in Rutkoske v. Commissioner, 149 T.C. No. 6 (Aug. 7, 2017), the Tax Court denied the conservation easement donation deduction to farmers. The Tax Court Summary is as follows:
In 2009 a limited liability company (LLC) in which Ps were members owned 355 acres of land (property) that it leased to others who used it as farmland. In 2009 LLC conveyed a conservation easement restricting the development rights on the property to E, a public charity, in exchange for $1,504,960. Ps reported the bargain element of the transaction (allegedly $1,335,040) as a noncash charitable contribution. Following the conveyance of the development rights, the LLC sold its interest in the property to Q, an unrelated party, for $1,995,040.
On their respective income tax returns, Ps classified themselves as “qualified farmers” within the purview of I.R.C. sec. 170(b)(1)(E). A qualified farmer, defined as a taxpayer whose gross income from the trade or business of farming (as defined by I.R.C. sec. 2032A(e)(5)) is greater than 50% of his/her total gross income for the – 2 – year, may deduct the value of a qualified conservation contribution of up to 100% of his/her contribution base for the year of contribution. I.R.C. sec. 2032A(e)(5) sets forth specific activities that constitute the trade or business of farming. Ps maintain that the proceeds from the sale of the property, as well as the proceeds from the sale of development rights attached thereto, while not specifically listed in I.R.C. sec. 2032A(e)(5), constitute income from the trade or business of farming.
Held: Pursuant to sec. 1.703-1(a)(2)(iv), Income Tax Regs., Ps are treated as having directly conveyed the conservation easement to E.
Held, further, Ps are not “qualified farmers” within the purview of I.R.C. sec. 170(b)(1)(E). Neither the sale of the property nor the sale of development rights attached thereto constitutes an activity that is included in the trade or business of farming as defined by I.R.C. sec. 2032A(e)(5).
Held, further, Ps are limited by I.R.C. sec. 170(b)(1)(E)(i) to a charitable contribution deduction of 50% of their respective contribution bases with respect to the conveyed conservation easement.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.