This is archived information that pertains only to the 2006 Tax Year. If you
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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 (see Taxable Events 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 to apply for an automatic extension of time to file. Check the “Form 706-A” box in Part II of Form 4768.
Make the check or money order payable to the “United States Treasury” and write “Form 706-A” and the qualified heir's social security
number on the check or money order.
If you are making an election to increase basis, see Basis on page 2 for information on paying interest.
File Form 706-A at the following address:
Internal Revenue Service Center
Cincinnati, OH 45999
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) for details.
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—Commencement
Date on page 2.)
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 (for example, 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 the basis of property acquired from a decedent.
Election to increase basis.
A qualified heir may elect to increase the basis of specially valued property when a taxable event (as defined on
page 1) occurs. If this election
is made, the basis of the property shall increase to the excess of the fair market value (as defined on page 3) amount on
the decedent's date of death
(or alternate valuation date, if applicable) over the value amount determined under section 2032A. Once the election is made,
it is irrevocable.
To make the election, a qualified heir must file with Form 706-A, a statement that:
-
Contains the name, address, and taxpayer identification number of the qualified heir and of the estate;
-
Identifies the election as the election under section 1016(c) of the Code; and
-
Specifies the property with respect to which the election is made.
A qualified heir who makes this election must pay interest on the additional estate tax calculated from the date that
is nine months after the date
of the decedent's death to the date of the payment of the additional estate tax.
When paying interest on the additional estate tax due, identify and enter the amount of interest you are paying in the bottom
margin on page 1 of
Form 706-A with a notation “
section 1016(c) interest.” Do not include the interest on line 19.
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, 2003, and the commencement date is August 1, 2004, the recapture period would
begin August 1, 2004,
and end July 31, 2014.
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, each heir must file a separate Form 706-A.
Complete Form 706-A in this order:
-
Part I,
-
Schedules A and B,
-
Part II,
-
Schedule C.
Note.
The qualified heir must sign the return.
