Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 56.—Adjustments in Computing Alternative Minimum Taxable Income

In determining the alternative minimum taxable income, is there an adjustment under § 56 of the Internal Revenue Code for the commercial revitalization deduction provided by § 1400I? See Rev. Proc. 2003–38, page 1017.

Section 126.—Certain Cost-Sharing Payments

26 CFR 16A.126–1: Certain cost sharing payments

— In general (Temporary).

Cost-share payments. The Conservation Reserve Program (CRP) is a small watershed program administered by the Secretary of Agriculture that is substantially similar to the type of programs described in sections 126(a)(1) through (8) of the Code within the meaning of section 126(a)(9). All or a portion of cost-share payments received under the CRP is eligible for exclusion from gross income to the extent permitted by section 126. Rental payments and incentive payments are not costshare payments and are not excludable from gross income.

Rev. Rul. 2003–59

ISSUE

Is the Conservation Reserve Program (CRP) substantially similar to the type of programs described in § 126(a)(1) through (8) of the Internal Revenue Code, so that the CRP is within the scope of § 126(a)(9) and, thereby, cost-share payments received under the CRP are eligible for exclusion from gross income to the extent permitted by § 126?

FACTS

The CRP, authorized under Title XII of the Food Security Act of 1985, as amended, Pub. L. No. 99–198, 99 Stat. 1504, and reauthorized under the Federal Agriculture Improvement and Reform Act of 1996, Pub. L. No. 104–127, 110 Stat. 888, is a voluntary program for soil, water, and wild

life conservation, wetland establishment and restoration, and reforestation. The Food, Agriculture, Conservation, and Trade Act of 1990, Pub. L. No. 101–624, 104 Stat. 3359, established the umbrella program “Environmental Conservation Acreage Reserve Program,” which is made up of the CRP and the Wetland Reserve Program, which was determined in Rev. Rul. 97–55, 1997–2 C.B. 20, to be within the scope of § 126(a)(9).

Landowners who participate in the CRP enter into one or more 10 to 15 year costshare contracts with the Department of Agriculture. Under a cost-share contract, a farmer or rancher agrees to implement approved conservation-related practices on the land in return for cost-share payments equal to 50 percent of the actual or average cost of establishing a practice. Typically, costshare payments range from $20 to $500 per acre. There is no maximum cost-share payment per person, however, the per acre payment for some practices is limited based on local land values.

In addition to cost-share payments, all participants in the CRP also receive annual rental payments for the 10 to 15 year contract duration. Rental payments range from $30 to $160 per acre, depending on soil type and local market rates, plus up to an additional $9 per acre for cover maintenance, with a maximum of $50,000 per person for any fiscal year. Some participants also may receive a one-time incentive payment of up to 20 percent of the annual payment for certain practices.

The Secretary of Agriculture has determined that the CRP is a small watershed program and that the cost-share payments under the CRP are primarily for the purpose of conservation.

LAW AND ANALYSIS

Under § 126(a), gross income does not include the excludable portion of payments received under certain conservation programs set forth in § 126(a)(1) through (8). Under § 126(a)(9), a program affecting “small watersheds” that is administered by the Secretary of Agriculture also is eligible for § 126 treatment if the Commis

sioner determines that the program is substantially similar to the type of programs described in § 126(a)(1) through (8). See § 16A.126–1(d)(3) of the temporary Income Tax Regulations for the definition of “small watershed.”

Once the Commissioner has determined that a program is substantially similar to the type of programs described in § 126(a)(1) through (8), taxpayers receiving cost-share payments under that program must determine what portion of the cost-share payments is excludable from gross income under § 126. See § 126(b)(1), and § 16A.126–1 relating to the partial exclusion for certain cost-share payments to determine what portion of the cost-share payments is excludable from gross income under § 126. The rental payments and incentive payments received under the CRP are not cost-share payments and therefore are not excludable from gross income. See § 16A.126–1.

HOLDING

The CRP is a small watershed program administered by the Secretary of Agriculture that is substantially similar to the type of programs described in § 126(a)(1) through (8) within the meaning of § 126(a)(9). All or a portion of cost-share payments received under the CRP is eligible for exclusion from gross income to the extent permitted by § 126. See § 126(b)(1) and § 16A.126–1 to determine what portion, if any, of the cost-share payments is excludable from gross income under § 126. Rental payments and incentive payments are not cost-share payments and are not excludable from gross income. See § 16A.126–1(b)(2)(iii).

DRAFTING INFORMATION

The principal author of this revenue ruling is Nicole R. Cimino of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Ms. Cimino at (202) 622–3120 (not a toll-free call).

2003–24 I.R.B. 1014 June 16, 2003

Section 168.—Accelerated Cost Recovery System

In lieu of determining depreciation under § 168 of the Internal Revenue Code, how does a taxpayer make an election under § 1400I to recover the cost of a new or substantially rehabilitated building that is placed in service in a renewal community? See Rev. Proc. 2003–38, page 1017.

Section 1400I.—Commercial Revitalization Deduction

How does a state make an allocation of commercial revitalization expenditures to a new or substantially rehabilitated building that is placed in service in a renewal community and how does a taxpayer make an election to recover the cost of this building under § 1400I of the Internal Revenue Code? See Rev. Proc. 2003–38, page 1017.

Section 2057.—Family-Owned Business Interests

Taxation of qualified family-owned business interest (QFOBI). A distribution in redemption of stock that is part of a QFOBI and that qualifies under section 303 of the Code: (1) does not affect the initial determination of whether the estate is eligible to make the QFOBI election, and (2) does not constitute a disposition under section 2057(f)(1)(B); thus under section 2057 no additional estate tax is imposed as a result of this distribution.

Rev. Rul. 2003–61

ISSUE

Does a distribution in redemption of stock that is part of a qualified familyowned business interest (QFOBI) and that qualifies under § 303 of the Internal Revenue Code: (1) affect the initial determination of whether the estate is eligible to make the QFOBI election, or (2) constitute a disposition under § 2057(f)(1)(B) that results in the imposition of an additional estate tax?

FACTS

At the time of D ’s death, D owned shares of stock in X corporation with an adjusted value under § 2057(d) of $3 million. No gift of X corporation stock was made or deemed made by D during D ’s life. These shares passed to D ’s children pursuant to the terms of D ’s will. The value

of D ’s adjusted gross estate under § 2057(c) was $5 million. On the federal estate tax return filed for D ’s estate, D ’s executor elected to treat all of D ’s stock in X corporation as a QFOBI under § 2057, filed the duly executed agreement referred to in § 2057(h), and claimed the maximum allowable deduction of $675,000. In all respects, the election complied with the provisions of § 2057. In order to pay the federal and state estate taxes imposed by reason of D ’s death, D ’s executor caused X corporation to redeem one-third of the X corporation stock in a distribution that satisfied the requirements of § 303.

LAW AND ANALYSIS

In general, under § 303(a), a distribution of property to a shareholder by a corporation in redemption of part or all of the stock of the corporation that is included in determining the decedent’s gross estate for federal estate tax purposes is treated as a distribution in full payment in exchange for the redeemed stock to the extent of the sum of certain taxes and expenses. These taxes and expenses are the estate, inheritance, legacy, and succession taxes (including any interest collected as a part of such taxes) imposed because of the decedent’s death, and the amount of funeral and administration expenses allowable as deductions for federal estate tax purposes. In addition to the other limitations and rules in § 303, the treatment under § 303(a) applies only to the extent that the interest of the shareholder receiving the distribution is reduced directly (or through a binding obligation to contribute) by any payment of these amounts. Section 303(b)(3).

Section 2057(a)(1) provides that, in the case of an estate to which § 2057 applies, the value of the taxable estate is determined by deducting from the value of the gross estate the adjusted value of the QFOBI of the decedent. Under § 2057(a)(2), the deduction may not exceed $675,000. One of the requirements of § 2057 is that the QFOBI either must be acquired by a qualified heir from the decedent or must pass to a qualified heir from the decedent. Section 2057(b)(2)(B).

Section 2057(f)(1) provides that additional estate tax is imposed if certain events occur within 10 years after the date of the decedent’s death and before the date of the qualified heir’s death. One of these events is the disposition by the qualified heir of

any portion of a QFOBI, other than by a disposition to a member of the qualified heir’s family or through a qualified conservation contribution under § 170(h). Section 2057(f)(1)(B).

Section 2057(i)(3)(O) provides that rules similar to the rule in § 6166(g)(1)(B) shall apply for purposes of § 2057.

Section 6166(g)(1)(A) provides that the privilege of paying the estate tax in installments ceases and the unpaid tax becomes due upon notice and demand if: (i) any portion of an interest in a closely held business that qualifies under § 6166(a)(1) is distributed, sold, exchanged, or otherwise disposed of, or money and other property attributable to the interest is withdrawn from the trade or business, and (ii) the aggregate of the distributions, sales, exchanges, or other dispositions and withdrawals equals or exceeds 50 percent of the value of the interest.

Section 6166(g)(1)(B) provides that in the case of a distribution in redemption of stock to which § 303 (or so much of § 304 as relates to § 303) applies: (i) the redemption of the stock, and the withdrawal of money and other property distributed in the redemption, is not treated as a distribution or withdrawal for purposes of § 6166(g)(1)(A), and (ii) for purposes of § 6166(g)(1)(A), the value of the interest in the closely held business is considered to be its value reduced by the value of the redeemed stock. Thus, the reduction in the value of the interest pursuant to § 6166(g)(1)(B)(ii) is applicable in determining whether subsequent distributions, sales, exchanges, or other dispositions and withdrawals equal or exceed 50 percent of the value of the interest under § 6166(g)(1)(A)(ii) and does not affect the determination of whether the estate is initially eligible for the extension of time to pay under § 6166.

In applying rules similar to the rule in § 6166(g)(1)(B) for purposes of § 2057, a distribution in redemption of stock to which § 303 applies is not a disposition that triggers an additional estate tax with respect to a QFOBI and the redemption does not affect the initial determination of whether the estate is eligible to make the QFOBI election.

After the redemption caused by D ’s executor of one-third of the X corporation stock in a distribution that satisfied the re

June 16, 2003 1015 2003–24 I.R.B.

quirements of § 303, the adjusted value of the QFOBI ($2 million) no longer exceeds 50 percent of D ’s adjusted gross estate ($5 million). The QFOBI election made for D ’s estate is not affected because the distribution in redemption of the X corporation stock does not affect the initial determination of whether D ’s estate is eligible to make the QFOBI election. The distribution in redemption of the X corporation stock is not a disposition of a portion of the QFOBI that would trigger an additional estate tax.

HOLDING

A distribution in redemption of stock that is part of a QFOBI and that qualifies under § 303: (1) does not affect the initial determination of whether the estate is eligible to make the QFOBI election, and (2) does not constitute a disposition under § 2057(f)(1)(B); thus under § 2057 no additional estate tax is imposed as a result of this distribution.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Corenna Howard and Lian Mito of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Ms. Howard or Ms. Mito at (202) 622–7830 (not a toll-free call).

2003–24 I.R.B. 1016 June 16, 2003