Estate Taxes: A Special Use Value Can Save the Farm

 Imagine a family member passes away and leaves the family farm or business to you. Internal Revenue Code Section 2032A allows for a Special Use Value to be applied to family farming operations as well as closely held businesses. However there are several requirements that must be met to claim the reduced value on the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. If these requirements are not met then you may receive a Notice of Deficiency from the IRS showing a vast increase in your taxable estate, coupled with a significant increase in tax and the imposition of hefty penalties. Lawyer firm in Illinois. Unfortunately, this scenario can and does happen, as the IRS may find that the taxpayer insufficiently established the method of valuation.

In general, the value of the gross estate of a decedent includes the value at the time of his or her death of all real and personal property. However, the executor or personal representative can often significantly reduce or even eliminate the estate tax when a large portion of the estate's value includes real property used for business or farming.

The executor or personal representative should elect the special use valuation if material participation by the deceased owner and/or a member of the owner's family in the operation of a farm or closely-held business can be established. Material participation must be shown to have existed for periods totaling 5 years or more during the 8 years immediately preceding the date of the decedent's death. Material participation can be shown in a variety of ways, but physical work and participation in management decisions are the principal factors the IRS considers in determining whether material participation has occurred.

Once the special-use election has been made, qualified heirs or their family members must continue to materially participate in the operation of the farm or closely-held business for the next 10 years. Further, the heirs may not dispose of the property during this 10-year period. Failure to comply with these rules results in a recapture of the special use value benefit.

If the IRS finds that the method of valuation was not sufficiently established, the estate could be burdened with hundreds of thousands of dollars of additional tax. In this scenario, the estate is entitled to an Appeals Conference with an IRS Appeals Officer and if not resolved in appeals, has the right to take the case to the United States Tax Court.