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Carolyn Finfrock, As Executor of the Estate of v. United States of America

March 20, 2012

CAROLYN FINFROCK, AS EXECUTOR OF THE ESTATE OF DORIS E. FINFROCK-WARE, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Sue E. Myerscough, U.S. District Judge.

E-FILED

Tuesday, 20 March, 2012 02:22:27 PM

Clerk, U.S. District Court, ILCD

OPINION

This cause is before the Court on the parties' cross-motions for summary judgment. See Plaintiff's Motion for Summary Judgment (d/e 10); Defendant's Motion for Summary Judgment (d/e 11). The sole issue is whether Treasury Regulation 20.2032A-8 (a)(2) (26 C.F.R. § 20.2032A-8 (a)(2)) is a valid regulation. For the reasons that follow, this Court finds that the regulation is invalid. Because additional issues remain to be determined, however, the Motions for Summary Judgment are taken under advisement.

I. FACTUAL BACKGROUND

The parties have stipulated to the following facts Plaintiff is the executor of the estate of her deceased mother-in-law, Doris Finfrock-Ware (the decedent), who previously resided in this District. The decedent died on January 3, 2008.

At the time of her death, the decedent owned 61.05% of the issued and outstanding stock in the farm corporation Finfrock Farms, Inc. (Finfrock Farms). Finfrock Farms was a closely-held business pursuant to the Treasury Department regulations.

At the time of decedent's death, and for at least 8 years prior to her death, Finfrock Farms owned the following items of real property: Item 1 (40 acres of real property); Item 2 (122.5 acres of real property); Item 3 (377.21 acres of real property); and Item 4 (165 acres of real property). There was no formal agreement describing who would operate the farm on behalf of the corporation. However, for the entire 8 years preceding the decedent's death, her son James Finfrock actively farmed Items 1 through 4.

On the decedent's death, Items 1 through 4 passed indirectly to qualified heirs as defined in 26 U.S.C. § 2032A(e) through a change in ownership of Finfrock Farms. The decedent estate's Internal Revenue Service (IRS) Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return ("Form 706"), was filed on October 2, 2008.

In Schedule A of the estate's Form 706, the estate listed decedent's share of Finfrock Farm's interest in Items 1 through 4, which Plaintiff alleges constituted "qualified real property" as that term is used in § 2032A. The estate's "adjusted value of the gross estate," as that term is used in 26 U.S.C. § 2032A(b)(1)(A) and (B), was $2,608,848.00. The estate's "adjusted value of real property," as that term is used in 26 U.S.C. § 2032A(b)(1)(B), which consists of the estate's interest in Items 1 through 4 listed in Schedule A of the Form 706, was $1,775,000.00, representing approximately 68% of the adjusted value of the gross estate.

The estate made a regular election to specially value its share of Finfrock Farm's interest in Item 4. The estate valued Items 1 through 3 using the usual valuation method. The special use valuation of Item 4 was $227,233.00. The adjusted value of Item 4, $402,930.00, represents approximately 15% of the adjusted value of the gross estate. The estate elected to value only the farmland referenced above as Item 4 pursuant to 26 U.S.C. § 2032A because Plaintiff wished to continue operating Item 4 as a farm, whereas other members of her family opted not to continue farming Items 1through 3 and sold them to unrelated third parties shortly after the decedent's death.

The IRS examined the Form 706 and determined that the estate's election to value only part of the qualifying real property did not meet the requirements of applicable federal regulation 26 C.F.R. § 20.2032A-8 ("Treasury Regulation § 20.2032A-8"). Under Treasury Regulation § 20.2032A-8, not only must the adjusted value of all of the estate's qualifying real property exceed the 25% threshold as provided in 26 U.S.C. § 2032A(b)(1)(B), but the value of the real property for which the executor makes the election also must exceed such threshold. As indicated above, because the estate's election only included its interest in Item 4, the adjusted value of which was only 15% of the adjusted value of the gross estate, the estate did not meet this threshold. Accordingly, Defendant "increased the returned value of Item 4 on Schedule A of the 706 return from $227,233.00" (its special use value) to $402,930.00 (its agreed market value) and assessed an additional tax on account of this increase. Statement of Undisputed Fact No. 13.

On behalf of the estate, Plaintiff timely filed a claim for refund and paid the additionally assessed tax. By letter dated February 7, 2011, Defendant denied the estate's claim.

On February 23, 2011, Plaintiff filed this lawsuit on behalf of the estate. Plaintiff contends that the estate should be entitled to elect a special use valuation for its interest in Item 4 notwithstanding Treasury ...


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