Stewart v. Commissioner
| Citation | 1986 TC Memo 295,51 TCM (CCH) 1446 |
| Decision Date | 21 July 1986 |
| Docket Number | Docket No. 16518-83,26407-84. |
| Parties | Robert E. Stewart and Gloria H. Stewart v. Commissioner. |
| Court | United States Tax Court |
John G. Gourlay, Jr., 400 Lamar Life Building, Jackson, Miss., for the petitioners. Robert W. West, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies and additions to petitioners' income taxes:
Tax Year Additions to Tax
Docket No. Ended Deficiency Sec. 6653(a)(1)2 Sec. 6653(a)(2)
16518-83 ................. 12/31/78 $73,279.80 $3,960.42 —
12/31/79 31,604.02 1,580.20 —
12/31/80 14,065.07 739.36 —
26407-84 ................. 12/31/81 51,874.88 2,593.74 *
12/31/82 18,535.45 926.77 **
* 50 percent of the interest due on $51,874.88
** 50 percent of the interest due on $18,535.45
After concessions,3 the only issues remaining for decision are the fair market values, for purposes of section 170(a), of three leasehold interests in real property donated in 1978 and 1981 by petitioner Robert E. Stewart to several charitable organizations.4
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto, as well as the oral stipulations made at trial, are incorporated herein by this reference.
Petitioners Robert E. Stewart (hereinafter petitioner) and Gloria H. Stewart, husband and wife, resided in Rankin County, Mississippi, at the time the petitions in docket Nos. 16518-83 and 26407-84 were filed. Joint Federal income tax returns were filed by petitioners for each of the calendar years 1978 through 1982.
Petitioner has been engaged in the business of home building and real estate development since 1961. In 1970, petitioner and his then 50 percent partner, Associated Constructors, Inc., began to purchase lands for the development of a residential subdivision in Rankin County. On February 2, 1972, as part of an acquisition of land for this project, petitioner and Joseph Campbell (Campbell), one of the principals of Associated Constructors, Inc., acquired the unexpired terms of two leasehold interests in what is commonly referred to as sixteenth section land.5
To help provide for the needs of the subdivision, petitioner decided to locate a sanitary sewage lagoon on the leased sixteenth section land. In order to effectuate this plan, on August 28, 1972, petitioner and Campbell applied for an extension or renewal of the existing sixteenth section leases. The Rankin County Board of Supervisors (hereinafter the Board of Supervisors or the Board) thereupon appointed three persons owning land in Rankin County, to appraise the land and report to the Board.6 Though none of the three people who were appointed were appraisers or held any interest in a sixteenth section lease, each of the three did own land in Rankin County in close proximity to the sixteenth section land at issue. The three recommended to the Board of Supervisors that the 443-acre tract be leased at a rate of $2.00 per acre per year. The Board, in its minutes dated September 5, 1972, stated that after receiving this report and "having examined said report and inquired into the matter finds and determines that said sum of $886.00 per year represents the ground rental value of such land."
On September 5, 1972, the two existing leases were replaced with a new twenty-five-year lease having an annual rental rate of $2.00 per acre (hereinafter referred to as the Sixteenth Section Lease). The only restrictions present in the Sixteenth Section Lease were as follows:
Sometime after the Lease was entered into, petitioner formally requested the Board of Supervisors to allow him to remove timber from the land for the purpose of constructing the sewage lagoon. On January 7, 1974, the Board requested the Mississippi Forestry Commission to make an appraisal of the timber. During this same time period, petitioner, with the approval of the Board, also had an independent appraisal made.
The Forestry Commission did not appraise the timber. Several interdepartment memoranda, written in the latter part of February 1974, indicate that the Commission was of the opinion that the sale was improper because, in its view, the land was classified as forest land. The sale to petitioner, however, did occur, with petitioner paying the independently appraised price to the Rankin County Board of Education. Sometime thereafter, the timber was removed and petitioner began construction of the sewage lagoon. When the Forestry Commission learned of the sale, it issued a letter to the Board, recommending, inter alia, that petitioner's lease be canceled, and that petitioner be charged double the value of the timber in view of the questionable nature of the sale. No action was taken, however, to cancel the lease.7 Construction of the lagoon was completed in 1974 and the lagoon has been in continuous operation ever since.
There were also two abandoned sand pits located on the sixteenth section land. On June 21, 1976, the Board granted Cox Construction Co., Inc. the right to remove sand and sand-clay topping from the sand pits, in exchange for a payment of $0.11 per cubic yard removed. On December 22, 1978, following the submission of sealed bids, petitioner, as highest bidder, was granted by the Board the right to remove and sell sand and/or sand-clay topping from the sixteenth section land in exchange for a payment of $0.11 per cubic yard removed. Petitioner subsequently removed and sold approximately 3,288 cubic yards of sand to an unrelated third party at a rate of $0.25 to $0.30 per cubic yard.
Through a series of transfers, on July 28, 1975, petitioner became the sole owner of that portion of the Sixteenth Section Lease pertaining to a 40-acre tract and that portion pertaining to an adjoining 3.8-acre tract. On that same date he also became a 70 percent owner of that portion of the Lease relating to a 30-acre tract.
On December 28, 1978, petitioner conveyed his leasehold interest in the 40-acre tract to the Rankin County School District for $1.00.8 The Northeast Rankin Attendance Center School was subsequently constructed on the said property. On their 1978 tax return petitioners claimed a charitable contribution deduction based on an estimated value for the leasehold interest of $243,500.00. This deduction was disallowed by respondent, who allowed a charitable deduction of only $669.19.
On January 10, 1981, petitioner conveyed his 70 percent leasehold interest in the 30-acre tract to the Rankin County YMCA for $1.00.9 Petitioner conveyed his entire leasehold interest in the 3.8-acre tract to the Rankin County School District for $1.00 on April 1, 1981. On their 1981 tax return, petitioners claimed charitable contribution deductions based on estimated values for these leasehold interests of $147,000 and $27,720, respectively. These deductions were disallowed by respondent, who allowed a charitable deduction of only $378.66.10
On September 5, 1972, the fair rental value of the property underlying the Sixteenth Section Lease was $25 per acre per year.
OpinionThe ultimate issue for decision is whether petitioners are entitled to charitable deductions, pursuant to section 170(a), in excess of the amounts allowed by respondent, for contributions made in 1978 and 1981 of leasehold interests in a 40-acre tract, a 30-acre tract, and a 3.8-acre tract of sixteenth section land.
There is no dispute here that the donations were in fact made to qualified donees under section 170(c). To determine the allowable deduction, however, we must determine the fair market value of the donated property, to wit, "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts." Sec. 1.170A-1(c)(2), Income Tax Regs. Resolution of this issue depends, in turn, on the threshold question of whether the Sixteenth Section Lease, including the donated portions thereof, was a valid lease having any ascertainable value. In making this determination we must look to Mississippi law, as interpreted by the highest court of that state. Aquilino v. United States 60-2 USTC ¶ 9538, 363 U.S. 509, 512-413 (1960); Morgan v. Commissioner 40-1 USTC ¶ 9210, 309 U.S. 78, 80 (1940); Commissioner v. Estate of Bosch 67-2 USTC ¶ 12,472, 387 U.S. 456, 465 (1967).
Petitioners contend that the Sixteenth Section Lease was properly executed in accordance with the provisions of the Mississippi Code, that the rent prescribed in the lease was fair and adequate, and that, accordingly, the lease was valid in every respect.11 Respondent, on the other hand, asserts that the consideration in the lease was grossly inadequate, and that therefore, the lease was void ab initio under Mississippi law.
Petitioners direct our inquiry to section 29-3-52 of the Mississippi Code which provides:
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