## Facts

- Doris E. Finfrock–Ware died on January 3, 2008, owning 61.05% of a closely held corporation, Finfrock Farms, Inc.
- For at least eight years before her death, Finfrock Farms owned several parcels of Illinois farm real estate (Items 1–4), which were actively farmed by the decedent’s son, James Finfrock.
- The parcels passed indirectly to qualified heirs through changes in ownership of the corporation after the decedent’s death.
- The estate filed a federal estate tax return (Form 706) and asserted that the estate’s interest in Items 1–4 constituted qualified real property eligible for special use valuation under 26 U.S.C. § 2032A.
- The estate’s adjusted value of the gross estate was $2,608,848; the adjusted value of real property (Items 1–4) was $1,775,000 (about 68% of the adjusted gross estate).
- The executor designated only a subset of the qualifying real property for special use valuation; the IRS contended the designated subset did not meet a 25% threshold under Treasury Regulation § 20.2032A-8(a)(2).
- The parties filed cross-motions for summary judgment, identifying a single threshold dispute: the validity of Treasury Regulation § 20.2032A-8(a)(2).

## Issues

1. Whether 26 U.S.C. § 2032A(b)(1) unambiguously measures the 25% eligibility test by reference to all real property used in the decedent’s farm or closely held business, rather than only the property designated for special use valuation on the return.
2. Whether Treasury Regulation § 20.2032A-8(a)(2), which effectively requires the 25% test to be met by designated property, is a valid interpretation of § 2032A(b)(1) under Chevron.

## Decision

- The court held Treasury Regulation § 20.2032A-8(a)(2) invalid.
- Applying Chevron step one, the court found § 2032A(b)(1) clear: the 25% test turns on the adjusted value of real property used in the farm or closely held business, not on the subset designated for special use valuation.
- The regulation was invalid because it conflicted with the statute by adding an extra condition (that designated property itself satisfy the 25% threshold).
- Because additional issues remained, the court did not finally resolve the merits of the tax refund dispute and took the cross-motions for summary judgment under advisement for further proceedings.

## Legal Principles

- Under Chevron step one, when statutory text is unambiguous, an agency regulation that conflicts with that text is invalid and receives no deference.
- Section 2032A(b)(1)’s 25% requirement is measured by the adjusted value of real property used in the farm or other closely held business relative to the adjusted value of the gross estate.
- An agency may not, through regulation, add an eligibility requirement for a statutory benefit that Congress did not enact.
- Statutory purpose may confirm a plain-text reading, particularly where Congress enacted a provision to reduce estate tax pressure on family farms and closely held businesses.

## Conclusion

The court invalidated Treasury Regulation § 20.2032A-8(a)(2) because it imposed a “designated property” version of the 25% threshold that contradicted the plain language of § 2032A(b)(1), leaving the parties to litigate remaining issues affecting the estate’s entitlement to special use valuation.


Finfrock v. United States, 860 F. Supp. 2d 651 (C.D. Ill. 2012)