Position: Seek to amend Paragraph (2) of Section 2032A(c) of the Internal Revenue Code to permit the severance or disposition of standing timber that is subject to a “special use valuation,” election for federal estate tax purposes, without the severance or disposition being termed a disposition of qualified real property and thus subject to a recapture tax, provided such severance or disposition is made pursuant to a written forest management plan developed by a professional forester.
Background: Section 2032A of the Internal Revenue Code (IRC) permits certain real property to be valued for federal estate tax purposes on the basis of its “current use” rather than at “highest and best use.” This is commonly termed, “special use valuation.” Real property may qualify for special use valuation if it is located in the United States and is devoted to either: 1) Use as a farm for farming purposes, or 2) Use in a closely held trade or business, other than farming. In either case, there must be a trade or business use.
The term “farm” is defined to include woodland. The term “farming purposes” includes the planting, cultivating, caring for, cutting down, and preparing for market of trees. The property must have passed from the decedent’s estate to a “qualified heir.” This term is defined in the statute.
Section 2032A(c) provides that, if within 10 years of the decedent’s death, and before the death of the qualified heir, the qualified heir either: 1) Disposes of any interest in real property subject to the special use valuation agreement (other than by disposition to a family member), or 2) Ceases the qualified use for the real property that was acquired from the decedent, an additional estate tax (termed a “recapture tax”) will be levied. In the case of woodland, subject to a special use valuation agreement, the disposition of an interest in qualified real property is defined to include the disposition or severance of any standing timber on the subject woodland.
The effect of this provision is to prevent the severance or disposition of standing timber – under any circumstances – from woodland subject to a special use valuation election during the 10 years following the decedent’s death, unless an onerous recapture tax is paid. Even a salvage harvest, following a natural disaster such as a hurricane or windstorm or severe insect infestation and damage, is precluded without payment of the recapture tax.
The purpose of enacting Section 2032A was to provide for continuance within the family of family farms and businesses, including family woodlands, without such ownership being disrupted by the federal estate tax. In the case of managed woodlands, timber must be harvested periodically in accordance with the property’s forest management plan. Adhering to the scheduled harvests ensures that the woodland will continue to be managed at an optimum and sustainable level, using good silvicultural practices. It also provides needed income in keeping with maintaining the woodland as an ongoing family business. A 10-year disruption of the forest management plan can seriously impact the woodland’s management regime, leading to less than optimal and sustainable conditions.
Rationale: The IRC Section 2032A prohibition against the severance or disposition of standing timber from a woodland subject to the Section’s special use valuation election during the 10 years following the decedent’s death, without the payment of an onerous recapture tax, makes absolutely no sense when compared to the legislative purpose for enacting Section 2032A. The prohibition prevents many estates with timberland from electing special use valuation. This often results in premature timber harvesting, disruption of approved silvicultural practices and the sale of part or all of the managed woodland for development purposes – in order to pay the higher estate tax due without the Section 2032A election.