United States Additional Estate Tax Return

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Instructions for Form 706-A

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APPROVED FOR TPCC
CHAIRPERSON "AS CORRECTED"
JOHNNY CERVANTES 1/16/2008

Instructions for Form 706-A
(Rev. January 2008)
United States Additional Estate Tax Return

Add page number to
citation once it becomes
available, which should
be late 1/16/2008 or
first thing 1/17/2008.
Call the IRB unit to
Department
of the Treasury
determine.
Internal Revenue Service

2008-13, 2008-3 I.R.B
XXX

To report dispositions or cessations of qualified use under section 2032A of the Internal Revenue Code

D

Section references are to the Internal
Revenue Code unless otherwise noted.

When To File and Pay

Penalties

What’s New

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.

Return preparer. The Small Business
and Work Opportunity Tax Act of 2007
extends the application of income tax
return preparer penalties to preparers
of estate tax returns. Under the
amended provision and transitional
relief provided by Notice 2007-54,
2007-27 I.R.B. 12, estate tax return
preparers who prepare any return or
claim for refund which reflects an
understatement of tax liability due to
willful or reckless conduct are subject to
a penalty of $5,000 or 50% of the
income derived (or income to be
derived), whichever is greater, for the
preparation of each such return. See
section 6694 and Notice 2007-54 for
more details.

• On page 1 of Form 706-A, we have

added a new line 7 to Part I and a new
line 20 to Part II. Check the box on line
7 of Part I to indicate that the qualified
heir is making an election to increase
the basis of specially valued property.
Report on line 20 of Part II the amount
of interest being paid. For more
information, see Basis, Election to
increase basis on page 2.
• The Small Business and Work
Opportunity Tax Act of 2007, P.L.
110-28, extends the application of
income tax return preparer penalties to
preparers of estate tax returns. See
Penalties, Return preparer below for
more information.

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.

Where To File

General Instructions
Purpose of Form
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.

Who Must File
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 at the following
address:
Department of the Treasury
Internal Revenue Service Center
Cincinnati, OH 45999

Statute of Limitations
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.

Lien
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.
Cat. No. 10142D

Definitions

2008-13

Specially valued property. The term
“specially valued property” means farm
or closely held business property that
the executor elected to value at actual
use rather than fair market value. The
executor makes the election on Form
706, United States Estate (and
Generation-Skipping Transfer) Tax
Return, filed for the decedent. Specially
valued property refers to the qualified
real property described in section
2032A and includes qualified real
property owned indirectly, such as
interests in certain partnerships,
corporations, and trusts as described in
section 2032A. If special valuation was
elected on Form 706, each qualified
heir consented in writing to his or her
personal liability for the additional
estate tax attributable to his or her
interest in the specially valued property.
Qualified heir. The term “qualified
heir” means, for any property, a
member of the decedent’s family who
acquired the property (or to whom the
property passes) from the decedent. If
a qualified heir disposes of any interest
in qualified real property to any member
of his or her family, that member shall
thereafter be treated as the qualified
heir for the interest.

Taxable Events
The qualified heir causes a taxable
event by disposing of any interest in the
specially valued property or ceasing to

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Instructions for Form 706-A

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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 below.)
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.
Disposition to family member. A
disposition of an interest in property to
a family member of the qualified heir is
a taxable event that must be reported
on Form 706-A. If the transferee enters
into an agreement to be personally
liable for any additional tax under
section 2032A(c), the disposition is
nontaxable and you should enter it on
Schedule C.
If the family member does not enter
into the agreement, the disposition is
taxable and you should enter it on
Schedule A.
Disposition of timber. If the executor
made a qualified woodlands election
(section 2032A(e)(13)(A)), the
disposition or severing of timber from
the woodland is a disposition of a
portion of the interest in the property.
The disposition of a right to sever is
treated as a disposition of the standing
timber.
The additional estate tax on this
disposition is the amount equal to the
lesser of:
• 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.
Cessation of qualified use. The
specially valued real property must be
used as a farm for farming purposes, or
used in a trade or business other than
the trade or business of farming. For
more details, see the Instructions for
Form 706.
The qualified use ceases if the
specially valued real property is not
used for the qualified use described
above. Use of the property as a farm or
other business is also considered to
cease if, during any 8-year period that

ends after the decedent’s death, there
were periods totaling more than 3 years
during which:
1. 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
2. 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).
If the decedent was retired or
disabled before death, there are special
rules for applying the 8-year period to
paragraph (1) above. See section
2032A(b)(4) and the Instructions for
Form 706.
Member of family. The term “member
of the family” includes only:
• 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.
A legally adopted child of an
individual is treated as a child of that
individual by blood.
Period of material participation. 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.

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Required activities for material
participation. See the Instructions for
Form 706.

Basis
See section 1014(a) for the basis of
property acquired from a decedent.
Election to increase basis. A
qualified heir may elect to increase the
basis of specially valued property when
a taxable event (as defined on page 1)
occurs. If this election is made, the
basis of the property shall increase to
the excess of the fair market value (as
defined on page 3) amount on the
decedent’s date of death (or alternate
valuation date, if applicable) over the
value amount determined under section
2032A. Once the election is made, it is
irrevocable.
To make the election, the qualified
heir must:
• 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.
A qualified heir who makes this
election must pay interest on the
additional estate tax calculated from the
date that is 9 months after the date of
the decedent’s death to the date of the
payment of the additional estate tax.

Two-Year Grace
Period—
Commencement Date
For the 2 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.

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Instructions for Form 706-A

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How To Complete Form
706-A
You may only file Form 706-A for 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:
1. Part I,
2. Schedules A and B,
3. Part II,
4. Schedule C.
Note. The qualified heir must sign the
return.

Specific Instructions
Valuation
When computing the amounts to enter
on Form 706-A, use the same values
and estate tax that the executor
reported on the Form 706 filed for the
decedent. However, if the IRS has
completed the audit of the estate tax
return, use the agreed values and tax
rather than the reported values and tax.

Schedule A. Disposition
of Specially Valued
Property or Cessation of
Qualified Use
On Schedule A, list every specially
valued property interest that the
qualified heir disposed of or
discontinued use of since the date of
the decedent’s death and for which a
Form 706-A has not been previously
filed. Do not list any interests that have
already been reported on Schedule A
or B of a previously filed Form 706-A. In
general, do not list property interests
disposed of to family members of the
qualified heir. These interests should be
listed on Schedule C.
Column A. Number and list the
property interests in chronological order
of disposition or cessation.
Column B. Use the same description
in column B that the executor used for
the specially valued property on the
Form 706 filed for the decedent. Please
include in column B the schedule and
item number where the specially valued
property was reported on the Form 706
filed for the decedent’s estate.
Column C. Report in column C the
date that the qualified heir disposed of
the specially valued property or
discontinued the qualified use.
Column D. If the qualified heir
disposed of the specially valued

property in an arm’s length transaction,
report in column D the amount realized.
Arm’s length transaction. An
arm’s length transaction is a transaction
where there is no bargain or gift
element for affection or other reasons.
Amount realized. The amount
realized is the sum of the money
received plus the fair market value of
property (other than money) received.
For the real property taxes that must be
taken into account, see section
1001(b).
If the qualified heir owned only a part
of the specially valued property, report
in column D the pro rata share of the
amount realized that is allocable to the
part owned by the qualified heir.
If the specially valued property is
disposed of by the qualified heir in
other than an arm’s length transaction,
or if the qualified use is discontinued by
the qualified heir, report in column D
the fair market value of the specially
valued property as of the date of
disposition or cessation of qualified use.
Fair market value. Fair market
value is the price at which the property
would change hands between a willing
buyer and a willing seller, neither being
under any compulsion to buy or to sell
and both having reasonable knowledge
of relevant facts.
For additional information and
examples, see Regulations section
20.2031-1(b). If the qualified heir owned
only a part of the specially valued
property, report in column D the pro
rata share of the fair market value
allocable to the part owned by the
qualified heir.
Column E. Report in column E the
special-use value at the date of the
decedent’s death (or alternate valuation
date) of the specially valued property
that passed from the decedent to the
qualified heir who disposed of the
property or discontinued the qualified
use. Use the same special-use value
that the executor reported on the Form
706 filed for the decedent’s estate. If
the IRS has completed the audit of the
estate tax return, use the agreed value
rather than the reported value. If the
qualified heir owned only a part of the
specially valued property, report in
column E the pro rata share of the
special-use value allocable to the part
owned by the qualified heir.

Schedule B. Involuntary
Conversions or
Exchanges
Involuntary conversions of qualified real
property (under the rules of section
1033) and exchanges of qualified real
property (under the rules of section
1031) are treated similarly when

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computing the additional estate tax on
Form 706-A.
The rules below apply to all qualified
heirs, whether or not they made an
election, for involuntary conversions
and exchanges occurring after 1981.
If you are reporting an involuntary
conversion or exchange, you may not
use the same Form 706-A to report any
cessations or other dispositions that are
not involuntary conversions or
exchanges. Use a separate Form
706-A for the cessations or other
dispositions.
You may report conversions and
exchanges together on the same
return.

Nontaxable Involuntary
Conversions or Exchanges
If the qualified heir reinvests all of the
involuntary conversion proceeds in
qualified replacement property or if the
qualified heir exchanges qualified real
property solely for qualified exchange
property, then there is no additional
estate tax.
You should complete Form 706-A,
even though there is no tax, to notify
the IRS that the involuntary conversion
or exchange took place. However, you
must complete only Part I, Schedule B,
and Schedule A. Write “nontaxable” on
line 19 of Part II.

Partially Taxable Involuntary
Conversions or Exchanges
If the cost of the qualified replacement
property is less than the amount
realized in the involuntary conversion or
if other property in addition to qualified
exchange property is received in the
exchange, the conversion or exchange
is partially taxable. You should
complete all of Form 706-A and
determine the tax using Part II.
List on Schedule A all specially
valued property that the qualified heir
disposed of or discontinued use of,
regardless of whether he or she
received replacement or exchange
property for it. List on Schedule B only
the replacement or exchange property
the qualified heir actually received.

Qualified Replacement or
Exchange Property
Qualified replacement property means
any real property that is to be used for
the qualified use and that:
• Was purchased by the qualified heir
within the time specified by section
1033 to replace the qualified property
or
• Is real property into which the
qualified real property has been
converted.
Qualified exchange property means
any real property that is to be used for

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Instructions for Form 706-A

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The comma and word
"beginning" shall be
deleted.

the same qualified use that the property
for which it was exchanged was used.
The period of the decedent’s or
family member’s ownership, qualified
use, or material participation with
respect to replaced or exchanged
property is treated as the period of
ownership, qualified use, or material
participation with respect to the
qualified replacement or exchange
property. This applies only to that part
of the fair market value of the
replacement or exchange property (at
the date of acquisition) that does not
exceed the fair market value of the
replaced or exchanged property (at the
date of disposition).
Note. The 10-year recapture period is
extended under certain circumstances.
See Two-Year Grace Period —
Commencement Date on page 2.

How To Complete
Schedule B
Column A. Make one entry for each
item of qualified replacement or
exchange property.
Column B. Describe the qualified
replacement property with enough
detail so that the IRS can locate and
value it. For more information, see the
instructions to Schedule A of Form 706.
Column C. For an involuntary
conversion, enter the cost of the
replacement property. For an
exchange, enter the fair market value of
the replacement property.

Part II—Tax
Computation
Line 2
Enter the total value at the estate tax
valuation date of all specially valued
property that the executor elected, on
the Form 706 filed for the decedent’s
estate, to value at actual use rather
than fair market value.

Line 3a
Enter the amount of the estate tax for
the decedent’s estate that is
recomputed using fair market value at

the estate tax valuation date rather than
actual use value. Attach a schedule
showing the recomputed estate tax.

Schedule C.
Dispositions to Family
Members of the Qualified
Heir
Agreement by transferee. You may
enter a disposition to a family member
of the qualified heir on Schedule C only
if you file this Form 706-A on time
(including extensions) and attach an
agreement by the transferee to be
personally liable for any additional
estate tax under section 2032A(c) on
the interest received. For a format of
the agreement, see Form 706,
Schedule A-1.
If you are not filing this Form 706-A
on time, or if the transferee does not
enter into the agreement, you must
enter the disposition(s) on Schedule A
instead of Schedule C.

How To Complete
Schedule C
See the instructions for completing
columns A, B, and C of Schedule A,
beginning on page 3.
Privacy Act and Paperwork
Reduction Act Notice. We ask for the
information on this form to carry out the
Internal Revenue laws of the United
States. We need it to figure and collect
the right amount of tax. Subtitle B,
Estate and Gift Taxes, of the Internal
Revenue Code, imposes a tax in some
cases on qualified heirs who dispose of
property valued under special valuation
rules. This form is used to determine
the amount of the taxes that you owe.
Section 6011 requires you to provide
the requested information if the tax is
applicable to you. Section 6109
requires you to provide your taxpayer
identification number (SSN).
Generally, tax returns and return
information are confidential, as required
by section 6103. However, section
6103 allows or requires the Internal

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Revenue Service to disclose or give
such information shown on your Form
706-A to the Department of Justice to
enforce the tax laws, both civil and
criminal, and to cities, states, the
District of Columbia, U.S.
commonwealths or possessions, and
certain foreign governments for use in
administering their tax laws. We may
also disclose this information to other
countries under a tax treaty, to federal
nontax criminal laws, or to federal law
enforcement and intelligence agencies
to combat terrorism. If you fail to
provide this information in a timely
manner, you may be subject to
penalties and interest.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records
relating to a form or its instructions
must be retained as long as their
contents may become material in the
administration of any Internal Revenue
law.
The time needed to complete and
file this form will vary depending on
individual circumstances. The
estimated average time is:
Recordkeeping . . . . . . . .

3 hr., 17 min.

Learning about the law or
the form . . . . . . . . . . . .

2 hr., 11 min.

Preparing the form . . . . . .

1 hr., 39 min.

Copying, assembling, and
sending the form to the
IRS . . . . . . . . . . . . . . .

1 hr., 3 min.

If you have comments concerning
the accuracy of these time estimates or
suggestions for making this form
simpler, we would be happy to hear
from you. You can write to the Internal
Revenue Service, Tax Products
Coordinating Committee,
SE:W:CAR:MP:T:T:SP, 1111
Constitution Ave. NW, IR-6526,
Washington, DC 20224. Do not send
the tax form to this office. Instead, see
Where To File on page 1.