a.
In
general. The fair market value of an item of property, both real and
personal, that is included in the gross estate for inheritance tax purposes is
expressed in the property's monetary equivalent. The process used to determine
fair market value presupposes the voluntary exchange of the item in a market
for its equivalent in money.
Hetland v. Bilstad, 140 Iowa 411,
415, 118 N.W. 422 (1908). The fact the item of property is not actually sold or
exchanged or even offered for sale is not relevant. It is sufficient for
establishing the item's value to arrive at the specific dollar amount that a
seller would voluntarily accept in exchange for the property and the amount
that a buyer would be willing to pay.
Juhl v. Greene County Board of
Review, 188 N.W.2d 351 (Iowa 1971). It is assumed when determining
this specific dollar amount, which is the item's fair market value, that the
seller is desirous of obtaining the highest possible price for the property and
that the buyer does not wish to pay more than is absolutely necessary to
acquire the property.
The item of property must be valued in a market where it is
customarily traded to the public. See federal regulation 20.2031-1(b).
Therefore, if an item of property is valued in a market which is not open to
the general public, the party asserting the value in the restricted market has
the burden to prove by a preponderance of the evidence that the value in the
restricted market is the item's fair market value.
The distinction between a public and a restricted market can
be illustrated by the following:
EXAMPLE 1. Under the provisions of the decedent's will, the
personal representative of the estate is given the power to sell the decedent's
property at either a public or private sale. Pursuant to this power, the
personal representative sold the decedent's household goods at public auction
held on a specific day and time which was widely advertised both in the
newspaper in the locality where the decedent lived and also by sale bills
posted in numerous public places in the decedent's community. The household
goods sold at auction for $2,500. The fair market value of the household goods
on the day of sale is $2,500. The public auction is a market where such items
are commonly sold and the public had knowledge of the impending sale. The
public was also invited to bid and the items to be sold were available for
inspection.
EXAMPLE 2. Pursuant to an agreement between the beneficiaries
of the estate, the personal representative sold the decedent's household goods
and personal effects at an auction where only members of the decedent's family
were permitted to bid. The items sold for $2,500, which may or may not be the
fair market value of the property. Family pride, sentiment, and other personal
considerations may have entered into the selling price. In this type of sale
the burden is on the personal representative to prove that the selling price is
the fair market value of the items sold.
b.
Values established by recognized
public markets.
(1) Stocks, bonds,
and notes. Items of personal property such as, but not limited to, corporate
stock, bonds, mutual funds, notes, and commodities which are traded on one or
more of the nation's stock or commodity exchanges shall be valued under the
provisions of Federal Estate Tax Regulation 20.2031-2, which regulation is
incorporated in and made a part of this subrule by reference.
Individuals who have a registration of a security indicating
sole ownership by one individual or multiple ownership by two or more
individuals with a right of survivorship and not as tenants in common, may
obtain a registration in beneficiary form as provided in the uniform transfer
on death security registration Act as provided in Iowa Code section 633.800. A
"registering entity" under this Act must provide notice to the department of
revenue of all reregistrations made pursuant to this Act. Such notice must
include the name, address, and social security number of the decedent and all
transferees. Until the division of the security, after the death of all the
owners, multiple beneficiaries surviving the death of all the owners hold their
interest as tenants in common. If no beneficiary survives the death of all the
owners, the security belongs to the estate of the deceased sole owner of the
estate of the last to die of the multiple owners.
(2) Local elevator and sale barn prices. The
fair market value of grain and livestock may be determined either by the quoted
price from the grain elevator or sale barn in the community where the grain or
livestock is located or by the price quoted from the nearest commodity
exchange, less the customary delivery discount.
(3) Public auctions by the court. The fair
market value of an item may be established in a public market other than a
market which has a permanent location and which holds sales at periodic stated
intervals. It is common for estates or the probate court to hold a public
auction to sell estate property and if the sale meets certain criteria the
selling price received in this type of public auction will establish the fair
market value of the property. Factors in an estate or court sale which tend to
establish the selling price as one at fair market value include but are not
limited to the time and place of the sale were well advertised; the public was
invited and encouraged to bid; members of the decedent's family or business
associates were not given special consideration as to price or terms of sale;
and the terms of sale were comparable to those offered at sales in a regularly
established public market.
(4)
Sales in a regularly established market. Sales made in a regularly established
market pursuant to Iowa Code section
633.387 would qualify as a sale
at fair market value for inheritance tax purposes.
c.
Private sales that may establish
fair market value. Private sales of estate assets may establish the
fair market value of the item depending on the facts and circumstances
surrounding each sale. Factors which tend to establish a private sale as one at
fair market value include but are not limited to:
(1) Sales made by a recognized broker who
receives a commission from the seller based on the selling price and who has
exercised diligence in obtaining a buyer.
(2) Sales made by the personal representative
to nonfamily members after a good-faith effort was made to solicit bids from
persons who are known to be interested in buying that particular kind of
property.
(3) Sales made by the
attorney or the personal representative after the item of property was
advertised for sale in a newspaper of general circulation or in trade
publications and a good-faith effort was made to obtain the best possible
price.
(4) Sales made by the
personal representative when the sale price is the price quoted on one of the
nation's stock or commodity exchanges.
(5) Private sales made by the personal
representative to members of the decedent's family or business associates are
suspect due to personal, family, or business reasons, but nevertheless may
constitute a sale at fair market value, depending on the facts and
circumstances surrounding each sale. The personal representative has the burden
to establish that this kind of private sale is a sale at fair market value.
Factors which have a bearing on whether this type of private sale is one at
fair market value include, but are not limited to, the following: Did the
decedent's will give a sale or price preference to a member of the decedent's
family or business associate? Were the terms of sale more advantageous than
terms that would be given to the general public? Was a good-faith effort made
to solicit bids from other persons known to be interested in buying that
particular kind of property? Was the sale made as part of a family settlement
of a will contest or dispute on a claim against the estate?
d.
Fair market value-no
regularly established market.
(1) In
general. Certain items of personal property such as, but not limited to,
closely held corporate stock, real estate contracts of sale, private promissory
notes, accounts receivable, partnership interests, and choses in action are not
customarily bought and sold in a public market. Occasional sales of these items
of personal property at infrequent intervals do not establish a market for this
kind of personal property, but the lack of a regular market does not indicate
that the item is of no value. When there is not a regularly established market
to use as a reference point for value, it is necessary to create a hypothetical
market to determine fair market value. The factors used to create a
hypothetical market vary with the kind of property being valued and depend on
the facts and circumstances in each individual case.
(2) Fair market value of closely held
corporate stock. A closely held corporation is a corporation whose shares are
owned by a relatively limited number of stockholders. Often the entire stock
issue is held by members of one family or by a small group of key corporate
officers. Because of the limited number of stockholders and due to a family or
business relationship, little, if any, trading in the shares takes place. There
is, therefore, no established market for the stock. Sales that do occur are
usually at irregular intervals and seldom reflect all of the elements of a
representative transaction as is contemplated by the term fair market value.
The term "fair market value" has the same meaning for federal estate tax
purposes as it does for Iowa inheritance tax purposes. As a result, the federal
revenue rulings establishing the criteria for valuing closely held corporate
stock are equally applicable to inheritance tax values. Therefore, corporate
stock which meets the standards for being closely held must be valued for
inheritance tax purposes under the provisions of Federal Revenue Ruling 59-60,
1959-1 C.B. 237 as modified by Revenue Ruling 65-193, 1965-2 C.B. 370 and
amplified by Revenue Ruling 77-287, 1977-2 C.B. 319, Revenue Ruling 80-213,
1980-2 C.B. 101, and Revenue Ruling 83-120, 1983-2 C.B. 170, which Federal
Revenue Rulings are incorporated in and made a part of this subrule by
reference.
(3) Fair market value of
real estate contracts, notes, and mortgages. The fair market value of
promissory notes, secured or unsecured, contracts for the sale of real estate,
and other obligations to pay money which are included in the gross estate is
presumed to be the amount of the unpaid principal plus the amount of interest,
if any, accrued to the day of the decedent's death. If the asset is not
reported on the return at face value plus accrued interest, the burden is on
the party claiming a greater or lesser value to establish that face value plus
accrued interest is not the asset's fair market value.
Factors which have a bearing on whether the fair market value
of an asset is greater or less than face value include, but are not limited to,
the rate of interest charged on the obligation; the length of time remaining on
the obligation; the credit standing and payment history of the debtor; the
value and nature of the property, if any, securing the obligation; the
relationship of the debtor to the decedent; and whether the obligation is to be
offset against the debtor's share of the estate. See Iowa Code section
633.471 and Welp v.
Department of Revenue, 333 N.W.2d 481 (Iowa 1983). This subrule can be
illustrated by the following:
EXAMPLE 1. The decedent at the time of death owned a seller's
interest in an installment sale contract for the sale of a 160-acre farm. The
contract contained a forfeiture provision in the event the buyer failed to make
the payments and further provided that the purchase price was to be paid in 20
equal annual principal payments plus interest at 7 percent per year on the
unpaid principal balance. At the time of the decedent's death, the contract of
sale had ten years yet to run and the current federal land bank interest rate
for farm land loans was 12 percent. Assuming in this example that other
valuation factors are not relevant, the fair market value of the contract is
the face amount of the contract, plus interest, discounted to reflect a 12
percent interest return on the outstanding principal balance. A prudent
investor would not invest at a lower rate of interest when a comparable
investment with equal security would earn 12 percent interest.
EXAMPLE 2. A tenant of the decedent owed the decedent $5,000,
which was evidenced by a promissory note, payable on demand, drawing 6 percent
interest, and which was executed in 1992, a year prior to the decedent's death.
Assuming no other valuation factors are relevant, the fair market value of the
$5,000 promissory note is its face value, plus accrued interest. The less than
market interest rate on the note does not affect its fair market value because
the note is due on demand and, as a consequence, there is no loss of a higher
rate of interest which would be the case if the note specified a future payment
date.
EXAMPLE 3. Decedent A died intestate July 1, 1993, survived
by two nephews, B and C. The estate consisted, after debts and charges, of
$300,000 in cash and U.S. Government bonds and a noninterest bearing promissory
note for $10,000 executed by nephew B in 1975 for money borrowed for his
college education. No payments were ever made on the note. The note is outlawed
by the statute of limitations and would be worthless if anyone other than
nephew B or C had executed the note. However, since nephew B inherits one-half
of A's estate, and is required under the law of setoff and retainer to pay the
note before he can participate in the estate, the fair market value of the note
in this particular fact situation is $10,000 because it is collectible in full.
Each nephew's share of the estate is $155,000. Nephew C receives $155,000 in
cash and nephew B receives $145,000 in cash plus his canceled note for $10,000.
In this example, the statutory right of setoff and retainer supersedes other
factors which are relevant in determining the fair market value of the asset.
See Iowa Code section
633.471; In re Estate of
Farris, 234 Iowa 960, 14 N.W.2d 889 (1944); Indiana Department
of Revenue v. Estate of Cohen, 436 N.E.2d 832 (Ind. App. 198 2);
Gearhart's Ex'r and Ex'x v. Howard, 302 Ky. 709, 196 S.W.2d
113 (1946).
(4) Fair market
value of a sole proprietorship or partnership interest. The fair market value
of the decedent's interest in a business, whether a partnership or a
proprietorship, is the net amount a willing buyer would pay for the interest to
a willing seller, neither being under any compulsion to buy or to sell and both
having reasonable knowledge of the relevant facts. Relevant factors in
determining net value include but are not limited to the following: a fair
appraisal as of the applicable valuation date of all of the assets of the
business, tangible and intangible, including goodwill; the demonstrated earning
capacity of the business; and the other factors in rule
701-700.8 (422), to the extent
they are applicable, that must be considered in valuing closely held corporate
stock.
(5) Fair market value of
choses in action. The fair market value of the decedent's interest in a right
to sue for a debt or a sum of money often cannot be determined with certainty
at the time of the decedent's death. The value of this right is dependent on
many factors which include, but are not limited to, the following: the strength
and credibility of the decedent's evidence; the statutory and case law
supporting the decedent's claim or position; the ability of the opposing party
to pay a judgment; the extent, if applicable, of the decedent's contributory
negligence; and the other normal hazards of litigation. However, this lack of
certainty does not mean the right to sue has no value at the time of the
decedent's death. Evidence of what was actually received for this right by the
decedent's estate or its beneficiary is evidence of the fair market value of
the right at death.
This subrule can be illustrated by the following
example:
The decedent died in a fire of uncertain origin that
destroyed his dwelling. Due to the circumstances surrounding the fire, the
estate's right of recovery from the fire insurance carrier was speculative and,
therefore, the value of this right at death was unknown. After the estate was
closed, the beneficiary of the estate settled the fire insurance claim for
$15,000. The amount received in settlement of the claim can be considered as
evidence of the fair market value of the right of action at death. Bair
v. Randall, 258 N.W.2d 333 (Iowa 1977). In addition, interest on the
unpaid tax begins and continues to accrue from the date of the decedent's
death.
(6) Wrongful death
proceeds are not included in the gross estate. Estate of Dieleman v.
Department of Rev., 222 N.W.2d 459 (Iowa 1974).
e.
By agreement between the
department, the estate and its beneficiaries. Iowa Code section
450.37 provides that the market
value in the ordinary course of trade is to be determined by agreement between
the estate and its beneficiaries and the department. The term "agreement" when
used with reference to the value of an asset, whether it is real or personal
property, has the same meaning as the term is used in the law of contracts. The
agreement between the department, the estate and its beneficiaries may be
contained in a single written instrument, or it may be made by an offer
submitted by the estate and its beneficiaries and its acceptance by the
department. The agreement establishing values for computing the tax may specify
that the values as finally determined for federal estate tax purposes on all or
a portion of the assets will be the values used in computing the tax.
(1) Offer by the estate and the
beneficiaries. It is the duty of the taxpayer to list on the inheritance tax
return the values of the assets in the gross estate which the estate and those
beneficially entitled to the decedent's property are willing to offer as the
values for computing the taxable shares in the estate. The value of the assets
listed on the return will constitute an offer for the department to accept or
reject. Counteroffers may be made in the event an offer is rejected. This rule
applies equally to real and personal property.
(2) Acceptance of values by the department.
The values offered on the inheritance tax return by the estate and its
beneficiaries are accepted by the department when:
1. The department has accepted the offered
values in writing, or
2. A
clearance certifying full payment of the tax due or a clearance certifying no
tax due is issued by the department, or
3. The department does not request an
appraisal within 60 days after the return has been filed in the case of the
value of real estate. Notice of appraisal must be served by certified mail, and
the notice is deemed completed when the notice is deposited in the mail and
postmarked for delivery. However, see 900.9(2)"e"(3) for the
rule governing values listed as "unknown" or "undetermined." See Iowa Code
sections 622.105 and
622.106 for the law determining
the filing date of a tax return that is mailed.
(3) Values listed on the return as
"undetermined" or "unknown." If at the time the inheritance tax return is filed
the information necessary to determine the value of an asset cannot be
presently ascertained, the taxpayer may list the value of that asset as
"unknown" or "undetermined." The return must contain a statement signed by the
taxpayer on behalf of the estate and the beneficiaries with an interest in the
property granting the department an extension of time for requesting an
appraisal until 60 days after an amended return is filed listing a value for
the real estate. Failure to grant an extension of time will subject the real
estate to an immediate request for an appraisal. The amended return shall be
accompanied with sufficient facts and other information necessary to
substantiate the value offered. An agreement concerning the value of an asset
presupposes that the department, the beneficiaries and the estate have
knowledge of the relevant facts necessary to determine value. There can be no
meaningful agreement or appraisal until the relevant facts relating to value
are known. See Bair v. Randall, 258 N.W.2d 333 (Iowa 1977),
regarding the criteria that may be used to determine the value of an asset
which was unknown at the time of the decedent's death.
f.
Values established-no
agreement.
(1) Real estate. If the
department, the estate and the persons succeeding to the decedent's property
have not reached an agreement as to the value of real estate under
86.9(2)"e," the market value for inheritance tax purposes will
be established by the appraisal proceedings specified in Iowa Code sections
450.27 to
450.36. For the purposes of
appraisal, "real estate or real property" means the land and appurtenances,
including structures affixed thereto. Use of the inheritance tax appraisers to
determine value for other purposes such as, but not limited to, determining the
share of the surviving spouse in the estate or for determining the fair market
value of real estate for the purposes of sale, is not controlling in
determining values for inheritance tax purposes. Appraisals of real estate must
be made in fee simple including land, all appurtenances and structures affixed
to the real estate. Discounts in the value of real estate are not to be
considered in the valuation of real property for the purposes of an appraisal.
Such discounts in valuation are to be resolved by mutual agreement through
informal procedures between the personal representative of the estate and the
department. If an agreement between the personal representative of the estate
and the department cannot be obtained, then the valuation placed on the
property by the department may be appealed by the personal representative of
the estate pursuant to the procedures set forth in 701-Chapter 7. If either the
department or the estate does not agree with the results of an appraisal that
is conducted pursuant to Iowa Code sections
450.27 through
450.36, either the department or
the estate may file an objection to the appraisal pursuant to Iowa Code section
450.31. Information on
additional factors to assist in the determination of fair market value of real
property can be found in 701-subrule 86.9(2).
(2) Personal property. Effective for estates
of decedents dying on or after July 1, 1983. If an agreement is not reached on
the value of personal property under 900.9(2)"e," the estate
or any person beneficially receiving the personal property may appeal to the
director under Iowa Code section
450.94, subsection 3, for a
resolution of the valuation dispute, with the right of judicial review of the
director's decision under Iowa Code chapter 17A.
g.
Amending returns to change
values.
(1) Amendment permitted or
required. Unless value has been established by the appraisal or administrative
proceedings, the inheritance tax return may be amended by the estate to change
the value of an asset listed on the return as long as the amendment is filed
before an agreement is made between the estate and the department as to the
asset's value. The return must be amended to list the value of an asset omitted
from the original return or to assign a value for an item listed on the
original return as "unknown" or "undetermined."
If the facts and circumstances surrounding the value
agreement would justify a reformation or rescission of the agreement under the
law of contracts, the return may be amended by the estate, and must be amended
at the department's request, to change the value of the item to its correct
fair market value or its special use value as the case may be.
(2) Amendment not permitted. A
return cannot be amended:
1. To change the
agreed value of an asset, if the facts and circumstances surrounding the
agreement would not justify a reformation or rescission of the
agreement,
2. To change a real
estate value that has been established by the appraisal proceedings under Iowa
Code sections 450.31 to
450.33, Insel v. Wright
County, 208 Iowa 295, 225 N.W. 378 (1929), or
3. To change the value of an item of personal
property that has been established by the department's administrative procedure
under 701-Chapter 7, or, if an appeal is taken from the director's decision, by
judicial review under Iowa Code chapter 17A. Provided, in no event may the
return be amended to lower the value of an asset that would result in a refund
of tax more than three years after the tax became due or one year after the tax
was paid, whichever time is the later. Iowa Code section
450.94, Welp v.
Department of Revenue, 333 N.W.2d 481 (Iowa 1983).
