An appropriate order will be issued.
Ps are members of an LLC which conveyed conservation easements encumbering two parcels of land (one conveyance in 2003 and the other in 2004) to COL, a qualified organization as defined in
139 T.C. 371">*372 JACOBS,
Pursuant to an agreement between counsel for petitioners and counsel for respondent submitted to the Court on November 3, 2011, a trial was held on November 30, 2011, in Denver, Colorado, to resolve the following issues: (1) whether the specific terms and conditions of the deeds of conservation easement (deeds) comply with
In addition to disallowing the claimed charitable contribution deductions for failure to meet the requirements of
Some of the facts are stipulated and are so found. We incorporate by reference the stipulation of facts and the attached exhibits. Petitioners resided in Colorado at the time they filed their respective petitions.
Irby Ranches, LLC, operates the Irby Ranch, which is approximately 24 miles east of Gunnison, Colorado. The property has been owned and operated as a cow-calf ranch since 1942, and the Irby family has owned and operated ranches in the area for four generations. As of December 31, 2003, the Irby Ranch lands consisted of cattle pasture and hay meadows. All of the land was used for agricultural purposes at the time of trial.
139 T.C. 371">*374 In 1999 the residents of the Gunnison Valley became interested in maintaining 2012 U.S. Tax Ct. LEXIS 39">*44 the rural nature of the area. The community as a whole began looking into conservation easements as an avenue to protect the area's farms and ranchlands. Residents, including the Irbys, began conversations with conservationists, and together they determined they could use conservation easements to provide some protection of the ranchlands in the area as well as provide a source of funding for ranchers who desired payment for agreeing to an easement.
Petitioners approached Colorado Open Lands to discuss Irby Ranches, LLC's conveying a conservation easement on its property. Their discussions led to Irby Ranches, LLC's, granting options to Colorado Open Lands on September 26, 2003, to purchase conservation easements on two parcels of land pursuant to bargain sale transactions. A minimal amount (i.e., $10) was the stated consideration for each option. Colorado Open Lands exercised both options. Thereafter, Irby Ranches, LLC, conveyed to Colorado Open Lands a conservation easement under an instrument recorded on December 10, 2003, with the Clerk and Recorder of Gunnison County, Reception No. 537437, which encumbered the western portion of the Irby Ranch (west Irby parcel). On June 10, 2004, 2012 U.S. Tax Ct. LEXIS 39">*45 Irby Ranches, LLC, conveyed a second conservation easement to Colorado Open Lands under an instrument executed on June 10, 2004, and recorded on June 16, 2004, with the Clerk and Recorder of Gunnison County, Reception No. 543071, which encumbered the eastern portion of the Irby Ranch (east Irby parcel).
Funding for each easement was through grants from three governmental agencies: (1) the Farm and Ranchland Protection Program (FRPP) of the National Resources Conservation Service (NRCS), an agency of the U.S. Department of Agriculture (USDA); (2) Great Outdoors Colorado (GOCO), a voter-created trust fund organization of the State of Colorado; and (3) the Gunnison County Land Preservation Board. The amount paid for the west Irby parcel easement in 2003 was $268,224.75, and $537,468.75 was paid for the east Irby parcel easement in 2004.
FRPP contributed $176,381 for the 2003 west Irby parcel easement and $358,312 for the 2004 east Irby parcel easement. GOCO contributed $89,191 for the 2003 west Irby 139 T.C. 371">*375 parcel easement and $119,583 for the 2004 east Irby easement. The Gunnison Land Preservation Board contributed $33,006 for the 2003 west Irby parcel easement and $119,583 for the 2004 east Irby 2012 U.S. Tax Ct. LEXIS 39">*46 parcel easement.5 The excess of the amounts contributed by the three governmental agencies over the amounts paid for the easements was used for settlement and legal charges as well as a grant to Colorado Open Lands.
Both deeds contained substantially the same restrictions. The easements were exclusively for conservation purposes and protected the properties in perpetuity. The deeds allowed for the continuation of agricultural operations in a manner consistent with a conservation plan prepared in consultation with the NRCS (which gave the NRCS the right to enter the property to monitor compliance with the plan). If agricultural operations on the properties were to cease, the land could not be converted to nonagricultural uses. The deeds prohibited commercial timber harvesting; mining; exploitation of gas, oil, and geothermal resources; and commercial and noncommercial recreation, except for certain low-impact uses such as hunting, outfitting, and bird watching, and imposed restrictions 2012 U.S. Tax Ct. LEXIS 39">*47 on the exploitation of the land's water rights and on the use of motor vehicles. The deeds also banned subdivisions, industrial activity, or the establishment of feedlots.6Colorado Open Lands was authorized to enter both the east and west Irby parcels in order to monitor compliance with the terms of the easements and, if necessary, to enforce the restrictions.
The deeds provided that Colorado Open Lands could transfer the easements to any public agency or private nonprofit organization that, at the time of transfer, was a qualified organization as defined by
An appraisal petitioners and Colorado Open Lands commissioned (discussed more fully
If the land were ever to be condemned, paragraph 12 of each of the deeds provided that the amount paid to the grantee (i.e., Colorado Open Lands) would be equal to the easement value percentage multiplied by the amount of the proceeds resulting from the disposition of the land. Specifically, following condemnation of the land, Colorado Open Lands would receive 63% of the price paid for the west Irby parcel easement and 60% of the price paid for the east Irby parcel easement. However, paragraph 13 of the deed to the west Irby parcel provides: The Board [of GOCO] shall be entitled to receive twenty-one percent (21%) of Grantee's compensation, which figure is equal to that portion of the Board's grant attributable to the fair market value of the Easement (the "Board's Proceeds"). The United States shall be entitled to receive fifty percent (50%) of Grantee's compensation, which figure is equal to that portion of the United States' funds attributable to the fair 2012 U.S. Tax Ct. LEXIS 39">*49 market value of the Easement (the "United States' Proceeds"). The Gunnison Valley Land Preservation Board shall be entitled to receive four percent (4%) of the net proceeds of condemnation or sale of the Property, which is equal to that portion of its grant attributable to the purchase price for the Property. Grantee shall remit promptly to the above parties their respective shares of the proceeds.
Paragraph 13 of the east Irby parcel deed is similar. Specifically, it provides that the Board of GOCO would receive 13% of Colorado Open Lands' compensation, the United States would receive 50%, and the Gunnison Valley Land Preservation Board would receive 12%. Accordingly, Colorado139 T.C. 371">*377 Open Lands would retain 25% of the proceeds resulting from the disposition of the easement on the east Irby parcel.
Arnold Butler was engaged to appraise both the east Irby parcel and west Irby parcel easements. At the time Mr. Butler had been an independent real estate appraiser for over 35 years and had appraised between 75 and 100 conservation easements in Gunnison County. The valuation date of his report was August 29, 2003. At the time of his engagement Mr. Butler understood that the east and west Irby parcel easements were being appraised in connection with a bargain sale to Colorado Open Lands, which was a below market sale, The purpose of the easement as quoted from the proposed Deed of Conservation Easement is: The purpose (the "Purpose") of this Easement is to preserve and protect in perpetuity the Conservation Values of the Property. This Purpose is in accordance with s170(h) of the Internal Revenue Code. In order to achieve this purpose, Grantor intends to convey this Deed to Grantee to ensure that the Conservation Values of the Property will be preserved and protected forever.
Mr. Butler prepared two addenda reports (addenda), one for the east Irby parcel easement and the other for the west Irby parcel easement, using valuation dates of December 4, 2003, and May 3, 2004, respectively. Inasmuch as the characteristics of the two parcels generally remained unchanged, Mr. Butler incorporated in the addenda the property descriptions, basis data descriptions, and valuation analyses set forth in his original appraisal report. Nonetheless Mr. Butler conducted a new investigation and analysis of current market conditions and by doing so concluded that the values set forth in the original reports remained valid. He briefly detailed his valuation analyses in the addenda. Mr. Butler drafted the addenda to comply with
Petitioners timely filed their respective 2003 and 2004 Federal income tax returns. Attached to petitioners' respective 2003 and 2004 returns was a Form 8283, Noncash Charitable Contributions, drafted by Mr. Butler. On the 2003 Form 8283 Mr. Butler wrote that the donated property consisted of a conservation easement, that petitioners received $268,224.75 in a bargain sale transaction, and that they claimed $89,408.25 as a charitable contribution deduction. On the 2004 Form 8283 Mr. Butler wrote that petitioners received $537,468.75 in a bargain sale transaction for the conservation easement but did not claim any amount as a charitable 2012 U.S. Tax Ct. LEXIS 39">*54 contribution deduction. In fact, petitioners 139 T.C. 371">*379 claimed, in the aggregate, $165,576.21 as deductions on their 2004 income tax returns.
Respondent challenges petitioners' deductions on the following grounds: (1) the contributions were not made exclusively for conservation purposes because that conservation purpose of the contributions was not protected in perpetuity; and (2) petitioners 2012 U.S. Tax Ct. LEXIS 39">*55 failed to meet certain recordkeeping requirements, specifically that they failed to obtain (a) a qualified appraisal, and (b) a contemporaneous written acknowledgment.
A contribution is made exclusively for conservation purposes only if it meets the requirements of
Even with the strictest protections, the possibility exists that an unexpected change in the conditions surrounding the property may make it impossible or impractical to continue the use of the property for conservation 2012 U.S. Tax Ct. LEXIS 39">*56 purposes. Thus,
for a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time. * * * Accordingly, when a change in conditions gives rise to the extinguishment of a perpetual conservation restriction under
Respondent posits that these requirements are violated by paragraph 13 of each respective deed because Colorado Open Lands was obligated to "remit promptly" the bulk of the proceeds received from the extinguishment of the easements to the NRCS, GOCO, and the Gunnison Valley Land Preservation Board. Continuing, respondent asserts that Colorado Open Lands' obligation to repay the grant money used to fund the sale portion of the bargain sale upon extinguishment of the easements means that Colorado Open Lands' entitlement to the proceeds is merely "superficial" and consequently Colorado Open Lands was not entitled to its required share of the extinguishment proceeds as set forth in the regulations. We disagree.
139 T.C. 371">*381 The matter before us presents issues not previously decided by this Court. The grantee conservation organization, Colorado Open Lands, acquired the east and west Irby parcel easements by way of a bargain purchase with funds provided by Federal, State, and local entities. In receiving funds 2012 U.S. Tax Ct. LEXIS 39">*58 to purchase the easements, Colorado Open Lands became obligated to repay the funding government entities in the event the easements were extinguished. We must therefore determine whether Colorado Open Lands' obligation to repay the governmental entities, i.e., the NRCS, GOCO, and the Gunnison Valley Land Preservation Board, results in a failure by Colorado Open Lands to receive its proportionate share of any extinguishment proceeds.
We are satisfied that were the easements to be extinguished, Colorado Open Lands would receive its proportionate share of the extinguishment proceeds. Pursuant to the respective deeds, the donor (i.e., Irby Ranches, LLC, and its members) unconditionally agreed that in the event of a change in conditions giving rise to the extinguishment of either or both of the conservation easements, Colorado Open Lands would be entitled to an amount at least equal to its proportionate share of the proceeds arising from the extinguishment of the conservation easement.
In cases involving a conservation easement where we determined that the regulation's requirements were not met and thus denied the claimed 2012 U.S. Tax Ct. LEXIS 39">*59 charitable contribution deduction, the grantee organization had been prevented by the deeds themselves from receiving the full proportionate value of the extinguishment proceeds.
Our conclusions in those cases (i.e., denying the deduction) reflect the purpose of the regulation. The Court of Appeals for the First Circuit noted:
No such diversion of extinguishment proceeds from Colorado Open Lands would occur--Colorado Open Lands holds an absolute right to the condemnation proceeds vis-a-vis Irby Ranches, LLC, and petitioners. There is no risk that Irby Ranches, LLC, or petitioners could ever reap a windfall should the east Irby and/or west Irby parcels be condemned. Significantly, any extinguishment proceeds which Colorado Open Lands is obligated to pay to others will go to governmental entities, each of which is an organization described in
Respondent's 2012 U.S. Tax Ct. LEXIS 39">*61 concerns more properly seem to address the question of whether petitioners have satisfied
We are mindful that while some conservation easements are gratuitously donated, others, such as the east and west Irby parcel easements, are acquired through bargain sale transactions. Because the Irbys required some cash consideration for the easements, Colorado Open Lands would not 139 T.C. 371">*383 have been able to further the desired conservation purpose derived by its obtaining and holding the east and west Irby parcel easements were it unable to receive government funding.
Daniel Pike, the president of Colorado Open Lands, testified that the reimbursement provisions included in the governmental grants were not negotiable. Indeed the USDA's regulations require that such reimbursement provisions be included in all deeds recording conservation easements funded by the FRPP.
The receipt of reimbursed funds by the NRCS, GOCO, and the Gunnison County Land Preservation Board furthers the conservation purpose of the original contribution. All three of these governmental agencies were established to assist in the conservation of open land, and all three agencies are legally obligated to fulfill their conservation purpose. The operation of the FRPP by the NRCS is governed by Federal regulations, specifically
139 T.C. 371">*384 GOCO was established by
The Gunnison Valley Land Preservation Board was formed in 1997 and is primarily a funding source for the land trusts and conservation organizations active in Gunnison County. It was created by a ballot measure that established a multijurisdictional sales tax pool that raises over $230,000 per year that is used as leverage for other funding sources such as GOCO funds. In 2002 the voters of the county approved a ballot measure that allows the Land Preservation Board to borrow up to $1 million against the sales tax revenue contribution.
We do not share respondent's fear that the "policies and intentions do not require either the parties or their successors in interest to use the proceeds for the conservation purposes of the West and East Parcel Easements." We are convinced that these institutions and their respective employees will fulfill their obligations under Federal, State, and local laws. Indeed, it appears to us that reimbursement 2012 U.S. Tax Ct. LEXIS 39">*65 under the terms of the deeds of conservation easement would enhance the ability of the NRCS, GOCO, and the Gunnison County Land Preservation Board to conserve and protect more land, since the reimbursed funds would be used to do just that.
We therefore find that including the reimbursement provision in the respective deeds of conservation easement is consistent with the conservation purpose of the original contribution and satisfies the requirements of
The Deficit Reduction Act of 1984 (DEFRA),
Pursuant to the authority of DEFRA
On other occasions we have considered whether the appraisal the taxpayer relied upon was a "qualified appraisal" as defined in Although the appraisals did not contain an explicit statement that they were prepared for income tax purposes, the appraisals did contain statements that the owner of the parcels (petitioner) was contemplating donating conservation easements to L'Enfant [the grantee]. The appraisals also include discussions of IRS practice and cases of this Court concerning facade easements. The dates of contribution were likewise included on petitioner's tax returns. The Forms 8283 that petitioner included with her returns required an acknowledgment by the donee, L'Enfant.
Like the appraisal 2012 U.S. Tax Ct. LEXIS 39">*69 report in
Petitioner asserts that the following documents, taken in their totality, constitute contemporaneous written acknowledgment:
1. the Option Agreements for the Purchase of Conservation Easement, dated September 26, 2003, in which Irby Ranches, LLC, received cash consideration totaling $20 for its granting Colorado Open Lands the option to purchase the conservation easements;
2. the Forms 8283 attached to petitioners' 2012 U.S. Tax Ct. LEXIS 39">*72 respective 2003 and 2004 income tax returns which disclosed the cash petitioners received in the bargain sale transaction, the basis of the property, and the amount claimed as a deduction arising from the donation of the property. And the attached form was signed by the president of Colorado Open Lands;
3. letters from Colorado Open Lands to Stanley Irby, dated January 21 and December 7, 2004, respectively, in which Colorado Open Lands states that (a) it is a qualified organization within the definition of
4. the settlement statements prepared by First Gunnison Title and Escrow, Inc., the title company in the transaction, which list the amounts paid as part of the bargain sale. Two settlement statements were drafted, one for the east Irby parcel easement and one for the west Irby parcel easement. The west Irby parcel easement statement was signed by Stanley Irby on behalf of Irby Ranches, LLC, as seller and by Daniel Pike, president of Colorado Open Lands, and Gary Finland of the NRCS on behalf of the Government of the United States. The east Irby parcel 2012 U.S. Tax Ct. LEXIS 39">*73 easement statement was signed by Stanley Irby on behalf of Irby Ranches, LLC, as seller and by Gary Finland on behalf of the Government of the United States; and
5. the deeds for the east Irby parcel easement and the west Irby parcel easement, respectively, which (a) state the properties were acquired in part though cash grants from the U.S. Government through the NRCS, GOCO, and the Gunnison Valley Land Preservation board, (b) describe the property 139 T.C. 371">*389 donated, and (c) list the responsibilities and rights that the donors and donees possess regarding the enforcement of the easement.
Petitioners assert that collectively the aforementioned documents disclose (1) the description of the east and west Irby parcels, (2) that the donee organization, Colorado Open Lands, provided $268,224.75 in cash in consideration for the west Irby parcel easement and $537,468.75 in cash in consideration for the east Irby parcel easement, and (3) Colorado Open Lands would provide a specific list of services to support and maintain the conservation easements. Moreover, the documents were created before petitioners filed their respective income tax returns.
Replying, respondent argues that none of the documents individually 2012 U.S. Tax Ct. LEXIS 39">*74 contains sufficient information to constitute a contemporaneous written acknowledgment. However, respondent does not assert, and we have found no authority to indicate, that the contemporaneous written acknowledgment may not be made up of a series of documents. We thus find that, collectively, the documents petitioners provided constitute a contemporaneous written acknowledgment. The deeds of conservation easement with respect to the east and west Irby parcel easements provide precise descriptions of the property being contributed;13 the Option Agreement and the settlement statements set forth the amounts of cash that was paid to petitioners in consideration of the donated property;142012 U.S. Tax Ct. LEXIS 39">*75 the letters from Colorado Open Lands state that it is a qualified organization; and the Form 8283 provides that petitioners may deduct only the part of the value of the easement that is not covered by the bargain sale.
Respondent asserts that none of petitioners' documents contains a statement that no services were provided by the donee organization. While respondent's assertion is correct, such a statement in the written acknowledgment is required only "[i]f the donee organization provided
On the basis of the foregoing, we conclude that (1) the terms and conditions of the conservation easement deeds comply with the requirements of
1. Cases of the following petitioners are consolidated herewith: Stanley W. Irby and Bonnie S. Irby, docket No. 7561-10; and Dale Irby and Wendy M. Irby, docket No. 7562-10.↩
2. A bargain sale is a transfer of property which is in part a sale or exchange of the property and in part a charitable contribution as defined in
3. At all relevant times Charles Irby was married to Irene Irby, Dale Irby was married to Wendy Irby, and Stanley Irby was married to Bonnie Irby. Charles Irby and Irene Irby filed joint Federal income tax returns for 2003 and 2004; Dale Irby and Wendy Irby filed joint Federal income tax returns for 2003 and 2004; and Stanley Irby and Bonnie Irby filed joint Federal income tax returns for 2003 and 2004. Dale Irby and Stanley Irby are the children of Charles Irby and Irene Irby.↩
4. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times.↩
5. Additionally, the Gunnison Ranchland Conservation Legacy, a Colorado nonprofit corporation, facilitated the transactions by assisting petitioners with the application process for the funding of the easements.↩
6. A feedlot is a permanently constructed confined area or facility which is used exclusively for the feeding of livestock.↩
7. This method relies on a hypothetical situation whereby (1) the buyer and seller are both typically motivated; (2) both parties are informed and act in their own best interests; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of comparable financial arrangements; and (5) the price represents normal consideration of the property sold unaffected by special or creative circumstances.
8. The report discusses the similarities and differences among the comparable unencumbered and encumbered properties as well as similarities and differences between them and the west and east Irby parcels, and adjustments to the sale prices of the comparable properties were made to reflect these differences.↩
9. We note that the original appraisal report was labeled as being completed for both Irby Ranches, LLC, and Lucy High, Executive Director of the Gunnison Ranchland Conservation Legacy, whereas the addenda were completed solely for Lucy High. At trial Mr. Butler explained that the name "Irby Ranches, LLC" was inadvertently left off of the addenda.↩
10. Tit.
11. Respondent raised other issues regarding Mr. Butler's appraisal in his pretrial memorandum. These arguments were not pursued in his brief. We therefore deem these issues to be conceded.↩
12. Form 8283 includes a jurat to be signed by the appraiser which states: "Furthermore, I understand that a false or fraudulent overstatement of the property value as described in the qualified appraisal or in this appraisal summary may subject me to penalty under
13. We note that we have held in cases where the property is simply donated to the grantee that the deeds themselves may constitute contemporaneous written acknowledgments.
14. Respondent argues that because the east Irby parcel easement settlement statement is only signed by Gary Finland on behalf of the Government of the United States, it is not truly an acknowledgment by the donee. We reject respondent's position. We are convinced that the Government of the United States represents the donee's interest with respect to the acknowledgment.
