Farm remainder sale to the seller's mother avoided special-use recapture tax

Plain-English summary

An estate elected special-use valuation for farm property that passed as a life estate to the decedent's daughter, with remainder interests for her two children. One grandchild proposed selling a half remainder interest to the daughter before the end of the 10-year recapture period. Section 2032A generally imposes additional estate tax when a qualified heir disposes of specially valued property during that period, but excludes a transfer to a family member. The IRS concluded that the daughter was both a qualified heir and an ancestor within the seller's family, so the sale would not trigger the additional tax. The daughter had to sign an amended agreement accepting personal liability for any future section 2032A recapture tax.

Ruling snapshot

• Question: Would a grandchild's sale of a farm remainder interest to the grandchild's mother trigger section 2032A additional estate tax?
• Outcome: Approved, subject to an amended personal-liability agreement reflecting the new ownership.
• Key authorities: IRC § 2032A(c), (e); Rev. Rul. 85-66; Rev. Rul. 89-22

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201743013                                             Third Party Communication: None
Release Date: 10/27/2017                                      Date of Communication: Not Applicable

Index Number: 2032A.00-00                                     Person To Contact:
                                                              -----------------------------------------------------
----------------------                                        --------------------------------------
--------------------------                                    Telephone Number:
---------------------------                                   ----------------------
                                                              Refer Reply To:
                                                              CC:PSI:B04
                                                              PLR-109107-17
                                                              Date:
--------- ------------------------                            July 26, 2017



Legend

Decedent                 -------------------
Daughter                 ----------------------
Grandson                 ------------------
Granddaughter            -----------------
Property                 --------------------------------------------------------------------------------------------------------------
                         -----------------------------------------------
Date 1                   ------------------------
Date 2                   -----------------
Date 3                   --------------------

Dear ------------------:

       This letter responds to your authorized representative’s letter dated February 13,
2017, and subsequent correspondence, requesting a ruling that the proposed sale of an
interest in a farm, that was specially valued under § 2032A of the Internal Revenue
Code, is not a disposition of the property under § 2032A(c)(1)(A) that will result in
imposition of the additional estate tax under that section.

         The facts and representations submitted are summarized as follows:

       Decedent died on Date 1. Provision 4.A. of Decedent’s will provides that upon
the death of Decedent’s wife, or in the event that she predeceases him, Decedent
devised Property to Decedent’s daughter, Daughter, for her life. Upon Daughter’s
death, the remainder interest is to become the property of her two children,
Granddaughter and Grandson. On Date 2, Decedent’s wife disclaimed her interest in
Property and Property was devised as though Decedent’s wife predeceased him. The
PLR-109107-17                                2

federal estate tax return was timely filed, with extension, on Date 3 and the executors
elected special use valuation under § 2032A to treat Property as a farm.

     Grandson proposes to sell his remainder interest in half of Property to Daughter.
Grandson proposes that the sale be completed before the date that is 10 years after
Decedent’s death.

     You have asked us to rule that the transfer of Grandson’s interest in Property to
Daughter will not trigger the tax consequences of § 2032A(c).

       Section 2032A generally provides that if certain conditions are met, the executor
may elect to value qualified real property on the basis of such property’s value at its
current use as a farm, rather than at its fair market value based on its highest and best
use.

        Section 2032A(c)(1)(A) provides that if, within 10 years after the decedent’s
death and before the death of the qualified heir, the qualified heir disposes of any
interest in qualified real property (other than by a disposition to a member of the
qualified heir’s family), then an additional estate tax is imposed. See Rev. Rul. 89-22,
1989-1 C.B. 276.

        Section 2032A(e)(1) defines “qualified heir” with respect to any property, a
member of the decedent’s family who acquired such property (or to whom such property
passed) from the decedent. If a qualified heir disposes of any interest in qualified real
property to any member of his family, such member shall thereafter be treated as the
qualified heir with respect to such interest.

       Section 2032A(e)(2) defines “member of the family” with respect to any individual
as only—
       (A) an ancestor of such individual
       (B) the spouse of such individual
       (C) a lineal descendant of such individual, of such individual's spouse, or of a
parent of such individual, or
       (D) the spouse of any lineal descendant described in subparagraph (C).

       In this situation, under § 2032A(e)(1) and § 2032A(e)(2) both Grandson and
Daughter are qualified heirs of Decedent because they are lineal descendants of
Decedent. Additionally, under § 2032A(e)(2), Daughter is a member of Grandson’s
family because Daughter is an ancestor of Grandson. Therefore, Grandson’s sale of his
interest in Property to Daughter, within 10 years after Decedent’s death, will not be a
disposition to a member of his family for purposes of § 2032A(c)(1)(A). Consequently,
the sale will not be a disposition upon which an additional tax is imposed under
§ 2032A(c)(1)(A). See Rev. Rul. 85-66, 1985-1 C.B. 324. However, Daughter must
sign and execute an amended written agreement consenting to personal liability for
PLR-109107-17                                3

additional estate tax under § 2032A(c) reflecting the changed ownership of the property.
See Rev. Rul. 85-66.

       We express no opinion regarding whether the property qualified for special use
valuation under § 2032A.

      In accordance with the Power of Attorney on file with this office, we have sent a
copy of this letter to your authorized representatives.

       Except as expressly provided herein, we neither express nor imply any opinion
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

      The rulings contained in this letter are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.


                                         Sincerely,

                                         Lorraine E. Gardner

                                         _________________________
                                         Lorraine E. Gardner
                                         Senior Counsel, Branch 4
                                         Office of the Associate Chief Counsel
                                         (Passthroughs and Special Industries)



      Enclosures
            Copy for § 6110 purposes
            Copy of this letter


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