Lead Opinion
These cases are before the Court on respondent’s motion for partial summary judgment. The issues for decision are:
(1) whether a State law that limits the duration of an easement to not more than 99 years precludes petitioners’ conservation easements from qualifying as granted “in perpetuity” under section 170(h)(2)(C) or (5)(A).
FINDINGS OF FACT
The transactions at issue involve members of the Wachter family and entities that they controlled. Michael and Kelly Wachter filed joint income tax returns for all the years in issue: 2004 through 2006. The same is true for Patrick and Louise Wachter. During the years in issue, Michael, Patrick, and Louise each held varying interests in two entities: WW Ranch, a partnership, and Wind River Properties LLC (Wind River), a limited liability company that is treated as a partnership for tax purposes. Wind River at times operated under the name Windsor Storage. For convenience, we will refer to petitioners individually by their given names or to Michael, Patrick, and Louise (as owners of WW Ranch and Wind River) collectively as the Wachters.
Farm and Ranch Lands Protection Program
Section 2503 of the Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-171, 116 Stat. at 267, authorized the Secretary of Agriculture to purchase conservation easements in order to protect topsoil by limiting non-agricultural uses of certain lands and authorized funding for such purchases. The United States, acting through the Commodity Credit Corporation (CCC), entered into cooperative agreements in order to implement the Farm and Ranch Lands Protection Program and used the Natural Resources Conservation Service (NRCS) of the Department of Agriculture to administer the program. The parties provided to the Court a copy of a 2003 cooperative agreement between the CCC and the American Foundation for Wildlife (AFW) with an attachment referencing land owned by WW Ranch. The cooperative agreement listed the requirements for such an easement, including that the easement “[r]un with the land in perpetuity or a minimum of thirty years, where State law prohibits a permanent easement.” As a part of the
Cash Contributions
On its returns for the years in issue, Wind River reported the following cash charitable contributions, which it allocated amongst its members:
2004 . $170,000
2005 . 171,150
2006 . 144,500
On behalf of Wind River, Michael and Patrick signed an agreement dated February 26, 2004, with North Dakota Natural Resource Trust (NRT) agreeing to donate $170,000 by March 1, 2004. Michael signed a check dated February 26, 2004, from Windsor Storage payable to NRT for $170,000. NRT provided a letter dated March 23, 2004, to Michael and Patrick “dba WW Ranch” acknowledging the cash gift and stating that NRT provided no goods or services in exchange for the donation.
Michael signed a check dated March 23, 2005, from Windsor Storage payable to NRT for $171,150. The Wachters provided the IRS with a letter from NRT dated March 21, 2005, to Windsor Storage acknowledging the cash gift and stating that NRT provided no goods or services in exchange for the donation. The only copy of this letter in the record is unsigned.
Someone prepared a check dated May 9, 2006, from Windsor Storage payable to NRT for $144,500. The only copy of this check in the record is unsigned, but the parties do not
Bargain Sale Charitable Contributions
On its partnership returns for the years in issue, WW Ranch reported bargain sales of conservation easements as charitable contributions as follows:
2004 . $349,000
2005 .;. 247,550
2006 . 162,500
For each year, the parties to the transaction obtained two appraisals of the property that was to be contributed. Each appraisal valued the property according to a different land use, and the Wachters used the difference in appraised values to determine the value of the conservation easement and thus the amounts of their charitable contributions.
NRT obtained an appraisal of WW Ranch’s sections 5 and 6 parcel
NRT obtained two appraisals of WW Ranch’s section 8 parcel as of February 21, 2005, one for use as agricultural property determining a value of $10,000 and one for “full developmental value” determining a value of $915,000. On March 24, 2005, WW Ranch sold a conservation easement on the section 8 parcel to AFW for $657,450 (of which $171,150 was supplied by NRT). The Wachters subtracted the sale
NRT obtained two appraisals of WW Ranch’s sections 16 and 18 parcels as of August 25, 2005, one subject to a proposed conservation easement determining a value of $46,000 and one for rural residential development determining a value of $696,000. On May 11, 2006, WW Ranch sold a conservation easement on its section 16 and 18 parcels to AFW for $487,500 (of which $144,500 was supplied by NRT). The Wachters subtracted the sale price of $487,500 from the difference in value of the two appraisals of $650,000 to arrive at their charitable contribution deduction of $162,500.
Individual Reporting
Patrick and Louise reported charitable contributions on their joint Federal income tax returns as follows:
2004 Cash — Wind River $85,000
Noncash — WW Ranch 174,500
2005 Cash 85,575
Noncash 123,775
2006 Cash 72,250
Noncash 81,250
Michael and Kelly reported charitable contributions on their joint Federal income tax returns as follows:
2004 Cash — Wind River $85,000
Noncash — WW Ranch 174,500
2005 Cash 85,575
Noncash 123,775
2006 Cash 72,250
Noncash 81,250
On April 8, 2011, respondent issued notices of deficiency to both couples disallowing the charitable contribution deductions related to WW Ranch and Wind River and determining accuracy-related penalties under section 6662. Each couple timely filed a petition disputing their notice of deficiency, and the Court consolidated the cases for trial, briefing, and opinion. Respondent filed a motion for partial summary judgment and a memorandum of facts and law in support of his motion for partial summary judgment, the Wachters filed a response, and respondent filed a reply.
Either party may move for summary judgment regarding all or any part of the legal issues in controversy. See Rule 121(a). We may grant summary judgment only if there are no genuine disputes of fact. See Rule 121(b); Naftel v. Commissioner,
A deduction is allowed for any charitable contribution for which payment is made within the taxable year if the contribution is verified under regulations prescribed by the Secretary. Sec. 170(a)(1). The Wachters claimed charitable contribution deductions for both cash and noncash contributions for each year. We discuss each in turn.
Noncash Contributions
Generally, a charitable contribution deduction is not allowed for a charitable gift of property consisting of less than the donor’s entire interest in that property. Sec. 170(f)(3)(A). However, there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii). A contribution of real property is a qualified conservation contribution if (1) the real property is a “qualified real property interest”, (2) the contributee is a “qualified organization”, and (3) the
North Dakota Law
We look to State law to determine the nature of property rights, whereas Federal law determines the appropriate tax treatment of those rights. United States v. Nat’l Bank of Commerce,
Beginning in 1915, the United States signed several treaties agreeing to protect migratory birds and their habitats. See North Dakota v. United States,
The United States brought a declaratory judgment action in the U.S. District Court for the District of North Dakota, seeking judgment that, inter alia, the State law was hostile to Federal law in certain respects and could not be applied. Id. at 309. The District Court granted the United States summary judgment, and the United States Court of Appeals for the Eighth Circuit affirmed. Id. The Supreme Court determined that because of the migratory bird treaties and the “ ‘certainty and finality’ that we have regarded as ‘critical
The Supreme Court in North Dakota v. United States invalidated the 99-year restriction only insofar as it related to easements on wetlands for which the Federal Government had already received consent. The Supreme Court did not invalidate the 99-year restriction in all situations in which the Federal Government is a party, directly or indirectly, to an easement purchase.
For the years in issue, N.D. Cent. Code sec. 47-05-02.1 (1999 & Supp. 2013) provided in pertinent part:
Real property easements * * * which become binding after July 1, 1977, shall be subject to the requirements of this section. These requirements are deemed a part of any agreement for such interests in real property whether or not printed in a document of agreement.
* * * * * * *
2. The duration of the easement * * * on the use of real property must be specifically set out, and in no case may the duration of any interest in real property regulated by this section exceed ninety-nine years. * * *
Both parties allege that the State law at issue here is unique because this is the only State that has a law that provides for a maximum duration that may not be overcome by agreement. The parties agree that, by operation of State law, the easements at issue will expire 99 years after they were conveyed. The parties do not draw a distinction where the donee of the easement is the Federal Government or an entity acting on behalf of the Federal Government. Nor do we see a distinction.
Respondent asserts that the State law restriction prevents the easements from being granted in perpetuity, which in turn prevents them'from being both qualified real property interests under section 170(h)(2) and contributions exclusively for conservation purposes under section 170(h)(5). Petitioners, however, assert that the 99-year limitation should be considered the equivalent of a remote future event or the retention of a negligible interest because at present the remainder is “essentially valueless.” There are two separate
Qualified Real Property Interest
Under section 170(h)(2)(C), a qualified real property interest means “a restriction (granted in perpetuity) on the use which may be made of the real property.” The Wachters assert that the possibility that the land would revert back to them, WW Ranch, or their successors in interest is the equivalent of a remote future event that will not prevent the easements from being perpetual. Section 1.170A-14(g)(3), Income Tax Regs., provides:
(3) Remote future event. — A deduction shall not be disallowed under section 170(f)(3)(B)(iii) and this section merely because the interest which passes to, or is vested in, the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible. * * *
This Court has construed “so remote as to be negligible” as “‘a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction’”, 885 Inv. Co. v. Commissioner,
“Remote” has various commonly accepted meanings. For example, remote can mean “far distant in space”, “secluded”, “distant in time”, “distant in relationship”, or “slight or faint; unlikely”. Webster’s New Universal Unabridged Dictionary 1630 (2d ed. 2003). As is relevant here, “remote” could refer to a temporal sense (distant, remote in time) or in a probable
As used in the regulation and as interpreted by our caselaw, the event is not remote. On the dates of the donations it was not only possible, it was inevitable that AFW would be divested of its interests in the easements by operation of North Dakota law. Therefore, the easements were not restrictions granted in perpetuity and were thus not qualified conservation contributions.
Cash Contributions
For any cash charitable contribution of $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the donee. Sec. 170(f)(8)(A). Section 170(f)(8)(B) provides that the contemporaneous written acknowledgment must include the following:
(B) Content of acknowledgement — An acknowledgment meets the requirements of this subparagraph if it includes the following information:
(i) The amount of cash and a description (but not value) of any property other than cash contributed.
(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i).
(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
Respondent asserts that none of the letters the Wachters provided to the IRS constitutes a valid contemporaneous written acknowledgment. Respondent asserts (1) that none of the letters was addressed to Wind River, the entity that made the cash contributions, (2) NRT provided goods or services to the Wachters each year that were not mentioned in the letters,
With respect to the assertion that the Wachters received some benefit that was not disclosed or valued in the letters, respondent has not proven on this record that the Wachters expected or received a benefit in exchange for their cash donations. If a taxpayer receives or expects to receive a benefit that is not disclosed in the contemporaneous written acknowledgment, the entire cash contribution deduction is disallowed. See Addis v. Commissioner,
The Wachters assert that the checks and letters for each year as well as the 2004 agreement can be taken together to meet the requirements of a contemporaneous written acknowledgment. In Irby v. Commissioner,
Conclusion
We conclude that respondent is entitled to partial summary judgment disallowing the charitable contribution deductions for the bargain sales of the conservation easements because North Dakota law prohibits real property easements from being granted in perpetuity. Thus a conservation easement conveyed subject to the statute cannot result in a charitable contribution deduction under section 170(f)(3)(B)(iii). However, because material facts remain in dispute as to whether the Wachters expected to receive or actually received goods or services in exchange for their cash contributions and the Wachters may yet be able to supplement the record to meet all of the requirements of a contemporaneous written acknowledgment, we will deny the motion for partial summary judgment on the issue of the cash contributions.
To reflect the foregoing,
An appropriate order will be issued.
Notes
Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Each parcel at issue is located in one or more sections of Township 140 North, Range 81 West of Morton County, North Dakota. The parties refer to the properties at issue as the “sections 5 and 6 parcel”, the “section 8 parcel”, and the “sections 16 and 18 parcels”, and we adopt their terminology.
We note that, in isolated situations, a long-term lease may be treated as the equivalent of a fee simple interest. See, e.g.,-secs. 1.1031(a)-1(c), 1.1033(g)-1(b)(4), Income Tax Regs. But unlike section 170(h)(2)(C), those isolated situations address exchanges for “like” or “similar” property and do not involve an express statutory requirement that an interest be “in perpetuity”.
We express no opinion on petitioners’ argument that at present the remainder is essentially valueless; to do so would require that we resolve a question of fact regarding value.
At minimum, respondent asserts that the goods or services provided were the appraisals NRT obtained and the partial funding it supplied for the bargain sales.
Respondent also contests the authenticity of this document.