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Whalen v. United States

decided: August 13, 1987.


Appeal from the United States District Court for the Central District of Illinois, Springfield Division, No. 84-3020 - Richard Mills, Judge.

Posner and Flaum, Circuit Judges, and Will, Senior District Judge.*fn*

Author: Will

WILL, Senior District Judge.

Katherine B. Whalen died on April 14, 1977. In her will, Whalen devised nearly one hundred acres of Illinois farm land to her three sons and stepdaughter, Catherine Brown. Whalen's estate claimed special use valuation under § 2032A, for all of the farmland. The Internal Revenue Service denied special use valuation for the quarter interest devised to Catherine Brown, finding that a stepchild was not a "qualified heir" as required by § 2032A. A magistrate and the district court agreed with the IRS determination.

On appeal, the estate concedes that a stepchild such as Catherine Brown is not a qualified heir,*fn1 but contends that § 2032A did not require that property pass to a qualified heir until the section was amended by the Revenue Act of 1978, Pub. L. No. 95-600, § 702(d)(1), 92 Stat. 2928. In the estate's view, the application of a 1978 law to the estate of a woman dying in 1977 violates the fifth amendment's due process clause. Because we find that the 1978 amendment of § 2032A did not change but merely clarified preexisting law, we affirm the district court's decision denying the estate's claim for refund.

Section 2032A allows certain property used in family farming and closely-held businesses to be valued, for purpose of the federal estate tax, on the basis of its actual use at the time of the decedent's death rather than its "highest and best use." Estate of Cowser v. Commissioner, 736 F.2d 1168, 1170 (7th Cir. 1984). The congressional purpose in enacting § 2032A was to protect the devisees of family farms and closely-held businesses from having to sell the property to pay the federal estate tax. Id. Briefly summarized, § 2032A requires that each of the following conditions be met to establish eligibility for special use valuation: (1) the decedent must have been a citizen or resident of the United States; (2) the property must be located in the United States; (3) the property must have been used at the time of the decedent's death as a farm or in a trade or business by the decedent, or by a member of the decedent's family; (4) there must be "material participation" in the operation of the farm or business by the decedent or a member of the decedent's family; and (5) the property must pass to a qualified heir, who must be a member of the decedent's family. Estate of Abell v. Commissioner, 83 T.C. 696, 699 (1984).

The question we must decide is whether the last of these requirements -- that the recipient of the property be a qualified heir -- was present in § 2032A as originally enacted in 1976 or was added by the section's 1978 amendment. If a qualified heir has been required all along, the 1978 amendment will have deprived the Whalen estate of nothing and we can affirm without proceeding further. If it was first required in 1978, however, the retroactive application of the amendment to the Whalen estate will implicate, which is not to say that it will necessarily violate, the due process clause.

The estate correctly notes that the 1976 version of § 2032A did not explicitly require that "qualified real property" be devised to a qualified heir in order to be eligible for special use valuation. The language italicized below was not added until the 1978 amendment, so that the statute now reads in pertinent part:

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 . . . .

26 U.S.C. § 2032A(b)(1) (emphasis added). Nevertheless, a fair reading of the Tax Reform Act of 1976 and its legislative history supports the government's interpretation. First, the inclusion in the 1976 Act of a definition of qualified heir (in subsections (e)(1) and (e)(2) of § 2032A, see supra n.1), suggests that Congress viewed this as a prerequisite of eligibility for special use valuation. Moreover, both the House Ways and Means Committee Report and the Joint Committee Report list inheritance by a qualified heir as one of the basic requirements for special use valuation.*fn2 The historical documents therefore confirm what is implied by the Act's structure and text, which is that for an estate to obtain special use valuation, the decedent's property must pass to a qualified heir.

The history of the 1978 amendment provides further support for this interpretation.*fn3 The amendment was introduced on April 28, 1977, two weeks after Katherine Whalen's death, as part of the Technical Corrections bill, H.R. 6715, 95th Cong., 1st Sess. (1977). Containing "technical, clerical, conforming and clarifying amendments to provisions enacted by the Tax Reform Act of 1976," H.R. Rep. No. 700, 95th Cong., 1st Sess. 1 (1977), the bill was passed by the House and reported by the Senate Finance Committee with the following observations:

Clarification of the Rules Relating to Special Use Valuation

Reasons for Change

Under present law, it is not clear whether, if the estate otherwise qualifies for the portion satisfying the percentage tests, other property which is used in a qualifying use can be valued under the special use valuation rules when it passes to ...

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