Mart D. GREEN, Trustee of the David and Barbara Green 1993 Dynasty Trust, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
No. 16-6371
United States Court of Appeals, Tenth Circuit.
January 12, 2018
880 F.3d 519
Charles E. Geister, III (J. Leslie LaReau, Len Cason, and Michael A. Furlong, with him on the brief), Hartzog Conger Cason & Neville, LLP, Oklahoma City, Oklahoma, appearing for Appellee.
Before BRISCOE, EBEL, and MATHESON, Circuit Judges.
BRISCOE, Circuit Judge.
Plaintiff Mart Green, as Trustee of the David and Barbara Green 1993 Dynasty Trust (the Trust), filed this action seeking a refund of federal income taxes paid by the Trust for the taxable year ending December 31, 2004. At issue is the amount of the charitable deduction that the Trust may take pursuant to
I
Factual background
a) The Trust and its relevant provisions
In December 1993, David M. Green and Barbara A. Green (the Greens) executed an instrument creating the Trust. App., Vol. 1 at 14. The Trust instrument named Mart Green as the initial trustee (the Trustee). Article II, Section 2.1 of the Trust instrument, entitled “General Guide for Trustee,” outlined the Greens’ expressions of intent for the Trust:
We want to provide for the relative health, education and maintenance needs of our children and descendants during the term of this Trust, and to provide for charity. In the absence of competing considerations, the Trustee should make an effort to primarily provide for the health and maintenance needs of our children. However, we recognize that different needs may and probably will arise as between our children and their descendants, particularly as to educational expenses and perhaps also with respect to their health and medical needs.
Id. at 20.
Article I, Section 1.6 of the Trust instrument, entitled “Distributions to Charities,” stated as follows:
A distribution may be made from the Trust to charity only when both the purpose of the distribution and the charity are as described in Section 170(c) of the [Internal Revenue] Code. Notwithstanding anything else contained in the Trust to the contrary, the number of charities that would be eligible to receive a distribution under this Trust at any given time will be limited to a number that will not prevent the Trust from
qualifying either as an Electing Small Business Trust (“ESBT“) or otherwise as an S corporation shareholder under the Code.
Id. at 19. Section 1.6 did not specify whether distributions to charity were limited to the Trust‘s principal, or instead could come from its income.
Exhibit A to the Trust was entitled “STANDARD TRUST PROVISIONS.” Id. at 31. Article IV, Section 4.5 thereof, entitled “Trustee‘s Power to Determine Income and Principal,” stated, in pertinent part: “The Trustee shall have full power and authority to determine the manner in which expenses are to be treated and in which receipts are to be credited as between income and principal and to determine what shall constitute income or principal.” Id. at 52.
b) GDT CG1 LLC
GDT CG1 LLC (GDT) is a single-member limited liability company that is wholly owned by the Trust. As such, GDT is disregarded for federal income tax purposes. In other words, all of GDT‘s income, deductions and credits are passed through to and reported by the Trust.
c) The Trust‘s interest in and income from the Hob-Lob Limited Partnership
Hob-Lob Limited Partnership (Hob-Lob) owns and operates most of the “Hobby Lobby” retail stores that are located nationwide. Between 2002 and 2004, the Trust held a 99 percent ownership interest in Hob-Lob; in other words, the Trust was the 99 percent limited partner in Hob-Lob.
During the year ending December 31, 2002, the Trust‘s distributive share of Hob-Lob‘s ordinary business income totaled $72,465,646 and, during that same year, the Trust received distributions of $38,722,126 from Hob-Lob.
During the year ending December 31, 2003, the Trust‘s distributive share of Hob-Lob‘s ordinary business income totaled $63,303,318 and, during that same year, the Trust received distributions of $41,076,436 from Hob-Lob.
During the year ending December 31, 2004, the Trust‘s distributive share of Hob-Lob‘s ordinary business income totaled $60,543,215, and the Trust received distributions of $29,480,397 from Hob-Lob.
d) The Virginia property
On February 19, 2003, GDT purchased 109 acres of land and two industrial buildings in Lynchburg, Virginia for approximately $10.3 million dollars. GDT obtained the money to purchase the property through a distribution from Hob-Lob to the Trust in 2003. This distribution was part of the distributive share of ordinary business income from Hob-Lob to the Trust in 2003.
On March 19, 2004, GDT donated to the National Christian Foundation Real Property, Inc. (NCF) approximately 73 of the 109 acres of land and the two industrial buildings. As of the date of the donation, NCF was an organization of the type described in
The Trust reported on a Form 8283, Noncash Charitable Contributions, attached to its 2004 income tax return that its adjusted basis in the Virginia property was $10,368,113 as of March 19, 2004, the date of the donation. The Virginia property had a fair market value in excess of $10,368,113 on the date of the donation.
e) The Oklahoma property
In August 2002, GDT purchased a church building and several outbuildings in
On October 5, 2004, GDT donated the Ardmore property to the Southwest Oklahoma District Church of the Nazarene (SODCN). As of the date of the donation, SODCN was an organization described in Internal Revenue Code
The Trust reported on a Form 8283, Noncash Charitable Contributions, attached to its 2004 income tax return that its adjusted basis in the Oklahoma property was $160,477 on October 5, 2004, the date of the donation. It is undisputed that the Oklahoma property had a fair market value of $355,000 on the date of the donation.
f) The Texas property
In June 2003, GDT purchased approximately 3.8 acres of land in Dickinson, Texas from Marina Bay Development Corp., Inc./Travis Moss for $145,000. GDT obtained the $145,000 to purchase the property through a distribution from Hob-Lob to the Trust in 2003. This distribution was part of the distributive share of ordinary business income from Hob-Lob to the Trust in 2003.
On October 5, 2004, GDT donated the Texas property to the Lighthouse Baptist Church. As of the date of the donation, the Lighthouse Baptist Church was an organization described in Internal Revenue Code
The Trust reported on a Form 8283, Noncash Charitable Contributions, attached to its 2004 income tax return that its adjusted basis in the Texas property was $145,180 on October 5, 2004, the date of the donation. It is undisputed that the Texas property had a fair market value of $150,000 on the date of the donation.
g) The Trust‘s 2004 tax return
In October 2005, the Trust filed its income tax return for 2004. The return reported income of approximately $58.8 million, of which $58,712,171 was unrelated business income. The return claimed a charitable deduction totaling $20,526,383. This included the donations of real property, as well as a $1,851,502.42 cash donation to the Reach the Children Foundation, Inc. The return reported that the Trust‘s total adjusted basis in the three donated real properties was approximately $10.7 million and that the properties’ fair market value at the time of donation was approximately $30.3 million. At no point in 2004 or any other tax year did the Trust report as income the properties’ unrealized appreciation of approximately $19.6 million (i.e., the claimed fair market value minus the adjusted basis).
h) The amended 2004 tax return
On October 15, 2008, the Trust filed an amended Form 1041 income tax return claiming a refund from the Internal Revenue Service (IRS) for $3,194,748 in income tax and increasing the Trust‘s reported charitable deduction from $20,526,383, as reported on the Trust‘s original 2004 income tax return, to $29,654,233.
i) The IRS‘s disallowance of the refund
On December 8, 2011, the IRS sent the Trustee a Notice of Disallowance of the Trust‘s refund claim. That Notice stated, in pertinent part: “The charitable contribution deduction for the real property donated in 2004 is limited to the basis of the real property contributed.” Aplt. App., Vol. I at 162.
On November 21, 2013, the Trustee initiated this action by filing a complaint in the Western District of Oklahoma against the United States seeking recovery of federal income tax for the taxable year ending December 31, 2004. The complaint alleged, in pertinent part, that “the Trust made charitable contributions during 2004 of real properties to qualified organizations operated exclusively for religious purposes” and that “[t]he fair market value of these real properties at the respective dates of contribution totaled $30,313,000.” App., Vol. 1 at 12. The complaint in turn alleged that “the Commissioner erroneously” concluded “that the charitable deduction for the real property donated in 2004 was limited to the basis of the real property contributed, in addition to the applicable [Unrelated Business Taxable Income (UBTI)] limitation.” Id. at 13. The complaint alleged that, due to the Commissioner‘s error, the Trust “ha[d] overpaid [its 2004] income tax by $3,194,748, and [wa]s entitled to a refund of such overpayment plus interest as provided by law.” Id.
In early 2015, the parties filed cross motions for summary judgment. The Trust‘s motion asked the district court to rule as a matter of law that the deduction allowed by
The district court subsequently granted the Trust‘s motion for partial summary judgment and denied the government‘s motion for summary judgment. Following the district court‘s rulings, the parties reached an agreement regarding the fair market values of the donated Oklahoma and Texas properties. That left one remaining issue of fact: the fair market value of the Virginia property at the time of its donation. That issue was tried to a jury in October 2016.
On November 4, 2016, the district court entered judgment in accordance with its summary judgment ruling, the stipulations of the parties, and the jury‘s verdict. The judgment awarded the Trust $2,754,514, plus interest, in overpaid taxes.
On December 28, 2016, the government filed a timely notice of appeal.
II
In this appeal, the government challenges the district court‘s grant of summary judgment in favor of the Trust, arguing that the district court‘s holding is contrary to the language of
Standard of review
We review the district court‘s grant of summary judgment de novo. United States v. ConocoPhillips Co., 744 F.3d 1199, 1204 (10th Cir. 2014). “In conducting this review, we will affirm if there was no genuine dispute over a material fact and” the Trust “was entitled to judgment as a matter of law.” Id. Further, “[i]n applying this test, we view the evidence in the light most favorable to” the government, the non-moving party. Id.
Section 642(c)(1) of the Internal Revenue Code
Generally speaking, the Internal Revenue Code (the Code) treats charitable contributions made by trusts differently than charitable contributions made by individu
(1) General rule.—In the case of an estate or trust (other then [sic] a trust meeting the specifications of subpart B), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a), relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c) (determined without regard to section 170(c)(2)(A)). If a charitable contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during such taxable year. The election shall be made at such time and in such manner as the Secretary prescribes by regulations.
The parties to this appeal generally agree that
The requirements imposed by § 642(c)(1)
In resolving this question, “[w]e begin ‘where all such inquiries must begin: with the language of the statute itself.‘” Caraco Pharm. Lab., Ltd. v. Novo Nordisk A/S, 566 U.S. 399, 412 (2012) (quoting United States v. Ron Pair Enter., Inc., 489 U.S. 235, 241 (1989)). As an initial matter, it is apparent that
Thus, to restate, it is clear and indisputable that
- the taxpayer is an estate or trust;
- during the taxable year at issue, or, alternatively, within the calendar year following the taxable year at issue, the taxpayer makes a qualifying charitable contribution under
I.R.C. § 170(c) ; and - the charitable contribution must be authorized by the terms of the instrument that established the taxpayer, i.e., the estate or trust.
That, of course, leaves the central question at issue in this appeal: what is the authorized amount of a deduction under
A second possible meaning, and one consistent with the holding in Old Colony but not urged by either party in this case, is that a charitable contribution must be made exclusively out of gross income earned by the trust at some point in time, so long as that gross income is, from the time it is earned until it is donated, kept separate from the trust‘s principal. See Old Colony, 301 U.S. at 384 (“Congress sought to encourage donations out of gross income....“); see also W. K. Frank Trust of 1931 v. Comm‘r, 145 F.2d 411, 413 (3d Cir. 1944) (interpreting predecessor statute to
A third possible meaning, and the one that both parties in this case appear to be urging, is that a charitable contribution need not be made directly from, but instead must simply be traceable to, current or accumulated gross income. As applied to contributions of real property, that would mean that the real property must have been purchased with, i.e., sourced from, the trust‘s current or accumulated gross income. At least one treatise on federal taxation supports this interpretation of
The fourth and final possible meaning, and one that neither party in this case has urged, is that the amount of the charitable deduction is capped or limited by the amount of the gross income earned by the
All of which leads us to conclude that the statutory phrase “any amount of the gross income,” as employed in
The IRS‘s regulation interpreting § 642(c)(1)
In resolving this ambiguity, we note that the IRS has implemented a regulation purporting to interpret
(a) In general. (1) Any part of the gross income of an estate, or trust which, pursuant to the terms of the governing instrument is paid (or treated under paragraph (b) of this section as paid) during the taxable year for a purpose specified in section 170(c) shall be allowed as a deduction to such estate or trust in lieu of the limited charitable contributions deduction authorized by section 170(a). In applying this paragraph without reference to paragraph (b) of this section, a deduction shall be allowed for an amount paid during the taxable year in respect of gross income received in a previous taxable year, but only if no deduction was allowed for any previous taxable year to the estate or trust, or in the case of a section 645 election, to a related estate, as defined under § 1.645-1(b), for the amount so paid.
It is well established, under Chevron, U.S.A., Inc. v. Nat‘l Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), that we must defer to an agency‘s regulation that reasonably interprets an ambiguous statute. See Keller Tank Servs. II, Inc. v. Comm‘r, 854 F.3d 1178, 1195 (10th Cir. 2017). As the Supreme Court noted in Chevron, “considerable weight should be accorded to an executive department‘s construction of a statutory scheme it is entrusted to administer.” 467 U.S. at 844. “This deference applies to Treasury regulations.” Keller, 854 F.3d at 1195. “For a construction to be permissible, we need not conclude it was the only one the agency could reasonably have adopted or that we would have rendered the same interpretation if the question arose initially in a judicial context.” Id. at 1196. Instead, “we look only to whether the implementing agency‘s construction is reasonable.” Id.
In our view, the IRS‘s regulatory construction of
The IRS‘s interpretation of § 642(c)(1)
Although
As an initial matter, the IRS asserts, and the Trust agrees, that the statutory phrase “any amount of the gross income” means that charitable donations must be made out of a trust‘s gross income, but that real property purchased with gross income can also be treated as the equivalent of gross income for purposes of the deduction outlined in
That still leaves open the question of the allowable amount of a deduction for donated real property that was purchased with a taxpayer‘s gross income. The IRS has consistently asserted, both in addressing the Trust‘s claim for a refund and in this litigation, that the deduction amount is limited to the taxpayer‘s adjusted basis in the donated real property, i.e., the amount of gross income the taxpayer originally paid for the real property. Without granting any deference to the IRS‘s position, we conclude that it is the most reasonable interpretation of the statutory language, particularly when considered in light of the Code as a whole.
It is well established that tax deductions are generally considered a matter
As we have concluded, it is consistent with this latter principle—of construing charitable deductions liberally in favor of taxpayers—to construe the term “gross income,” as used in
The term “gross income” is generally defined in the Code to mean “all income from whatever source derived,”
Gain realized on the sale or exchange of property is included in gross income, unless excluded by law. For this purpose property includes tangible items, such as a building, and intangible items, such as goodwill. Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged. The specific rules for computing the amount of gain or loss are contained in section 1001 and the regulations thereunder. When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property sold is the difference between the selling price and the cost or other basis allocated to such part. The sale of each part is treated as a separate transaction and gain or loss shall be computed separately on each part. Thus, gain or loss shall be determined at the time of sale of each part and not deferred until the entire property has been disposed of.
Defining the term “dealing” to include only sales or exchanges is consistent with the concept of realization. The Supreme Court has held that a gain “constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it.” Rutkin v. United States, 343 U.S. 130, 137 (1952). Section 1001(a) of the Code incorporates this concept, noting that “[t]he gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain.”
As the IRS correctly notes in this case, because the Trust never sold or exchanged the properties at issue, it never realized the gains associated with their increases in market value and was therefore never subject to being taxed on those gains. Thus, construing
Finally, we note that this interpretation finds support in a leading tax treatise, see 9 MERTENS LAW OF FEDERAL INCOME TAXATION, § 36:75 (Eric D. Roth ed., Dec. 2017) (“Where appreciated property purchased from accumulated gross income is donated, the amount of the deduction is limited to the adjusted basis of the property, rather than based on the fair market value of the donated property.“), as well as, at least in part, an older Third Circuit case dealing with
The district court‘s reasoning
We find unpersuasive the other bases cited by the district court for adopting the Trust‘s fair market value arguments. First, in concluding that the Trust was entitled to deduct the fair market value of the properties as of the time they were donated, the district court relied, in part, on
The district court also relied on the Supreme Court‘s decision in Old Colony for the proposition that charitable giving should be encouraged and, thus, that
Lastly, the district court concluded, in part, that because
The Trust‘s § 512(b)(11) theory
That leaves one remaining issue we must address. In its appellate response brief, the Trust argues, in part, that the “Donated Properties were allocable to the Trust‘s UBI [unrelated business income]” and that, consequently,
“A taxpayer may not sue the United States for the recovery of income taxes unless it has timely filed a refund claim at the [IRS] in the manner prescribed by regulation.” Lockheed Martin Corp. v. United States, 210 F.3d 1366, 1371 (Fed. Cir. 2000) (citing
No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of the period. The claim must set forth in detail each ground upon which a credit or a refund is claimed and in facts sufficient to apprise the Commissioner of the exact basis thereof.
Together,
As the government correctly notes, the Trust‘s refund claim made no mention of its
In addition, we note that the Trust‘s
III
The Trust‘s motion to file a surreply brief is GRANTED. The judgment of the district court is REVERSED and the case REMANDED to the district court with directions to enter summary judgment in favor of the government.
Notes
In computing the deduction allowable under section 642(c) to a trust, no amount otherwise allowable under section 642(c) as a deduction shall be allowed as a deduction with respect to income of the taxable year which is allocable to its unrelated business income for such year. For purposes of the preceding sentence, the term “unrelated business income” means an amount equal to the amount which, if such trust were exempt from tax under section 501(a) by reason of section 501(c)(3), would be computed as its unrelated business taxable income under section 512 (relating to income derived from certain business activities and from certain property acquired with borrowed funds).