Source: https://www.lawonpurpose.com/2017/08/new-cases-mixed-messages-conservation-easement-donors/
Timestamp: 2019-04-24 16:41:30+00:00

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The Fifth Circuit also disapproved of the Tax Court’s holding that the baseline documentation materials for the conservation easements were insufficient, stating that “a flexible approach on documentation is appropriate.” Although the Fifth Circuit overturned the perpetuity and baseline rulings from the lower court, it remanded the case so that the Tax Court could determine whether there are any other deficiencies upon which the deduction could be denied and a gross valuation penalty applied.
The dissenting opinion by Judge Dennis disagrees with the majority’s distinguishment from Belk and the majority’s use of an ordinary standard of statutory construction, claiming that the majority has created a circuit split. If that is the case, this story may not be over if the IRS decides to appeal to the Supreme Court.
The full Bosque Canyon opinion can be found here.
In other conservation easement news, on August 7, 2017, the Tax Court issued the first judicial opinion interpreting the special “farmer and rancher rule” in IRC § 170(b)(1)(E)(iv), which was part of the conservation easement incentive package that Congress made permanent in the PATH Act of 2015. The farmer and rancher rule permits qualified farmers and ranchers to deduct the value of a conservation easement donation up to 100% of their adjusted gross income, rather than the general 50% limit provided to non-farmers and ranchers for conservation easements in IRC § 170(b)(1)(G).
In Rutkoske, the Tax Court interpreted the definition of “qualified farmer and rancher” narrowly, holding that the taxpayers in that case did not qualify because the sale of real property is not a farming activity, even if the real property is used as farmland.
Examining the gross income of the Rutkoske taxpayers to determine whether at least 50% of such income was from the trade or business of farming within the meaning of section 2032(A)(e)(5), the Tax Court interpreted “within the meaning of 2032(A)(e)(5)” to mean that the source of income must be derived from the specific activities listed in IRC § 2032(A)(e)(5). Here, the adjusted gross income for the taxpayers in the year in question was primarily derived from the subsequent sale of the ranch over which the conservation easement was placed, and the Tax Court found that such a sale did not fit within the specific activities listed by section 2032(A)(e)(5). Even though the Tax Court does acknowledge that “the taxpayers are in the business of farming,” it goes on to hold that being a “qualified” farmer is different from being a farmer because of the list in section 2032(A)(e)(5).
This case highlights the difficulty of applying the qualified farmer and rancher rule, particularly because the rule hinges on gross income. On the one hand, a non-farmer taxpayer could buy one farm enterprise to meet the 50% income threshold for a particular year, donate a conservation easement over any piece of property (farm or not) that year, and offset all income for the year, including the taxpayer’s remaining 50% of non-farm income for that year. On the other hand, a legitimate farmer who makes a large real property sale in the year of an easement donation could preclude him or herself from being “qualified” because of the disparate impact of that single sale on the farmer’s income that year.
One questions whether there is a more logical interpretation of the phrase “trade or business of farming (within the meaning of section 2032A(e)(5))” than that made by the Tax Court in Rutkoske. Could the term mean that the activity that is the source of income must have the purpose of farming and ranching, given that section 2032(A)(e)(5) actually provides a definition of “farming purpose”? That may be an issue ripe for appeal at the Third or Fourth Circuit. Perhaps the generous language in Bosque Canyon Ranch could be used as persuasive authority, despite its Fifth Circuit origin.
The full Rutkoske decision can be found here.
 Bosque Canyon Ranch LP v. Comm’r, Case Nos. 16-60068 and 16-60069 (5th Cir. Aug. 11, 2017).
 Rutkoske v. Comm’r, 149 T.C. No. 6 (Aug. 7, 2017).
 Belk v. Comm’r, 140 T.C. 1, 10-11 (2013), aff’d, 774 F.3d 221 (4th Cir. 2014).
 Balsam Mountain v. Comm’r, T.C. Memo. 2015-43.
 Bosque Canyon Ranch LP v. Comm’r at 10.
 For a more detailed analysis, see Farmers weren’t “Farmers” for Purposes of Conservation Easement Deduction, K. Tilgren, Iowa State University Center for Agricultural Law and Taxation (Aug. 8, 2017).

References: § 170
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