The opinion of the court was delivered by: Mihm, District Judge.
Plaintiffs Merle Schuneman and Robert Doty, as trustees
under a trust agreement of which Kathryn M. Keefe was settlor,
have brought this action to recover certain estate taxes paid
in connection with the estate of the decedent, Kathryn M.
Keefe. The Plaintiffs were assessed and paid (1) $144,892.36
in taxes and interest based on a denial of the special use
valuation for certain farm land of the estate and (2)
$37,930.48 based on the disallowance of the state tax credit.
Plaintiffs allege that (1) the IRS erroneously held that the
decedent's estate did not qualify for special use valuation
under § 2032A of the Internal Revenue Code; and (2) the IRS
erroneously disallowed a credit for the state death taxes paid
by the estate. (The United States has conceded that Plaintiffs
were entitled to a credit for this sum but refuses to refund
the $8,028.48 of assessed interest paid by the Plaintiffs on
The case is before the Court on cross motions for summary
A discussion of the facts will help clarify the situation
involved in this case. Most of the farm land in question had
been in the Keefe family since 1895. During the period 1895
through 1956, the farm was operated by Kathryn's parents and
following their death, by Kathryn and her brothers. Two of her
brothers predeceased her and Kathryn inherited their portion
of the farm land. Later, she acquired forty additional acres
from another source, bringing her total farm ownership to 330
During the years 1956 through 1968, Kathryn resided on the
farm and operated the farm land, hiring neighboring farmers to
use their machinery to plant and harvest the crops. In 1969,
Kathryn first entered into an oral crop-share-lease
arrangement with a neighboring farmer, Arthur Wetzell, and
continued this arrangement through 1975. Under the terms of
the crop share arrangement, Kathryn reserved the right to
decide what crops were to be planted, the number of acres
which would be planted in each crop, and the crop rotation
practices which would be used. Each winter Mr. Wetzell would
present a proposed crop plan showing the amount and location
of each crop for the coming year. During each year of the crop
share arrangement Kathryn, in consultation with Mr. Wetzell,
decided which crops would be planted and the number and the
location of the acres which would be planted in each crop.
Under the crop share arrangement, Kathryn paid 50% of the
production costs, including fertilizer, seed, and supplies and
100% of the utilities. Kathryn participated with Mr. Wetzell
in making decisions concerning the extent to which the farm
operation should participate in programs implemented by the
United States Department of Agriculture. In August, 1975,
Kathryn took out a personal liability insurance policy for the
farm operations in which she designated herself as operator
and not simply as landlord. During the planting and harvesting
season, consultations between Kathryn and Mr. Wetzell
generally occurred two or three times a week and during the
remainder of the year, generally at least once a week.
In 1976, Kathryn entered into a written lease with Mr.
Wetzell for the subject farm land. Under the terms of this
lease agreement, the tenant, Mr. Wetzell, was to pay Kathryn
cash rent in the amount of $26,240 and Kathryn was not to
participate in the operation of the farm as she had under the
previous arrangement with Mr. Wetzell. A similar agreement was
negotiated in 1977; however, this arrangement did provide that
if, at the time of harvest, the gross income derivable to Mr.
Wetzell was shown to be less than the average production of 70
bushels per acre times a price of $2.25 per bushel, then the
annual rent would be adjusted to $26,080 from the $32,600
which the 1977 lease stated as rent.
Later the Defendant conceded that the trustees were entitled
to a credit for the state death taxes under § 2011 of the Code.
However, the Defendant denied a refund or credit for the
$8,028.48 of assessed interest with respect to the additional
estate tax paid because of the Defendant's disallowance of the
state death tax credit.
It is with this background that the Court must examine the
The Plaintiffs have raised three issues with regard to §
(1) Whether § 2032A, as enacted by the 1976 Act, required the
decedent to use the farm land for a qualified use at the time
of her death;
(2) Whether § 2032A, as amended by the Economic Recovery Tax
Act (ERTA) of 1981, required the decedent to use the farm land
for a qualified use at the time of her death; and
(3) If the amendments made by the 1981 Act change the
requirements of the 1976 Act, is it a violation of due process
to apply them retroactively.
Under § 2032A the executor of an estate may elect to value
certain property based on its actual use rather than its
"highest and best use" as is typically done. However, to
qualify under § 2032A a number of requirements must be
satisfied. The portion of § 2032A as provided in the 1976 Act
which is relevant to this case provided:
"For purposes of this section, the term
`qualified real property' means real property
located in the United States which was acquired
from or passed from the decedent to a qualified
heir of the decedent and which, on the date of
the decedent's death, was being used for a
qualified use . . ."
Plaintiffs argue that this portion of § 2032A simply required
that the real property be used for a qualified use. According
to Plaintiffs, the qualified use test could be satisfied ...