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IRS Issues Private Letter Ruling on Estate Tax Law

from Exchange, Summer 2000

The U.S. Internal Revenue Service in March made public its first private letter ruling under Section 2031(c) of the Internal Revenue Code (IRC), the tax law allowing a new estate tax exclusion for certain land under conservation easements.

While the IRS specifies that its letter rulings discuss only the case presented for the ruling, and should not be cited as a legal precedent, they are often used for guidance in interpreting laws and to understand the IRS's current thinking.

The ruling was requested by Boston, MA-based attorney Stephen J. Small on behalf of the estate of a western rancher. At the time of the rancher's death, a trust he controlled owned the majority of the stock in a corporation, and a ranch with a number of conservation easements on it. The rancher's wife succeeded him as trustee of the trust, and she was also executor of his estate. She and the other surviving shareholders wanted to know if IRC 2031(c) estate tax benefits could be available to his estate.

Mr. Small advised that, in order for the easement to qualify for the estate tax benefits under IRC 2031(c), all but "de minimis commercial recreational activities" must be extinguished. He also recommended extinguishing remaining subdivision rights on the property to maximize the law's estate tax benefits.

"What really complicated the situation was that a corporation owned the ranch," said Mr. Small. "There was no clear legal authority on exactly how these rights could be extinguished. Even though we thought we knew the course of action to pursue, we suggested getting a letter ruling."

Perhaps the most significant clarification the IRS made in the ruling is that "unspecified, non-prohibited commercial activity" - such as the right to conduct commercial recreational activity -- is considered a development right, and can be terminated under the provisions of 2031(c), Mr. Small noted. "One relatively easy way to do this is by amending the existing easement after the death of the landowner," he said.

The ruling also noted that a written agreement among the surviving corporate shareholders to permanently extinguish the recreation and subdivision rights could satisfy the qualification requirements, if the agreement was executed on or before the due date for the estate tax filing return (nine months after the decedent's death), and included with the filing form (Form 706).

"This is a very unusual provision in 2031(c)," Mr. Small explained. "What it says is you can agree in writing to do something and you can file an estate tax return based on that agreement. Usually you can't file any tax return that's based on a promise that you will do something quite this complicated in the future."

Nevertheless, there were safeguards in the agreement in this case, Mr. Small noted. "We said in the agreement that all the people who signed would be liable for any additional estate tax that would be due if for some reason the development rights weren't extinguished as agreed."

Soon after the private letter ruling was made, the corporation completed one new conservation easement on the entire ranch, essentially amending, restating and tightening the prior conservation easements on the property, eliminating the retained subdivision rights and prohibiting any commercial recreational activity.

Read the private letter ruling.

Section 2031(c) of the IRC

posted 9/6/00