Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Federal District Court Invalidates §2032A Regulation

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In Carolyn Finfrock v. United States, 860 F.Supp.2d 651 (2012), a Federal District Court in Illinois held that Treas. Reg. § 20.2032A-8(a)(2) is contrary to the statute and is, therefore, invalid. This has happened before:

In Miller v. United States, 680 F.Supp. 1269, the district court found Treasury Regulation § 20.2032A-8(a)(2) invalid by using the test that preceded the test articulated by the United States Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The Miller court found that the Treasury Regulation was an interpretive regulation, promulgated under the general rule-making power of the Code, and represented an invalid exercise of that power. Miller, 680 F. Supp. at 1273-74. The court concluded that Treasury Regulation § 20.2032A-8(a)(2) added a requirement not found in the underlying statute that was inconsistent with the statute. Id.

The opinion summarizes the difficulty:

To qualify for the special use valuation, several conditions must be met. One of those conditions is that “25 percent or more of the adjusted value of the gross estate consists of the adjusted value of real property which meets the requirements of subparagraphs (A)(ii) and (C).” 26 U.S.C. § 2032A(b)(1)(B). The parties agree that Items 1 through 4 represented approximately 68% of the adjusted value of the gross estate.

The Treasury Regulations, however, provide that while an estate need not elect special use valuation with respect to all of the qualifying property, the property actually elected for the special use valuation must constitute at least 25% of the adjusted value of the gross estate. See 26 C.F.R. § 20.2032A-8(a)(2) (“An election under section 2032A need not include all real property included in an estate which is eligible for special use valuation, but sufficient property to satisfy the threshold requirements of section 2032A(b)(1)(B) must be specially valued under the election”); see also Miller v. United States, 680 F. Supp. 1269, 1270 n. 1 (C.D. Ill. 1988) (noting the interpretation of the regulation is that the election must be made on property valued at 25% or more of the adjusted value of the gross estate). Defendant argues that this regulation is valid and, because the property elected for special use valuation (Item 4) constituted only 15% of the adjusted value of the gross estate, Plaintiff is not entitled to the refund. Plaintiff argues that the regulation is invalid and in conflict with the statute.

The Court applied Chevron and held that the regulation is invalid:

Therefore, under the plain language of the statute, to meet the definition of “qualified real property,” 25% or more of the adjusted value of the gross estate must consist of real property that (1) “was acquired from or passed from the decedent to a qualified heir of the decedent” (26 U.S.C. § 2032A(b)(1)(A)(ii)); and (2) has been used for a qualified use for 5 of the 8 years preceding the decedent’s death and for which there was material participation by the decedent or a member of the decedent’s family in the operation of the farm (26 U.S.C. § 2032A(b)(1)(C)). Subparagraph (D) further defines “qualified real property” as “such real property” that is designated in the agreement required by subsection (d)(2). 26 U.S.C. § 2032A(b)(1)(D).

Notably, the statute does not require that real property constituting 25% or more of the adjusted value of the gross estate be “designated in an agreement referred to in subsection (d)(2).” 26 U.S.C. § 2032A(b)(1)(D). The 25% or more requirement is a means to limit the benefit of the special use valuation to family farms and family businesses. Nonetheless, under the plain language of the statute, once the estate meets the thresholds identified in subsections (1)(A), (1)(B), and (1)(C), the only other requirement to qualify as “qualified real property” is to designate the property in the required agreement. Congress did not require that the designation be of all or a certain percentage of the real property in the estate that meets the requirements of 1(A), 1(B), and 1(C). See, e.g., Miller, 680 F. Supp. at 1273 (finding “[t]he language of Code § 2032A(b)(1)(B) . . . cannot be said to be ambiguous with respect to the 25% requirement which the regulation imposes”).

This Court finds that § 2032A(b) is neither silent nor ambiguous on the precise issue — whether an executor can elect for special valuation property that constitutes less than 25% of the gross value of the adjusted value of the gross estate. The statute unambiguously provides that an executor can do so.

Having found the statute unambiguous, the Court next determines if the plain meaning of the statute supports or opposes Treasury Regulation § 20.2032A-8(a)(2). See Bankers Life & Casualty Co., 142 F.3d at 982 (explaining step one of the Chevron test). Here, the regulation imposes an additional requirement that the property designated by the agreement referenced in § 2032A(b)(1)(D) and (d)(2) for special use valuation must constitute at least 25% of the adjusted value of the gross estate. This additional requirement is contrary to the plain language of the statute. See, e.g., Miller, 680 F. Supp. at 1273 (finding that “the regulation clearly imposes an additional, substantive requirement not authorized by the statute”). The regulation neither clarifies an ambiguity in the statute, because the statute contains no ambiguity, nor fills any gap, as there is no gap to fill. Therefore, Treasury Regulation § 20.2032A-8(a)(2) is invalid.

Because this Court finds that the statute is unambiguous and that Treasury Regulation § 20.2032A-8(a)(2) conflicts with the statute, this Court need not proceed to step two of the Chevron test or address Defendant’s arguments with regard to step two of the Chevron test.

Turney P. Berry
Louisville, Kentucky


Author: robmalinesq

I am an estate planning and probate attorney in Memphis, Tennessee.

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