The Economic Recovery Tax Act of 1981 
(ERTA) liberalized both the procedures and benefits 
of the special use valuation election. One important 
change is that an estate is now permitted to include 
the value of standing timber growing in a qualified 
woodland tohelp meet the special use valuation re- 
quirements (Siegel 1982a). 
Certain of the requirements are very strictly con- 
strued. One in this category is that the property 
must have been owned by the decedent or a mem- 
ber of the decedent's family and used by the dece- 
dent or family member for a qualifying purpose for 
at least 5 of the 8 years immediately preceding 
death. The qualified use test, used to make this 
determination, requires that the decedent orfamily 
member have had an equity interest in the forestry 
operation at the time of death and for 5 or more of 
the last 8 years before death. 
Material participation is another prerequisite 
strictly interpreted (Siegel 1982b). In meeting this 
test, material participation may be accomplished by 
either the decedent or a member of the decedent's 
family during the time the property was held by the 
decedent. For the period following death, during 
which the property is held by the qualified heir, ma- 
terial participation may be accomplished by the 
qualified heir or any member of that person's family. 
The timber example in the Treasury regulations that 
govern special use valuation suggests that at least 
the following activities are to be generally required 
in order to qualify for election: 
(1) Participate actively in making management 
decisions such as where and when to con- 
duct stand-improvement operations. 
(2) | Assume financial responsibility for meeting 
forestry business expenses. 
(3) | Retain prerogatives for approval of manage- 
ment plans submitted by consulting foresters 
or other forester-advisors. 
(4) Participate in the supervision of harvesting, 
marketing, and planting activities to a degree 
indicative of an ongoing business rather than 
of a passive investment. 
Following the decedent's death, heirs are re- 
quired to continue active operation of the property 
in its qualifying use for a period of 10 years. Failure 
to do so, or disposition of any portion of the property 
(to anyone other than another family member) trig- 
gers the imposition of an additional estate tax. This 
amounts to a recapture of the tax saved by special 
use valuation. 
Deferral and Extension of Payments 
Another important provision of the estate tax 
law permits deferral and extension of that portion of 
the estate tax payment attributable to the dece- 
dent's interest in a farm or woodland if it qualifies as 
a closely-held business (Siegel and Utz 1983). If the 
qualifications are met, this option can provide finan- 
cial flexibility for the estate and may reduce the net 
present value of estate tax liability. The tax is permit- 
ted to be deferred for a period of up to 5 years, to 
be followed by payments in a maximum of 10 equal 
annual installments. Interest must be paid during 
both periods but is deductible as an estate adminis- 
tration expense. 
To qualify for this election, more than 35 percent 
of the adjusted gross estate must be comprised of 
an interest in a closely-held business. The Internal 
Revenue Service interprets this requirement to 
mean an active as opposed to a passive trade or 
business. Thus investment property per se does not 
constitute a trade or business. Only where there has 
been active management by the decedent or his 
agent does property qualify. 
Termination of deferral and extension privileges 
occurs and the remaining balance of the estate tax 
becomes payable immediately if either of the follow- 
ing situations occurs: 
(1) | One-half or more of the qualifying property is 
sold, exchanged, or otherwise disposed of 
before the estate tax is paid in full. 
(2) Any payment of interest on the tax is not 
made within 6 months of its original due date. 
Impact on Southern Forestry 
Both the special use valuation and deferral and 
extension options are too new to accurately evalu- 
ate their utilization and impact on southern wood- 
lands. Nevertheless, it is known that a substantial 
number of southern estates have elected timber 
special use valuation since the option has become 
available. A lesser number have qualified for the tax 
deferral and extension provisions. 
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