Home » Welcome » Form Instructions » IRS Instructions » Form 706

Instructions for Form 706 (9/2007)

Specific Instructions

Table of Contents

You must file the first three pages of Form 706 and all required schedules. File Schedules A through I, as appropriate, to support the entries in items 1 through 9 of Part 5—Recapitulation.

IF . . . THEN . . .
you enter zero on any item of the Recapitulation, you need not file the schedule (except for Schedule F) referred to on that item.
you claim an exclusion on item 11, complete and attach Schedule U.
you claim any deductions on items 13 through 21 of the Recapitulation, complete and attach the appropriate schedules to support the claimed deductions.
you claim the credits for foreign death taxes or tax on prior transfers, complete and attach Schedule P or Q.
there is not enough space on a schedule to list all the items, attach a Continuation Schedule (or additional sheets of the same size) to the back of the schedule;
(see the Form 706 package for the Continuation Schedule);
photocopy the blank schedule before completing it, if you will need more than one copy.

Also consider the following:

  • Form 706 has 40 numbered pages. The pages are perforated so that you can remove them for copying and filing.

  • Number the items you list on each schedule, beginning with the number “1” each time, or using the numbering convention as indicated on the schedule (for example, Schedule M).

  • Total the items listed on the schedule and its attachments, Continuation Schedules, etc.

  • Enter the total of all attachments, Continuation Schedules, etc., at the bottom of the printed schedule, but do not carry the totals forward from one schedule to the next.

  • Enter the total, or totals, for each schedule on page 3, Part 5—Recapitulation.

  • Do not complete the “Alternate valuation date” or “Alternate value” columns of any schedule unless you elected alternate valuation on line 1 of Part 3—Elections by the Executor.

  • When you complete the return, staple all the required pages together in the proper order.

Part 1—Decedent and Executor (Page 1 of Form 706)

Line 2

Enter the social security number assigned specifically to the decedent. You cannot use the social security number assigned to the decedent's spouse. If the decedent did not have a social security number, the executor should obtain one for the decedent by filing Form SS-5, Application for Social Security Card, with a local Social Security Administration office.

Line 6a. Name of Executor

If there is more than one executor, enter the name of the executor to be contacted by the IRS. List the other executors' names, addresses, and SSNs (if applicable) on an attached sheet.

Line 6b. Executor's Address

Use Form 8822, Change of Address, to report a change of the executor's address.

Line 6c. Executor's Social Security Number

Only individual executors should complete this line. If there is more than one individual executor, all should list their social security numbers on an attached sheet.

Part 2—Tax Computation (Page 1 of Form 706)

In general, the estate tax is figured by applying the unified rates shown in Table A on page 4 to the total of transfers both during life and at death, and then subtracting the gift taxes.

Note. You must complete Part 2—Tax Computation.

Table A—Unified Rate Schedule

Column A Column B Column C Column D
Taxable amount over Taxable amount not over Tax on amount in column A Rate of tax on excess over amount in column A
(Percent)
0 $10,000 0 18
$10,000 20,000 $1,800 20
20,000 40,000 3,800 22
40,000 60,000 8,200 24
60,000 80,000 13,000 26
80,000 100,000 18,200 28
100,000 150,000 23,800 30
150,000 250,000 38,800 32
250,000 500,000 70,800 34
500,000 750,000 155,800 37
750,000 1,000,000 248,300 39
1,000,000 1,250,000 345,800 41
1,250,000 1,500,000 448,300 43
1,500,000 2,000,000 555,800 45
2,000,000 - - - - - - - - 780,800 45
This image is too large to be displayed in the current screen. Please click the link to view the image.

Worksheet TG

Line 1

If you elected alternate valuation on line 1, Part 3—Elections by the Executor, enter the amount you entered in the “Alternate value” column of item 12 of Part 5—Recapitulation. Otherwise, enter the amount from the “Value at date of death” column.

Line 3b. State Death Tax Deduction

Caution
The estates of decedents dying after December 31, 2004 will be allowed a deduction for state death taxes, instead of a credit. The state death tax credit is repealed, effective January 1, 2005.

You may take a deduction on line 3b for estate, inheritance, legacy, or succession taxes paid as the result of the decedent's death to any state or the District of Columbia.

You may claim an anticipated amount of deduction and figure the federal estate tax on the return before the state death taxes have been paid. However, the deduction cannot be finally allowed unless you pay the state death taxes and claim the deduction within 4 years after the return is filed, or later (see section 2058(b)) if:

  • A petition is filed with the Tax Court of the United States,

  • You have an extension of time to pay, or

  • You file a claim for refund or credit of an overpayment which extends the deadline for claiming the deduction.

Note. The deduction is subject to no dollar limits. If you make a section 6166 election to pay the federal estate tax in installments and make a similar election to pay the state death tax in installments, see section 2058(b) for exceptions and periods of limitation. If you transfer property other than cash to the state in payment of state inheritance taxes, the amount you may claim as a deduction is the lesser of the state inheritance tax liability discharged or the fair market value of the property on the date of the transfer. For more information on the application of such transfers, see the principles discussed in Rev. Rul. 86-117, 1986-2 C.B. 157, prior to the repeal of section 2011. You should send the following evidence to the IRS:

  1. Certificate of the proper officer of the taxing state, or the District of Columbia, showing the:

    1. Total amount of tax imposed (before adding interest and penalties and before allowing discount),

    2. Amount of discount allowed,

    3. Amount of penalties and interest imposed or charged,

    4. Total amount actually paid in cash, and

    5. Date of payment.

  2. Any additional proof the IRS specifically requests.

    You should file the evidence requested above with the return if possible. Otherwise, send it as soon after you file the return as possible.

Line 6

To figure the tentative tax on the amount on line 5, use Table A on
page 4.

Lines 4 and 7

Three worksheets are provided to help you compute the entries for these lines. You need not file these worksheets with your return but should keep them for your records. Worksheet TG—Taxable Gifts Reconciliation, on page 4, allows you to reconcile the decedent's lifetime taxable gifts to compute totals that will be used for the Line 4 Worksheet on page 4 and the Line 7 Worksheet on page 5.

Line 7 Worksheet—Gift Tax on Gifts Made After 1976

a.
Calendar year or calendar quarter		 b.
Total taxable gifts for prior periods (from Form 709, Part 2, Tax Computation, line 2)		 c.
Taxable gifts for this period (from Form 709, Part 2, Tax Computation, line 1)
(see below)		 d.
Tax payable using
Table A
(see below)		 e.
Unused unified credit (applicable credit amount) for this period
(see below)		 f.
Tax payable for this period (subtract col. e from col. d)
Total pre-1977 taxable gifts. Enter the amount from line 1, Worksheet TG






1. Total gift taxes payable on gifts made after 1976 (combine the amounts in column f) 1
2. Gift taxes paid by the decedent on gifts that qualify for “special treatment.” Enter the amount from line 2, column e,
Worksheet TG		 2
3. Subtract line 2 from line 1 3
4. Gift tax paid by decedent's spouse on split gifts included on Schedule G. Enter the amount from line 2, column f,
Worksheet TG		 4
5. Add lines 3 and 4. Enter here and on line 7 of the Tax Computation of Form 706 5
Columns b and c. In addition to gifts reported on Form 709, you must include in these columns any taxable gifts in excess of the annual exclusion that were not reported on Form 709.
Column d. To figure the “tax payable” for this column, you must use Table A in these instructions, as it applies to the year of the decedent's death rather than to the year the gifts were actually made. To compute the entry for column d, you should figure the “tax payable” on the amount in column b and subtract it from the “tax payable” on the amounts in columns b and c added together. Enter the difference in column d.
“Tax payable” as used here is a hypothetical amount and does not necessarily reflect tax actually paid. Figure “tax payable” only on gifts made after 1976. Do not include any tax paid or payable on gifts made before 1977. However, if the decedent made taxable gifts before January 1, 1977, a special computation is required. The amount of gift tax payable (line 7) should be determined by applying the unified rate schedule, in effect at date of death, to the cumulative lifetime taxable transfers made both before January 1, 1977, and after December 31, 1976, and then subtracting the taxes payable on the lifetime transfers made before December 31, 1976.
To calculate the tax, enter the amount for the appropriate year from column c of the worksheet on line 1 of the Tax Computation of the Form 709. Enter the amount from column b on line 2 of the Tax Computation. Complete the Tax Computation through the tax due before any reduction for the unified credit (applicable credit amount) and enter that amount in column d, above.
Column e. To figure the unused unified credit, (applicable credit amount), use the unified credit (applicable credit amount) in effect for the year the gift was made. This amount should be on line 12 of the Tax Computation of the Form 709 filed for the gift.

You must get all of the decedent's gift tax returns (Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return) before you complete Worksheet TG—Taxable Gifts Reconciliation. The amounts you will enter on Worksheet TG can usually be derived from these returns as filed. However, if any of the returns were audited by the IRS, you should use the amounts that were finally determined as a result of the audits.

In addition, you must include in column b of Worksheet TG any gifts in excess of the annual exclusion made by the decedent (or on behalf of the decedent under a power of attorney) but for which no Forms 709 were filed. You must make a reasonable inquiry as to the existence of any such gifts. The annual exclusion for 1977 through 1981 was $3,000 per donee per year, $10,000 for years 1981 through 2001, and $11,000 for years 2002 through 2005. For 2006 and 2007, the annual exclusion for gifts of present interests is $12,000 per donee.

Note. In figuring the line 7 amount, do not include any tax paid or payable on gifts made before 1977. The line 7 amount is a hypothetical figure used to calculate the estate tax.
Special treatment of split gifts. These special rules apply only if:

  • The decedent's spouse predeceased the decedent;

  • The decedent's spouse made gifts that were “split” with the decedent under the rules of section 2513;

  • The decedent was the “consenting spouse” for those split gifts, as that term is used on Form 709; and

  • The split gifts were included in the decedent's spouse's gross estate under section 2035.

If all four conditions above are met, do not include these gifts on line 4 of the Tax Computation and do not include the gift taxes payable on these gifts on line 7 of the Tax Computation. These adjustments are incorporated into the worksheets.

Line 9. Maximum Unified Credit (applicable credit amount)

The applicable credit amount (formerly the unified credit), is $780,800 for the estates of decedents dying in 2007. The amount of the credit cannot exceed the amount of estate tax imposed.

Line 10. Adjustment to Unified Credit (applicable credit amount)

If the decedent made gifts (including gifts made by the decedent's spouse and treated as made by the decedent by reason of gift splitting) after September 8, 1976, and before January 1, 1977, for which the decedent claimed a specific exemption, the unified credit (applicable credit amount) on this estate tax return must be reduced. The reduction is figured by entering 20% of the specific exemption claimed for these gifts.

Note. The specific exemption was allowed by section 2521 for gifts made before January 1, 1977.

If the decedent did not make any gifts between September 8, 1976, and January 1, 1977, or if the decedent made gifts during that period but did not claim the specific exemption, enter zero.

Line 15. Total Credits

Generally, line 15 is used to report the total of credit for foreign death taxes (line 13) and credit for tax on prior transfers (line 14).

However, you may also use line 15 to report credit taken for federal gift taxes imposed by Chapter 12 of the Code, and the corresponding provisions of prior laws, on certain transfers the decedent made before January 1, 1977, that are included in the gross estate. The credit cannot be more than the amount figured by the following formula:

Gross estate tax minus (the sum of the state death taxes and unified credit)


x

Value of included
gift
Value of gross estate minus (the sum of the deductions for charitable, public, and similar gifts and bequests and marital deduction)

When taking the credit for pre-1977 federal gift taxes:

  • Include the credit in the amount on line 15 and

  • Identify and enter the amount of the credit you are taking on the dotted line to the left of the entry space for line 15 on page 1 of Form 706 with a notation “section 2012 credit.”

For more information, see the regulations under section 2012. This computation may be made using Form 4808, Computation of Credit for Gift Tax. Attach a copy of a completed Form 4808 or the computation of the credit. Also attach all available copies of Forms 709 filed by the decedent to help verify the amounts entered on lines 4 and 7, and the amount of credit taken (on line 15) for pre-1977 federal gift taxes.

Canadian marital credit. In addition to using line 15 to report credit for federal gift taxes on pre-1977 gifts, you may also use line 15 to claim the Canadian marital credit, where applicable. When taking the marital credit under the 1995 Canadian Protocol:

  • Include the credit in the amount on line 15 and

  • Identify and enter the amount of the credit you are taking on the dotted line to the left of the entry space for line 15 on page 1 of Form 706 with a notation “Canadian marital credit.”

Also, attach a statement to the return that refers to the treaty, waives QDOT rights, and shows the computation of the marital credit. See the 1995 Canadian income tax treaty protocol for details on computing the credit.

Part 3—Elections by the Executor (Page 2 of Form 706)

Line 1. Alternate Valuation

Tip
See the example on page 13 showing the use of Schedule B where the alternate valuation is adopted.

Unless you elect at the time you file the return to adopt alternate valuation as authorized by section 2032, you must value all property included in the gross estate on the date of the decedent's death. Alternate valuation cannot be applied to only a part of the property.

You may elect special-use valuation (line 2) in addition to alternate valuation.

You may not elect alternate valuation unless the election will decrease both the value of the gross estate and the sum (reduced by allowable credits) of the estate and GST taxes payable by reason of the decedent's death with respect to the property includible in the decedent's gross estate.

You elect alternate valuation by checking “Yes” on line 1 and filing Form 706. You may make a protective alternate valuation election by checking “Yes” on line 1, writing the word “protective,” and filing Form 706 using regular values.

Once made, the election may not be revoked. The election may be made on a late filed Form 706 provided it is not filed later than 1 year after the due date (including extensions actually granted). Relief under sections 301.9100-1 and 301.9100-3 may be available to make an alternate valuation election or a protective alternate valuation election, provided a Form 706 is filed no later than 1 year after the due date of the return (including extensions actually granted).

If you elect alternate valuation, value the property that is included in the gross estate as of the applicable dates as follows.

  • Any property distributed, sold, exchanged, or otherwise disposed of or separated or passed from the gross estate by any method within 6 months after the decedent's death is valued on the date of distribution, sale, exchange, or other disposition, whichever occurs first. Value this property on the date it ceases to form a part of the gross estate; for example, on the date the title passes as the result of its sale, exchange, or other disposition.

  • Any property not distributed, sold, exchanged, or otherwise disposed of within the 6-month period is valued on the date 6 months after the date of the decedent's death.

  • Any property, interest, or estate that is “affected by mere lapse of time” is valued as of the date of decedent's death or on the date of its distribution, sale, exchange, or other disposition, whichever occurs first. However, you may change the date of death value to account for any change in value that is not due to a “mere lapse of time” on the date of its distribution, sale, exchange, or other disposition.

The property included in the alternate valuation and valued as of 6 months after the date of the decedent's death, or as of some intermediate date (as described above) is the property included in the gross estate on the date of the decedent's death. Therefore, you must first determine what property constituted the gross estate at the decedent's death.

Interest. Interest accrued to the date of the decedent's death on bonds, notes, and other interest-bearing obligations is property of the gross estate on the date of death and is included in the alternate valuation.
Rent. Rent accrued to the date of the decedent's death on leased real or personal property is property of the gross estate on the date of death and is included in the alternate valuation.
Dividends. Outstanding dividends that were declared to stockholders of record on or before the date of the decedent's death are considered property of the gross estate on the date of death, and are included in the alternate valuation. Ordinary dividends declared to stockholders of record after the date of the decedent's death are not property of the gross estate on the date of death and are not included in the alternate valuation. However, if dividends are declared to stockholders of record after the date of the decedent's death so that the shares of stock at the later valuation date do not reasonably represent the same property at the date of the decedent's death, include those dividends (except dividends paid from earnings of the corporation after the date of the decedent's death) in the alternate valuation.

As part of each Schedule A through I, you must show:

  1. What property is included in the gross estate on the date of the decedent's death;

  2. What property was distributed, sold, exchanged, or otherwise disposed of within the 6-month period after the decedent's death, and the dates of these distributions, etc.
    (These two items should be entered in the “Description” column of each schedule. Briefly explain the status or disposition governing the alternate valuation date, such as: “Not disposed of within 6 months following death,” “Distributed,” “Sold,” “Bond paid on maturity,” etc. In this same column, describe each item of principal and includible income);

  3. The date of death value, entered in the appropriate value column with items of principal and includible income shown separately; and

  4. The alternate value, entered in the appropriate value column with items of principal and includible income shown separately.
    (In the case of any interest or estate, the value of which is affected by lapse of time, such as patents, leaseholds, estates for the life of another, or remainder interests, the value shown under the heading “Alternate value” must be the adjusted value; for example, the value as of the date of death with an adjustment reflecting any difference in its value as of the later date not due to lapse of time.)

Distributions, sales, exchanges, and other dispositions of the property within the 6-month period after the decedent's death must be supported by evidence. If the court issued an order of distribution during that period, you must submit a certified copy of the order as part of the evidence. The IRS may require you to submit additional evidence, if necessary.

If the alternate valuation method is used, the values of life estates, remainders, and similar interests are figured using the age of the recipient on the date of the decedent's death and the value of the property on the alternate valuation date.

Line 2. Special-Use Valuation of Section 2032A

In general. Under section 2032A, you may elect to value certain farm and closely held business real property at its farm or business use value rather than its fair market value (FMV). You may elect both special-use valuation and alternate valuation. To elect this valuation, you must check “Yes” on line 2 and complete and attach Schedule A-1 and its required additional statements. You must file Schedule A-1 and its required attachments with Form 706 for this election to be valid. You may make the election on a late filed return so long as it is the first return filed.

The total value of the property valued under section 2032A may not be decreased from FMV by more than $940,000 for decedents dying in 2007.

Real property may qualify for the section 2032A election if:

  1. The decedent was a U.S. citizen or resident at the time of death;

  2. The real property is located in the United States;

  3. At the decedent's death, the real property was used by the decedent or a family member for farming or in a trade or business, or was rented for such use by either the surviving spouse or a lineal descendant of the decedent to a family member on a net cash basis;

  4. The real property was acquired from or passed from the decedent to a qualified heir of the decedent;

  5. The real property was owned and used in a qualified manner by the decedent or a member of the decedent's family during 5 of the 8 years before the decedent's death;

  6. There was material participation by the decedent or a member of the decedent's family during 5 of the 8 years before the decedent's death; and

  7. The qualified property meets the following percentage requirements:

    1. At least 50% of the adjusted value of the gross estate must consist of the adjusted value of real or personal property that was being used as a farm or in a closely held business and that was acquired from, or passed from, the decedent to a qualified heir of the decedent, and

    2. At least 25% of the adjusted value of the gross estate must consist of the adjusted value of qualified farm or closely held business real property.

For this purpose, adjusted value is the value of property determined without regard to its special-use value. The value is reduced for unpaid mortgages on the property or any indebtedness against the property, if the full value of the decedent's interest in the property (not reduced by such mortgage or indebtedness) is included in the value of the gross estate. The adjusted value of the qualified real and personal property used in different businesses may be combined to meet the 50% and 25% requirements.

Qualified Real Property

Qualified use. The term “qualified use” means the use of the property as a farm for farming purposes or the use of property in a trade or business other than farming. Trade or business applies only to the active conduct of a business. It does not apply to passive investment activities or the mere passive rental of property to a person other than a member of the decedent's family. Also, no trade or business is present in the case of activities not engaged in for profit.
Ownership. To qualify as special-use property, the decedent or a member of the decedent's family must have owned and used the property in a qualified use for 5 of the last 8 years before the decedent's death. Ownership may be direct or indirect through a corporation, a partnership, or a trust. If the ownership is indirect, the business must qualify as a closely held business under section 6166. The ownership, when combined with periods of direct ownership, must meet the requirements of section 6166 on the date of the decedent's death and for a period of time that equals at least 5 of the 8 years preceding death. If the property was leased by the decedent to a closely held business, it qualifies as long as the business entity to which it was rented was a closely held business with respect to the decedent on the date of the decedent's death and for sufficient time to meet the “5 in 8 years” test explained on page 7.
Structures and other real property improvements. Qualified real property includes residential buildings and other structures and real property improvements regularly occupied or used by the owner or lessee of real property (or by the employees of the owner or lessee) to operate the farm or business. A farm residence which the decedent had occupied is considered to have been occupied for the purpose of operating the farm even when a family member and not the decedent was the person materially participating in the operation of the farm. Qualified real property also includes roads, buildings, and other structures and improvements functionally related to the qualified use. Elements of value such as mineral rights that are not related to the farm or business use are not eligible for special-use valuation.
Property acquired from the decedent. Property is considered to have been acquired from or to have passed from the decedent if one of the following applies.

  • The property is considered to have been acquired from or to have passed from the decedent under section 1014(b) (relating to basis of property acquired from a decedent);

  • The property is acquired by any person from the estate; or

  • The property is acquired by any person from a trust, to the extent the property is includible in the gross estate.

Qualified heir. A person is a qualified heir of property if he or she is a member of the decedent's family and acquired or received the property from the decedent. If a qualified heir disposes of any interest in qualified real property to any member of his or her family, that person will then be treated as the qualified heir with respect to that interest. The term “member of the family” includes only:

  • An ancestor (parent, grandparent, etc.) of the individual;

  • The spouse of the individual;

  • The lineal descendant (child, stepchild, grandchild, etc.) of the individual, the individual's spouse, or a parent of the individual; or

  • The spouse, widow, or widower of any lineal descendant described above.

A legally adopted child of an individual is treated as a child of that individual by blood.

Material Participation

To elect special-use valuation, either the decedent or a member of his or her family must have materially participated in the operation of the farm or other business for at least 5 of the 8 years ending on the date of the decedent's death. The existence of material participation is a factual determination, but passively collecting rents, salaries, draws, dividends, or other income from the farm or other business does not constitute material participation. Neither does merely advancing capital and reviewing a crop plan and financial reports each season or business year.

In determining whether the required participation has occurred, disregard brief periods (that is, 30 days or less) during which there was no material participation, as long as such periods were both preceded and followed by substantial periods (more than 120 days) during which there was uninterrupted material participation.

Retirement or disability. If, on the date of death, the time period for material participation could not be met because the decedent had retired or was disabled, a substitute period may apply. The decedent must have retired on Social Security or been disabled for a continuous period ending with death. A person is disabled for this purpose if he or she was mentally or physically unable to materially participate in the operation of the farm or other business. The substitute time period for material participation for these decedents is a period totaling at least 5 years out of the 8-year period that ended on the earlier of:

  • The date the decedent began receiving social security benefits or

  • The date the decedent became disabled.

Surviving spouse. A surviving spouse who received qualified real property from the predeceased spouse is considered to have materially participated if he or she was engaged in the active management of the farm or other business. If the surviving spouse died within 8 years of the first spouse's death, you may add the period of material participation of the predeceased spouse to the period of active management by the surviving spouse to determine if the surviving spouse's estate qualifies for special-use valuation. To qualify for this, the property must have been eligible for special-use valuation in the predeceased spouse's estate, though it does not have to have been elected by that estate. For additional details regarding material participation, see Regulations section 20.2032A-3(e).

Valuation Methods

The primary method of valuing special-use value property that is used for farming purposes is the annual gross cash rental method. If comparable gross cash rentals are not available, you can substitute comparable average annual net share rentals. If neither of these are available, or if you so elect, you can use the method for valuing real property in a closely held business.

Average annual gross cash rental. Generally, the special-use value of property that is used for farming purposes is determined as follows:

  1. Subtract the average annual state and local real estate taxes on actual tracts of comparable real property from the average annual gross cash rental for that same comparable property and

  2. Divide the result in (1) by the average annual effective interest rate charged for all new Federal Land Bank loans.

The computation of each average annual amount is based on the 5 most recent calendar years ending before the date of the decedent's death. See Effective interest rate below.
Gross cash rental. Generally, gross cash rental is the total amount of cash received in a calendar year for the use of actual tracts of comparable farm real property in the same locality as the property being specially valued. You may not use appraisals or other statements regarding rental value or areawide averages of rentals. You may not use rents that are paid wholly or partly in-kind, and the amount of rent may not be based on production. The rental must have resulted from an arm's-length transaction. Also, the amount of rent is not reduced by the amount of any expenses or liabilities associated with the farm operation or the lease.
Comparable property. Comparable property must be situated in the same locality as the specially valued property as determined by generally accepted real property valuation rules. The determination of comparability is based on all the facts and circumstances. It is often necessary to value land in segments where there are different uses or land characteristics included in the specially valued land. The following list contains some of the factors considered in determining comparability.

  • Similarity of soil;

  • Whether the crops grown would deplete the soil in a similar manner;

  • Types of soil conservation techniques that have been practiced on the 2 properties;

  • Whether the 2 properties are subject to flooding;

  • Slope of the land;

  • For livestock operations, the carrying capacity of the land;

  • For timbered land, whether the timber is comparable;

  • Whether the property as a whole is unified or segmented. If segmented, the availability of the means necessary for movement among the different sections;

  • Number, types, and conditions of all buildings and other fixed improvements located on the properties and their location as it affects efficient management, use, and value of the property; and

  • Availability and type of transportation facilities in terms of costs and of proximity of the properties to local markets.

You must specifically identify on the return the property being used as comparable property. Use the type of descriptions used to list real property on Schedule A.
Effective interest rate. See Rev. Rul. 2007-45, 2007-28 I.R.B. 49, for the average annual effective interest rates in effect for 2007.
Net share rental. You may use average annual net share rental from comparable land only if there is no comparable land from which average annual gross cash rental can be determined. Net share rental is the difference between the gross value of produce received by the lessor from the comparable land and the cash operating expenses (other than real estate taxes) of growing the produce that, under the lease, are paid by the lessor. The production of the produce must be the business purpose of the farming operation. For this purpose, produce includes livestock. The gross value of the produce is generally the gross amount received if the produce was disposed of in an arm's-length transaction within the period established by the Department of Agriculture for its price support program. Otherwise, the value is the weighted average price for which the produce sold on the closest national or regional commodities market. The value is figured for the date or dates on which the lessor received (or constructively received) the produce.
Valuing a real property interest in closely held business. Use this method to determine the special-use valuation for qualifying real property used in a trade or business other than farming. You may also use this method for qualifying farm property if there is no comparable land or if you elect to use it. Under this method, the following factors are considered.

  • The capitalization of income that the property can be expected to yield for farming or for closely held business purposes over a reasonable period of time with prudent management and traditional cropping patterns for the area, taking into account soil capacity, terrain configuration, and similar factors;

  • The capitalization of the fair rental value of the land for farming or for closely held business purposes;

  • The assessed land values in a state that provides a differential or use value assessment law for farmland or closely held business;

  • 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 nonagricultural use is not a significant factor in the sales price; and

  • Any other factor that fairly values the farm or closely held business value of the property.

Making the Election

Include the words “section 2032A valuation” in the “Description” column of any Form 706 schedule if section 2032A property is included in the decedent's gross estate.

An election under section 2032A need not include all the property in an estate that is eligible for special-use valuation, but sufficient property to satisfy the threshold requirements of section 2032A(b)(1)(B) must be specially valued under the election.

If joint or undivided interests (that is, interests as joint tenants or tenants in common) in the same property are received from a decedent by qualified heirs, an election with respect to one heir's joint or undivided interest need not include any other heir's interest in the same property if the electing heir's interest plus other property to be specially valued satisfies the requirements of section 2032A(b)(1)(B).

If successive interests (that is, life estates and remainder interests) are created by a decedent in otherwise qualified property, an election under section 2032A is available only with respect to that property (or part) in which qualified heirs of the decedent receive all of the successive interests, and such an election must include the interests of all of those heirs.

For example, if a surviving spouse receives a life estate in otherwise qualified property and the spouse's brother receives a remainder interest in fee, no part of the property may be valued under a section 2032A election.

Where successive interests in specially valued property are created, remainder interests are treated as being received by qualified heirs only if the remainder interests are not contingent on surviving a nonfamily member or are not subject to divestment in favor of a nonfamily member.

Protective Election

You may make a protective election to specially value qualified real property. Under this election, whether or not you may ultimately use special-use valuation depends upon values as finally determined (or agreed to following examination of the return) meeting the requirements of section 2032A.

To make a protective election, check “Yes” on line 2 and complete Schedule A-1 according to its instructions for “Protective Election.”

If you make a protective election, you should complete this Form 706 by valuing all property at its fair market value. Do not use special-use valuation. Usually, this will result in higher estate and GST tax liabilities than will be ultimately determined if special-use valuation is allowed. The protective election does not extend the time to pay the taxes shown on the return. If you wish to extend the time to pay the taxes, you should file Form 4768 in adequate time before the return due date.

If it is found that the estate qualifies for special-use valuation based on the values as finally determined (or agreed to following examination of the return), you must file an amended Form 706 (with a complete section 2032A election) within 60 days after the date of this determination. Complete the amended return using special-use values under the rules of section 2032A, and complete Schedule A-1 and attach all of the required statements.

Additional information

For definitions and additional information, see section 2032A and the related regulations.

Line 3. Installment Payments

If the gross estate includes an interest in a closely held business, you may be able to elect to pay part of the estate tax in installments under section 6166.

The maximum amount that can be paid in installments is that part of the estate tax that is attributable to the closely held business. In general, that amount is the amount of tax that bears the same ratio to the total estate tax that the value of the closely held business included in the gross estate bears to the adjusted gross estate.

Bond or lien. The IRS may require that an estate furnish a surety bond when granting the installment payment election. In the alternative, the executor may consent to elect the special lien provisions of section 6324A, in lieu of the bond. The IRS will contact you regarding the specifics of furnishing the bond or electing the special lien. The IRS will make this determination on a case-by-case basis, and you may be asked to provide additional information. If you elect the lien provisions, section 6324A requires that the lien be placed on property having a value equal to the total deferred tax plus four years of interest. The property must be expected to survive the deferral period.
Percentage requirements. To qualify for installment payments, the value of the interest in the closely held business that is included in the gross estate must be more than 35% of the adjusted gross estate (the gross estate less expenses, indebtedness, taxes, and losses). Interests in two or more closely held businesses are treated as an interest in a single business if at least 20% of the total value of each business is included in the gross estate. For this purpose, include any interest held by the surviving spouse that represents the surviving spouse's interest in a business held jointly with the decedent as community property or as joint tenants, tenants by the entirety, or tenants in common.
Value. The value used for meeting the percentage requirements is the same value used for determining the gross estate. Therefore, if the estate is valued under alternate valuation or special-use valuation, you must use those values to meet the percentage requirements.
Transfers before death. Generally, gifts made before death are not included in the gross estate. However, the estate must meet the 35% requirement by both including in and excluding from the gross estate any gifts made by the decedent in the 3-year period ending on the date of death.
Passive assets. In determining the value of a closely held business and whether the 35% requirement is met, do not include the value of any passive assets held by the business. A passive asset is any asset not used in carrying on a trade or business. Any asset used in a qualifying lending and financing business is treated as an asset used in carrying on a trade or business; see section 6166(b)(10) for details. Stock in another corporation is a passive asset unless the stock is treated as held by the decedent because of the election to treat holding company stock as business company stock; see Holding company stock below. If a corporation owns at least 20% in value of the voting stock of another corporation, or the other corporation had no more than 45 shareholders and at least 80% of the value of the assets of each corporation is attributable to assets used in carrying on a trade or business, then these corporations will be treated as a single corporation, and the stock will not be treated as a passive asset. Stock held in the other corporation is not taken into account in determining the 80% requirement.
Interest in closely held business. For purposes of the installment payment election, an interest in a closely held business means:

  • Ownership of a trade or business carried on as a proprietorship,

  • An interest as a partner in a partnership carrying on a trade or business if 20% or more of the total capital interest was included in the gross estate of the decedent or the partnership had no more than 45 partners, or

  • Stock in a corporation carrying on a trade or business if 20% or more in value of the voting stock of the corporation is included in the gross estate of the decedent or the corporation had no more than 45 shareholders.

The partnership or corporation must be carrying on a trade or business at the time of the decedent's death. For further information on whether certain partnerships or corporations owning real property interests constitute a closely held business, see Rev. Rul. 2006-34, 2006-26 I.R.B. 1171. In determining the number of partners or shareholders, a partnership or stock interest is treated as owned by one partner or shareholder if it is community property or held by a husband and wife as joint tenants, tenants in common, or as tenants by the entirety. Property owned directly or indirectly by or for a corporation, partnership, estate, or trust is treated as owned proportionately by or for its shareholders, partners, or beneficiaries. For trusts, only beneficiaries with present interests are considered. The interest in a closely held farm business includes the interest in the residential buildings and related improvements occupied regularly by the owners, lessees, and employees operating the farm.
Holding company stock. The executor may elect to treat as business company stock the portion of any holding company stock that represents direct ownership (or indirect ownership through one or more other holding companies) in a business company. A holding company is a corporation holding stock in another corporation. A business company is a corporation carrying on a trade or business. In general, this election applies only to stock that is not readily tradable. However, the election can be made if the business company stock is readily tradable, as long as all of the stock of each holding company is not readily tradable. For purposes of the 20% voting stock requirement, stock is treated as voting stock to the extent the holding company owns voting stock in the business company. If the executor makes this election, the first installment payment is due when the estate tax return is filed. The 5-year deferral for payment of the tax, as discussed below under Time for payment, does not apply. In addition, the 2% interest rate, discussed on page 11 under Interest computation, will not apply. Also, if the business company stock is readily tradable, as explained above, the tax must be paid in 5 installments.
Time for payment. Under the installment method, the executor may elect to defer payment of the qualified estate tax, but not interest, for up to 5 years from the original payment due date. After the first installment of tax is paid, you must pay the remaining installments annually by the date 1 year after the due date of the preceding installment. There can be no more than 10 installment payments. Interest on the unpaid portion of the tax is not deferred and must be paid annually. Interest must be paid at the same time as and as a part of each installment payment of the tax.
Acceleration of payments. If the estate fails to make payments of tax or interest within 6 months of the due date, the Service may terminate the right to make installment payments and force an acceleration of payment of the tax upon notice and demand. Generally, if any portion of the interest in the closely held business which qualifies for installment payments is distributed, sold, exchanged, or otherwise disposed of, or money and other property attributable to such an interest is withdrawn, and the aggregate of those events equals or exceeds 50% of the value of the interest, then the right to make installment payments will be terminated, and the unpaid portion of the tax will be due upon notice and demand. See section 6166(g).
Interest computation. A special interest rate applies to installment payments. For decedents dying in 2007, the interest rate is 2% on the lesser of:

  • $562,500 or

  • The amount of the estate tax that is attributable to the closely held business and that is payable in installments.

2% portion. The 2% portion is an amount equal to the amount of the tentative estate tax (on $1,000,000 plus the applicable exclusion amount in effect) minus the applicable credit amount in effect. However, if the amount of estate tax extended under section 6166 is less than the amount computed above, the 2% portion is the lesser amount.
Inflation adjustment. The $1,000,000 amount used to calculate the 2% portion is indexed for inflation for the estates of decedents dying in a calendar year after 1998. For an estate of a decedent dying in calendar year 2007, the dollar amount used to determine the “2% portion” of the estate tax payable in installments under section 6166 is $1,250,000.
Computation. Interest on the portion of the tax in excess of the 2% portion is figured at 45% of the annual rate of interest on underpayments. This rate is based on the federal short-term rate and is announced quarterly by the IRS in the Internal Revenue Bulletin. If you elect installment payments and the estate tax due is more than the maximum amount to which the 2% interest rate applies, each installment payment is deemed to comprise both tax subject to the 2% interest rate and tax subject to 45% of the regular underpayment rate. The amount of each installment that is subject to the 2% rate is the same as the percentage of total tax payable in installments that is subject to the 2% rate.
Caution
The interest paid on installment payments is not deductible as an administrative expense of the estate.
Making the election. If you check this line to make a protective election, you should attach a notice of protective election as described in Regulations section 20.6166-1(d). If you check this line to make a final election, you should attach the notice of election described in Regulations section 20.6166-1(b). In computing the adjusted gross estate under section 6166(b)(6) to determine whether an election may be made under section 6166, the net amount of any real estate in a closely held business must be used.

You may also elect to pay GST taxes in installments. See section 6166(i).

Line 4. Reversionary or Remainder Interests

For details of this election, see section 6163 and the related regulations.

Part 4—General Information (Pages 2 and 3 of Form 706)

Authorization