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This morning I received a telephone call from Roger Wachter, Internal Revenue Service Auditor, oa this file. He indicated that if we are willing to enter into an agreed stipulation on the case at this time, he will accept Loren Aistrope's appraisal of the market value of the property, even though he feels that it was conservative for selling prices at the time, and that he will also accept our calculations for cash rental value, even though again based on their statistics, he feels my numbers are conservative. If the value of the farm was adjusted to $2,000.00 per acre, instead of approximately $1,800.00 as shown on the original return, the estate taxes would be about $33,000.00, instead of $25,000.00. The only disputed item would be the legal issue of whether cash rent qualifies for special use value.
If we agree with these adjustments we would then have to pay the tax, and file a claim for refund or sue for a refund for the $25,000.00 plus dollars.
Alternatively, we can continue to dispute the claim, in which case, Mr. Wachter will have to review with his supervisors or other adjustments would have to be made in his report regarding values, etc. We would then have the opportunity, however, of litigating the question of cash rents in the tax court and getting the issue decided before we have to pay the tax.
If we pay the tax and sue for a refund, the lawsuit if tried, would be in the Federal District Court, a completely different court system from the tax court.
My preliminary concept is that the District Court would be more favorable to us than the tax court would be, which we feel probably would be much more sympathetic to the Internal Revenue Service's interpretation of the law.
On this date, December 29th, 1980, I personally talked with Tom Hagedorn about the matter while he was in Fairmont. He indicated he expected a correction to be made with regard to this cash rental problem in an omnibus tax bill which he would anticipate will not be passed until about May of 1981. In the meantime we need to come up with a delay or holding tactic if we wish to not be paying the tax now.
This afternoon I talked to Lillian Saunders in Senator Boschwitz' office by telephone in Washington.
She indicated that their amendment regarding this matter passed both the House and the Senate in their tax bills in December, but that the conference committee threw it out the last night. I understand the reason it was thrown out was not because they disliked this particular amendment, but that it is part of the compromise on pay raises for congress, all amendments to the particular bill were throwa out in order to get anything passed at all.
KRAHMER & KRAH MER
Louis F. Boehne Estate Page 2
December 29, 1980
She indicated that they also expect something to be passed by Congress to correct this problem for the benefit of the farmers. She indicated that they had requested the IRS to delay action on issues of this matter since it appeared apparent that Congress will do something, with both Houses having been in agreement in principal on making such a correction. She indicated that she understood that the IRS had actively opposed the amendment, but ultimately dropped the opposition when it appeared to be a hopeless cause. Whether the IRS will delay actions as they had re quested, she did not know. She will make a specific inquiry with the IRS regarding the possibility of such delays and get back to me within the next day or so.
The status of my phone conversation with Mr. Wachter was that I was going to confer with Mr. Boehne regarding our decision of alternatives of paying the tax and writing it up on a settled basis, or disputing it at the audit level and taking the issue to tax court. I suppose another alternative is to drop the issue all together, but it would appear that we can see the light at the end of the tunnel with Congress on our side.
My recommendation is that to the extent that we cannot delay further, we enter into a settled agreement with regard to the IRS on the facts and pay the taxes, if necessary, followed by claim for refund or lawsuit depending on what congress does. I am requesting that Mr. Boehne advise me of his thoughts on this so that I can report back to Mr. Wachter.
Bruce A. Krahmer
This is in response to your communication dated February 6, 1981, by which you forwarded correspondence from Mr. Bruce A. Krahmer of Fairmont, Minnesota. Mr. Krahmer wrote to you concerning the definition of "qualified use" contained in the final treasury regulations under section 2032A of the Internal Revenue Code.
Section 2032A was added to the Code by the Tax Reform Act of 1976. Section 2032A provides that if certain conditions are met, the executor may elect to value qualified real property on the basis of such property's value at its current use rather than its fair market value.
Only property that is used for a qualified use is eligible for special use valuation. A qualified use is a use as a farm for farming purposes or in a trade or business other than the trade or business of farming. The legislative history (H.R. Rep. 94-1380) indicates that the trade or business in which the qualified property is used must be the owner's trade or business.
The Estate Tax Regulations in section 20.2032A-3(b)(1) adopt a position consistent with this legislative history. The regulation states that "under section 2032A, the term trade or business applies only to an active business such as a manufacturing, mercantile . or service enterprise, or to the raising of agricultural or horticultural commodities as distinguished from passive investment activities. The mere passive rental of property will not qualify. The decedent must own an equity interest in the farm operation." Therefore, property which is leased by the decedent for an amount of rent that is not contingent upon production, even if the lease is to a member of the decedent's family, is not normally considered to be used in a qualified use since the mere passive rental of property is not a trade or business use. At a minimum, the decedent must in some way be at risk (i.e., have an "equity interest") in the farming operation before he or she can be considered to be engaged in a trade or business. See General Explanation of
The Honorable Dave Durenberger
The "active business" and "at risk" requirements of a qualified use are determined independently of any personal involvement in the business operation by the decedent or members of his family. That involvement addresses another statutory requirement that the decedent or a member of his family materially participate in the operation of the farm business for certain specified periods. Activities of family members are by statutc considered only for purposes of satisfying the material participation requirements. Therefore, even though the decedent's son operated the farm before his father died, the qualified use test is not satisfied unless Louis Boehne, the owner of the property, had an equity interest ir he farming operation.
We appreciate your interest and that of Mr. Krahmer in this matter.
Thank you for forwarding the correspondence on March 17th that you received from the IRS about the Louis boeline Estate.
I feel that you can be of further assistance to the Boehne facily, and to any other fart families in Minnesota and throughout the country if you will assist Senator Boschwitz and Represeаtative Hagedorn and other nenibers of the Congress to get the law clarified and changed on the point at issue regarding Section 2032A.
The IRS stated to you that their position is that the estate cannot qualify because the decedent was cash renting the fart, even though it was cash rented to his son who is actively operating it. Section 2032A was added as a relief provision to help family farming operations to be passed from one generation to another. Under the interpretation which is being applied to it, this can effectively be accomplished only if the father dies before reaching retirement time. The present interpretation is preventing fathers from shifting from an active participation to a passive participation in the farming operation, letting the younger generation take the risk. Although it is supposed to be theoretically possible, they have to walk a tight rope, under the IRS interpretation, on a share rent besis, being certain that they have enough participation to qualify under Section 2032A to qualify for special use when they die, but not having so much participation that they are "materially participating for purposes of social security earnings tests, whereby until age 72. they would lose their monthly social security checks.
We hope that you will pursue the matter, rather than just drop the matter after having forwaçded the correspondence to me, so that this inequity la interpretation which the IRS has applied can be corrected.
Very truly yours,
Bruce A. Krahmer