DocketNumber: Docket No. 10409-84
Citation Numbers: 86 T.C. 243, 1986 U.S. Tax Ct. LEXIS 149, 86 T.C. No. 17
Judges: Cohen
Filed Date: 3/3/1986
Status: Precedential
Modified Date: 1/13/2023
*149
P donated certain real property to the U.S. Forest Service and sold certain real property for less than its value to an unrelated third party for simultaneous exchange with the Forest Service. In both instances, P retained a mineral interest in the property.
*244 Respondent determined a deficiency of $ 97,372.10 in petitioner's Federal income tax for 1975. Petitioner claimed an overpayment in an amended petition. The issues for decision are as follows: (1) Whether petitioner is entitled to a charitable contribution deduction with respect to certain real property in which she retained a mineral interest, and (2) if so, the proper amount of the charitable contribution deduction resulting from a bargain sale of certain real property.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioner resided in Orange, Texas, at the time she filed her petition. She filed a Federal income tax return and an amended Federal income tax return for 1975 with the Internal Revenue Service Center*152 in Austin, Texas.
For many years, petitioner owned a 3,358 acre tract of land in East Texas that the U.S. Forest Service (the Forest Service) wished to acquire for use as a public recreation area. In late 1972 and early 1973, the Forest Service purchased approximately 2,280 acres of such tract from petitioner. Because petitioner wanted the Forest Service to have the entire tract for public recreation use, she offered to sell the Forest Service the remaining land, which the parties erroneously believed to be 1,000 acres. The Land and Water Conservation Act of 1965 precluded the Forest Service from purchasing the additional land from petitioner, however, because the land was located outside the existing National Forest boundary. Moreover, petitioner did not wish to donate such land or exchange it for land owned by the Forest Service. The parties therefore decided to use a third party to purchase petitioner's land and make an exchange with the Forest Service.
The Forest Service proposed that Harris R. Fender (Fender), a person with whom petitioner had no prior business or other dealings, act as such third party. By letter dated April 12, 1972, petitioner agreed with the Forest *153 Service to hold the 1,000 acre tract available for sale to Fender for use by him in the exchange with the Forest *245 Service. In the letter petitioner stated:
I understand the exchange procedure will require considerable time to allow the Forest Service and Mr. Fender to work out all details of the transaction. * * *
I will hold the 1,000 acres available for a reasonable time, but not beyond the first day of June 1973, for sale to Mr. Fender to be used by him in the proposed exchange with the Forest Service, but if the sale has not been completed on or before June 1, 1973, any obligation I may have to sell the property shall, at my election, terminate.
* * * *
It is understood that I have absolutely no connection with the proposed exchange other than the sale of the 1,000 acres for a previously specified consideration and my wish that the Forest Service have the additional 1,000 acres to be used as a part of its proposed recreation area.
The "previously specified consideration" referred to in the letter was $ 1,200,000.
Although Fender and the Forest Service did not complete negotiations by June 1, 1973, petitioner continued to give oral and written extensions of the*154 agreement to hold the land available for the proposed transaction. Fender and the Forest Service ultimately agreed upon the terms of the exchange in 1975, and Forest Service officials in Washington, D.C., approved the transaction. Prior to that time, certain land brokers told petitioner that they could sell the land for more than $ 1,200,000; but petitioner refused to consider any other potential buyers while the Forest Service continued preparation for its acquisition.
A survey of the land prior to consummation of the transaction revealed that the tract contained 1,079 acres. Because petitioner and Fender had agreed upon a sale of only 1,000 acres, the Forest Service requested that petitioner donate to it the excess contained in the tract. The parties ultimately agreed that petitioner would donate 77.28 acres to the Forest Service and that Fender would purchase 1,001.72 acres from petitioner for simultaneous exchange with the Forest Service. On October 16, 1975, petitioner conveyed 77.28 acres to the Forest Service (i.e., to the United States of America) for no consideration and conveyed 1,001.72 acres to Fender for $ 1,200,000.
*246 Petitioner would not have sold the land*155 to Fender had Fender not been obligated to reconvey the land to the Forest Service for use as a public recreation area. Petitioner had no knowledge of the location, size, description, fair market value, or other characteristics of the land to be conveyed to Fender by the Forest Service in the exchange.
Petitioner's family had a long-standing business practice of never conveying mineral interests together with the conveyance of surface real estate interests. Based on this policy, petitioner retained, in the deeds of conveyance to the Forest Service and to Fender, the interest in all minerals in the land and the right to enter the land to prospect for, mine, and remove such minerals for 25 years. The reservation in the deeds was subject to the following restrictions:
(1) Whoever undertakes to exercise the reserved rights shall give prior written notice to the Forest Service and shall submit satisfactory evidence of authority to exercise such rights. Only so much of the surface of the lands shall be occupied, used or disturbed as is necessary in bona fide prospecting for, drilling, mining (including the milling or concentration of ores), and removal of the reserved minerals, oil, *156 gas or other inorganic substances.
(2)(i) None of the lands in which minerals are reserved shall be so used, occupied or disturbed as to preclude their full use for authorized programs of the Forest Service until the record owner of the reserved rights, or the successors, assigns or lessees thereof, shall have applied for and received a permit authorizing such use, occupancy or disturbance of those specifically described parts of the lands as may reasonably be necessary to exercise of the reserved rights.
(ii) Said permit shall be issued upon agreement as to conditions necessary to protect the interest of the United States including such conditions deemed necessary to provide for the safety of the public and other users of the land, and upon initial payment of the annual fee, which shall be at the rate of $ 2.00 per acre or fraction of acre included in the permit.
(iii) The permit shall also provide that the record owner of the reserved right or the successors, assigns or lessees thereof, will repair or replace any improvements damaged or destroyed by the mining operations and restore the land to a condition safe and reasonably serviceable for authorized programs of the Forest Service, *157 and shall provide for a bond in sufficient amount as determined necessary by the Forest Service to guarantee such repair, replacement or restoration.
(iv) Failure to comply with the terms and conditions of the aforesaid permit shall be cause for termination of all rights to use, occupy or disturb the surface of the lands covered thereby, but in event of such termination, a new permit shall be issued upon application when the *247 causes for termination of the preceding permit have been satisfactorily remedied and the United States reimbursed for any resultant damage to it.
(3) All structures, other improvements and materials shall be removed from the lands within one year after date of termination of the aforementioned permit. Should the holder of the permit fail to do so within the specified time, the Forest Service may remove, destroy or otherwise dispose of said structures, other improvements and materials at the permittee's expense or in lieu thereof, may upon written notice to the permittee, assume title thereto in the name of the United States.
(4) Timber and/or young growth cut or destroyed in connection with exercise of the reserved right shall be paid for at rates determined*158 by the Forest Service to be fair and equitable for comparable timber and/or young growth in the locality. All slash resulting from cutting or destruction of timber or young growth shall be disposed of as required by the Forest Service.
(5) In the prospecting for, mining, and removal of reserved minerals, oil, gas or other inorganic substances, all reasonable provisions shall be made for the disposal of tailings, dumpage, and other deleterious materials or substances in such manner as to prevent obstruction, pollution or deterioration of water resources.
(6) Nothing herein contained shall be construed to exempt operators or the mining operations from any requirements of applicable State Laws, nor from compliance with or conformity to any requirement of any law which later may be enacted and which otherwise would be applicable.
(7) While any activities and/or operations incident to the exercise of the reserved rights are in progress, the operators, contractors, subcontractors and any employees thereof shall use due diligence in the prevention and suppression of fires and shall comply with all rules and regulations applicable to the land.
Oil and gas exploration and drilling would not*159 interfere with the Forest Service's administration of the property. As of the date of the conveyances, however, there were no known deposits of oil, gas, or other minerals on or beneath the land. Property located approximately 35 miles to the south of the land was the nearest property producing oil and gas. Dry holes existed to the north, west, and east of the land conveyed by petitioner. The land possessed a hilly terrain not conducive to the transportation and operation of a drilling rig. As of October 1975, the likelihood that the property would be a prospect for any type of mineral exploration for production was negligible.
The fair market value of the surface interest in the land conveyed by petitioner was $ 1,800 per acre as of the date of conveyance. On such date, the fair market value of the *248 mineral interest retained by petitioner was between $ 1 and $ 2 per acre, taking into account the restrictions contained in the deeds.
Contemporaneously with petitioner's conveyance of the 1,001.72-acre tract to Fender, Fender exchanged such land for Forest Service land possessing a fair market value of $ 1,690,300.
On her 1975 Federal income tax return, petitioner claimed*160 a $ 139,103 charitable contribution deduction, representing the fair market value of the surface interest of the 77.28 acres donated to the Forest Service. On her 1975 amended Federal income tax return, petitioner claimed an additional $ 536,917.75 charitable contribution deduction and a $ 63,082.25 charitable contribution deduction carryover, resulting from the sale of the surface interest in the 1,001.72 acres to Fender, who conveyed the property to the Forest Service in the prearranged transaction.
Respondent denied all charitable contribution deductions claimed by petitioner with respect to the land because petitioner did not transfer her entire interest in the land.
OPINION
The threshold issue before us is whether petitioner's retention of a mineral interest in the 77.28 acres of land donated to the Forest Service and the 1,001.72 acres sold to Fender for exchange with the Forest Service precludes any charitable contribution deduction with respect to such land. Respondent concedes that if petitioner's deduction is not so precluded, petitioner is entitled to deductions of $ 139,103 with respect to the donated land, which equals the stipulated fair market value of the surface*161 rights of such land, and of $ 109,700 with respect to the land sold, which equals the difference between the stipulated value of the surface rights of such land and the stipulated value of the land received by Fender from the Forest Service in the exchange. Petitioner contends that the amount of the charitable contribution deduction with respect to the land sold is $ 600,000, which equals the difference between the stipulated value of such land and the $ 1,200,000 sales price received from Fender. Thus, if we decide in favor of petitioner on the first issue, we must further determine the proper amount of *249 the charitable contribution deduction resulting from the bargain sale of the 1,001.72 acres.
(A) In general. -- In the case of a contribution (not made by a transfer in trust) of an interest in property which consists of less than the taxpayer's entire interest in such property, a deduction shall be allowed under this section only to the extent that the value of the interest contributed would be allowable as a deduction under this section if such interest had been transferred in trust. For purposes of this subparagraph, a contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer's entire interest in such property.
Prior to 1969, taxpayers could deduct the contribution to charity of the right to use property. Concluding that such taxpayers received an undesirable "double benefit," Congress added
Accord S. Rept. 91-552 (1969),
Paragraph (B)(ii) of
(1)
*165 Both petitioner and respondent cite revenue rulings in support of their respective positions. Petitioner relies primarily upon
Absent special circumstances, a revenue ruling merely represents the Commissioner's position with respect to a *251 specific factual situation. See
A revenue ruling does not constitute authority for deciding a case in this Court. We would decide this issue irrespective of the existence or nonexistence of a revenue ruling. We agree with the Court of Appeals for the Second Circuit in
Thus, while we shall examine the above revenue rulings, the conclusions reached in this case are our own. 3
*167 In
*252
In
We hold that the "insubstantiality rule" expressed in
To be entitled to any deduction, the taxpayer must prove that her situation comes within a particular statutory provision.
The present case, however, does not involve such an unlimited retention of mineral rights. Pursuant to Department of Agriculture regulations in force on the date of the conveyances (
There existed no known deposits of any minerals on or under the land. Geneos P. Cokinos, petitioner's expert witness and a geological engineer possessing substantial experience and expertise with minerals in East Texas, concluded that the likelihood that the property would be a prospect for any type of mineral exploration for production was "very negligible." Cokinos based his conclusion primarily upon geological concerns: An examination of various geological reports indicated that no oil or gas had been found near the property and the property was virtually surrounded by dry holes. Cokinos also conducted a physical inspection of the property, which indicated that the hilly terrain would not easily accommodate a drilling rig and that it was unlikely that the property contained any other (nonpetroleum) minerals. Respondent presented no evidence of his own on this issue. Indeed, respondent stipulated*172 that the value of the limited mineral interest retained by petitioner was between $ 1 and $ 2 per acre, whereas the stipulated value of the transferred surface rights was $ 1,800 per acre at the time of the transfer. This stipulation shows that the value of the retained mineral interest was de minimis.
*254 Respondent's position herein is, in effect, that the retention of any mineral interest is per se the retention of a substantial interest. Yet, subsequent to the year in issue, both Congress and the Commissioner recognized a de minimis exception to the general rule.
In the Temporary Tax Provisions, Extension, Pub. L. 96-541, sec. 6, 94 Stat. 3204, 3206 (1980), Congress added
The undivided interest exception * * * [does] not * * * extend to situations where taxpayers transferred their fee interest in property to a charitable organization while retaining
Compare
In
in effect, the corporation's exercise of its mineral * * * rights is conditioned upon the approval of the ultimate donee, the United States Government. *174 The possibility that it will grant such approval is so remote as to be negligible, since, on the date of the gift, the United States planned to use the property as a wildlife preserve. [
*176 On the facts of the present case, we conclude that the mineral interest retained by petitioner was not a "substantial interest or right" within the meaning of
Petitioner conveyed the 1,001.72 acres worth $ 1,800,000 to Fender for $ 1,200,000. Fender simultaneously exchanged the land for Forest Service land worth $ 1,690,300. The issue before us is the proper amount of petitioner's charitable contribution deduction resulting from this bargain sale. Petitioner contends that the deduction should be the difference between the fair market value of the 1,001.72 acres and the sales price received by her ($ 600,000), whereas respondent argues that petitioner's deduction should be limited to the difference between the fair market value of the land sold and the fair market value of the land that the Forest Service exchanged therefor ($ 109,700).
A taxpayer who makes a bargain sale to charity is typically entitled to a charitable contribution*177 deduction *256 equal to the difference between the fair market value of the property and the amount realized from the sale. See
Like any purported charitable contribution, however, a sale for less than full consideration results in a deduction under
Petitioner's true intention when she conveyed the land to Fender for $ 600,000 less than its fair market value is not absolutely clear. The parties stipulated that petitioner wished that the Forest Service acquire the land for use as a public recreation area. The land may have been worth only $ 1,200,000 in 1972, however, when the parties first agreed upon a sales price. Although petitioner was not bound to the original terms throughout the ensuing 3-year period and was told that other potential buyers might pay more than $ 1,200,000, her willingness to convey the land for less than*179 its full value could have been based upon genuine donative intent, a perceived moral obligation, ignorance of the magnitude of the subsequent increase in value, inertia, or some other factor. The only reasonably certain conclusion to *257 be drawn is that she did
We need not further explore the precise nature of petitioner's mental state, however, to resolve the case before us. Respondent's concession that petitioner is entitled to a deduction based upon the bargain sale, although lower in amount than that claimed by petitioner, necessarily implies that petitioner possessed the requisite "charitable" intention. We cannot conclude that petitioner had such intent only with respect to the $ 109,700 benefit ultimately realized by the Forest Service and not the $ 490,300 benefit apparently inuring to Fender. Petitioner had no knowledge of the value, or any other characteristics, of the property to be conveyed by the Forest Service to Fender. Any reasonable person in petitioner's situation who intended to confer a benefit upon the Forest Service would presume that the Forest Service would accept such benefit and not divert*180 a substantial part of it to a private third party. Petitioner's deduction should not be limited based on any lack of donative intent.
Respondent's primary argument is that petitioner's deduction is limited to the benefit to the Forest Service, which he concludes is $ 109,700. He implies that petitioner's contribution was not completed until Fender transferred the land to the Forest Service in the exchange.
With respect to the latter argument, petitioner would not have sold the land to Fender had Fender not been obligated to transfer it to the Forest Service. Indeed, petitioner initially proposed to sell the land directly to the Forest Service. The Forest Service asked petitioner to convey the land to Fender and thereby accomplish indirectly what, under the Land and Water Conservation Act, could not be accomplished directly. Consistent with the terms of petitioner's April 12, 1972, letter, when petitioner conveyed the land to Fender, she placed it beyond her control. Her contribution to the Forest Service was therefore complete at that time.
*258 With respect to respondent's argument based upon the benefit to the Forest Service, one might conclude that petitioner conferred a $ 600,000 benefit upon the Forest Service when she conveyed the land to Fender. Although the Forest Service ultimately did not retain the full benefit, petitioner placed the Forest Service in a position to negotiate an exchange with Fender that reflected the consideration to be paid to petitioner. Although the record is not clear as to whether the Forest Service had actual knowledge of the $ 1,200,000 price, 9 it certainly could have and should have determined the price before settling upon an exchange with Fender. We thus reject respondent's assertion that petitioner and not the Forest Service should have made certain that the Forest Service received its "money's worth" in the transaction. We again emphasize that the
*182 Moreover, even if the benefit conferred upon the Forest Service by petitioner were only $ 109,700, the amount ultimately retained by it, petitioner is nevertheless entitled to the full $ 600,000 deduction. In
It may be argued that the hospital ultimately received for its use only the proceeds of sale and that this should be taken into consideration in determining the amount of the allowable deduction. But until, or unless, the law limits the deduction for charitable contributions to the value of the contributions
Respondent cites
The depot was actually a liability; before the Post Office could use the site for its intended purpose, it had to have the structure demolished. More than likely, any benefit resulting from the transfer inured to petitioner, given the fact that petitioner was saved the expense of razing the depot * * * [75 T.C. at 603-604.] * * *
Moreover, we held in
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue.↩
2. Par. (B)(i) provides a similar exception for a remainder interest in a personal residence or farm. In the Tax Reform Act of 1976, Pub. L. 94-455, sec. 2124(e)(1), 90 Stat. 1520, 1919, Congress added pars.(B)(iii), (iv), and (C), providing exemptions for certain contributions for conservation purposes. See also Tax Reduction and Simplification Act of 1977, Pub. L. 95-30, sec. 309, 91 Stat. 126, 154 (requiring that interests so contributed be perpetual). Congress replaced these latter exceptions in 1980 with an exception for a "qualified conservation contribution." See
3. In
4.
5. In the Tax Reform Act of 1984, Pub. L. 98-369, sec. 1035, 98 Stat. 494, 1042, Congress amended this provision generally to prohibit the possibility of surface mining.↩
6. (3) A deduction shall not be disallowed under
7. See generally T. Bergin & P. Haskell, Preface to Estates in Land and Future Interests 64-68 (1966).↩
8.
9. We are not persuaded by the testimony of the Forest Service employee who negotiated the transaction.↩
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