Stark v. Comm'r of Internal Revenue
| Decision Date | 03 March 1986 |
| Docket Number | Docket No. 10409-84. |
| Citation | 86 T.C. 243,86 T.C. No. 17 |
| Parties | NELDA C. STARK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P donated certain real property to the United States 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. HELD, on the facts of this case, the mineral interest retained by P was so insubstantial that section 170(f)(3) does not prohibit a charitable contribution deduction with respect to the conveyances. HELD FURTHER, amount of deductible contribution with respect to the ‘bargain sale‘ determined.
John G. Heard, Glen A. Rosenbaum, and James D. Penny, for the petitioner. David W. Johnson, for the respondent.
Respondent determined a deficiency of $87,372.10 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.
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 in Austin, Texas.
For many years, petitioner owned a 3,358 acre tract of land in East Texas that the United States 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 Service to hold the 1,000 acre tract available for sale to Fender for use by him in the exchange with the Forest 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 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.
Petitioner would not have sold the land 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, 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, 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 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 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...
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