District Court Tells Treasury That Its Special Use Valuation Regulation Is Invalid – Again

The Tax Reform Act of 1976 provided a legislative solution to the perceived problem facing rural landowners of having their estates taxed on the basis of fair market value, and the ability of the Internal Revenue Service (IRS) to use fluctuating values in agricultural land markets to their advantage.  That solution, in the form of the enactment of I.R.C. §2032A (special use valuation) allows the executor of a decedent’s estate to value farmland in the estate at its value for agricultural purposes rather than fair market value.  In recent months, the rapid increase in farmland values in many parts of the country and the uncertainly over the future level of the federal estate tax exemption has increased interest in the utilization of special use valuation.

Because of the significant tax benefits that can be derived by a decedent’s estate making an election to value qualified elected land under a special use valuation election, numerous requirements must be satisfied.   Two of those requirements focus on the amount of farmland and farm personal property that a decedent’s estate must contain.  Statutorily, one of those requirements (discussed further below) requires that the real estate eligible for a special use valuation election must make up at least 25 percent of the adjusted value of the decedent’s gross estate.    But, must the 25 percent test be satisfied only with property that is subject to a special use valuation election?  IRS thinks so, and has adopted a regulation that specifies just that.   In 1988, however, the Federal District Court for the Central District of Illinois invalidated the regulation.   Apparently, IRS didn’t get the message.  The same court has now, 24 years later, again instructed the IRS that the court meant what it said in 1988.