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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, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, 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.
Department of the Treasury
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.
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.
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.
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).
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.
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.
See section 1014(a) for the basis of property acquired from a decedent.
Check the box on line 7 of Part I,
Enter on line 20 of Part II the amount of interest being paid on the additional estate tax due, and
File with Form 706-A, a statement that:
a. Contains the name, address, and taxpayer identification number of the qualified heir and of the estate;
b. Identifies the election as the election under section 1016(c) of the Code; and
c. Specifies the property with respect to which the election is made.
For the two 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, 2006, and the commencement date is August 1, 2007, the recapture period would begin August 1, 2007, and end July 31, 2017.
You may file Form 706-A for only 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:
Schedules A and B,
The qualified heir must sign the return.
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