Mitchell v. Comm'r of Internal Revenue, Docket No. 10891-10

• Decision Date: 03 April 2012
• Docket Number: Docket No. 10891-10
• Parties: RAMONA L. MITCHELL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

138 T.C. No. 16

RAMONA L. MITCHELL, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10891-10

UNITED STATES TAX COURT

Filed April 3, 2012

In 2003 P contributed a conservation easement over 180 acres of unimproved land to a qualified organization. The purchase of the unimproved land was seller financed. After a downpayment, P executed a promissory note for the remaining payments secured by a deed of trust on the unimproved land. P failed to have the mortgagee subordinate the deed of trust to the conservation easement deed until two years later, in 2005. P claimed a charitable contribution deduction on her 2003 Federal income tax return.

I.R.C. sec. 170 allows a deduction for a "qualified conservation contribution". A qualified conservation contribution must be made exclusively for conservation purposes. I.R.C. sec. 170(h). A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity. I.R.C. sec. 170(h)(5)(A). Pursuant to sec. 1.170A-14(g)(2), Income Tax Regs., no deduction is permitted for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights

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in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.

P argues she has met the requirements of sec. 1.170A-14(g)(2), Income Tax Regs., and is eligible for a charitable contribution deduction under I.R.C. sec. 170. R argues that P failed to have the mortgagee subordinate his deed of trust to the conservation easement deed and therefore failed to meet the requirements of sec. 1.170A-14(g)(2), Income Tax Regs., and I.R.C. sec. 170.

As part of P's argument that she has met the requirements of sec. 1.170A-14(g)(2), Income Tax Regs., P raises an issue of first impression: whether we must consider the so-remote-as-to-be-negligible standard of sec. 1.170A-14(g)(3), Income Tax Regs., in determining whether P satisfied the requirements of sec. 1.170A-14(g)(2), Income Tax Regs.

Held: The so-remote-as-to-be-negligible standard of sec. 1.170A-14(g)(3), Income Tax Regs., does not apply to determine whether P satisfied the requirements of sec. 1.170A-14(g)(2), Income Tax Regs.

Held, further, P has not met the requirements of sec. 1.170A-14(g)(2), Income Tax Regs., and is not eligible for the charitable contribution deduction under I.R.C. sec. 170 for 2003.

Held, further, P is not liable for the accuracy-related penalty under I.R.C. sec. 6662.

Larry D. Harvey, for petitioner.

Miles B. Fuller, Steven I. Josephy, and Joseph A. Peters, for respondent.

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HAINES, Judge: Respondent determined a deficiency of $142,600 in petitioner's Federal income tax and an accuracy-related penalty under section 6662(a)¹ and (d) of $28,520 for 2003.² The issues for decision after concessions are: (1) whether petitioner is entitled to a charitable contribution deduction with respect to the conservation easement she granted to Montezuma Land Conservancy (Conservancy); (2) if petitioner is entitled to a charitable contribution deduction, the amount of the deduction; and (3) whether petitioner is liable for the accuracy-related penalty under section 6662(a) and (d) or alternatively, if we determine petitioner is entitled to a charitable contribution deduction, whether she is liable for the gross valuation misstatement penalty under section 6662(a) and (h).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. At the time petitioner filed her petition, she lived in Colorado.

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Charles Mitchell, his wife Ramona L. Mitchell, and their son, Blake Mitchell (Mitchells), resided in Mancos, Colorado, a ranching community established in 1876. Mancos is between Cortez, Colorado, 17 miles to the west, and Durango, Colorado, 30 miles to the east. Highway 160, at the base of the San Juan Mountains and known as the San Juan Skyway, connects the three towns. The towns are in the southwest corner of Colorado in the "Four Corners" area, where the boundaries of Colorado, New Mexico, Arizona, and Utah meet.

The town of Mancos is in the northern part of Mancos Valley. Charles had owned a business in the town which began as a manufacturer of matches but eventually evolved into a manufacturer of erosion and flood control products. Charles had tried to buy 456 acres of ranchland in the southern part of the Mancos Valley from Clyde Sheek for over 20 years. The ranchland was approximately eight miles by road south of the town of Mancos.

In 1998 Sheek finally agreed to sell the northerly 105-acre parcel to the Mitchells for $180,000.³ The parcel was unimproved; i.e., it had no buildings, only partial fencing, no utilities, and no domestic water. Access was from a two-lane gravel road maintained by the county. The land had been used by Sheek to

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graze cattle and was not in good condition when the Mitchells purchased it. The property also was used by wildlife for habitat.

The Mitchells installed a two-inch water line from the northern boundary of the 105-acre parcel in 2000 with electrical lines added in 2001-02. The Mancos River channel running through the property was protected from further erosion, and fields were improved. Blake and his wife, Melody, built a home on the 105-acre parcel in 2000. Subsequently a 50- by 100-foot shop and a 900-square-foot guesthouse were built on the parcel.

In 2000 Charles sold his business. He again approached Sheek to buy the remaining 351 acres bordering the south boundary of the 105-acre parcel bought in 1998. Sheek agreed to sell the 351-acre parcel in 2001 for $683,000. He did not want all cash. He wanted retirement income. Consequently, after a downpayment of $83,000, the balance of $600,000 was to be paid in installments of $60,000 per year plus interest. A promissory note was signed and secured by a deed of trust recorded in the records of Montezuma County, Colorado, in January 2001.

As a result of the two purchases, the Mitchells owned 456 acres of ranchland in the southern portion of the Mancos Valley (Lone Canyon Ranch). The south and west sides of the Lone Canyon Ranch are bordered by the Mesa

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Verde National Park (park) where the Anasazi people, the cliffdwellers, had their communities. A portion of the ranch is actually within the park. To the south also is Ute Indian land and to the east is Bureau of Land Management land and a privately owned ranch. Charles and petitioner built their own home at Lone Canyon Ranch in 2001 and 2002.

Charles began having health problems. In December 2002 the Mitchells formed C. L. Mitchell Properties, L.L.L.P., a family limited partnership (partnership).⁴ Lone Canyon Ranch was transferred to the partnership, subject to the deed of trust, as were other investments, including a rental property and cash and securities. Although Charles was named the general partner, it soon became evident that he could not carry out his management duties. Consequently, Blake took over the management duties. Charles eventually died of his illness in 2006.

On December 31, 2003, the partnership granted a conservation easement on the south 180 acres of unimproved land to Conservancy. The parties executed a deed of conservation easement in gross. At the time the easement was granted, the deed of trust securing the debt to Sheek was not subordinated to the conservation easement held by Conservancy. From 2003 to 2005 the partnership had the money

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to pay off the promissory note, which the deed of trust secured, at any time. There were no lawsuits, potential or otherwise; all bills were paid; payments on the promissory note to Sheek were current, and casualty insurance was in place. Two years after the conservation easement was granted, Sheek agreed to subordinate his deed of trust to the conservation easement but received no consideration for the subordination. On December 22, 2005, Sheek signed the Subordination to Deed of Conservation Easement in Gross (subordination agreement).

In 2004 the Mitchells hired William B. Love Appraisals, Inc. (Love), to appraise the conservation easement granted to Conservancy as of December 31, 2003. Love determined that the conservation easement had a market value of $504,000. Love issued an appraisal report for the partnership on February 17, 2004 (Love appraisal). The partnership claimed a $504,000 charitable contribution deduction, which flowed through to its two partners, Charles and petitioner, equally. Charles and petitioner claimed a $504,000⁵ charitable contribution deduction on their 2003 joint Federal income tax return dated April 13, 2004 (2003 return). Charles and petitioner attached Form 8283, Noncash

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Charitable Contributions, to their 2003 return along with a copy of the Love appraisal.

A notice of deficiency was mailed to petitioner on February 23, 2010, disallowing her 2003 charitable contribution deduction. Respondent determined that petitioner had not met the requirements of section 170. Alternatively, respondent determined that if petitioner had met the requirements of section 170, the amount of the charitable contribution deduction was $100,100.⁶ Petitioner timely filed a petition with this Court on May 12, 2010.

OPINION

The issues before this Court are whether petitioner made a qualified conservation contribution to Conservancy and if so, whether she substantiated the reported charitable contribution deduction in the manner required by section...