value election returns handled by our office, agents have declined to document local requirements in writing. Capitalization Rates. Local agents try to push use value election out of 4. Expense. Local agents require documentation of comparability, leases, and 5. Attitudes. Several (3) local agents have expressed the opinion that use value is "unfair" and willingly admitted their reluctance to permit its use. Conclusion The National Office and local Kansas agents seem anxious to disallow use value elections, apparently based on subjective notions of "fairness," placing undue strain on the selfassessment system of federal estate taxation. |