With respect to the method of valuation, petitioner submitted, with the amended Federal estate tax return, a lease for a period of June 1, 1982, through May 31, 1983, covering comparable pasture land adjoining tract III. Petitioner submitted an opinion letter from the vice president of Farmers & Merchants Bank in Crescent, Oklahoma, setting forth a cash rental value of $40 to $45 per acre per year for the cultivated land for a period subsequent to decedent's death. Other comparable cultivated and pasture land existed in the geographical area of the respective tracts, but petitioner did not submit evidence of them. Taxes paid on tracts III, IV, and V for the years 1979, 1980, and 1981 were submitted by petitioner in a letter from the Logan County treasurer's office. In addition, copies of receipts were submitted from the Grant County treasurer's office for taxes paid on tracts I and II for the years 1979, 1980, and 1981.

The agreement as to special use valuation was filed with the amended Federal estate tax return and was signed by all the required parties.

On March 8, 1984, and again on May 30, 1984, petitioner was notified by letter from respondent, that the information and documentation submitted with respect to the special use valuation was not sufficient and a request was made for the required information. Petitioner responded on October 3,1984, stating that petitioner was determining whether or not to contest the disallowance of the section 2032A election.

On October 23, 1986, petitioner was informed by letter that respondent had not yet received the required information and documentation to support the special use value. On January 7, 1987, petitioner submitted two documents in response to respondent's request. One document was the same cash lease submitted with the notice of election from comparable property adjoining tract III, the only difference being that the lease covered a period from June 1978 through 1984. The second document was a statement from the Logan County treasurer setting forth the taxes paid in 1981 on this comparable parcel.

On February 17, 1987, petitioner was notified that it failed to qualify for the special use valuation provided under section 2032A, even after taking into account the two

documents previously submitted by letter dated January 7, 1987. No further documentation was submitted by petitioner. In the statutory notice of deficiency, the Commissioner determined that petitioner was not entitled to the special use valuation under section 2032A because of petitioner's failure to properly document and substantiate the section 2032A election.

OPINION

The value of property included in the gross estate of a decedent is usually the fair market value of the property interest as of the date of death of the decedent. Sec. 2031. Prior to 1976, there were no provisions in the Internal Revenue Code that permitted any other valuation. Section 2032A, which was adopted as part of the Tax Reform Act of 1976, provides an alternative means for valuing real property used in farming operations or other closely held businesses. Tax Reform Act of 1976, Pub. L. 94-455, sec. 2003(a), 90 Stat. 1856. The purpose in adopting section 2032A was to provide an alternative to "highest and best use" for valuing real property used in family farming operations or closely held businesses. Estate of Johnson v. Commissioner, 89 T.C. 127, 129 (1987); Estate of Coon v. Commissioner, 81 T.C. 602, 608 (1983).

Under section 2032A(a)(1)(B), the executrix must elect this special use valuation on a Federal estate tax return. Sec. 2032A(d)(1); sec. 20.2032A-8, Estate Tax Regs. A notice of election must be filed with the Federal estate tax return setting forth 14 items of information. In addition, an agreement must be filed, signed by each person in being who has an interest in any property designated in such agreement, consenting to the application of an additional estate tax under subsection (c) with respect to such property. Sec. 2032A(d)(2). The estate must also meet a number of other conditions to be eligible for special use valuation.2 We must first decide whether a proper election has been filed.

"The decedent must have been a citizen or a resident of the United States, and the subject property must be located in the United States. Sec. 2032A(a)(1)(A); sec. 2032A(b)(1). The real property must have been used as a farm or in a trade or business by the decedent or by a member of the decedent's family, and the decedent or a member of the decedent's family must have materially participated in the operation of the farm or the business. Sec. 2032A(b)(1)(A)(i)

A section 2032A election need not be made as to all real property in the estate, but only sufficient property to satisfy the threshold requirements of section 2032A(b)(1).3 Sec. 20.2032A-8(a)(2), Estate Tax Regs. The election is to be made on the Federal estate tax return in the manner prescribed by the regulations. Sec. 2032A(d)(1). Section 1025 of the Deficit Reduction Act of 1984 retroactively amended section 2032A(d)(3) to provide that the Secretary shall prescribe procedures that give the executrix of the estate of a decedent dying after 1976 a reasonable time within which to cure defects in a section 2032A election. Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 1025(a), 98 Stat. 1030.4 In any case in which the executrix timely files an election in "substantial compliance" with the regulations but which does not contain the required information, the executrix will have a reasonable time, not to exceed 90 days after notification of such failures, to provide all of the information. Sec. 2032A(d)(3).

Section 20.2032A-8(a)(3), Estate Tax Regs., delineates 14 items of information that petitioner must submit with the Federal estate tax return:

(i) The decedent's name and taxpayer identification number as they appear on the estate tax return;

(ii) The relevant qualified use;

(iii) The items of real property shown on the estate tax return to be specially valued pursuant to the election (identified by schedule and item number);

(iv) The fair market value of the real property to be specially valued under section 2032A and its value based on its qualified use (both values determined without regard to the adjustments provided by section 2032A(b)(3)(B));

and (ii). In addition, the property must pass to a qualified heir, who must be a member of the decedent's family. Ownership and use requirements must be satisfied as set forth in the statute to avoid recapture of part of the tax savings resulting from special use valuation. Sec. 2032A(c).

3In addition to the requirements listed above, sec. 2032A includes requirements regarding the makeup of the estate, as set forth in sec. 2032A(b)(1)(A) and (B). These percentage requirements limit tax relief to those situations where the family farm or business is a major asset, in terms of value, in the decedent's estate. We need not address this issue for this information was sufficiently set forth in petitioner's notice of election.

*Petitioner erroneously contends on brief that because the passage of sec. 1025(a) of the Deficit Reduction Act of 1984 was subsequent to the date of the amended Federal estate tax return, the 90-day requirement has no application because it was not in existence at the time of the filing or auditing of the amended Federal estate tax return. Petitioner has failed to take notice of the fact that sec. 1025(a) was made retroactive to apply to decedents dying after Dec. 31, 1976. Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 1025(b)(1), 98 Stat. 1030.

(v) The adjusted value (as defined in section 2032A(b)(3)(B)) of all real property which is used in a qualified use and which passes from the decedent to a qualified heir and the adjusted value of all real property to be specially valued;

(vi) The items of personal property shown on the estate tax return that pass from the decedent to a qualified heir and are used in a qualified use under section 2032A (identified by schedule and item number) and the total value of such personal property adjusted as provided under section 2032A(b)(3)(B);

(vii) The adjusted value of the gross estate, as defined in section 2032A(b)(3)(A);

(viii) The method used in determining the special value based on use; (ix) Copies of written appraisals of the fair market value of the real property;

(x) A statement that the decedent and/or a member of his or her family has owned all specially valued real property for at least 5 years of the 8 years immediately preceding the date of the decedent's death;

(xi) Any periods during the 8-year period preceding the date of the decedent's death during which the decedent or a member of his or her family did not own the property, use it in a qualified use, or materially participate in the operation of the farm or other business within the meaning of section 2032A(e)(6);

(xii) The name, address, taxpayer identification number, and relationship to the decedent of each person taking an interest in each item of specially valued property, and the value of the property interests passing to each such person based on both fair market value and qualified use; (xiii) Affidavits describing the activities constituting material participation and the identity of the material participant or participants; and (xiv) A legal description of the specially valued property.

We must decide whether petitioner "substantially complied" with the regulations in submitting a notice of election which did not contain all of the required information. If we find that petitioner has "substantially complied" with the regulations, then, in determining whether petitioner completed the notice of election, we will take into account any documents submitted by petitioner within 90 days after notification by the Internal Revenue Service. If petitioner has not "substantially complied" with the regulations, section 2032A will not apply to the valuation of the respective properties and petitioner must value the five tracts of land listed in the amended Federal estate tax return, Schedule A-Real Estate, at the fair market value on the date of decedent's death.

It is well established that the Commissioner's determination is presumed to be correct and that the taxpayer has

not only the burden of proving error in that determination, but the burden of producing evidence from which a proper determination can be made. Most of the information required under section 20.2032A-8(a)(3), Estate Tax Regs., can be ascertained from petitioner's amended Federal estate tax return and the notice of election submitted with the return. However, with respect to the section 20.2032A-8(a)(3)(viii), Estate Tax Regs., method of determining special value based on use, petitioner failed to supply the information and documentation necessary to substantiate the special value based on the use of the property.

In determining special value based on use, section 2032A provides several methods for valuing farms. Sec. 2032A(e)(7); sec. 2032A(e)(8); sec. 20.2032A-4, Estate Tax Regs. The first method, capitalization of rents, measures the present value of the future cash-flows from the real property by using cash rent figures for the last 5 years. Sec. 2032A(e)(7)(A). The capitalization of rents formula is the excess of the average annual gross cash rental for comparable land used for farming purposes and located in the locality of such farm over the average annual State and local real estate taxes for such comparable land divided by the average annual effective interest rate for all new Federal Land Bank loans.5 Each average annual computation shall be made on the basis of the 5 most recent calendar years ending before the date of decedent's death. Sec. 2032A(e)(7)(A); sec. 20.2032A-4(a), Estate Tax Regs.

Gross cash rental is the amount of cash received during the year for the use of actual tracts of comparable farmland in the same locality, undiminished by any expenses or liabilities associated with the farm operation. Sec. 20.2032A4(b)(1), Estate Tax Regs. In using this method, the executrix must identify to the Internal Revenue Service actual comparable property for all specially valued property and cash rentals from that property. Sec. 20.2032A-4(b)(2)(i), Estate Tax Regs. If it is established that there is no comparable land from which the annual gross cash rentals

The Internal Revenue Service issues an annual revenue ruling setting forth the effective interest rate for each of the 12 regional Federal Land Bank Districts. The effective interest rate for the Federal Land Bank District in which the respective property is located, for 1982, was 10.26 percent. Rev. Rul. 82-104, 1982-1 C.B. 129, 130.