1985 U.S. Tax Ct. LEXIS 100">*100
P's are the seven heirs of the Estate of John A. Fischer. At his death on Jan. 29, 1978, decedent devised to such heirs, as tenants in common, a 209-acre crop-producing family farm. The farm was leased on a sharecrop basis to the son-in-law of decedent at the time of his death. The estate properly elected, qualified for, and received a special-use valuation pursuant to
84 T.C. 620">*621 Respondent determined1985 U.S. Tax Ct. LEXIS 100">*104 deficiencies in estate tax against each of the foregoing seven petitioners in the amount of $ 95,088.14. 1 Respondent has conceded $ 81,504.12 of each such deficiency, leaving deficiency determinations in the amount of $ 13,584.02 in issue as to each petitioner. 2
After concessions, the sole issue remaining for our decision is whether the seven heirs of the decedent, John A. Fischer, ceased to use qualified real property for a qualified use, so that they are liable for an additional estate tax pursuant 1985 U.S. Tax Ct. LEXIS 100">*105 to
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of facts and exhibits attached thereto are incorporated herein by this reference.
At the time their petitions were filed, petitioners John R. Fischer (John R.), Richard J. Fischer (Richard), Francis J. Fischer (Francis), and Patricia Ann Norman (Patricia) resided at Mount Vernon, Indiana; petitioner Wilburn H. Fischer (Wilburn) resided at Corpus Christi, Texas; and petitioners Mary Jean Martin (Mary) and Dorothy Fischer (Dorothy), by her guardian, Mary Jean Martin, resided at Poseyville, Indiana.
John A. Fischer (the decedent) and his wife, Florence Fischer (Florence) were citizens of the United States and resided in Posey County, Indiana, for virtually all of their lives. The decedent1985 U.S. Tax Ct. LEXIS 100">*106 and Florence owned, as tenants by the entirety, certain real estate in Posey County, Indiana, consisting of a total of 209 acres, and comprised of approximately 166 acres of farm land, 23 to 26 acres of unproductive and unmanaged woodland of little value, 17 to 20 acres of woods and creeks, and a residence (hereinafter referred to, collectively, 84 T.C. 620">*622 as the farm). At all times here pertinent, the farm produced various types of crops.
Decedent and Florence Fischer had seven children, namely: John R., Richard, Wilburn, Francis, Dorothy, Patricia, and Mary.
The principal occupation of decedent and Florence Fischer was farming, and they personally farmed the foregoing acreage until approximately 1970, when they were unable to do so as a result of advancing age and poor health. At such time, they entered into an oral sharecrop arrangement with Mary's husband, Anthony Martin (Anthony), whereby he would farm approximately 95 acres of the farm on a sharecrop basis, with one-third of the net proceeds therefrom going to the lessors and the remainder going to Anthony. In 1974, the lease was modified to include the entire farm.
At an undisclosed time prior to 1978, Patricia became the1985 U.S. Tax Ct. LEXIS 100">*107 guardian of decedent and Florence Fischer. During 1977, a typewritten lease of the farm was entered into between Patricia, in her guardian capacity, and Anthony, continuing the one-third, two-thirds split between the landlords and the tenant.
On or about March 29, 1977, Florence died, and the farm passed to her husband by operation of law. On January 29, 1978, decedent died.
By the will of the decedent, which was probated, his seven children received the farm as tenants in common. John R. qualified as the personal representative of the estate of his father, and an estate administration was opened in the Posey Circuit Court in Indiana.
From January 29, 1978 until August 1979, the farm continued to be farmed on a sharecrop basis by the decedent's son-in-law, Anthony Martin, pursuant to automatic extensions of the 1977 lease.
On September 29, 1978, John R. caused to be filed with the Internal Revenue Service, a United States Estate Tax Return, Form 706, on which the estate properly elected to value the farm pursuant to
As filed, the estate tax return showed a total estate tax of $ 11,473.02. Had the parties not elected the special-use valuation for the farm, the estate would have owed an additional $ 95,088.14 in estate taxes at the time the return was filed. However, the requirements of
By 1978, Dorothy had become mentally incompetent, and on April 13, 1978, Mary was appointed as her guardian, and continued in that capacity at all times here pertinent.
Subsequent to filing the estate tax return, John R. determined that Anthony should not continue farming the property. Accordingly, on February 15, 1979, John R. caused to be sent to Anthony a notice to terminate the typewritten 1977 lease agreement. The notice of termination was to be effective on August 15, 1979, and provided that Anthony was not to thereafter plant any crops to be harvested after that date, and was to have1985 U.S. Tax Ct. LEXIS 100">*109 all of his crops off of the farm prior to that date, but Anthony was permitted to remove any crops, already planted, which would not mature until after August 15, 1979.
In July or early August of 1979, John R. advertised for bids to lease the farm for a 1-year period on a pure cash rental basis. Several sealed bids were submitted, each of which was based on a fixed dollar amount. When the sealed bids were opened in August 1979, the highest bid was submitted by Droege Farms, which submitted a cash rental bid of $ 21,060. On August 17, 1979, a cash lease of the farm was entered into by and between the personal representative and Edmund Droege, acting for Droege Farms as lessee. Edmund Droege was a third party, who was not related to the decedent or Florence. The contract provided for payment of 10 percent of the total rent on or before September 1 of the year in which the lease was signed, with the remainder due on or before the last day of January 1981.
On August 24, 1979, John R., as personal representative, petitioned the Posey Circuit Court to approve the lease to Droege Farms. At least in part as a result of concern over losing the advantages of the special use valuation 1985 U.S. Tax Ct. LEXIS 100">*110 under
The rental specified in the cash lease, $ 21,060, was based upon $ 117 per acre multiplied by 180 tillable acres. The initial 10-percent payment specified in the lease, or $ 2,106, was paid in the Spring of 1980, after which time it was determined that there were only 165.9 tillable acres. Accordingly, the final lease payment was adjusted to $ 17,304.30, computed as the product of 165.9 acres and $ 117, less the $ 2,106 initial payment. The rental was not based upon the level of crop production from the farm.
On September 12, 1979, Mary, acting individually and as guardian for Dorothy, filed with the Posey Circuit Court a petition for partition of the farm.
In or about October of 1979, Anthony, the prior lessee, was permitted to and did enter the farm to remove his crops. Between August 17, 1979, and October of 1979, while Anthony's crops were still in the field, and prior to approval of the cash lease by the Posey Circuit Court, Droege Farms1985 U.S. Tax Ct. LEXIS 100">*111 did not plant. In November of 1979, however, Droege Farms planted winter wheat, and it likewise was permitted to and did remove its crops in or about October of 1980. Droege Farms thereafter sold the crop, and made the final rental payment under the August 17, 1979, cash lease on December 29, 1980. On August 17, 1980, the 1-year cash lease to Droege Farms ended.
During the cash lease of the farm, the farming operation was conducted by Droege Farms, which used its own chisel plow, moldboard plow, grader blade, disc, culti-mulchers, planters, drill, tractor, and combine. The estate owned no farm equipment.
During the cash lease term, Richard and John R. participated in maintenance and operation of the farm by performing a number of duties, including clearing approximately one-half mile of fence rows, repairing field tile and a washed-out culvert, and filling so-called sinkholes on the farm. In addition, John R. regularly conferred with Edmund Droege, providing advice to the lessee concerning the location for planting crops, plowing and fertilizing methods, crop rotation, seed selection, 84 T.C. 620">*625 disking, control of Johnson grass and other weeds, and rototilling.
At the termination1985 U.S. Tax Ct. LEXIS 100">*112 of the 1-year cash lease, a sharecrop lease was executed on August 19, 1980, by and between John R., acting as agent for himself, Richard, Wilburn, Francis, and Patricia, and Edmund Droege, acting for Droege Farms, for the lease of a portion of the farm consisting of approximately 143 acres. Droege Farms has continued to operate this portion of the farm on this basis. At or about the same time, Mary and her husband, Anthony, began farming the remaining portion of the farm, or some 65 acres, which constituted a two-sevenths share of the entire farm.
On October 16, 1980, some 4 months after issuance of his closing letter, respondent first became aware of the August 19, 1979, cash lease between the personal representative and Droege Farms.
The estate of the decedent was closed on or about November 3, 1980, and the entire farm was thereafter transferred to all seven heirs as tenants in common.
On May 11, 1982, the Posey Circuit Court approved an agreement of the parties to partition the farm. Pursuant to the agreement, 142.5 acres were set off as the sole property of John R., Richard, Wilburn, Francis, and Patricia as tenants in common, and 65.3 acres were set off as the sole property1985 U.S. Tax Ct. LEXIS 100">*113 of Mary, individually, and Dorothy, by Mary as guardian.
OPINION
The sole issue presented for our decision is whether the seven heirs of the decedent, all of whom are petitioners herein, ceased, by virtue of cash leasing the farm to Droege Farms, to use qualified property for a qualified use, calling for imposition of the additional estate tax (also called a recapture tax) under
Valuation on the basis of highest and best use rather than actual use may result in the imposition of substantially higher estate taxes. In some cases, the greater estate tax burden makes continuation of farming etc., activities not feasible because the income from these activities is insufficient to service extended tax payments on loans obtained to pay the tax. Thus, the heirs may be forced to sell the land for development purposes. [S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 643, 657.]
At the same time, it was realized that it would be a windfall to the beneficiaries to provide the foregoing relief in instances where the beneficiaries did not continue to use the property for a reasonable period as the decedent did before death.
In response to these concerns, Congress enacted
To qualify for the special use valuation, the following conditions must be met: (1) The decedent at the time of his death must have been a citizen or resident of the United States; (2) the property for which the special use value is sought must be located within the United States; (3) the property must pass to a member of the decedent's family who qualifies under
The parties herein are in agreement that the estate of the decedent1985 U.S. Tax Ct. LEXIS 100">*116 qualified for and properly elected the special use valuation under
In accordance with the foregoing congressional intent to avoid windfall benefits for beneficiaries who ceased to continue using property as the decedent did for a reasonable post-death period,
(1) Imposition of additional estate tax. -- If, within 15 years 4 after the decedent's death and before the death of the qualified heir -- (A) the qualified heir disposes of any interest in qualified real property (other than by a disposition to a member of his family), (B) [Emphasis added.]
1985 U.S. Tax Ct. LEXIS 100">*117 Pursuant to
(2) Qualified use. -- For purposes of this section, the term "qualified use" means the devotion of the property to any of the following: (A) use as a farm for farming purposes, or (B) use in a trade or business other than the trade or business of farming.
The legislative history of
84 T.C. 620">*628 In the case of either of these qualifying uses [use as a farm for farming purposes or use in a trade or business other than farming], your committee intends that
As noted
(7) Cessation of qualified use. -- For purposes of paragraph 1(B), real property shall cease to be used for the qualified use if -- (A) (B) during any period of 8 years ending after the date of the decedent's death and before the date of the death of the qualified heir, there had been periods aggregating 3 years or more during which -- (i) in the case of periods during which the property was held by the decedent, 1985 U.S. Tax Ct. LEXIS 100">*119 there was no material participation by the decedent or any member of his family in the operation of the farm or other business, and (ii) in the case of periods during which the property was held by any qualified heir, there was no material participation by such qualified heir or any member of his family in the operation of the farm or other business. [Emphasis added.]
Imposition of the additional estate tax after the decedent's death can therefore be triggered by any one, inter alia, of the following events:
(a) A failure to continue the
(b) A failure by a
(c) A failure of
84 T.C. 620">*629 In the instant case, respondent has not raised a material participation objection under1985 U.S. Tax Ct. LEXIS 100">*120
As we have found, the farm qualified under
In an opinion of this Court which was filed after the trial in the instant case,
Since, as noted
In support of their contention that no such cessation occurred, petitioners rely upon two cases, both of which address the qualified use requirement of
In the first such case,
In the instant case, by contrast, it was initially determined that Droege Farms would lease 180 tillable acres, or some 86 84 T.C. 620">*631 percent of the total acreage. While the estimate of tillable acreage was later reduced to 165.9 acres (with a commensurate reduction in the rent), this still constituted some 79 percent of the total acreage. Furthermore, unlike
In sum,
1985 U.S. Tax Ct. LEXIS 100">*126 The second case relied upon by petitioners is
After reaching the foregoing conclusions, with which we are in full accord, the District Court proceeded in that case to note that the decedent would be considered as using the property at her death if the lease of the property at that time was substantially based on production,
Petitioners raise a number of arguments in opposition to the conclusion 1985 U.S. Tax Ct. LEXIS 100">*128 that the August 1979 lease to Droege Farms constituted an event calling for the imposition of additional estate tax under
We note that in considering the issue of the qualified use of property passed by a decedent who died in 1979, in
Petitioners next make two arguments relating to Indiana State law. First, petitioners contend that they should not be "penalized" under
The other section of Indiana law relates to the responsibility of the personal representative to disburse, distribute, and account for certain income received by him during administration of the estate, and petitioners do not contend that there was any failure on the part of John R. to meet his responsibilities under this provision, nor that there would have been if he had not entered into the lease.
Second, petitioners point to
We cannot concur in petitioners' contention that they did not have use of the farm until late 1980, within the meaning of
The sole provision which might have excused petitioners' failure to use the farm for a post-death qualified use during all or a portion of the period of administration of the decedent's estate, is
(A) No tax if use begins within 2 years. -- If the date on which the qualified heir begins to use the qualified real property (hereinafter in this subparagraph referred to as the commencement date) is before the date 2 years after the decedent's death -- (i) no tax shall be imposed under paragraph (1) by reason of the failure by the qualified heir to so use such property before the commencement date, and (ii) the 10-year period 9 under paragraph (1) shall be extended by the period after the decedent's death and before the commencement date.
It is petitioners' next contention that the farm was cash leased for such a short period of time, relative to the time that it was farmed on a sharecrop basis, that no real "cessation of qualified use" occurred. As conceded by petitioners, however, neither the Code nor the regulations allow for any de minimis exception to the qualified use requirement of
Finally, petitioners contend that the heirs of the decedent "did materially participate and contribute to the maintenance and operation of the farm during the term of the cash lease." Even assuming that the activities of some or all of the heirs constituted material participation during the period of the cash lease to Droege Farms, however, a cessation of qualified use occurs under
To reflect the foregoing,
1. Respondent also determined additions to tax under sec. 6651(a)(1), as to each of the petitioners herein, but has conceded this issue.↩
2. Such concessions were explained by respondent as follows:
"In each statutory notice of deficiency issued to the seven petitioners herein, respondent determined the full amount of the additional estate tax, or $ 95,088.14. Respondent should have determined one-seventh of the full amount of the additional estate tax against each of the seven petitioners, or $ 13,584.02."↩
3. All statutory references are to the Internal Revenue Code of 1954 as amended and in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise stated.↩
4. For the estates of decedents dying after Dec. 31, 1981, this period was amended to the present 10 years. Pub. L. 97-34, sec. 421(c)(1)(A), 95 Stat. 172, 307.↩
5. A similar provision is now contained in
6. We need not decide whether the qualified heirs, through John R. as personal representative, were engaged in a trade or business, and therefore in a "qualified use" under
7. In support of this interpretation of
8. Petitioners make much of our findings in
9. For the year here in issue, this was a 15-year period.↩
10. Petitioners make no claim under such section, apparently because of their mistaken belief that the section is not to be retroactively applied.↩
