7. Federal court again invalidates special use valuation treasury regulation. Most assets are valued at fair market value as of the date of a decedent’s death. The IRS defines fair market value as the price at which a willing buyer and a willing seller would exchange the property, neither being under any compulsion to buy or sell and each having full knowledge of all relevant facts.*21 The only major exception to the willing buyer/willing seller test is special use valuation of land used in a farming or ranching business.*22 Since 1976, there has been a special way to value farmland at death which has been criticized and is controversial. The executor of an estate may elect to value real property devoted to farming or ranching (or other closely-held businesses) at its special use or “use” value rather than its fair market value. This valuation provision, however, could not reduce the gross estate by more than $1,040,000 for deaths in 2012.

In order for an estate to utilize special use valuation, many pre-death requirements must be satisfied. The pre-death eligibility requirements are very complex and technical, and one of them requires that the farmland itself must make up at least 25 percent of the gross estate less secured indebtedness.*23 Thus, at least 25 percent of the adjusted value of the decedent’s gross estate must be qualified farm real property that was acquired from or passed from the decedent to a qualified heir. As such, the land itself must be a significant part of the total value of the estate.*24 The Treasury Department, however, adopted a regulation stating that “[a]n election under I.R.C. §2032A need not include all real property in an estate which is eligible for special use valuation, but sufficient property [that is, 25 percent] to satisfy the threshold requirements of §2032A(b)(1)(B) must be specially valued under the election.” But, in 1988, a federal court in Illinois invalidated the regulation as creating a qualification requirement that was substantive in nature rather than simply interpreting the statute.*25 The court noted that the special use valuation statute allowed the Treasury to write regulations detailing only the procedure for making the special use valuation election. The statute, I.R.C. §2032A(d)(1), gave the Treasury the power to promulgate regulations detailing the manner for making the special use value election, but no power to add a substantive requirement for an estate to be eligible to make a use value election.

In 2012, the IRS brought the same issue on the same set of facts back to the same court. This time, IRS argued that the regulation should be upheld under a more deferential standard, known as the “Chevron” deference.*26 That higher deferential standard applied, IRS argued, because of a federal court opinion in 2008 that held that the Chevron standard applied to Treasury Regulations where the statute at issue did not address the specific issue involved.*27 However, the Illinois federal court again ruled against the IRS, determining that the statute clearly established that the 25 percent requirement applied to the adjusted value of the gross estate and did not include any requirement that the estate had to make the use value election on sufficient real estate representing at least 25 percent of the adjusted value of the gross estate. Because the statute was clear, and the regulation added a substantive requirement to the statute which was impermissible even under the more deferential standard, the court did not have to decide whether the regulation was a permissible construction of the statute. Finfrock v. United States, 860 F. Supp. 2d 651 (C.D. Ill. 2012).