Dumaine Farms v. Comm'r of Internal Revenue
| Citation | 73 T.C. 650 |
| Decision Date | 09 January 1980 |
| Docket Number | Docket No. 13428-78X. |
| Parties | DUMAINE FARMS, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
T is a perpetual, irrevocable trust organized to operate an experimental model demonstration farm in North Carolina. T conducts large-scale research projects designed to demonstrate (1) marginally arable land should be held as conservation land to improve the watershed, provide ground cover and food for wildlife, and for timber production; and (2) modern, ecologically sound farming techniques can restore to productive use land exhausted by repetitive cash-crop farming. T will keep the public and the farming community informed about its activities and will be open to the public on a partially restricted basis. Held, respondent properly raised in his answer to the petition an issue not addressed during administrative review. Held, further, T is organized exclusively for exempt purposes under sec. 501(c)(3), I.R.C. 1954. Held, further, the administrative record shows T is operated exclusively for scientific and educational purposes under sec. 501(c)(3). Held, further, T is not operated for private benefit. Therefore, T is exempt under sec. 501(a) as an organization described in sec. 501(c)(3). Frederick D. Herberich, Katharine Sanderson Heidlage, and Philip J. Sweeney III, for the petitioner.
Bernard B. Kornmehl, for the respondent.
Respondent determined petitioner does not qualify for exemption from Federal income tax under section 501(a)1 as an organization described in section 501(c)(3). Having exhausted its administrative remedies as required by section 7428(b)(2), petitioner has timely challenged respondent's determination and invoked the jurisdiction of this Court for a declaratory judgment pursuant to section 7428(a). The issues are whether petitioner is organized and operated exclusively for scientific, educational, or charitable purposes, and whether petitioner is operated for private benefit.
This case was submitted for decision on the stipulated administrative record under Rules 122 and 217, Tax Court Rules of Practice and Procedure. The evidentiary facts and representations contained in the administrative record are assumed to be true for purposes of this proceeding. 2 The relevant facts are summarized below.
At the time its petition was filed in this case, petitioner's principal office was located in Boston, Mass.
Petitioner is an irrevocable trust known as Dumaine Farms, established by Frederic C. Dumaine (F. Dumaine) in Boston, Mass., on December 1, 1977. Petitioner's only substantial asset is 75 acres of land situated in Rockingham County, N.C., conveyed to petitioner on December 30, 1977, by F. Dumaine, the trust settlor, and his wife, Margaret.
Petitioner's governing instrument describes its objectives and purposes as follows:
The purpose of this trust shall be to hold the property initially given and any other real and personal property received by gift, devise, bequest, purchase or otherwise, and to maintain, improve, operate and manage the same as an experimental and demonstration farm for the benefit of the general public and particularly the farmers and other people of Rockingham County, North Carolina. The purpose of the farm shall be to improve the quality of farming by the selection and types of crops grown, the management and restructuring of the land, the planting and harvesting of trees, the selective preservation of native growth in such manner as to demonstrate that farming can be profitable while maintaining sound, ecological principles and native wildlife. In furtherance of its charitable purposes, the trust may acquire as part of the trust property additional land and other property, erect or otherwise construct, maintain and utilize any one or more buildings or other structures or abandon the same, plant, cultivate and harvest agricultural products, purchase machinery and hire experts and other personnel in furtherance of its purposes. It shall not be the purpose of this trust to make money except as incidental to showing that an ecologically sound farm may be profitable.
As restated in petitioner's initial application for recognition of exempt status: “The purpose of the trust is to dedicate to public use land and facilities in Rockingham County in order to experiment in and disseminate knowledge about improved methods of agriculture and particularly to demonstrate that profitable farming can be combined with wildlife management and conservation of natural areas.” In short, petitioner is organized as an experimental demonstration farm. Its purpose is to demonstrate to local farmers and the general public the economic feasibility of experimental farming practices which will conserve the area's ecology and native wildlife.
Petitioner's trust articles go on to provide: “This trust is created and shall be operated exclusively for charitable, scientific or educational purposes within the meaning of those terms as used in section 501(c)(3).” In addition, the articles prohibit political activity, self-dealing, noncharitable investments, and the use of trust assets for the private benefit of any individual. Although petitioner is intended to be perpetual, its articles provide that in the event of termination, the trustees shall distribute petitioner's assets to organizations described in sections 501(c), 170(c), and 2522.
Petitioner presently has three trustees: Dudley B. Dumaine (D. Dumaine), Albert B. Hunt, and Rufus R. Beaver. Under the terms of its governing instrument, petitioner may not have less than 3, nor more than 12, trustees, who act by majority in all matters. On petitioner's Application for Recognition of Exemption Under Section 501(c)(3), petitioner indicated that F. Dumaine, the settlor, is chief executive officer and a director of Amoskeag Co., and that D. Dumaine, trustee, is F. Dumaine's son and Amoskeag's president and chief operating officer. Albert Hunt is chairman of the board of Amoskeag and is experienced in philanthropic endeavors. Rufus Beaver, a Native North Carolinian with an extensive background in farming, holds a bachelor of science degree in agricultural education and is a former teacher of vocational agriculture.
Respondent's request for additional information to supplement petitioner's application contained the following question:
9. Describe in detail your relationship to the Amoskeag Company and the character and nature of their business activities.
Petitioner replied:
9. The Amoskeag Company has no legal or other relationship to Dumaine Farms.
This matter was not pursued further during the administrative process.
In December 1977, when petitioner first applied for recognition of exempt status, it had engaged in no operations. Petitioner was still not fully operational by the date of its final submission into the administrative record in July 1978. Thus, our descriptions are based partly on actual operations and partly on proposed operations.
Viewed broadly, petitioner is a model farm operated as a conservation project. Both its experimental projects and its demonstration function further its overriding purpose of conserving the ecology.
However, petitioner does not intend merely to preserve land in an untouched natural state. Rather, petitioner's goal is to test and demonstrate the restoration of overcultivated, exhausted land to a working ecological balance. For this reason, it is essential to petitioner's purpose that its land is generally representative of the surrounding farmland in the county. Petitioner readily admits its land does not have special environmental attributes, nor is the land part of an ecologically significant undeveloped area such as a swamp, marsh, forest, or other wilderness tract.
Petitioner encourages more local practice of the farming and conservation techniques it is developing. However, farmers dependent upon the land for their livelihood cannot be expected to adopt unproven methods. Thus, one of petitioner's goals is to demonstrate the economic feasibility of farming techniques which conserve and protect the environment. Produce and timber grown on petitioner's land will be sold in the usual farm markets, and the proceeds will be used to cover operating costs. Petitioner will also use crop proceeds to pay for making the results of its experimental projects available to the public. Extensive fundraising is not contemplated, but, if needed, contributions will be sought from those most interested in petitioner's agricultural and conservation programs.
Petitioner's estimated budget for 1978 shows a net farm profit of $2,920, based on receipts of $5,000 and crop expenses of $2,080. These estimated expenses were somewhat lower than they might have been otherwise, since the use of machinery was to be provided without charge by F. Dumaine, the grantor, in conjunction with his other farming activities. Petitioner also estimated it would spend $1,200 on advertising, posting signs, and other costs of reaching the public, leaving $1,720 as 1978 net receipts.3 Because in its first year petitioner was not fully operational, the 1978 figures do not reflect the full range of petitioner's proposed activities and do not include such items as timber income, nominal access fees, drainage and irrigation expenses, monitoring and information distribution costs, or machinery and depreciation.
Petitioner's experimental farming methods continue, to a large extent, work begun by the settlor F. Dumaine on his private farmlands. F. Dumaine owns approximately 1,600 acres of land in Rockingham County, of which 600 acres are farmed. Some of the farmland has been used to conduct experiments in farming methods and new crops particularly suited to the Rockingham County area of North Carolina. Those parts of F. Dumaine's land not farmed have been actively managed as both conservation lands and wildlife preserves. The 75 acres deeded to petitioner comprise the...
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