In 2009, the members (Mark Rutkoske and Felix Rutkoske) of an LLC holding 355 acres of farmland conveyed a conservation easement to a public charity for $1,504,960. The Rutkoske brothers believed that the sale of the conservation easement was for a bargain purchase price and claimed $1,335,040 for the bargain element of the transaction based on an appraisal. Following the conveyance of the conservation easement, the LLC sold the farmland for $1,995,040 on the same day as the conveyance.

This case for partial summary judgment did not address whether the claimed bargain price deduction was indeed the fair market value of the bargain element, which the Tax Court (the “court”) noted will be determined in another trial. Rather, this case hinged on whether the brothers were “qualified farmers” under Section 170(b)(1)(E).

The court stated, “If the conveyance of the conservation easement was made by qualified farmers, petitioners may deduct a qualified conservation contribution of up to 100% of their respective contribution bases, less the amount of all other charitable contributions allowable under paragraph (1) of subsection (b), for the year of contribution. If the donation of the conservation easement was not made by qualified farmers, then the deduction is limited to 50% of the donors’ respective contribution bases, less the amount of all other charitable contributions allowable under paragraph (1) of subsection (b) in the year of contribution.”

The court also noted that “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.”

In addition, the court stated, “To determine whether the contribution of the conservation easement qualifies for the special rule of Section 170(b)(1)(E)(iv), a fraction must be created, the numerator of which is the income derived from the trade or business of farming, and the denominator of which is the donor’s gross income. See Section 170(b)(1)(E)(v).”

In this case, the parties disagreed as to what constitutes income derived from the “trade or business of farming.” More specifically, does the sale of the property and conservation easement count as income derived from the “trade or business of farming?” If the answer is yes, then the Rutkoske brothers qualify for the deduction of 100% of the conservation easement donation. If the answer is no, then the Rutkoske brothers are limited to “50% of the donors’ respective contribution bases.”

In support of their position, the Rutkoske brothers argued that “the sale of the property falls under the strictures of Section 2032A(e)(5) in that ‘farm real estate is an asset integral to raising, harvesting, and/or producing saleable agricultural or horticultural commodities as well as the handling, drying, packing, grading, and or storing the agricultural and/or horticultural commodities produced for sale.’”

To resolve this issue, the court looked to the plain wording of Section 2032A(e)(5), which the court said “sets forth activities, the revenues of which constitute income from the trade or business of farming.”

As mentioned in Section 2032A(e)(5), “The term ‘farming purposes’ means:

“(A) cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm

 “(B) handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated

“(C) (i) the planting, cultivating, caring for, or cutting of trees, or (ii) the preparation (other than milling) of trees for market.”

The court further noted that “neither the disposal of property nor the disposal of the development rights attached thereto is an activity listed in Section 2032A(e)(5) ... 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.”

Although the decision seems a bit unfair to the Rutkoske brothers, the court stated in its closing, “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 [Maryland] with high land values. But it is not our task to rewrite a statute.”

_{*Rutkoske v. Commissioner - 149 T.C. No. 6 (August 7, 2017)}