Late special-use valuation permitted

A U.S. district court held that the election for special-use valuation of qualified real property under Sec. 2032A was timely despite being made on a federal estate tax return that was filed more than five years late.

Facts: Merle L. Parks died on Sept. 19, 2003. Under the provisions of his will, his nephew, Ronald G. Parks, inherited three parcels of farmland and other assets. The estate tax return, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, was due nine months after his death, on May 19, 2004. The estate requested and received a six-month extension to file the tax return. On June 22, 2004, the estate made a prepayment of federal estate tax of $333,959. However, the estate neither filed the estate tax return by the extended due date nor asked for any further extension to file.

The estate finally filed the return more than five years later in February 2010. The filing reported a taxable estate of $1,664,059 and included the Sec. 2032A special-use valuation election for the qualified farm property. Accordingly, the farm property’s value was adjusted downward from the fair market value at the date of death. The estate claimed an overpayment of estate tax in the amount of $87,838.

The IRS sent a notice of deficiency to the estate for additional tax of $199,111. The IRS denied the use of the special-use valuation election on the grounds that the return was not timely filed and accordingly increased the taxable estate by the amount the property value had been adjusted down by the special-use valuation. The notice also included a late-filing penalty of $27,818. The tax penalties remained unpaid, and the balance due exceeded $400,000 by October 2021.

On Nov. 15, 2021, the government filed a civil action to collect the unpaid tax liabilities.

Issues: The estate, in its response to the IRS’s complaint, admitted that the estate tax return was filed over five years late but contended that the Sec. 2032A election for special-use valuation was timely filed because the election was made on the estate’s first estate tax return filed and that the estate owed no taxes, penalties, or interest.

The estate based its argument on Temp. Regs. Sec. 22.0(b), which states that the Sec. 2032A election is valid on the first estate tax return filed even if it is late. The government argued that the Sec. 2032A election is not valid on a late return. It further asserted that Temp. Regs. Sec. 22.0(b) (which was issued in 1981) was not intended to be permanent and that it was in fact superseded first by Rev. Proc. 92-85, which provided standards for granting extensions of time to make elections. The government also noted that Regs. Sec. 301.9100-2, which was implemented in 1997, grants a 12-month extension to make a regulatory election and argued that it supersedes Rev. Proc. 92-85 and Temp. Regs. Sec. 22.0(b). The government further argued that even if the court ruled that Temp. Regs. Sec. 22.0(b) was not completely superseded by Regs. Sec. 301.9100-2, the temporary regulation could not be interpreted to give an estate an indefinite amount of time to make a Sec. 2032A election.

The estate argued that Temp. Regs. Sec. 22.0(b) has never been superseded and remains in effect. Thus, it contended, the estate’s special-use valuation election on its late-filed Form 706 return was valid because the Sec. 2032A election was included with the estate’s first-filed tax return, even though that tax return was filed late. The estate also asserted that the instructions to the Form 706 estate tax return specifically stated that the Sec. 2032A election can be made on a late-filed return if it is the first return filed.

Holding: The court found that the government failed to demonstrate that Temp. Regs. Sec. 22.0(b) has been superseded by Regs. Sec. 301.9100-2 because the government failed to cite any authority or support for its argument, and the court could not find any authority that Temp. Regs. Sec. 22.0(b) had been superseded. The court found that Temp. Regs. Sec. 22.0 remains in force. The court also noted that Regs. Sec. 301.9100-2 provides that the extension “is available regardless of whether the taxpayer timely filed its return.” The court’s finding was also bolstered by the estate’s argument regarding the instructions for the 2003 Form 706. Therefore, the district court determined that the Sec. 2032A election could not be disregarded on the grounds that the estate tax return was filed late.

■ Parks, No. 21-cv-12676 (E.D. Mich. 11/18/22)

— Mani Gupta, CPA, is a senior tax manager in Cranford, N.J., and David R. Silversmith, CPA, CFP, CFE, is a senior tax manager in Hauppauge, N.Y., both with PKF O’Connor Davies LLP. To comment on this column, contact Paul Bonner, the JofA’s tax editor.