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Letter Ruling 9328004, March 31, 1993

Private Letter Rulings
Private Letter Ruling 9328004, 3/31/1993, IRC Sec(s). 2032a

UIL No. 2032A.00-00
Headnote:
Reference(s): Code Sec. 2032a;
SPECIAL USE VALUATION OF MIXED USE PROPERTY MUST DERIVE FROM MULTIPLE FACTOR METHOD.

A decedent's estate included a 272-acre parcel of real estate that consisted of approximately 127 acres of pastureland and 145 acres of timberland. Although the lessee of the parcel used part of it as a farm and for pasturelands, the lessee had no responsibility for maintaining the timberland and only the lessor (decedent) had the right to sell timber selectively harvested from the parcel.

For estate tax purposes, the decedent's executor elected special use valuation for the parcel. In addition, the executor elected, under section 2032A(e)(13), not to treat any trees growing on "qualified woodlands" as a crop. In computing the special use valuation, the executor relied exclusively on assessed land values in the state, which provides a differential or use value assessment for farmland and does not treat an interest in timber as an interest in the real estate on which it stands. In making the election, the executor cited as comparable property only one other property in the area, which also consisted of both pastureland and woodland and which was sold shortly after the decedent's death to a lumber company.

The Service has ruled in technical advice that in valuing the parcel, the executor must segment the pastureland and woodland, assign appropriate values to each, and then arrive at a combined special use valuation for the entire parcel. In addition, as required by Rev. Rul. 89-30, 1989-1 C.B. 274, which applies to situations in which no substantially comparable property has been cited, the executor must use all five prongs of the multiple factor method set forth in section 2032A(8).

Merely using local real estate property tax assessment values is not sufficient, the Service said, because those values apply only to the land and not to the growing timber. Thus, an appraisal value of standing timber on the property must be considered and a comparison must be made of contract values for similar timber sales in the area. In addition, the executor must examine the history of the parcel, in terms of selected or total harvesting, and the income derived from it.

Electronic Citation: 93 TNT 150-23
Geographic Identifier: United States
Index Term: estate tax, valuation, farms
Full Text:
Date: March 31, 1993
TR-32-355-92
Taxpayer Name: ***
Taxpayer Address: ***
Taxpayer Identification No.: ***
Date of Death: ***

Issue

What method of valuation should be used to value qualified woodlands described in section 2032A(e)(13) included in the decedent's gross estate, under the circumstances described below?

Facts

The decedent, a United States citizen, died testate in June 1990. On a timely-filed federal estate tax return, the executor of the decedent's estate elected to value a parcel of property included in the decedent's gross estate under section 2032A of the Code. In addition, the executor made an election under section 2032A(e)(13) such that trees growing on any "qualified woodlands" would not be treated as a crop for purposes of section 2032A. The 272 acre parcel included approximately 127 acres of pastureland (including the farmstead and farm improvements) and 145 acres of timberland. A cruise (appraisal) of the timberland estimated that there was a total of 2,471 thousand board feet (MBF) of timber of which 89% consisted of Douglas fir.
The executor cited only one other property in the area that was rented on a cash basis and that included woodlands within the leased area. The cited property contained both woodlands and pasturelands. The lessee had no right to do anything to the timber and had no responsibilities with respect to the caring for or cultivating of the timber. The woodlands area was included in the lease only in order to give the lessee access to a reservoir located in the timbered area for irrigation purposes. The timber was sold by the lessor to a lumber company which harvested it during the lease term and the lessee had no interest in the proceeds from the timber sale. This property was sold shortly after the death of the decedent. The land was sold under one contract, and the timber was sold under a separate contract to the lumber company, as discussed above.

The local real estate tax assessment does not treat timber as an interest in the real property on which it stands. Thus, for real estate tax assessment purposes, no value is assigned to the standing timber and timberland is valued as if it were bare land.
For purposes of this technical advice, it is assumed that the property in question qualifies as "qualified woodlands" under section 2032A(e)(13) of the Code.

LAW AND ANALYSIS

Section 2032A(a) provides that, if the decedent at the time of his death was a citizen or resident of the United States and the personal representative makes the election and files the agreement referred to in section 2032A(d)(2), then, for purposes of the estate tax, the value of qualified real property shall be its value based on its use under which it qualifies rather than its value based on its highest and best use. Section 2032A(b)(1) defines qualified real property as real property located in the United States which was acquired from or passed from the decedent to a qualified heir of the decedent and which, on the date of the decedent's death, was being used for a qualified use by the decedent or a member of his family. In addition, the value of the qualified real and personal property must satisfy specified percentage tests with respect to the value of the adjusted gross estate.

Section 2032A(e)(13) of the Code provides that, if woodlands in a decedent's gross estate qualify as "qualified woodlands" and if the executor so elects, then trees growing on such woodlands shall not be treated as a crop. The term "qualified woodlands" means any real property which is used in timber operations and is an identifiable area of land (such as an acre) or other area for which records are normally maintained in conducting timber operations. Section 2032A(e)(13)(C) provides that "timber operations" means 1) the planting, cultivating, caring for, or cutting of trees, or 2) the preparation (other than milling) of trees for market.

Section 2032A(e)(7)(A) of the Code provides that the valuation of a farm for farming purposes shall be determined by dividing the excess of the average annual gross cash rental for comparable land used for farming purposes and located in the locality of such farm over the average annual state and local real estate taxes, by the average effective interest rate for all new Federal Land Bank loans. Section 2032A(e)(7)(C) provides that the formula provided in section 2032A(e)(7)(A) shall not be used where there is no comparable land from which the average annual gross cash rental may be determined, or where the executor elects to have the value of the farm determined under section 2032A(e)(8).

Under section 2032A(e)(8), the method prescribed by that section is to be used if the method prescribed by section 2032A(e)(7) is not applicable. Section 2032A(e)(8) provides that the following factors are to be used in determining the value of qualified real property when section 2032A(e)(7) does not apply:

1. the capitalization of income which the property can be expected to yield for farming or closely-held business purposes over a reasonable period of time under prudent management using traditional cropping patterns for the area;
2. the capitalization of the fair rental value of the land for farmland or closely-held business purposes;
3. assessed land values in a state which provides a differential or use value assessment law for farmland or closely-held business property;
4. comparable sales of other farm or closely-held business land in the same geographical area far enough removed from a metropolitan or resort area so that non-agricultural use is not a significant factor in the sales price; and
5. any other factor which fairly values the farm or closely- held business value of the property.

Section 20.2032A-4(a) of the Estate Tax Regulations provides that the executor must use section 2032A(e)(7) in valuing land for purposes of section 2032A unless he fails to document comparable rented farm property. Section 20.2032A-4(d) provides that comparable real property must be situated in the same locality as the specially valued property. The determination of properties which are comparable is a factual one and must be based on numerous factors, no one of which is determinative. It will, therefore, frequently be necessary to value farm property in segments where there are different uses or land characteristics included in the specially valued farm. In cases involving multiple areas or land characteristics, actual comparable property for each segment must be used. All factors generally considered in real estate valuation are to be considered in determining comparability under section 2032A.

Section 20.2032A-4(b)(2)(i) places the burden on the executor to identify to the Service actual comparable property for all specially valued property and cash rentals from that property if the decedent's real property is valued under section 2032A(e)(7).
Rev. Rul. 89-30, 1989-1 C.B. 274, holds that, if farm property is specially valued under section 2032A(a), an executor may not select one of the five factors provided in section 2032A(e)(8) as the exclusive basis for the farm valuation. The executor must utilize in the valuation of the specially valued property all of the factors listed in section 2032A(e)(8) and accord appropriate weight to each factor.

In view of the executor's election under section 2032A(e)(13), the timber on the property is to be specially valued under section 2032A. The Senate Finance Committee Report underlying section 2032A(e)(13), S. Rept. No. 144, 97th Cong. 1st Sess., 135 (1981), states as follows with respect to the special valuation of standing timber:
Standing timber is to be specially valued by reference to similar timber located on comparable land where both the land and timber are rented for timber growing purposes under a cash or share rental lease. If no comparable timber and land are so rented in the locality of the decedent's property, the timber and land are to be specially valued using the multiple factor method. . . . Leases for purposes other than growing timber to which the comparable land is subject are to be ignored in determining the value of qualified timber property in its current use.

In the instant case, the parcel of property in question included two different land characteristics: woodlands and pasturelands. Consequently, the parcel of property must be segmented in determining its value for purposes of section 2032A. The property which the executor cites as comparable includes both woodlands and pasturelands. However, the lessee on the property had no right to conduct timber operations, as defined in section 2032A(e)(13), on the woodlands. The lessee's gross cash rents were based on his use of the land for pasturelands. Thus, this property may be used as a comparable property with respect to the decedent's pasturelands, but is not comparable for purposes of valuing the woodlands. As the Senate Committee Report explains, leases for purposes other than growing timber to which the comparable land is subject are to be ignored in determining the value of qualified timber property based on its current use.

Since the executor has produced no properties that are comparable for purposes of section 2032A(e)(7), the executor must use the multiple factor method under section 2032A(e)(8) to value the decedent's property. As Rev. Rul. 89-30 explains, all of these factors must be weighed in determining the value of property under section 2032A(e)(8). Since there are various recognized methods of harvesting trees when managing a timber operation, ranging from selective cutting to clear cutting, one must consider the history of the timber operations with respect to the subject property in order to determine the weight to be placed on each of the various factors.

The property mentioned above that the executor contends is comparable, was sold shortly after the decedent's death. The land was sold under one contract and the timber was sold for clear cutting purposes under another. The contract for the sale of the land would be relevant for determining the value of the underlying land under the comparable sales factor (factor 4). The contract for the sale of the timber would be relevant as an example of a comparable sale for the timber under factor 4. The value produced under this factor with respect to the timber would be most relevant where there was a history of clear cutting on the decedent's property.

Since the local real estate property tax assessment applies only to the land and not to the growing timber, the use of the assessed value under factor 3 alone, would not represent an accurate valuation of the woodlands for purposes of sections 2032A(e)(8) and (13). The assessed value may, however, be relevant as one of the multiple factors used in determining the value of the underlying land. In addition, the executor has produced no comparable woodlands that are being cash rented for timber operations for factor 2.

In order to use factor 1 (the capitalization of income which the property can be expected to yield) the computation must cover a reasonable period of time and must be made as if the timberland were under prudent management using traditional cropping patterns for the area. This method may be relevant where there is a history of thinning or selective cutting of the timber. The executor has the burden of proving what would be considered prudent management of the timberlands and what would be traditional cropping patterns for the area. The cruise (appraisal) of the timber may be useful in making this computation. Economically prudent management would dictate the frequency and type of cutting to be used in valuing the timberlands under this factor.

These factors as well as others, such as the accessibility of the timber, that may be relevant under factor 5 of section 2032A(e)(8), must be weighed in determining the value of the decedent's qualified woodlands.
Conclusion

The executor must use the multiple factor method under section 2032A(e)(8) in valuing the qualified woodlands in the decedent's gross estate. All of the factors must be accorded appropriate weight, based on the nature of the decedent's property, and the nature of the timber operation, in determining this value.
A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.