Esgar Corp. v. Comm'r

• Decision Date: 07 March 2014
• Docket Number: No. 12–9009.,12–9009.
• Citation: 744 F.3d 648
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: ESGAR CORPORATION; Delmar L. Holmes; Patricia A. Holmes; George H. Tempel; Georgetta Tempel, Petitioners–Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.

744 F.3d 648

ESGAR CORPORATION; Delmar L. Holmes; Patricia A. Holmes; George H. Tempel; Georgetta Tempel, Petitioners–Appellants,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.

No. 12–9009.

United States Court of Appeals, Tenth Circuit.

March 7, 2014.

James Walker (and Justin D. Cumming of Rothgerber, Johnson & Lyons, L.L.P., on the briefs), Denver, CO, for Petitioners–Appellants.

Jennifer Rubin (Kenneth L. Greene, Tax Division of Department of Justice, and Kathryn Keneally, Assistant Attorney General, on the brief), Washington, D.C., for Respondent–Appellee.

Before KELLY, GORSUCH, and HOLMES, Circuit Judges.

KELLY, Circuit Judge.

Petitioners–Appellants Esgar Corporation, George and Georgetta Tempel, and Delmar and Patricia Holmes (collectively, the “Taxpayers”) appeal from two decisions of the United States Tax Court. Esgar Corp. v. Comm'r, 103 T.C.M. (CCH) 1185, 2012 WL 371809 (T.C.2012); Tempel v. Comm'r, 136 T.C. 341 (T.C.2011). They argue that the Tax Court erred in valuing conservation easements they claimed as charitable deductions and in determining the holding period of state tax credits they sold. Our jurisdiction arises under I.R.C. § 7482,¹ and we affirm.

Background

In 1987, Esgar, the Holmeses, the Tempels, and Kelling Fine Foods, Inc., each acquired an undivided, one-fourth interest in roughly 2,200 acres of land in Prowers County, Colorado. Esgar Corp., 2012 WL 371809, at *2. They acquired and held the land in partnership. Around 1999, the partnership leased 1,470 acres of the property to Eastern Colorado Aggregates to operate as a gravel mine. Id. at *3. The mine, known as the Midwestern Farms Pit, is one of the four largest aggregate ² mines in Prowers County. Id.

In December 2004, the partnership transferred approximately 163 of the non-leased acres to the Taxpayers individually. Id. at *4. When all was said and done, Esgar and the Tempels each owned 54.34 acres, and the Holmeses owned 54.35 acres of land adjacent to the Midwestern Farms Pit. Id. On December 17, 2004, the Taxpayers each donated a conservation easement over their respective property to the Greenlands Reserve. Id. at *5. The donations granted a perpetual easement over the properties, giving Greenlands the right to preserve the natural condition of the land and protect its biological, ecological, and environmental characteristics. Id. The grant specifically prohibited the mining of sand, gravel, rock, or any other minerals on the properties. Id.

The Taxpayers claimed charitable deductions on their 2004, 2005, and 2006 tax returns for “qualified conservation contributions” under I.R.C. § 170(f)(3)(B)(iii). Id. The Taxpayers engaged William Milenski to appraise their contributions. Mr. Milenski concluded that, had the conservation easements not been granted, the properties would have realized their greatest potential as a gravel mining operation. Id. Based on the value of that relinquished use, Mr. Milenski valued Esgar's donated conservation easement at $570,500, the Holmeses' at $867,500, and the Tempels' at $836,500. Id. The Taxpayers claimed these amounts as charitable contributions on their respective 2004 tax returns, deducting what they could and carrying the remainder forward onto their 2005 and 2006 returns. Id.

Also as a result of their donations, the Taxpayers received transferable tax credits from the State of Colorado. Tempel, 136 T.C. at 342. Between December 22 and 31, 2004—within two weeks of receiving the credits—the Taxpayers sold portions of their credits to third parties. Id. at 343. From these sales, Esgar received net proceeds of $18,000, the Tempels received net proceeds of $82,500, and the Holmeses received net proceeds of $164,625. Id.; Stip. of Facts at 11 ¶¶ 47–49. On their respective 2004 tax returns, the Taxpayers reported these proceeds as income, albeit each differently: Esgar reported the income as a long-term capital gain; the Tempels reported it as a short-term capital gain; and the Holmeses reported it as ordinary income. Tempel, 136 T.C. at 343; Stip. of Facts at 12 ¶ 54, 15 ¶ 67, 16 ¶ 75.

After an audit of the Taxpayers' 2004, 2005, and 2006 returns, the Commissioner determined that the Taxpayers' conservation easements were in fact valueless and that the sales proceeds from their state tax credits should be reported as ordinary income. The Commissioner issued notices of deficiency for the 2004, 2005, and 2006 tax years. The notices indicated that Esgar, the Holmeses, and the Tempels had understated their tax liability for those years by $32,357, $82,296, and $93,681, respectively. Esgar Corp., 2012 WL 371809, at *1. The Taxpayers challenged these notices in the United States Tax Court, and a three-day trial was held in Denver, Colorado, in November 2009.

In the Tax Court, the Commissioner did not challenge whether the conservation easements were deductible “qualified conservation contributions” under I.R.C. § 170(h). Rather, the only issue was the easements' value. Concerning valuation methodology, the parties agreed that there were no comparable sales of easements with which to compare the Taxpayers' donations. Thus, the parties agreed on “before and after” valuation.³ The Taxpayers and the Commissioner agreed that the after value of the Esgar and Tempel properties was $24,000, and the after value of the Holmes property was $27,000. Id. at *7. Their disagreement, and thus the trial, centered around the properties' before value.

The Tax Court noted that a property's “highest and best use” determines its before value. Id. The Taxpayers argued that their properties' highest and best use before granting the easements was gravel mining; the Commissioner argued that it was agriculture.⁴Id. To this end, both sides introduced reports and testimony from various experts. Id. at *8–14. Taking into account these experts, the Tax Court sided with the Commissioner's conclusion that agriculture was the properties' highest and best use. Id. at *15. This conclusion was based in part on a finding that, although “it would have been physically possible to mine the properties in 2004 (or in the future),” there was no demand for such use “in the reasonably foreseeable future.” Id. at *19. The Tax Court then decided the properties' before value based on comparable sales of agricultural lots. It concluded that the before value of the Esgar and Tempel properties was $73,774, and the before value of the Holmes property was $76,502.50. Id. at *22. After subtracting the properties' after values, the Tax Court valued the Esgar and Tempel conservation easements at $49,774, and the Holmes conservation easement at $49,502.50. Id.

In a separate decision, the Tax Court held that the Taxpayers' state tax credits were capital assets and that their holding periods were insufficient to qualify for long-term capital gain treatment. Tempel, 136 T.C. at 355. The resulting income was thus properly reported as short-term capital gains.

This appeal followed.

Discussion

We review the Tax Court's determination and application of law de novo. Cox v. Comm'r, 514 F.3d 1119, 1123 (10th Cir.2008). However, the Supreme Court has counseled that, “[w]hile [the Tax Court's] decisions may not be binding precedents for courts dealing with similar problems, uniform administration would be promoted by conforming to them where possible.” Dobson v. Comm'r, 320 U.S. 489, 502, 64 S.Ct. 239, 88 L.Ed. 248 (1943). Rulings by the Tax Court on matters of tax law are therefore persuasive authority, especially if consistently followed.

On the other hand, we review the Tax Court's findings of fact for clear error. Cox, 514 F.3d at 1123. The Supreme Court has delineated the nature of our review:

The Tax Court has the primary function of finding facts in tax disputes, weighing the evidence, and choosing from among conflicting factual inferences and conclusions those which it considers most reasonable. The Circuit Courts of Appeals have no power to change or add to those findings of fact or to reweigh the evidence.

Comm'r v. Scottish Am. Inv. Co., 323 U.S. 119, 123–24, 65 S.Ct. 169, 89 L.Ed. 113 (1944). Our review of such matters is limited to asking whether the Tax Court's decision “is supported by substantial evidence and is not clearly erroneous.” Home Co. v. Comm'r, 212 F.2d 637, 639 (10th Cir.1954).

The Taxpayers point to three errors by the Tax Court, each of which they frame as a “misapplication of legal standards and methodologies mandated by the Internal Revenue Code and Treasury Regulations.” Aplt. Br. 17. They argue that: (1) the Tax Court erroneously placed on them the burden of proving the before value of their properties; (2) the Tax Court applied incorrect legal standards in valuing their conservation easements; and (3) the Tax Court erred in determining the holding period of their state tax credits. Aplt. Br. 2–3. We consider each in turn.

A. Burden of Proof Allocation and Factual Inferences

The Taxpayers argue that the Tax Court erred by placing on them the burden of proving the before value of their properties. They contend that they satisfied I.R.C. § 7491(a)'s requirement of producing credible evidence on that issue, thus shifting the burden to the Commissioner. Aplt. Br. 20–30. Because the burden was not properly allocated, they argue, the Commissioner was allowed to prevail without presenting any “objective evidence” that agriculture was the properties' highest and best use. Id. at 31. They assert that the Tax Court's decision is devoid of “factual evidence presented by the Commissioner” but is instead supported “through negative presumptions of fact improperly inferred” against them. Id. at 34.

1. Burden of Proof under I.R.C. § 7491

Generally, deductions are a matter of legislative grace, and a taxpayer bears the burden of proving entitlement to any claimed deduction. INDOPCO, Inc. v. Comm'r, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992); Zell v. Comm'r, 763 F.2d 1139, 1141 (10th Cir.1985). Moreover, the...