Estate of Opal P. Heffley, Deceased, Timothy S. Heffley, Executor v. Commissioner of Internal Revenue, 89 T. C. 265 (1987)

Passive rental of farmland to non-family members does not qualify for special use valuation under IRC Section 2032A.

Summary

Opal Heffley’s estate sought to value her farmland under the special use valuation provisions of IRC Section 2032A. However, the farmland was leased to non-family members under fixed-rent agreements, with no material participation by Opal or her family in the farm’s operation. The Tax Court held that the farmland did not meet the qualified use requirement and that there was no material participation, thus disqualifying the estate from special use valuation. Additionally, the court declined jurisdiction over the estate’s claim for reduced interest rates on the tax deficiency.

Facts

Opal Heffley owned a 296. 37-acre farm in Indiana, which was leased to non-family members from 1976 until her death in 1981. The lease agreements provided for fixed rent, not contingent on crop production, and required no services or management from Opal or her family. After her husband’s death in 1972, Opal managed the farm for one year before leasing it out. Her son, Timothy, occasionally helped the lessees but was compensated directly by them. Opal’s health declined after a 1975 stroke, preventing her from participating in farm management. Timothy’s independent farming activities in 1981 were minimal, involving only 18 acres of the farm.

Procedural History

The estate filed a Federal estate tax return electing special use valuation under IRC Section 2032A. The Commissioner determined a deficiency and denied the special use valuation, asserting that the farm was not put to a qualified use and there was no material participation. The estate petitioned the Tax Court, which upheld the Commissioner’s determination and also declined jurisdiction over the estate’s claim for reduced interest rates on the deficiency.

Issue(s)

1. Whether the farm was put to a qualified use within the meaning of IRC Section 2032A(b)(2) during the relevant period.
2. Whether Opal Heffley or a member of her family materially participated in the operation of the farm during the relevant period.
3. Whether the Tax Court has jurisdiction to allow the estate to pay interest on its deficiency at the reduced rate provided by IRC Section 6601(j).

Holding

1. No, because the farm was leased to non-family members under fixed-rent agreements, which constituted passive rental and not an active trade or business as required by IRC Section 2032A.
2. No, because neither Opal nor Timothy participated in the management decisions, performed physical work, or assumed financial responsibility for the farm’s operation.
3. No, because the Tax Court’s jurisdiction is limited to determining the amount of a deficiency, and the estate did not make a timely election under IRC Section 6166 to pay the tax in installments.

Court’s Reasoning

The court applied the regulations under IRC Section 2032A, which require the property to be used in an active trade or business, not merely as a passive investment. The leases to non-family members were for fixed rent, not dependent on crop production, and did not require any services from Opal or her family. The court found that Opal’s health prevented her from participating in the farm’s operation, and Timothy’s activities were insufficient to establish material participation. The court cited Estate of Martin and Estate of Abell, where similar passive rental arrangements were held not to qualify for special use valuation. On the interest issue, the court noted its limited jurisdiction and the absence of a timely election under IRC Section 6166, thus declining to review the interest claim.

Practical Implications

This decision clarifies that passive rental of farmland to non-family members does not qualify for special use valuation under IRC Section 2032A. Estate planners and tax professionals must ensure active involvement in the farm’s operation by the decedent or family members to qualify for this tax benefit. The decision also highlights the importance of timely elections for installment payments under IRC Section 6166 to secure reduced interest rates on deficiencies. Subsequent cases have followed this precedent, reinforcing the need for active management and participation to qualify for special use valuation. Practitioners should advise clients on the necessity of maintaining detailed records of their involvement in the farm’s operation to support a special use valuation claim.