United States Court of Appeals,
Eleventh Circuit.
No. 95-2370.
In re ESTATE OF Charles R. LUCAS, Deceased, Plaintiff.
Roy H. LUCAS; Howard C. Lucas, Co-Personal Representatives of
the Estate of Charles R. Lucas, Plaintiffs-Appellants,
v.
UNITED STATES of America, Defendant-Appellee.
Oct. 23, 1996.
Appeal from the United States District Court for the Middle
District of Florida. (No. 91-622-CIV-T-25A), Henry Lee Adams, Jr.,
District Judge.
Before HATCHETT, Chief Judge, ANDERSON, Circuit Judge, and WOOD*,
Senior Circuit Judge.
ANDERSON, Circuit Judge:
In this federal estate tax case, the government determined
that the Estate of Charles R. Lucas (the Estate) was not entitled
to "special use valuation" of certain family farm property pursuant
to section 2032A of the Internal Revenue Code. See 26 U.S.C. §
2032A. The first issue on appeal is whether the Estate's initial
effort to elect special use valuation was sufficient to constitute
"substantial compliance" with the applicable regulations, thereby
entitling the Estate to perfect its election upon notice from the
I.R.S. that the original election was deficient. See 26 U.S.C. §
2032A(d)(3). A related issue is also presented: whether the
Estate provided "substantially all the information" required on the
estate tax return with respect to the election for special use
*
Honorable Harlington Wood, Jr., Senior U.S. Circuit Judge
for the Seventh Circuit, sitting by designation.
valuation, such that the I.R.S. should have allowed the Estate to
perfect its previously deficient election. See Tax Reform Act of
1986, Pub.L. No. 99-514, § 1421, 100 Stat. 2085, 2716, as amended
by the Technical and Miscellaneous Revenue Act of 1988, Pub.L. No.
100-647, § 1014(f), 102 Stat. 3342, 3562. We find that the
Estate's election for special use valuation did not substantially
comply with the applicable regulations, nor did it provide
substantially all the information required on the tax return.
Accordingly, we affirm the district court's entry of judgment in
favor of the government.
I. FACTS AND PROCEDURAL HISTORY
Charles R. Lucas (decedent) died testate on December 15, 1985.
Howard C. Lucas and Roy H. Lucas are the decedent's sons and the
co-personal representatives of his estate. Under their father's
will, they are also the only legatees to certain Polk County,
Florida farm land, the valuation of which is at issue in this case.
After receiving an extension from the I.R.S., the Estate filed
a timely federal estate tax return on October 16, 1986. The Estate
used the March 1985 version of Form 706. On line 2 of page 2 of
the form, in response to the question, "Do you elect special use
valuation?," the Estate failed to check either the "yes" or "no"
box. Immediately below the question, Form 706 instructs that, "If
"Yes,' complete and attach Schedule N and the agreements required
by the instructions to Schedule N."
Despite its failure to check the "Yes" box on page 2 of the
return, the Estate completed a Schedule N. Schedule N of Form 706
(March 1985), entitled "Section 2032A Valuation," directs the
taxpayer: "Enter the requested information for each party who
received any interest in the specially valued property. Also
complete and attach the required agreements described in the
instructions."1 The Estate's Schedule N lists Roy H. Lucas and
Howard C. Lucas, the decedent's two sons, as the parties with an
interest in the specially valued property. Under the preprinted
headings "Fair market value" and "Special use value," the amounts
$187,500 and $40,000, respectively, are listed for Roy Lucas. The
same amounts are listed for Howard Lucas.2
1
The instruction booklet accompanying the March 1985 version
of Form 706 contains a section entitled "Instructions for
Schedule N.—Section 2032A Valuation." This section instructs the
taxpayer how to complete the Schedule N, lists the items of
information that must be included in a required attachment called
the "notice of election," and describes in detail the required
"agreement to special valuation by persons with an interest in
property."
2
On Schedule A of Form 706, where the taxpayer is required
to list and describe all of its real property, the Estate
included a description of the property that was to be specially
valued. Item numbers 3A, 3B, and 3C are described as follows:
3A Parcel # 2—West parcel consisting of 30.2 + A. of
citrus grove and woodlands fronting on the South
side of Crystal Beach Rd., and along the North
shore of Lake Millsite. The grove consists of 7.3
+ A., an old frame house occupies about 3A. near
the N.W. end of parcel. Winter Haven, Florida.
3B The remaining 22.6 A. is woodland used as native
cattle range in conjunction with adjacant [sic]
improved pasture owned by other members of Lucas
family. Agricultural use value of this parcel.
Winter Haven, Florida.
3C The grove is a very old planting, substantial foot
rot, ytd. blite or other die-back associated with
old plantings.
The highest and best use of parcels 3B and 3C is
building lots—$375,000 but the agricultureal [sic]
use valuse [sic] is.... 80,000
The Estate attached to its return a document entitled
"Affidavit from Personal Representatives," which purported to serve
as the Estate's notice of election. This document contained most,
but not all, of the fourteen items of information required by the
applicable Treasury regulations to be included in the notice of
election. See 26 C.F.R. § 20.2032A-8(a)(3).3 Significantly, the
Estate did not attach an "agreement to special valuation by persons
with an interest in property," also called a recapture agreement,
to its return. See 26 U.S.C. § 2032A(a)(1)(B) and (d)(2); 26
C.F.R. § 20.2032A-8(a)(3) and (c).
On audit of the estate tax return, the I.R.S. advised the
Estate that the attempted election for special use valuation was
defective, the primary reason being the Estate's failure to attach
a recapture agreement. Subsequently, and within ninety days
following the notice from the I.R.S. about the defective election,
the Estate submitted a recapture agreement that fully complied with
the requirements of the regulations. Nevertheless, the I.R.S.
This property qualifies under Section 2032 A/S
[sic] of the I.R.C.
Winter Haven, Florida.
3
The Estate's notice of election did not contain a
"statement that the decedent and/or a member of his or her family
has owned all specially valued real property for at least 5 years
of the 8 years immediately preceding the date of the decedent's
death," as required by 26 C.F.R. § 20.2032A-8(a)(3)(x). Nor did
it contain a statement of "[a]ny periods during the 8 year period
preceding the date of the decedent's death during which the
decedent or a member of his or her family did not own the
property, use it in a qualified use, or materially participate in
the operation of the farm or other business ...," as required by
26 C.F.R. § 20.2032A-8(a)(3)(xi). With respect to these items,
the notice of election stated "affidavit attached." However, no
additional affidavits were attached.
denied special use valuation for the properties in question. The
I.R.S. took the position that the Estate's initial submission did
not substantially comply with the applicable regulations, and the
Estate therefore was not eligible subsequently to perfect its
defective election under § 2032A(d)(3). The I.R.S. increased the
amount of the gross estate, based on the excess of the fair market
value of the real property in question over its value as farm land,
and assessed a tax deficiency in the amount of $87,131.
The Estate paid the assessment, filed a claim for a refund,
and when the claim was denied by the I.R.S., filed a complaint in
federal district court. A jury trial was conducted. At the close
of the evidence, the district court awarded judgment to the
government as a matter of law, without sending the case to the
jury. This appeal followed.
II. DISCUSSION
A. Introduction: Special Use Valuation Under Internal Revenue Code
§ 2032A
For purposes of calculating the federal estate tax, the value
of real property included in the gross estate of a decedent is
generally its fair market value. See 26 U.S.C. § 2031(a); 26
C.F.R. § 20.2031-1(b). In 1976, however, Congress authorized an
alternate valuation method, "special use valuation," for certain
family farms and other family businesses. Tax Reform Act of 1976,
Pub.L. No. 94-455, § 2003, 90 Stat. 1520, 1856-62 (codified, as
amended, at 26 U.S.C. § 2032A). Special use valuation allows
qualified real property to be valued according to its actual use
(e.g., as a farm), rather than at its fair market value based on
its highest and best use (e.g., as a housing development or a
shopping mall). The rationale underlying § 2032A is to reduce the
tax burden on the estate's heirs, so that they are not forced to
sell the family farm or business in order to pay the high estate
taxes that would result if the property were taxed at its fair
market value. Estate of Sherrod v. Commissioner, 774 F.2d 1057,
1061-62 (11th Cir.1985), cert. denied, 479 U.S. 814, 107 S.Ct. 66,
93 L.Ed.2d 24 (1986); Estate of Doherty v. Commissioner, 982 F.2d
450, 453 (10th Cir.1992); H.R.Rep. No. 94-1380, 94th Cong., 2d
Sess., 21-22 (1976), reprinted in 1976 U.S.Code Cong. & Admin.News
2897, 3356, 3375-76.
To qualify for special use valuation, the estate must satisfy
several substantive conditions. The decedent must have been a
citizen or resident of the United States at the time of his or her
death, 26 U.S.C. § 2032A(a)(1)(A); the property must be located in
the United States, id. § 2032A(b)(1); the value of the property
must exceed specified percentages of the decedent's gross estate
and adjusted estate, id.; the property must devolve to a
"qualified heir," who must be a member of the decedent's family,
id., id. § 2032A(e)(1), (2); and the decedent or a member of the
decedent's family must have materially participated in the
operation of the farm or business at the time of the decedent's
death and for five of the eight years preceding the decedent's
death, id. § 2032A(b)(1).
Additionally, in order to avoid subsequent recapture of the
tax savings produced by special use valuation, the property must
remain in the ownership of the family and must be used for the
qualified use for at least ten years following the decedent's
death. 26 U.S.C. § 2032A(c). At the time of the election for
special use valuation, the qualified heirs who inherited the
property ("qualified heirs") must agree to keep the specially
valued property in the family and to operate it for the qualified
use for ten years. Id., § 2032A(c) and (d)(2). The contract
expressing such agreement by the qualified heirs, commonly called
a "recapture agreement," must be executed and filed
contemporaneously with the estate tax return. Id. § 2032A(a)(1).
In this recapture agreement, the qualified heirs must bind
themselves under state law to be personally liable to the
government for a recapture tax in the event of a premature
disposition of the property or an early cessation of the qualified
use. 26 C.F.R. § 20.2032A-8(c).
Special use valuation of qualified real property does not
occur just because the Estate satisfies all of the substantive
conditions; rather, the Estate must affirmatively elect such
treatment on the estate tax return. 26 U.S.C. § 2032A(a)(1)(B).
The principal requirements for a valid election are (1) checking
the appropriate box on the estate tax return and completing the
Schedule N; (2) completing and attaching to the return a notice of
election, which contains all of the information specified in §
2032A and the applicable regulations; and (3) attaching a
recapture agreement that has been signed by all parties with
interests in the specially valued property, expressly consenting to
personal liability for the recapture tax in the event of a
premature disposition of the property or an early cessation of its
qualified use. "Thus a Notice of Election and a Recapture
Agreement, validly and completely executed and filed
contemporaneously with the estate tax return, are essential
prerequisites if an estate that elects special use valuation is to
be in full compliance with § 2032A." Estate of Hudgins v.
Commissioner, 57 F.3d 1393, 1397 (5th Cir.1995).
Treating Congress' allowance of special use valuation as an
act of legislative grace, the I.R.S. and the courts have strictly
construed § 2032A and its requirements. See Prussner v. United
States, 896 F.2d 218, 220 (7th Cir.1990) (en banc). In response to
complaints from taxpayers who were denied special use valuation
because of their failure to comply fully with all of the procedural
requirements for a valid election, Congress passed two statutes
designed to block the I.R.S. from seizing upon slight technical
defects, which would prevent otherwise qualified taxpayers from
taking advantage of special use valuation. See McAlpine v.
Commissioner, 968 F.2d 459, 461 (5th Cir.1992). Under 26 U.S.C. §
2032A(d)(3), added by the Deficit Reduction Act of 1984, Pub.L. No.
98-369, § 1025, 98 Stat. 494, 1030-31, an estate whose initial
election for special use valuation "substantially complies" with
the applicable regulations may subsequently correct technical
deficiencies within a reasonable period (not to exceed ninety days)
following notice from the I.R.S. Section 1421 of the Tax Reform
Act of 1986 provides similar relief to certain taxpayers who
elected § 2032A treatment on the estate tax return and provided
"substantially all the information with respect to such election
required on such return of tax." Tax Reform Act of 1986, Pub.L.
No. 99-514, § 1421(a)(2), 100 Stat. 2085, 2716, as amended by the
Technical and Miscellaneous Revenue Act of 1988, Pub.L. No. 100-
647, § 1014(f), 102 Stat. 3343, 3562.
In the instant case, the Estate concedes that its election for
special use valuation did not fully comply with the applicable
regulations. However, the Estate argues that its initial effort to
elect special use valuation "substantially complied" with the
applicable regulations, thus entitling the Estate, pursuant to 26
U.S.C. § 2032A(d)(3), to correct or perfect its defective election
once notified by the I.R.S. In the alternative, the Estate
contends that it provided "substantially all the information"
required on its return with respect to the election for special use
valuation, and that it was eligible under § 1421 of the Tax Reform
Act of 1986 to perfect its previously defective election. We
address each of the Estate's arguments.
B. Section 2032A(d)(3)
It is undisputed that the Estate failed to file a recapture
agreement with the estate tax return. In addition, the Estate
omitted several items of information from the notice of election,
and failed to check the box on the portion of the tax return that
asks whether the estate intends to elect special use valuation.
Nevertheless, the Estate argues that it "substantially complied"
with the applicable regulations in its effort to elect special use
valuation, thus entitling it to correct the defects in its election
pursuant to § 2032A(d)(3). We disagree, and hold that the Estate's
failure to attach a recapture agreement is sufficient by itself to
preclude the requisite "substantial compliance" with the
regulations.4
Section 2032A(d)(3) provides as follows:
MODIFICATION OF ELECTION AND AGREEMENT TO BE PERMITTED.—The
Secretary [of the Treasury] shall prescribe procedures which
provide that in any case in which—
(A) the executor makes an election under [26 U.S.C. §
2032A(d)(1) ] within the time prescribed for filing such
election, and
(B) substantially complies with the regulations
prescribed by the Secretary with respect to such election,
but—
(i) the notice of election, as filed, does not
contain all required information, or
(ii) signatures of 1 or more persons required to
enter into the [recapture agreement] are not included on
the agreement as filed, or the agreement does not contain
all required information,
the executor will have a reasonable period of time (not
exceeding 90 days) after notification of such failures to
provide such information or agreements.
26 U.S.C. § 2032A(d)(3). "By "agreements' in the last line the
statute evidently means an additional copy or additional copies of
the agreement, containing the missing signatures." Prussner v.
United States, 896 F.2d 218, 222 (7th Cir.1990) (en banc).
The Code does not define the phrase "substantial compliance,"
and no Treasury regulations defining that phrase have been enacted.
"It is left to the courts to determine whether a taxpayer has
substantially complied with the applicable regulations such that
4
Because we conclude that the absence of the recapture
agreement is sufficient to preclude "substantial compliance" for
purposes of § 2032A(d)(3), we do not address the effect of the
Estate's omission of specific items of information from the
notice of election. With respect to the Estate's failure to
check the "Yes" box on the portion of the return that asks
whether the estate intends to elect special use valuation, see
Part II.C., infra.
perfection of an election is allowed." McAlpine v. Commissioner,
968 F.2d 459, 461 (5th Cir.1992).
In answering the question presented—whether a taxpayer who
fails to attach any kind of recapture agreement to the estate tax
return has "substantially complied" with the regulations for making
an election—we start with the statute itself. The language of §
2032A(d)(3)(B)(ii) allows the taxpayer to correct a defective
election where the taxpayer "substantially complies with the
regulations ... with respect to [the] election, but ... signatures
of 1 or more persons required to enter into the [recapture
agreement] are not included on the agreement as filed, or the
agreement does not contain all required information...." The
foregoing language implies that the taxpayer who has submitted a
recapture agreement, albeit with defects, will be allowed to
correct those defects. It does not suggest that such relief should
be afforded to the taxpayer who has failed to submit any kind of
recapture agreement with his or her return. See Estate of Hudgins
v. Commissioner, 57 F.3d 1393, 1400-01 (5th Cir.1995) (holding §
2032A(d)(3) is available for the correction of "hypertechnical
glitches," not the complete failure to file a recapture agreement);
McDonald v. Commissioner, 853 F.2d 1494, 1497-98 (8th Cir.1988)
(explaining that § 2032A(d)(3) allows the taxpayer to correct
"slight technical failures" in an otherwise acceptable recapture
agreement).
The legislative history of the Deficit Reduction Act of 1984
also indicates that the failure to attach any kind of recapture
agreement to the estate tax return precludes "substantial
compliance" for purposes of § 2032A(d)(3). According to the
conference report, the recapture agreement itself, as originally
filed, must substantially comply with the regulations, and thus the
defects subject to correction must be minor. The report states:
[A]n agreement to the current use valuation election may be
perfected under this provision provided the agreement, as
filed with the estate tax return, evidences substantial
compliance with the requirements of the regulations. To be
eligible for perfection, the agreement as originally filed
must at a minimum be valid under State law and must include
the signatures of all parties having a present interest or a
remainder interest other than an interest having a relatively
small value. The right to perfect agreements is intended to
be limited to cases where, for example, a parent of a minor
remainderman, rather than a guardian ad litem, as required
under State law, signs the agreement. Similarly, failure to
designate an agent in the agreement as filed may be corrected
under this provision.
H.R.Conf.Rep. No. 861, 98th Cong., 2d Sess. 1241, reprinted in 1984
U.S.Code Cong. & Admin.News 697, 1445, 1929 (footnote omitted).
The complete failure to attach a recapture agreement to the estate
tax return is not the type of defect contemplated by the drafters
of § 2032A(d)(3).5
The attachment of a recapture agreement to the estate tax
return is part and parcel of a valid election for special use
valuation, thus leading to the conclusion that a taxpayer cannot
5
As explained in the text below, it is clear that the
Estate's total failure to attach a recapture agreement renders
the Estate ineligible for the relief afforded by § 2032A(d)(3).
Thus, we need not address the more difficult issues involving the
effect of various deficiencies in a timely filed recapture
agreement. Nor need we address the possible tension between the
statutory language of § 2032A(d)(3) (implying that the filing of
a signed recapture agreement might constitute substantial
compliance, notwithstanding the need to obtain additional
signatures) and the language of the legislative history quoted
above, to the effect that the agreement as initially filed must
contain signatures of all except interests of small value. See
McAlpine v. Commissioner, 968 F.2d 459, 463 (5th Cir.1992).
substantially comply with the regulations for making an election
without attaching a recapture agreement. See Estate of Hudgins v.
Commissioner, 57 F.3d 1393, 1398 (5th Cir.1995) (explaining that a
recapture agreement "is an integral and indispensable element of a
special use valuation election"). Section 2032A(a)(1) provides
that an estate may enjoy special use valuation only where "the
executor elects the application of this section and filed the
agreement referred to in subsection (d)(2) [i.e., the recapture
agreement]." 26 U.S.C. § 2032A(a)(1)(B) (emphasis added). The
Treasury regulations and the legislative history accompanying §
2032A confirm that an election for special use valuation is not
valid unless a recapture agreement is submitted contemporaneously
with the estate tax return. See 26 C.F.R. § 20.2032A-8(a)(3) ("An
election under this section is made by attaching to a timely filed
estate tax return the agreement described in paragraph (c)(1) of
this section [i.e., the recapture agreement] and a notice of
election...."); H.R.Rep. No. 94-1380, 94th Cong., 2d Sess. 27
(1976), reprinted in 1976 U.S.Code Cong. & Admin.News 2897, 3356,
3381 ("One of the requirements for making a valid election is the
filing with the estate tax return a written [recapture] agreement
signed by each person in being who has an interest (whether or not
in possession) in any qualified real property with respect to which
the [special] use valuation is elected.").
To be valid, the recapture agreement must be executed by all
parties who have any kind of property interest in the specially
valued property. 26 U.S.C. § 2032A(d)(2); 26 C.F.R. § 20.2032A-
8(c)(1). In the agreement, the qualified heirs to the specially
valued property must express consent to personal liability for the
recapture tax imposed by § 2032A(c), which is triggered by an early
disposition of the property or an early cessation of the qualified
use. 26 C.F.R. § 20.2032A-8(c)(1). To aid the Commissioner in
collecting the recapture tax, the recapture agreement must be
binding under local law on all parties with an interest in the
property, and it must designate an agent for the parties with
satisfactory evidence of authority to act for all parties to the
agreement in dealing with the I.R.S. on matters arising under §
2032A. Id. § 20.2032A-8(c)(1). The personal liability of the
qualified heirs through the recapture agreement is complemented by
26 U.S.C. § 6324B, which gives the United States a lien on the
specially valued real property to aid in the collection of the
recapture tax. As the Fifth Circuit recently explained, the
availability of a statutory lien against the property does not
diminish the importance of the recapture agreement:
Personal liability of the heirs [through the recapture
agreement] enhances the likelihood that the property will be
kept in the family and used for qualified purposes, and that
the Commissioner would be able to recover the defaulted tax
benefit if, by the time recapture is triggered, the value of
the property shall have so declined that the § 6324 lien is
then wholly or partially worthless.... The heirs' agreement
to be personally liable for the tax consequences is equally
indispensable, for "without the heirs' signatures, the
election on the original return may not effectively bind the
heirs."
Estate of Hudgins v. Commissioner, 57 F.3d 1393, 1398-99 (5th
Cir.1995) (quoting McDonald v. Commissioner, 89 T.C. 293, 305 n.
31, 1987 WL 43888 (1987), aff'd in part and rev'd in part, 853 F.2d
1494 (8th Cir.1988), cert. denied, 490 U.S. 1005, 109 S.Ct. 1639,
104 L.Ed.2d 155 (1989)).
The foregoing explanation of the essential nature of a
recapture agreement leads ineluctably to the conclusion that a
taxpayer does not "substantially comply" with the requirements for
electing special use valuation without submitting a recapture
agreement with the return. Moreover, the case law from every
circuit court of appeals to have considered this issue, as well as
the United States Tax Court, clearly supports this holding. See
Estate of Hudgins v. Commissioner, 57 F.3d 1393, 1405 (5th
Cir.1995) ("[W]e hold today that a special use valuation election
can never be in substantial compliance with the requirements of §
2032A if the estate tax return in which the election is made is not
accompanied by a Recapture Agreement or some reasonable facsimile
thereof, signed by the holders of all interests (other than de
minimis) in the qualified assets, and personally binding the
interest holders under state law to be liable for tax deficiencies
in the event of disqualifying use or disposition of the property
during the statutory period."); Prussner v. United States, 896
F.2d 218, 223 (7th Cir.1990) (en banc) (holding that the failure to
attach the recapture agreement to the estate tax return is a
default for which § 2032A(d)(3) provides "no absolution");
McDonald v. Commissioner, 853 F.2d 1494, 1497-98 (8th Cir.1988)
(holding that a timely-filed recapture agreement, which contained
"neither the name nor the signature of anyone with an interest in
the property," did not "substantially comply" with the regulations
and thus could not be perfected later); Estate of Merwin v.
Commissioner, 95 T.C. 168, 173, 1990 WL 120054 (1990) ("Failure to
attach a recapture agreement, whether or not a notice of election
is attached, alone precludes the requisite substantial compliance
[under § 2032A(d)(3) ].").
For the foregoing reasons, we hold that the Estate has not
satisfied the substantial compliance provision of § 2032A(d)(3) and
thus is not entitled under that section to perfect its deficient
election. We now turn to the Estate's other argument.
C. Section 1421 of the Tax Reform Act of 1986
The Estate also contends that § 1421 of the Tax Reform Act of
1986 (hereinafter "§ 1421") excuses its failure to submit a
recapture agreement with its estate tax return. Section 1421, as
amended, provides as follows:
SEC. 1421. INFORMATION NECESSARY FOR VALID SPECIAL USE
VALUATION ELECTION.
(a) IN GENERAL.—In the case of any decedent dying before
January 1, 1986, if the executor—
(1) made an election under section 2032A of the
Internal Revenue Code of 1954 on the return of tax
imposed by section 2001 of such Code, and
(2) provided substantially all the information with
respect to such election required on such return of tax,
such election shall be a valid election for purposes of
section 2032A of such Code.
(b) EXECUTOR MUST PROVIDE INFORMATION.—An election
described in subsection (a) shall not be valid if the
Secretary of the Treasury or his delegate after the date of
the enactment of this Act requests information from the
executor with respect to such election and the executor does
not provide such information within 90 days of receipt of such
request.
Tax Reform Act of 1986, Pub.L. No. 99-514, § 1421, 100 Stat. 2085,
2716, as amended by the Technical and Miscellaneous Revenue Act of
1988, Pub.L. No. 100-647, § 1014(f), 102 Stat. 3343, 3562.
In order for a defective election to be deemed valid under §
1421(a), three conditions must be satisfied: (1) the decedent must
have died before January 1, 1986; (2) the taxpayer must have "made
an election" for § 2032A treatment on the estate tax return; and
(3) the taxpayer must have "provided substantially all the
information with respect to such election required on such return
of tax."6 In this case, the first condition has been satisfied,
because the decedent died on December 15, 1985. The parties
disagree, however, on whether the second and third requirements
have been satisfied.
With respect to the second condition, the government argues
that the Estate failed to make an election for special use
valuation on its estate tax return. Indeed, the Estate failed to
check the box, on page 2 of the return, which is designated for
electing special use valuation. This failure to check the
appropriate box, the government points out, distinguishes this case
from the cases that the Estate relies upon in its brief. See
Prussner v. United States, 896 F.2d 218, 225 (7th Cir.1990) (en
banc) ("All that is required [under § 1421] ... is the making of an
election on the estate tax return—that is, the marking of the box
for the election. The taxpayer who checks the box—that was done
here—and provides substantially all the information that the return
requires with respect to the election is home free."); Estate of
Doherty v. Commissioner, 982 F.2d 450, 456 (10th Cir.1992)
(following Prussner and noting that the taxpayer "marked the box
6
Notwithstanding the satisfaction of these three conditions,
special use valuation may be denied if the executor of the estate
fails to respond in a timely manner to a request for the missing
information pursuant to § 1421(b).
for the election on the estate's tax return").
We are not persuaded that the Estate's failure to mark the
appropriate box on its tax return is sufficient, by itself, to
preclude relief under § 1421. In this case, despite the failure to
mark the box, the Estate expressed a clear intent on the estate tax
return to elect special use valuation. Specifically, the Estate
completed a Schedule N, which appears at page 15 of the return and
is entitled "Section 2032A Valuation." A taxpayer would not
complete a Schedule N unless an election for special use valuation
was intended. In addition to the Schedule N, the Estate attached
to its return a document entitled "Affidavit from Personal
Representatives," which contained much of the information required
by 26 C.F.R. § 20.2032A-8(a)(3) to be included in a § 2032A "notice
of election" and which clearly indicated the Estate's intent to
elect special use valuation for the real property designated on the
Schedule A as Parcels 3A, 3B, and 3C. Under these circumstances,
we conclude that the Estate "made an election under section 2032A"
on its tax return, however awkwardly, thus satisfying the second
condition for relief under § 1421.
The third condition for § 1421 relief is that the Estate must
have "provided substantially all the information with respect to
such election required on such return of tax." § 1421(a)(2). The
government argues that the Estate failed to provide substantially
all of the required "information" because it failed to submit a
7
recapture agreement with its return. The Estate, on the other
7
In addition to omitting the recapture agreement, the Estate
also omitted certain items of information from its notice of
election. See supra note 3. However, the government apparently
hand, contends that a recapture agreement does not constitute
"information" for purposes of § 1421(a)(2). We confront a split of
authority on the issue of whether the phrase "information with
respect to such election required on such return of tax," as used
in § 1421(a)(2), includes the recapture agreement. Compare
Prussner v. United States, 896 F.2d 218, 225-28 (7th Cir.1990) (en
banc)8 with Estate of Merwin v. Commissioner, 95 T.C. 168, 181,
1990 WL 120054 (1990).9
concedes that, with the exception of the omitted recapture
agreement, the Estate provided "substantially all the
information" required on the estate tax return with respect to
the § 2032A election.
8
The Tenth Circuit, in Estate of Doherty v. Commissioner,
982 F.2d 450, 456-57 (10th Cir.1992), indicated that it was
"greatly persuaded by the rationale of Prussner." Id. at 456.
Although this dicta in Doherty indicates approval of the Prussner
rationale, the holding in Doherty is not necessarily inconsistent
with the holding of this opinion. Doherty involved a taxpayer
who failed to attach to the estate tax return a previously
obtained appraisal of the fair market value of the property
sought to be specially valued. Id. at 455. The face of the Form
706 in Doherty apparently did not direct the taxpayer to include
the missing appraisal. Id. at 451-52. By contrast, in the
instant case (and in Prussner ), the face of the Form 706 directs
the taxpayer to attach a recapture agreement.
Although the face of the Form 706 in Doherty did not
alert the taxpayer that an appraisal had to be attached, the
instructions accompanying the Form 706 clearly directed the
taxpayer to attach "copies of written appraisals of the fair
market value of the real property." Thus, Doherty stands
for the proposition that a taxpayer who fails to follow the
instructions accompanying Form 706 is nevertheless entitled
to relief under § 1421. In the instant case, because the
face of the Form 706 directs the taxpayer to attach a
recapture agreement, we need not decide whether the failure
to provide substantially all the information elicited by the
separate instructions accompanying the return precludes
relief under § 1421. Accordingly, we express no opinion on
that particular issue.
9
The Eighth Circuit, in McDonald v. Commissioner, 853 F.2d
1494 (8th Cir.1988), cert. denied, 490 U.S. 1005, 109 S.Ct. 1639,
104 L.Ed.2d 155 (1989), employed an interpretation of § 1421
As in any case of statutory interpretation, we start with the
language of the statute itself. See Kelly v. Robinson, 479 U.S.
36, 43, 107 S.Ct. 353, 357, 93 L.Ed.2d 216 (1986). In our opinion,
the ordinary meaning of the word "information," in the context of
the phrase "information with respect to such election required on
such return," § 1421(a)(2), is broad enough to include the
recapture agreement.10 As consultation with dictionaries confirms,
the word "information" can encompass a broad range of meaning. The
language of the statutory phrase, "information with respect to such
election," elaborates the scope of the meaning in this context,
i.e., information with respect to such election. Clearly, the
statute at this point is referring to the data which the statute
and regulations indicate are necessary for the election. The
recapture agreement is one such item, indeed a significant one.
See Estate of Merwin v. Commissioner, 95 T.C. 168, 182, 1990 WL
120054 (1990) (explaining that the word "information" includes
"everything that section 2032A and the corresponding regulations
require for a valid election," including a recapture agreement).
The statutory language then specifies the portion of that broader
different from that of Merwin or our opinion in this case.
McDonald indicated that § 1421 requires substantial compliance
with the separate instructions accompanying Form 706, with no
discussion of the relevance of the directions on the return form
itself, although its facts may not have required a holding of
that breadth. Accord Foss v. United States, 865 F.2d 178 (8th
Cir.1989). As noted in note 8, supra, we express no opinion on
the effect of the taxpayer's failure to comply with the separate
instructions accompanying Form 706.
10
We recognize that the Seventh Circuit in Prussner v.
United States, 896 F.2d 218, 226-28 (7th Cir.1990) (en banc) is
contra. For the reasons discussed below, we respectfully
disagree with the Prussner interpretation.
range of items (i.e., those necessary for the election) that the
taxpayer must provide, i.e., those items "required on such return."
In the instant case, the return form specifically directed that the
"required agreements" be attached.
Our interpretation finds strong support in the structure of
the statute. The very next subsection of this same 1986 statute,
§ 1421(b), also uses the word "information" in a manner that
undoubtedly contemplates the inclusion of recapture agreements.11
Section 1421(b) provides that "[a]n election described in
subsection (a) shall not be valid if the Secretary ... requests
information from the executor with respect to such election and the
executor does not provide such information within 90 days of
receipt of such request." (Emphasis added). Clearly, as used in
§ 1421(b), Congress intended the phrase "information" to include a
recapture agreement. As noted above, the recapture agreement is an
essential ingredient for a valid election; it is unreasonable to
suppose that Congress was not contemplating in § 1421(b) that the
Secretary could request information including the recapture
agreement. Accord Merwin, 95 T.C. at 182.
Our interpretation is confirmed by the legislative history of
§ 1421. Apparently, the face of the June 1982 version of Form 706
failed to specify the requirement of filing the recapture agreement
with the return. As a result, many taxpayers who had used that
11
It is true that in a related statute, I.R.C. §
2032A(d)(3), the statutory language more precisely uses both the
term "information" and the term "agreement." See Prussner, 896
F.2d at 228. However, we find more persuasive the use of the
word "information" in a broader, inclusive sense in the very next
subsection of the same 1986 Act.
version of the Form 706 failed to submit recapture agreements, and
were denied special use valuation. The conference report
accompanying § 1421 explains:
The Senate amendment provides that estates of individuals
dying before January 1, 1986, that substantially complied with
the requirements enumerated on the Federal Estate Tax Return
(as opposed to Treasury Department regulations) are allowed to
perfect defective elections within 90 days of being notified
of errors by the Treasury. Specifically, the March 1982
edition of Form 706, Federal Estate Tax Return, did not
specify that the required agreement had to be submitted with
the estate tax return. This provision, therefore, permits
late filing of the required agreements for estates that used
the March 1982 version of Form 706.
H.R.Conf.Rep. No. 841, 99th Cong., 2d Sess. II-770-71 (1986),
reprinted in 1986 U.S.Code Cong. & Admin.News 4075, 4858-59.
Although the legislative history refers to the "March 1982" version
of Form 706, Congress in fact meant to refer to the June 1982
version. Prussner, 896 F.2d at 226; Merwin, 95 T.C. at 178.
Running throughout the legislative history is the indication that
the purpose of the statute was to permit later perfection of the
election by a taxpayer who could have been misled by an absence of
information on the tax return, i.e., where the taxpayer has
substantially complied with the requirements enumerated on the
return. Thus, the report of the Senate Finance Committee states:
Reasons for Change
The committee is concerned that, in certain cases, the
Federal estate tax return (Form 706) provided by the Treasury
Department for filing estate tax returns did not sufficiently
inform taxpayers of what information must be provided to elect
current use valuation and that an agreement to the election is
required to be attached to Form 706. The committee
determined, therefore, that limited relief permitting
taxpayers additional time to supply information is appropriate
where taxpayers could have been misled by an absence of
information on Form 706.
Explanation of Provision
The bill provides that, if an estate ... provided
substantially all the information elicited by Form 706, ...
the election is valid if the estate provides ... additional
information necessary to perfect the election.... (This
provision permits notices of election and [recapture]
agreements to the election to be filed late where the estate
timely filed those documents to the extent requested and
described on Form 706.)
S.Rep. No. 313, 99th Cong. 2d Sess. (1986) (Emphasis added).
Despite the clear indication in the legislative history, and
indeed the statute itself, that the purpose of the statute was to
permit later perfection by taxpayers who "substantially complied
with the requirements enumerated" on the return (i.e., those who
timely filed those documents to the extent requested on the
return), the Prussner court would apparently permit later
perfection by taxpayers who merely checked the election box on the
return. The Prussner court gave two reasons for its holding: its
view that a recapture agreement is not "information" in the
ordinary sense of the word; and the fact that the recapture
agreement is attached to the return rather than written out "on"
the return. Id., 896 F.2d at 225-26.
We disagree with Prussner 's reading of the statute. As
noted above, we believe that the word "information," as used in §
1421(a)(2), is broad enough to include the recapture agreement.12
Moreover, we think that Prussner erred in relying on the
technicality that the recapture agreement is attached to the tax
return, as opposed to being "on" the return itself. The text of §
12
The broad definition of "information" in the dictionaries
belies the suggestion in Prussner, 896 F.2d at 226, that the word
"information" cannot include a report of a commitment. The
definition in the various dictionaries is inconsistent with the
Prussner notion that the term is limited in meaning to inert data
with no real life consequences.
1421(a)(2) requires that the taxpayer shall have "provided
substantially all the information ... required on such return of
tax." The Seventh Circuit interpreted the phrase "required on such
return of tax" as referring to the location where the taxpayer
supplies the relevant information, and thus held that the
substantial compliance provision of § 1421(a)(2) does not apply to
documents that must be attached to the return. We respectfully
suggest that Prussner 's is a technical interpretation of the
statutory language, which misses its true import. To be eligible
to perfect the return, the statute requires that the taxpayer must
have "provided substantially all the information ... required on
such return." The most reasonable reading of the statutory
language is that the phrase "required on such return" refers to the
word "information." Thus, the taxpayer must have provided—whether
written in the spaces provided on the return or attached to the
return—the "information," or substantially all of it, which the
return directs should be provided.
We respectfully suggest that the Prussner court
inappropriately watered down the statutory requirement of
substantial compliance by relying upon an unduly narrow
interpretation of the statutory term "information" and a technical
construction of the statutory phrase "required on such return of
tax," and by failing to accord proper significance to the
legislative history and to the fact that Congress in the same 1986
Act, in the very next subsection (i.e., § 1421(b)), employed the
same term "information" in a context which clearly encompasses the
recapture agreement.13
The Tax Court in Estate of Merwin v. Commissioner, 95 T.C.
168, 1990 WL 120054 (1990), rejected the Prussner court's
interpretation for the same reasons that we do. Merwin concluded
that the phrase "required on such return" means "requested by the
face of Form 706." Id. at 179. Thus, if the taxpayer uses a
version of Form 706 that on its face requests a recapture
agreement, then the recapture agreement constitutes "information"
required to satisfy the substantial compliance language of §
1421(a)(2). The Tax Court supported this interpretation of the
statute by quoting from the legislative history noted above.
Under Merwin 's interpretation of § 1421, the estate's initial
return need not include a recapture agreement if the face of Form
706 makes no reference to a required "agreement" or to specific
instructions describing a recapture agreement. Id., 95 T.C. at
179. Thus, a taxpayer who used the June 1982 version of Form 706
would have provided "substantially all the information ... required
on such return of tax" even if a recapture agreement had not been
attached. However, consistent with the statutory language and
legislative history quoted above, a different rule applies to
taxpayers who use nonmisleading versions of the Form 706:
In contrast to the June 1982 version of Form 706, if the face
of the applicable Form 706 refers expressly to a required
"agreement' or to specific instructions that describe a
recapture agreement, Congress appears to have intended the
13
We need not and do not address another holding of the
Prussner court, i.e., its rejection of the I.R.S. argument that
the relief afforded by the 1986 Act is limited to those taxpayers
who filed their returns on the June 1982 version of Form 706.
Moreover, as indicated in our discussion in Part II.B., we agree
with the Prussner holding with respect to I.R.C. § 2032A(d)(3).
"information with respect to such election required on such
return of tax' to expand accordingly.... An estate will then
satisfy section 1421(a)(2) only if it provides substantially
all of the expanded information base. The reason the estate
should be held to a higher level of compliance under these
circumstances is that the face of the Form 706 is sufficient
to alert the estate to additional requirements, and misled
taxpayers were the exclusive congressional concern underlying
section 1421....
Merwin, 95 T.C. at 180.
We find Merwin persuasive. We hold that the word
"information," as used in § 1421(a)(2), includes the recapture
agreement in this case, where the face of the applicable Form 706
refers to the "required agreements." The instant case involves the
March 1985 version of Form 706, not the June 1982 version addressed
in the legislative history. Unlike the June 1982 version of Form
706 (the face of which makes no reference to a required "agreement"
nor to the applicable parts of the instructions), the face of the
March 1985 form tells the taxpayer that a recapture agreement must
be attached to the return. Specifically, line 2 (on page 2) asks
the taxpayer: "Do you elect special use valuation?" Immediately
below this question, the March 1985 form states: "If "Yes,'
complete and attach Schedule N and the agreements required by the
instructions to Schedule N." Similarly, Schedule N, which is part
of the return, directs the taxpayer: "Enter the requested
information for each party who received any interest in the
specially valued property. Also complete and attach the required
agreements described in the Instructions." Because these
references appear on the face of the March 1985 version of Form
706, we conclude in this case that a recapture agreement
constitutes "information with respect to such election required on
such return of tax" for purposes of § 1421(a)(2).14
In order to take advantage of § 1421, the taxpayer must have
provided "substantially all" of the "information" requested by the
tax return. In light of our earlier discussion of the importance
of the recapture agreement, and in light of our holding that the
omission of a recapture agreement precludes "substantial
compliance" with the requirements for electing special use
valuation for purposes of § 2032A(d)(3), we readily conclude that
the Estate in this case failed to provide "substantially all the
information ... required on such return of tax" within the meaning
of § 1421(a)(2).
III. CONCLUSION
For all the foregoing reasons, the judgment of the district
court is AFFIRMED.
14
In this case, because the Form 706 itself expressly
referred to the required agreements, we need not address issues
involving a different version of the form with perhaps less
specific reference (e.g., incorporation of directions in the
instructions which accompany the return) to the omitted
information. See supra notes 8 & 9.