In Uncategorized on 08/07/2017 at 16:04

Old men grow garrulous and remember their children’s childhood, anecdotalizing to the four winds. I can hear those little voices still, although the little girls are far away both in space and time. “First, the farmer sows his seed, Then, he stands and takes his ease, Stamps his foot and claps his hands, And turns around to view his land.”

Well, I don’t know if Mark A. Rutkoske, Sr., 149 T.C. 6, filed 8/7/17, did any of the foregoing, but he claims to be a qualified farmer. So does his brother Felix Jr. Felix Jr.’s spouse Karen is along for the hayride.

The Rutkoske clan are farmers for sure, in the Old Line State. They gave a conservation easement on one of their farms, got $1.5 million from the charity, but claimed the donation was a bargain sale, and went for $1.3 million as a charitable gift, because the diminution in the value of the property was that much. Then they sold the property cum easement and claimed capital gain, but they wanted to deduct 100% of the charitable gift in the year of granting the easement, rather than the 50% in Section 170(b)(1)(E)(i).

You get that largesse if you are not merely a farmer, but a “qualified farmer.”

Here’s His Honor Big Julie, a/k/a His Honor Judge Julian I Jacobs, hereinafter referred to as HHBJJJIJ, to give you the down-to-earth story.

“Section 170(b)(1)(E)(iv) provides a special rule for contributions of property used in agriculture or livestock production.  If the individual is a ‘qualified farmer or rancher’ for the taxable year for which the contribution is made, then that individual may deduct the value of the donation up to 100% of the his/her contribution base, less the amount of all other charitable contributions allowable under section 170(b)(1) made during the year.  Section 170(b)(1)(E)(v) defines the term ‘qualified farmer or rancher’ as an individual whose gross income from the trade or business of farming (within the meaning of section 2032A(e)(5)) is greater than 50% of the individual’s gross income for the taxable year.) “ 149 T. C. 6, at p. 10.

Well, the Rutkoskes definitely farmed. “We note that after the sale of the property, petitioners, through Rutkoske Farms, continued to actively farm full time the 1,100 acres on the six other farms, growing and harvesting wheat, soybeans, corn, and barley.” 149 T. C. 6, at pp. 6-7, footnote 5.

But their gross income included the sale of the farm that year, which IRS claims is nonfarm income and disqualifies them. And IRS disputes the valuation of the diminution, but HHBJJJIJ needn’t go there yet.

Although the Rutkoskes claim that sale of an asset used in farming is farming income, section 2032A(e)(5) is much more restrictive.

“We recognize that an individual engaged in the trade or business of farming most likely will engage in activities beyond those enumerated in the statute.  The sale of used equipment by farmers is common.  The acquisition and disposition of land is necessary because without land none of the section 2032A(e)(5) activities could be carried on.  But we are not reviewing petitioners’ activities in the context of determining their operation expense deductions or any other provision of the Code that relates to a business’ general operations.

“Section 170(b)(1)(E) is a narrowly tailored provision intended to provide a tax benefit for a specific action, namely, the contribution of conservation easements by qualified farmers.  We will not broaden the scope of activities listed in section 2032A(e)(5) beyond that ordinarily associated with them because our sole duty is to interpret the law as written by Congress.” 149 T. C. 6, at p. 16.

In other words, the largesse only goes to those farmers 50% of whose gross income comes from cultivating the soil, raising agricultural or horticultural commodities, the handling of such commodities, or tree farming. Real estate investing is something else.

HHBJJJIJ is aware it’s a tough rule. “We recognize that the statute makes it difficult for a farmer to receive a maximum charitable contribution deduction by disposing of a portion of property in a year in which he/she donates a conservation easement, especially in a State with high land values.  But it is not our task to rewrite a statute.” 149 T. C. 6, at p. 18.

The valuation issue will be fought out another day.


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