Section 2032A Election on Estate Return Filed Five Years Late Is Valid

(Parker Tax Publishing December 2022)

A district court held that an estate's Code Sec. 2032A election, made for the first time on an estate tax return filed over five years late, was valid. In reaching its conclusion, the court relied on a temporary regulation issued in 1981 and rejected the IRS's argument that the temporary regulation should not be interpreted to permit a Code Sec. 2032A election "to be made literally forever." U.S. v. Parks, 2022 PTC 359 (E.D. MI 2022).

Background

On July 24, 2003, Merle Parks executed his Last Will and Testament (Will), which named his brother, Elmer Parks, as personal representative, and his nephew, Ronald Parks, as successor personal representative. Merle's will, aside from two specific devisements to his brother and to a church, left all Merle's personal effects and equipment and "all the residue and remainder" of his estate (the Estate) to Ronald. The Will further directed that all estate taxes that might be assessed or become payable because of Merle's death would be paid out of the residuary estate passing under the will.

Six weeks before Merle's death, Merle and Ronald established the Parks Family Limited Liability Company, LLC (Parks Farm LLC), with Merle owning a 98 percent membership interest in the LLC and Ronald owning a 2 percent membership interest. Merle also executed a quitclaim deed transferring three parcels of working farmland to the Parks Farm LLC for consideration of less than $100.

Merle died in September of 2003, and under the terms of his will, Ronald inherited the three parcels of working farmland (the Parks Farm Property), as well as the residuary estate cash, savings instruments, retirement accounts, stocks, and bonds. Ronald subsequently transferred the Parks Farm Property to himself, his wife, entities that he controlled, and ultimately to the Ronald G. Parks Revocable Living Trust, a trust established by Ronald in 2006, of which Ronald was named trustee.

Estate's Tax Return and Code Section 2032A Election

The Estate's Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, was due on May 19, 2004. The Estate requested and received one six-month extension to file the return. Thus, the extended due date was December 19, 2004. Prior to that, the Estate had made an estate tax prepayment of $333,959. The Estate did not file its Form 706 tax return by the extended due date and it did not seek any further extension of time to file its return. Instead, the Estate filed it tax return in February of 2010. That return showed a that, based on reported credits for state death taxes and the prior prepayment, the estate had an overpayment of almost $88,000.

Included in the reported assets of the Estate were $131,904 in stocks and bonds; $443,696 in cash, savings accounts, and certificates of deposit; $289,878 in individual retirement accounts; and $113,450 of joint interests in farm equipment. According to the government, by the Will's terms, this property would have been included in the residuary estate, the remainder of which, after estate taxes, debts, funeral expenses, and estate fees, would be devised to Ronald. The Estate's Form 706 reported that the gross estate also included "98% of land owned by Parks Family Limited Liability Company, LLC," which included the Parks Farm Property. The full value of this 98 percent interest in real property was reported to be $921,200. The Form 706 also reported a one-half interest in certain real property jointly owned with Merle's brother, Elmer, and Elmer's wife. The full value of this interest was reported as $210,000.

The Estate's Form 706 included an election under Code Sec. 2032A. As a result, the Estate sought to adjust down the full value of the real property reported on the return (i.e., the $921,200 and the $210,000) by approximately $308,000 and $51,000, respectively.

In October of 2012, the IRS sent a notice to the Estate, identifying a deficiency of federal estate tax of approximately $199,000, for the reason that special use valuation under Code Sec. 2032A was not available because the tax return was untimely filed. The IRS also asserted a penalty for late filing of almost $28,000 under Code Sec. 6651(a)(1).

Special Valuation Election under Code Section 2032A

Code Sec. 2032A, which was added as part of the Tax Reform Act of 1976, provides for a special valuation of certain estate property used for farming or a trade or business that is inherited by certain family members. Under this provision, property is valued on the basis of the property's actual use at the time of the decedent's death, rather than on the basis of its highest and best (or fair market value) use, for federal estate tax purposes, resulting in lower estate taxes. Code Sec. 2032A(d)(1) (1976) required that the election be made not later than the time prescribed for filing the estate tax return. Other requirements apply as well.

Congress amended Code Sec. 2032A in the Economic Recovery Tax Act of 1981 to expressly remove the requirement in Code Sec. 2032A(d)(1) that an election be made "not later than the time prescribed ... for filing the return," and to instead require that the election be made on the estate tax return in such manner as the IRS prescribes. While Reg. Sec. 20.2032A-8(a)(3) prescribed that the election be made on a timely filed estate tax return, the IRS subsequently issued Temp. Reg. Sec. 22.0 which provides that an election under Code Sec. 2032A is made in the manner prescribed in Reg. Sec. 20.2032A-8(a)(3) except that the election "shall be valid even if the estate tax return is not timely filed." On December 31, 1997, the IRS issued Reg. Sec. 301.9100-2 which provides automatic extensions to make certain regulatory elections, including elections under Code Sec. 2032A.

Government Action to Recoup Estate Taxes and Penalties

The government filed a civil action in district court, pursuant to Code Secs. 7401, 7402(a), and 7403(c), to satisfy the Estate's unpaid federal estate tax liability. The government argued that the Estate's Code Sec. 2032A election was untimely and the Estate was thus not entitled to the special use valuation. According to the government, the reliance on Temp. Reg. Sec. 22.0(b) by the Estate and its Personal Representative (the defendants) was inappropriate because that regulation was not intended to be permanent, and was in fact superseded by Rev. Proc. 92-85, which provided standards for granting extensions of time to make elections. The government said that Rev. Proc. 92-85 was issued to provide relief to taxpayers who reasonably and in good faith failed to make a timely election when granting relief would not prejudice the interests of the government. The government alternatively argued that Reg. Sec. 301.9100-2 superseded Rev. Proc. 92-85 and Temp. Reg. Sec. 22.0(b) and thus the defendants were required to file an estate tax return seeking the special use valuation election no later than 12 months after the due date for the return. The government further argued that, even if Temp. Reg. Sec. 22.0(b) was not "completely superseded" by Reg. Sec. 301.9100-2, the temporary regulation cannot be interpreted to permit a Code Sec. 2032A election "to be made literally forever."

The sole issue before the court was whether the Estate's Code Sec. 2032A election, made for the first time on an estate tax return filed over five years late, was valid. The defendants argued that the election, attached to the late-filed Form 706 tax return, was valid because the election was made in accordance with Temp. Reg. Sec. 22.0(b), which is still valid. Thus, the defendants contended that a Code Sec. 2032A election filed under this temporary regulation is valid no matter when it is made, so long as the election is made on the first filed tax return.

Analysis

The district court held that the Estate's Code Sec. 2032A special use valuation election was timely made and thus valid. The court rejected the government's argument regarding Rev. Proc. 92-85 superseding Temp. Reg. Sec. 22 after noting that the procedure did not mention Temp. Reg. Sec. 22.0(b) much less state that it superseded the regulation. Further, the court said, Reg. Sec. 301.9100-2, which specifically grants an automatic extension of 12 months from the date of making a regulatory election, specifically includes the Code Sec. 2032A election and such extension is available regardless of whether the taxpayer timely files its return for the year the election should have been made.

However, the court declined to dismiss the government's complaint because other issues pertaining to the correct amount of tax owed by the Estate, such as the valuation of assets, still must be decided.

For a discussion of the special estate valuation election under Code Sec. 2032A, see Parker Tax ¶224,930.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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