Estate of Walter F. Klosterman, Deceased Kent Klosterman Alan Klosterman, Personal Representatives v. Commissioner Internal Revenue Service

The Estate of Walter F. Klosterman, deceased, elected to use the formula prescribed by 26 U.S.C. § 2032A(e)(7)(A) to value farmland for estate tax purposes. This section permits a taxpayer to value farmland by dividing the excess of the “average annual gross cash rental” received for comparable land over the “State and local real estate taxes” imposed upon such land, by the applicable Federal Land Bank interest rate'. In applying this formula, the estate excluded from the average annual gross cash rental the average annual amounts of irrigation assessments tenants of such land pay to their landlords. The estate contends these payments are not payments of rent for land and thus are not includable in the valuation formula as “gross cash rental for comparable land,” or, if includable in such gross rental, the assessments may be deducted as local real estate taxes under § 2032A(e)(7)(A)(i) and 26 U.S.C. § 164 .

The tax court, in a published decision, Estate of Klosterman v. Commissioner I.R.S., 99 T.C. 313 , 1992 WL 217491 (1992), rejected the estate’s arguments, concluded the estate had misapplied the formula, and determined the estate’s tax deficiency to be $15,232. The estate…