Item You Should Note.
The 10–15 year phasedown of the recapture tax does not apply
to the estates of decedents dying after 1981. For these estates, no
recapture tax is imposed on dispositions or cessations occurring more
than 10 years after the commencement date. (If you are filing this
form for the estate of a decedent dying after 1976 and before 1982,
see the March 1997 revision of Form 706-A.)
This Form 706-A may be used for the estates of decedents dying
after December 31, 1981, to report all dispositions or cessations of
qualified use that occurred after December 31, 1981.
An heir must use Form 706-A to report the additional estate tax
imposed by section 2032A(c) for an early disposition of specially
valued property or for an early cessation of a qualified use of
specially valued property.
The recapture tax is limited to the tax savings attributable to the
property actually disposed of (or for which qualified use ceased)
rather than to the tax savings attributable to all the specially
valued property received by the heir.
The qualified heir must file Form 706-A if there was any “taxable
event” (as defined below) with respect to the specially valued
property even if no tax is ultimately due. Further, the qualified heir
must file Form 706-A if there was any involuntary conversion or
exchange of the specially valued property even if the conversion or
exchange is nontaxable.
File Form 706-A and pay any additional taxes due within 6 months
after the taxable disposition or cessation of the qualified use unless
an extension of time has been granted.
Use Form 4768, Application for Extension of Time to File
a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer)
Taxes, to apply for an extension of time to file. Circle “Form 706-A”
at the top of Form 4768.
Make the check or money order payable to the United States Treasury
and write the qualified heir's social security number on the check or
money order.
File Form 706-A with the Internal Revenue Service office where Form
706 for the decedent's estate was filed.
The additional estate tax may be assessed until 3 years after the
IRS receives notice that the qualified heir disposed of the specially
valued property or ceased to use it for the qualified use.
However, if the property was disposed of in an involuntary
conversion or in an exchange, the tax may be assessed up to 3 years
after the IRS receives notice that the property was replaced or will
not be replaced. See section 2032A(f).
If the estate elected special use valuation, section 6324B
establishes a special lien against the specially valued property equal
to the adjusted tax difference attributable to the special use
valuation.
Specially valued property.
The term “
specially valued property” means farm or closely
held business property that the executor elected to value at actual
use rather than fair market value. The executor makes the election on
Form 706, United States Estate (and Generation- Skipping
Transfer) Tax Return, filed for the decedent. Specially valued
property refers to the qualified real property described in section
2032A and includes qualified real property owned indirectly, such as
interests in certain partnerships, corporations, and trusts as
described in section 2032A. If special valuation was elected on Form
706, each qualified heir consented in writing to his or her personal
liability for the additional estate tax attributable to his or her
interest in the specially valued property.
Qualified heir.
The term “
qualified heir” means, for any property, a member of
the decedent's family who acquired the property (or to whom the
property passes) from the decedent. If a qualified heir disposes of
any interest in qualified real property to any member of his or her
family, that member shall thereafter be treated as the qualified heir
for the interest.
The qualified heir causes a taxable event by disposing of any
interest in the specially valued property or ceasing to use the
specially valued property for its qualified use if:
- The disposition or cessation of qualified use was before the
death of the qualified heir, and
- The disposition or cessation was within 10 years after the
decedent's death. (But see “Two-Year Grace Period” below.)
Only one additional estate tax will be imposed with respect to any
one part of specially valued property. For example, if additional
estate tax is imposed for early cessation of a qualified use, a second
additional estate tax will not be imposed for a subsequent early
disposition of the same part of the specially valued property.
Disposition to family member.
A disposition of an interest in property to a family member of the
qualified heir is a “
taxable event” that must be reported on Form
706-A. If the transferee enters into an agreement to be personally
liable for any additional tax under section 2032A(c), the disposition
is nontaxable and you should enter it on Schedule C.
If the family member does not enter into the agreement, the
disposition is taxable and you should enter it on Schedule A.
Disposition of timber.
If the executor made a qualified woodlands election (section
2032A(e)(13)(A)), the disposition or severing of timber from the
woodland is a disposition of a portion of the interest in the
property. The disposition of a right to sever is treated as a
disposition of the standing timber.
The additional estate tax on this disposition is the amount equal
to the lesser of:
- The amount realized on the disposition (or, if other than a
sale or exchange at arm's length, the fair market value of the
interest disposed of), or
- The amount of additional estate tax that would have been
imposed if the entire interest of the qualified heir in the qualified
woodland had been disposed of, minus any additional estate tax imposed
on all earlier transactions involving the woodland.
Cessation of qualified use.
The specially valued real property must be used as a farm for
farming purposes, or used in a trade or business other than the trade
or business of farming. For more details, see the Instructions for
Form 706.
The qualified use ceases if the specially valued real property is
not used for the qualified use described above. Use of the property as
a farm or other business is also considered to cease if, during any
8-year period that ends after the decedent's death, there were periods
totaling more than 3 years during which:
- Neither the decedent nor any member of the decedent's family
materially participated in the operation of the farm or other business
(while the decedent held the property); and
- Neither the qualified heir nor any member of the qualified
heir's family materially participated in the operation of the farm or
other business (while the heir held the property).
If the decedent was retired or disabled before death, there are
special rules for applying the 8-year period to paragraph
1
above. See section 2032A(b)(4) and the Instructions for Form
706.
Member of family.
The term “
member of the family” includes only:
- An ancestor (parent, grandparent, etc.) of the individual
(where individual refers to either the decedent or a qualified
heir),
- The spouse of the individual,
- A 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.
Period of material participation.
To determine whether the material participation requirement is
satisfied, include periods during which the decedent's estate held the
property.
If a qualified heir dies before the required period has passed, any
material participation requirement ends for that heir's portion of the
property, provided the heir received a separate or other undivided
interest from the decedent.
If qualified heirs receive successive interests in specially valued
property (e.g., a life estate and remainder interests), the material
participation requirement does not end for any part of the property
until the later of the expiration of the recapture period or the death
of the last qualified heir.
In determining whether the required participation has occurred,
disregard brief periods (30 days or less) during which there was no
material participation. But you may disregard these periods only if
they were both preceded and followed by substantial periods (more than
120 days) in which there was uninterrupted material participation.
Required activities for material participation.
See the Instructions for Form 706.
See section 1014(a). For an election to increase basis, see section
1016(c) and Temporary Regulations section 301.9100-4T.
Two-Year Grace
Period:
Commencement Date
For the 2 years immediately following the date of the decedent's
death, the failure by the qualified heir to begin using the property
in a qualified use will not be considered a cessation of qualified use
and therefore will not trigger the additional estate tax. The date on
which the qualified heir begins to use the property in a qualified use
is the “commencement date.”
The 10-year recapture period is extended by the period after the
decedent's death and before the commencement date.
For example, if the decedent died February 28, 1989, and the
commencement date is August 1, 1990, the recapture period would begin
August 1, 1990, and end July 31, 2000.
How To Complete Form 706-A
You may only file Form 706-A for one qualified heir. If a
disposition, cessation, involuntary conversion, or exchange involves
more than one qualified heir, you must file a separate Form 706-A for
each.
Complete Form 706-A in this order:
- Part I;
- Schedules A and B;
- Part II;
- Schedule C.
The qualified heir must sign the return.
