SCHUNEMAN v. UNITED STATES

The opinion of the court was delivered by: Mihm, District Judge.

ORDER

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 this sum).

The case is before the Court on cross motions for summary judgment.

FACTS

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 acres.

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.

On April 23, 1977, Kathryn died and the trustees filed the federal estate tax return. The trustees valued the farm land on the estate tax return at its special use value under § 2032A of the Code. Upon audit of the return, however, the Defendant denied the estate's election of special use valuation and determined that the real estate did not qualify for special use valuation under § 2032A because the Defendant determined that the real estate was not being used for a qualified use on the date of the decedent's death. The Defendant also disallowed the state death tax credit in the amount of $29,902.

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 issues involved.

DISCUSSION

26 U.S.C. § 2032A

The Plaintiffs have raised three issues with regard to § 2032A:

(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:

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 ...