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4.22.15 graphic BKF Estate Tax special Use Valuation for Farmland Part 2 M0710620xA6406

by: Beth K. Flowers

As part of a IRC §2032A Special Use Valuation election, the applicable property must be used in a “qualified use” by the decedent or a member of the decedent’s family for five of the eight years preceding the decedent’s death.  The qualified use may be as a farm for farming business purposes but also includes use in a trade or business other than farming. The term “farm” includes stock, dairy, poultry, fruit, furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands.

For purposes of §2032A, a decedent’s family includes the decedent’s spouse, ancestors, lineal descendants (and their spouses), lineal descendants of the decedent’s parent (and their spouses), and lineal descendants of the decedent’s spouse (and their spouses).  This would include children, grandchildren, siblings, aunts, uncles, cousins, nieces and nephews, among others.  

IRC §2032A also requires that the decedent or family member of the farming business must have materially participated in the qualified use, either through direct involvement or through an arrangement such as a crop share agreement. By way of example, a crop share lease agreement whereby the landlord shares in the economic risk of the farm operations would be considered a qualified use for purposes of IRC §2032A, whereas a cash rent arrangement would not, as the landlord does not share in the economic risk of the farm operations under a cash rent situation.

There are a number of factors to be considered in determining material participation, but, at a minimum, the participating party must regularly advise or consult with the other managing party on the operation of the business and must participate in a substantial number of the final management decisions.  Examples of the types of involvement or decisions that would need to be made for the material participation requirement to be met include (but are not limited to):

  • Crop patterns and rotations
  • Levels and formula of fertilization
  • Participation or non-participation in government price income support programs
  • Plans for chemical weed and insect control
  • Soil and water conservation practices to be followed
  • Changes in basic tillage practices
  • Varieties of seed to be purchased