Tempel v. Comm'r of Internal Revenue
| Citation | 136 T.C. No. 15,136 T.C. 341 |
| Decision Date | 05 April 2011 |
| Docket Number | No. 23689–08.,23689–08. |
| Parties | George H. TEMPEL and Georgetta Tempel, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In 2004 Ps donated a qualified conservation easement to a qualified charitable organization. As a result, Ps received conservation easement income tax credits from the State of Colorado. These credits were transferable to other taxpayers. That same year Ps sold a portion of those credits.
Ps reported short-term capital gains from the sales of the State credits. Ps claimed an allocated portion of the professional fees they incurred to complete the conservation easement donation, as adjusted basis in the State tax credits they sold.
R determined the State income tax credits that Ps sold were not capital assets and that Ps had no adjusted basis in the credits. R filed a motion for partial summary judgment and Ps filed a cross-motion. In their cross-motion, Ps also claim that proceeds from their sales of State tax credits should have been reported as long-term capital gains.
Held: The State tax credits Ps sold are capital assets.
Held, further, Ps do not have any basis in their State tax credits.
Held, further, Ps' holding period in their State tax credits is insufficient to qualify for long-term capital gains treatment.
James R. Walker and Christopher D. Freeman, for petitioners.
Tamara L. Kotzker and Sara J. Barkley, for respondent.
This case involves a petition for redetermination of income tax deficiencies determined by respondent for petitioners 2004 and 2005 tax years. It is before the Court on respondent's August 3, 2009, motion for partial summary judgment and petitioners' August 31, 2009, cross-motion for partial summary judgment. See Rule 121(a).1 Respondent argues that petitioners' gains from sales of their transferable Colorado income tax credits (State tax credits) are not capital gains and instead should be taxed as ordinary income. Respondent also argues in the alternative that petitioners do not have any basis in their State tax credits.
Petitioners filed a cross-motion for partial summary judgment in which they agree that summary judgment is appropriate. Petitioners claim that their gains from the sales of their State tax credits, reported as short-term capital gains, should have been reported as long-term capital gains. They also assert they are entitled to reduce those gains by their allocable basis in the credits they sold. For the reasons discussed below, we agree with petitioners that the transferable State tax credits at issue are capital assets, and we agree with respondent that petitioners had neither basis, nor a long-term holding period, in their State tax credits.
On December 17, 2004, petitioners, George and Georgetta Tempel, husband and wife, donated a qualified conservation easement to the Greenlands Reserve, a qualified organization, on approximately 54 acres of petitioners' land in Colorado. Petitioners claimed the fair market value of their donation was $836,500. They incurred $11,574.74 of expenses in connection with the donation that primarily consisted of various professional fees. As a result of the donation petitioners received $260,000 of conservation easement income tax credits from the State of Colorado.
Throughout 2004 Colorado granted its eligible residents income tax credits for donating perpetual conservation easements. Colo.Rev.Stat. sec. 39–22–522 (2010). For 2004 the State granted an income tax credit equal to 100 percent of the value of such a donation up to $100,000. Id. sec. 39–22–522(4)(a)(I). To the extent a donation's value exceeded $100,000, additional credit was limited to 40 percent of the value in excess of $100,000. Id. The maximum allowable credit was $260,000 for each donation. Id.
Colorado allowed conservation easement credit recipients to use their credits to receive a limited refund provided that the State had exceeded constitutional tax collection limits commonly known as “Amendment 1” or the “Douglas Bruce Amendment” establishing the taxpayer bill of rights (“TABOR”). Id. sec. 39–22–522(5)(b). The refund in certain circumstances could reach a maximum of $50,000. Id. Unused credits could be carried forward for up to 20 tax years or transferred to certain eligible taxpayers. Id. sec. 39–22–522(5)(a), (7). Transferees may use their credits only to offset a tax liability. Id. sec. 39–22–522(7). Transferees are ineligible for a refund and may not transfer their credits. Id.
On December 22, 2004, with the assistance of brokers, petitioners sold $40,500 of their State tax credits to an unrelated third party for net proceeds of $30,375.2 On December 31, 2004, with the assistance of brokers, petitioners sold an additional $69,500 of their credits to another unrelated third party for net proceeds of $52,125.3 On December 31, 2004, petitioners gave away $10,000 of their credits.
On their 2004 Form 1040, U.S. Individual Income Tax Return, petitioners reported $77,603 of short-term capital gains from the sale of their State tax credits. Schedule D, Capital Gains and Losses, of their 2004 tax return reflects total proceeds from the sales of the State tax credits of $82,500 and a basis of $4,897 in those credits. Petitioners reported their basis in the State tax credits by allocating the $11,574.74 of expenses they incurred to make the donation to the portion of the credits they sold (i.e., $110,000 of credits sold / $260,000 of total credits x $11,574.74 = $4,897).
On June 26, 2008, respondent issued a notice of deficiency to petitioners for their 2004 and 2005 tax years. Respondent determined petitioners owed additional tax and penalties partially arising from respondent's adjustments to petitioners' reported gains from the sales of the State tax credits. Respondent concluded that petitioners did not have any basis in their State tax credits and that the gains were ordinary rather than capital.
Petitioners timely petitioned this Court. At the time the petition was filed, petitioners resided in Colorado. Respondent moved for partial summary judgment. Petitioners also moved for partial summary judgment.
Respondent's motion for partial summary judgment and petitioners' cross-motion dispute (i) whether petitioners' State tax credits were capital assets, (ii) whether the sales resulted in long-term or short-term capital gains, and (iii) the amount of basis, if any, petitioners had in those credits. Respondent contends and petitioners do not contend otherwise that petitioners' receipt of State tax credits as a result of their conservation easement contribution was neither a sale or exchange of the easement nor a quid pro quo transaction. For our discussion we accept those deemed concessions.
Rule 121(a) allows a party to move “for a summary adjudication in the moving party's favor upon all or any part of the legal issues in controversy.” Summary judgment is appropriate “if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law.” Rule 121(b). Facts are viewed in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821, 1985 WL 15413 (1985).
The moving party bears the burden of demonstrating that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520, 1992 WL 88529 (1992), affd. 17 F.3d 965 (7th Cir .1994). The Court has considered the pleadings and other materials of record and concludes that as to the points of law at issue here there is no genuine issue of material fact. Whether petitioners' transferable State tax credits are capital assets and what basis, if any, and the holding period petitioners have in their State tax credits are novel legal questions appropriate for decision by summary judgment.
Capital gains are derived from the sale or exchange of capital assets. Sec. 1222. Section 1221 defines “capital asset” as property 4 held by a taxpayer, except for eight categories of property specifically excluded from the definition.5 None of the excluded categories is applicable to the State tax credits at issue.6
The purpose of capital gains treatment is to provide some relief to taxpayers from the excessive burdens of taxation of an entire gain in 1 year in those instances “typically involving the realization of appreciation in value accrued over a substantial period of time”. Commissioner v. Gillette Motor Transp., Inc., 364 U.S. 130, 134, 80 S.Ct. 1497, 4 L.Ed.2d 1617 (1960). Capital gains treatment also alleviates the pernicious effects of inflation which creates phantom profits and mitigates the deterrent effect taxation may have on a taxpayer's decision to convert assets that have appreciated. Burnet v. Harmel, 287 U.S. 103, 106, 53 S.Ct. 74, 77 L.Ed. 199 (1932); Snowa v. Commissioner, 123 F.3d 190, 193 (4th Cir.1997). However, it has also been acknowledged that section 1221 makes no mention of these judicially perceived motivations for capital asset treatment. Commissioner v. Ferrer, 304 F.2d 125, 133 (2d Cir.1962), revg. and remanding 35 T.C. 617, 1961 WL 1332 (1961).
There is “no single definitive” definition of a capital asset. Gladden v. Commissioner, 112 T.C. 209, 218, 1999 WL 218904 (1999), revd. on a different issue 262 F.3d 851 (9th Cir.2001). Instead, it is a very broad term. As the Supreme Court observed:
The body of § 1221 establishes a general definition of the term “capital asset,” and the phrase “does not include” takes out of that broad definition only the classes of property that are specifically mentioned. * * *
Ark. Best Corp. v. Commissioner, 485 U.S. 212, 218, 108 S.Ct. 971, 99 L.Ed.2d 183 (1988). While Congress...
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