Court Opinion

ID: 2656275
Source: CourtListenerOpinion
Date Created: 2014-03-11 19:20:29.190307+00
Date Added: 2024-06-11T12:17:58.890638
License: Public Domain

142 T.C. No. 7

                  UNITED STATES TAX COURT

PATRICK J. WACHTER AND LOUISE M. WACHTER, Petitioners v.
   COMMISSIONER OF INTERNAL REVENUE, Respondent

MICHAEL E. WACHTER AND KELLY A. WACHTER, Petitioners v.
   COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 9213-11, 9219-11.                Filed March 11, 2014.

       For 2004 through 2006 Ps reported charitable contributions
that flowed to them from a partnership and an LLC, both of which
were treated as partnerships for tax purposes. For each year the LLC
reported charitable contributions of cash and the partnership reported
bargain sales of conservation easements as charitable contributions of
property. R issued notices of deficiency to Ps disallowing all of the
charitable contribution deductions and determining accuracy-related
penalties. R filed a motion for partial summary judgment asserting
that Ps did not satisfy the “contemporaneous written
acknowledgment” requirement for the cash contributions. For the
property contributions, respondent asserted that the easements were
not granted in perpetuity as a result of a North Dakota State law that
limits the duration of a real property easement.
                                        -2-

            Held: North Dakota State law limits the duration of an
      easement to not more than 99 years, thus precluding a North Dakota
      conservation easement from qualifying as granted “in perpetuity”
      under I.R.C. sec. 170(h)(2)(C) and (5)(A).

             Held, further, material facts remain in dispute regarding
      whether Ps satisfied the “contemporaneous written acknowledgment”
      requirement of I.R.C. sec. 170(f)(8) and sec. 1.170A-13(f)(15),
      Income Tax Regs., and thus summary judgment is not appropriate on
      this issue.

      Jon J. Jensen, for petitioners.

      David L. Zoss and Christina L. Cook, for respondent.

      BUCH, Judge: 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).1 We hold that it

does; and

      1
       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.
                                       -3-

      (2) whether the documents petitioners provided to the IRS satisfy the

“contemporaneous written acknowledgment” requirement of section 170(f)(8) and

section 1.170A-13(f)(15), Income Tax Regs. We hold that material facts remain in

dispute and thus summary judgment is not appropriate for this issue.

                              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 the 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
                                       -4-

nonagricultural 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 cooperative agreement, the NRCS listed its prerequisites for easement

purchases before the Federal Government would release the Federal funds to

reimburse AFW for up to 50 % of the easement purchase price. The cooperative

agreement included a provision whereby a landowner could donate up to 25% of

the appraised fair market value of the easement and that such a donation may be

considered as part of AFW’s contribution to the purchase price. However, in

order for the landowner’s donation to be considered part of AFW’s contribution,

AFW was required to get a current appraisal of the contribution. In the event the

landowner made such a donation, NRCS required a copy of the landowner’s IRS
                                         -5-

Form 8283, Noncash Charitable Contributions, before the NRCS would release the

federal funds.

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.
                                        -6-

      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 appear to dispute that the payment was made.

NRT provided a letter dated May 10, 2006, to Windsor Storage acknowledging the

cash gift and stating that NRT provided no goods or services in exchange for the

donation.

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.
                                         -7-

      NRT obtained an appraisal of WW Ranch’s sections 5 and 6 parcel2 as of

April 30, 2003, determining a value of $31,000 for use as agricultural property. A

second appraisal dated May 14, 2003, was prepared for the sections 5 and 6 parcel,

determining a value of $1,400,000 for use as “rural residential sites”. On March 8,

2004, WW Ranch sold a conservation easement on its sections 5 and 6 parcel to

AFW for $1,020,000 (of which $170,000 was supplied by NRT). The Wachters

subtracted the sale price of $1,020,000 from the difference in value of the two

appraisals of $1,369,000 to arrive at their charitable contribution deduction of

$349,000.

      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 price of $657,450 from the difference in value of the

      2
       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.
                                        -8-

two appraisals of $905,000 to arrive at their charitable contribution deduction of

$247,550.

      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:
                                         -9-

             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.

                                     OPINION

      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, 85 T.C. 527, 529 (1985). Respondent, as the moving party, bears

the burden of proving that no genuine dispute exists as to any material fact and

that respondent is entitled to judgment as a matter of law. See Sundstrand Corp. v.
                                       - 10 -

Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In

deciding whether to grant summary judgment, the factual materials and the

inferences drawn from them must be considered in the light most favorable to the

nonmoving party. See FPL Grp., Inc. v. Commissioner, 115 T.C. 554, 559 (2000);

Bond v. Commissioner, 100 T.C. 32, 36 (1993); Naftel v. Commissioner, 85 T.C.

at 529. When a motion for summary judgment is made and properly supported,

the nonmoving party may not rest on mere allegations or denials but must set forth

specific facts showing that there is a genuine dispute for trial. See Celotex Corp.

v. Catrett, 477 U.S. 317, 324 (1986); Sundstrand Corp. v. Commissioner, 98 T.C.

at 520; see also Rule 121(d). Respondent filed the motion for partial summary

judgment; therefore we construe all factual disputes and draw all inferences in

favor of the Wachters.

      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.
                                         - 11 -

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 contribution

is “exclusively for conservation purposes.” Sec. 170(h)(1); see also sec. 1.170A-

14(a), Income Tax Regs. For the purposes of the motion for partial summary

judgment, respondent argues that the State law restricting easements to 99 years

prevents the conservation easements from being qualified real property interests

and prevents the conservation easements from being exclusively for conservation

purposes.

      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, 472 U.S. 713, 722 (1985); see also 61 York

Acquisition, LLC v. Commissioner, T.C. Memo. 2013-266, at *8.
                                        - 12 -

      Beginning in 1915, the United States signed several treaties agreeing to

protect migratory birds and their habitats. See North Dakota v. United States, 460
U.S. 300, 309-310 n.12 (1983), aff’g 650 F.2d 911 (8th Cir. 1981). Between 1931

and 1977 the United States acquired easements covering nearly 1 million acres of

land in North Dakota for use as migratory bird refuges. Id. at 304-305. However,

cooperation between the Federal Government and the State of North Dakota broke

down such that in 1977 the State enacted a law, which it amended in 1979 and

1981, (1) requiring approval for all wetland acquisitions first by the board of

county commissioners and only then by the governor, (2) allowing the landowner

to negotiate the terms of the easement and “drain any after expanded wetland or

water area in excess of the legal description”, and (3) restricting all easements to a

maximum of 99 years. Id. at 306-308 (quoting N.D. Cent. Code sec. 20.1-02-18.2

(1981)).

      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. at 309. The

Supreme Court determined that because of the migratory bird treaties and the
                                        - 13 -

“‘certainty and finality’ that we have regarded as ‘critical when * * * federal

officials carrying out the mandate of Congress irrevocably commit scarce funds’”,

the North Dakota statute was hostile to Federal interests and may not be applied to

the easements for which the Federal Government had already received consent.

Id. at 320 (quoting United States v. Little Lake Misere, 412 U.S. 580, 596 (1973)).

      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. * * *
                                        - 14 -

      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 and distinct

perpetuity requirements, and the failure to satisfy either of them will prevent the

easements from being qualified conservation contributions. See Belk v.

Commissioner, 140 T.C. 1, 12 (2013).
                                         - 15 -

      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, 95 T.C. 156, 161 (1990) (quoting United States v.

Dean, 224 F.2d 26, 29 (1st Cir. 1955)), or “‘a chance which every dictate of reason

would justify an intelligent person in disregarding as so highly improbable and

remote as to be lacking in reason and substance’”, Graev v. Commissioner, 140

T.C. __, __ (slip op. at 27-28) (June 24, 2013) (quoting Briggs v. Commissioner,
                                         - 16 -

72 T.C. 646, 657 (1979), aff’d without published opinion, 665 F.2d 1051 (9th Cir.

1981)). “[A] conservation easement fails to be ‘in perpetuity’ * * * if, on the date

of the donation, the possibility that the charity may be divested of its interest in the

easement is not so remote as to be negligible.” Id. at __ (slip op. at 27).

      “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 sense (unlikely, a remote

possibility). Id.; see also The American Heritage Dictionary of the English

Language 1476 (4th ed. 2000). Both the regulation and our caselaw focus on the

term “remote” in terms of likelihood.

      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.3 As a result, we will grant

      3
       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)-
                                                                         (continued...)
                                       - 17 -

respondent’s motion for partial summary judgment insofar as the State law

prevents a charitable contribution deduction for a conservation easement conveyed

under the State law.4

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 acknowledgment.--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).

      3
        (...continued)
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”.
      4
       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.
                                          - 18 -

                       (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.

      Section 170(f)(8)(C) provides that a written acknowledgment is

contemporaneous when the taxpayer obtains it on or before the earlier of: (1) the

date the taxpayer files a return for the taxable year of contribution or (2) the due

date, including extensions, for filing that return.

      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,5 and (3) the values of the goods or services

were not mentioned in the letters. Further, respondent asserts the 2005 letter fails

to qualify as a contemporaneous written acknowledgment because the letter is

unsigned and it predates the check by two days.6

      5
       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.
      6
          Respondent also contests the authenticity of this document.
                                        - 19 -

      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, 118 T.C. 528

(2002), aff’d, 374 F.3d 881 (9th Cir. 2004); see also Viralam v. Commissioner,

136 T.C. 151, 170-171 (2011); Averyt v. Commissioner, T.C. Memo. 2012-198.

Because the receipt of an expected or actual benefit is a material fact that remains

in dispute, summary judgment is not proper on this issue.

      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, 139 T.C.
371, 389 (2012), the Court held that a series of documents may constitute a

contemporaneous written acknowledgment, and the Wachters may yet be able to

authenticate disputed documents and provide additional documents to supplement

those they have included with the stipulation of facts. Because we must construe

all factual inferences in favor of the nonmoving party, we must deny summary

judgment regarding the cash charitable contribution deductions.
                                          - 20 -

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.