2011 U.S. Tax Ct. LEXIS 14
T.C.2011Background
- Petitioners donated a qualified conservation easement on about 54 acres in Colorado on December 17, 2004, claiming FMV of $836,500 and incurring $11,574.74 in expenses, generating a State conservation easement credit of $260,000.
- Colorado granted credits in 2004 equal to 100% of value up to $100,000, plus up to 40% of value above $100,000, with a maximum of $260,000 per donation; credits could offset state tax and sometimes refundable under TABOR, with limits and carryforward provisions.
- Petitioners sold $40,500 of credits for net $30,375 and $69,500 for net $52,125 in December 2004; they also gifted $10,000 of credits the same year.
- On their 2004 return, petitioners reported $77,603 of short-term capital gains from the sale of credits, with total sale proceeds of $82,500 and claimed basis of $4,897 allocated from donation expenses.
- Respondent issued a deficiency notice in 2008 challenging petitioners’ basis and characterizing gains as ordinary income, arguing petitioners had no basis and that gains were not capital.
- This Court granted partial summary judgment on whether the credits are capital assets, the holding period, and any basis, ultimately holding that the credits are capital assets, with no basis, and that gains are short-term.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are Colorado conservation easement credits capital assets? | Tempel contends credits are capital assets. | Respondent argues they are not capital assets and should be ordinary income. | Credits are capital assets. |
| Are gains from sale of the credits long-term or short-term capital gains? | Tempel asserts long-term gains due to holding period in related property. | Respondent argues gains are short-term. | Gains are short-term capital gains. |
| What basis, if any, do petitioners have in the credits? | Tempel seeks a basis allocation from donation expenses or land basis. | Respondent contends there is no basis in the credits. | Petitioners have no basis in the credits. |
| Is the substitute for ordinary income doctrine applicable to the sale of state credits? | Tempel challenges applicability of substitute for ordinary income doctrine. | Respondent argues the sale could be ordinary income under doctrine. | Doctrine inapplicable; credits are capital assets not ordinary income. |
Key Cases Cited
- Ark. Best Corp. v. Commissioner, 485 U.S. 212 (1988) (capital asset breadth and limits of definition)
- Commissioner v. Gillette Motor Transp., Inc., 364 U.S. 130 (1960) (purpose and limits of capital gains treatment)
- United States v. Midland-Ross Corp., 381 U.S. 54 (1965) (capital asset scope and income concepts)
- Gladden v. Commissioner, 112 T.C. 209 (1999) (substitute for ordinary income doctrine and six-factor analysis)
- Foy v. Commissioner, 84 T.C. 50 (1985) (origin of substitute for ordinary income doctrine)
- Solitron Devices, Inc. v. Commissioner, 80 T.C. 1 (1983) (basis allocation and cost principles (context for basis discussions))