6. Special use valuation, income tax basis and the “duty of consistency.” I.R.C. §2032A allows the executor of a decedent’s estate to list the value of the decedent’s farmland on the decedent’s estate tax return at its agricultural use value rather than its fair market value. The executor must make an election to be able to do this, and can select the farmland that is subject to the election. Numerous requirements must be satisfied by the decedent before death for the decedent’s estate to make the election, and the farmland and farm personal property must make up a sufficient amount of the total value of the property in the estate. In addition, the heirs who inherit the land must continue to farm the land for 10 years after the decedent’s death. If the elected land is not farmed for 10 years, the tax benefits to the estate of having made the election are forfeited and interest is tacked-on. In addition, the estate’s executor must file an agreement signed by each person who has an interest in the elected property. In this consent agreement, the heirs consent to the election, agree to personal liability for any additional taxes imposed as result of sale of elected property or cessation of qualified use within that 10-year post-death “recapture” period and consent to the collection of the recapture tax from the property subject to the election. In addition, the heirs receive as their income tax basis in the elected land the special use value of the property as reported in the decedent’s estate. That’s different that the general rule that persons that inherit property get an income tax basis in the inherited property equal to its value reported for estate tax purposes. In 1954, IRS said that a taxpayer can challenge the reported value of property for estate tax purposes if the taxpayer has clear and convincing evidence that the reported value was wrong, unless the taxpayer is barred by previous conduct. Rev. Rul. 54-97, 1954-1 C.B. 113. However, since that time, the courts have utilized a “duty of consistency” that prevents a taxpayer from making an inconsistent representation after the expiration of the statute of limitations that IRS had relied on if the outcome of the taxpayer’s position would not be in the favor of the IRS.


Also see Top ten agricultural law developments of 2012


In a 2013 U.S. Tax Court case, the petitioners were two children of a 1994 decedent and were beneficiaries of a residuary testamentary trust that received most of decedent’s estate, including a 13/16 interest in a 2,345-acre cattle ranch. Their stepmother was the executor. The fair market value of the ranch was determined to be $1,963,000 at the time of the decedent’s death, but was reported on the decedent’s estate tax return at less than $100,000in accordance with I.R.C. §2032A. That dramatically reduced value was incorrect because it far exceeded that total value reduction that was possible under the I.R.C. §2032A rules. But, IRS allowed it as the result of a trade-off for higher estate tax values on other non-elected parcels. The petitioners signed a consent agreement (one via guardian ad litem). Years later, the trust sold an easement on the ranch for $910,000 that restricted development on the property. The gain on sale of the easement was reported with reference to the I.R.C. §2032A value and K-1s were issued showing that the proceeds had been distributed to the beneficiaries. The beneficiaries did not report the gain as reflected on the K-1s, asserting that the ranch was mistakenly undervalued (by someone other than themselves) on the estate tax return and, thus, the gain reportable should be reduced by using a fair market value income tax basis. The court determined, however, that I.R.C. §2032A value pegs the income tax basis in accordance with I.R.C. §1014(a)(3).

Importantly, the court determined that the heirs (who were not the estate’s executor) as being bound by a “duty of consistency” to use as their income tax basis, the value of the property as reported on the decedent’s estate tax return. The court noted that the IRS had relied on the values as stated on the estate tax return, and that the petitioners were trying to change that representation to the detriment of the IRS after the statute of limitations with respect to the estate tax return had expired. As such, Rev. Rul. 54-97 did not apply. The court also noted the “unequivocal” language of I.R.C. §1014(a)(3) which states that the basis of property acquired from a decedent as “in the case of an election under section 2032A, its value determined under such section.”

Clearly, the caselaw supports the notion that the “duty of consistency” establishes basis in an heir’s hands as the estate tax value of the inherited property if the heir was also a fiduciary of the estate. But, the court expanded the application of the doctrine to non-fiduciary heirs by citing three cases, all of which applied the doctrine to an heir that was also a fiduciary of the estate. Another problem with the court’s opinion is that the audit of the estate went, as the court described it, “back and forth.” Estate tax audits are often characterized by negotiations, and it is possible in this case that the special use value for the ranch property was allowed to be lower than what was allowed by statute as a trade-off for higher values on other non-elected property in the decedent’ estate. The result was that the estate’s executor and the IRS negotiated estate tax values on elected and non-elected land that were not representative of actual fair market value of the non-elected property or a special use value for the elected land that was within the statutory limitation. Binding the non-fiduciary heirs (such as the petitioners in this case) to the outcome of negotiations between the executor and the IRS seems to not be fair, but apparently the signed consent agreement trumps that concern. Van Alen v. Comr., T.C. Memo. 2013-235.