This article explores the intricacies of the case and highlights how the inclusion of a trust department or trust company as successor trustee might have averted protracted delays and potential lawsuits.
Merle Parks left the bulk of his estate, which included a farm, to his nephew Ronald. Merle died on September 19, 2003. At that time, the federal estate tax exemption was only $1 million. The estate tax return for Merle was due six months later, but the estate asked for a six-month extension, which is automatically granted. Nevertheless, the estate made a $333,959 prepayment of the expected estate tax liability in June 2004. No estate tax return was filed at that time.
For reasons not explained in the Court’s decision, the estate tax return was not filed until February 2010, more than five years after the extension for filing expired. The return reported a gross estate of some $1.7 million, a taxable estate of $1.6 million, and an election for special use valuation of the farm property under the tax code’s §2032A. That tax code provision allows for farm property to be valued for its agricultural use, rather than its fair market value, which is often far higher. The purpose of the provision is to allow farm property to stay within the family, but a number of requirements must be met to prove that the heirs will continue the farm.
Based upon these final values, and allowing for the special use value reduction, the estate asked for a tax refund of $87,838 from the 2004 payment. Two years later, in 2012, the IRS did much more than deny the refund. The Service stated that five years was too long to wait to make the election for special use valuation, that additional taxes of $199,111 were due, as well as a late filing penalty of $27,818.25.
The estate did not pay the additional tax. In 2021 the U.S. brought a civil action to collect the taxes through a judicial seizure and sale of the farm property. The defendants admitted that estate tax return was late, but argued that an election of special use valuation on a late return is still valid, provided that the return is the first estate tax return filed. Both sides asked that the case be dismissed in their favor.
After a long and careful examination of the history of the law and Regulations on valuing farm property for the federal estate tax, the District Court held that the special use election was not invalid for being late, just as the estate had argued. However, it was not a total win for the estate. The IRS continues to have the ability to prove at trial that the estate has not met the other technical requirements for the election, such as qualified uses of the property and material participation in farming by the heirs. With interest, as of the time of the decision, the amount at issue has grown to $433,654.66.
Thus, more than 19 years after his death, the federal estate tax on Merle Parks’ farm property remains unsettled.
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