SSeS, aN Re ne ae March/April 1996 Golf Course Conservatior Cue very nation e's golf course seems pal tothe underyide porpore of most and the potcton of tanpaled land roar devcoge Ze Upon rccign’ wowever, land test ater oor may find that jf certain situnilons coopgtation with ge Course oytirs, opera tore oF devoltpers could ta fact Mage their Boule ‘Through opéecrvation eascmonts, cpdeervation organ, Zattosay be able to preven} Ae subsvision @ Fp cl oi aes are operated in 98 ecologically Tried ma Additionally, by collaborating with /'ssitededev lopment schemes, conse / ‘sows may ot oni? obiin protectye casements over estable wacts af land, but they/an make sure that ‘courses 10 be’ developed ei areas are de Signed, constructed. and oppfated in a manner that ‘minimizeyharm to the sumpnding ecosystem. velopers in Rofl scenarios requiyé a donor, either an owner of an existing goll course,or the owner of a act of land slated to become one/There are a number of reasons g0ll course owners/ operators, and developers may fd such a partaerdhip beneficial, Donation of a con nn eh aS nee Vol. 6, Not Private Letter Ruling 9407005 Private Letter Routing 9407005 involved a rather rojects unique transsesor AL issue was a beachiront golf (presumably through foreclosure) by the “Trust Corporation (RTC). portions of which ‘@ discourage the development eloped coastal areas, the RTC was ffer the course (bereinalter “ihe Coastal iyetem course”) for sale for a limited time, at arket price, to "qualified organizations” as de fined in Internal Revenue Code (Code) section 17oUHY.) “X" conporation was just such an organization Specifically, X was a 301(6)3) tax-exempt organiza tion that sought to “provide guidance and education conceming environmeatal conservation issues and ae lvities” by means of several programs, including a “golf course programm,” In furtherance ofthis Program, which included amoug it goals enhancing’ wilde Inabitats on existing golf courses, X sought to purchase the RTC's golf course, sell itt a partnership, and TABLE OF CONTENTS. AnricLes Golf Course Conservation Projects 1 Appurtanant Propeny and’Common Law result in a large fax deduction. A developer may also (Donsereden Exmmmanta: . ‘ish to involvg/a land trast hs or hee developement | Tetteme tn ongér to smooth cut the entlements pro | ‘ess. Infacifa cera situations, a go course oper Fearunes | tor oe deyotfper may even need the savolvement of a | From the IR: Geting “Creat tem | ‘conservation organization ia ordetto acquire the prop. eects fall ny tool relauvely recent IRS peivar leer fing? | Mibgaton Banks... | soled sch ncn ort aes. ad use] a tates some ofthe possiblities for future "pol course Iv.c 12 [Gre conservation projets J Gestion & Anawere 18 ce tht Lo March/April 1996, xFrom the Bench Bea ouvert Commissioner ‘by Regina Wallon In. DuVal v. Commissioner, 68T.CM. 1375 (1994), the IRS sought to deny a eal estate dealer's charitable Contribution deduction of @ parcel of real estate 10 & county fora hbrary site. ‘The IRS claimed that the Sonation was made with the expectation of a benefit to the donoe on in the altermative. the charitable donation, ‘Seduction vas limited to the basis im the donated prop- “If the wansfer is impelled primarily by the antici pation of some economic beaefit or is io fact an ex- Shange in the form of a substantial quid pro quo. itis fot 2 coatibuuon.” Osborne s. Commissioner, 87 TC. S75, S81 (quoting Rusoff v. Commissioner, 65 TG. 459, 469 (1975), aif. 356 F 2d $59 Cd Cir 197). Thus, sf one makes a “gift” and expects some economic return or benefit, the IRS may disallow the charitable contribution deduction Further, under Intemal Revenue Code section 170(e\ 1A) a charitable contribution of property must be reduced by the "amount of gaim which would not have been long-terin capital gain if the property coa- {tibuted id been sold by the taxpayer at it far market Values." Trearury Regulation section L-170A-4(@)(1) requires that a real estate dealer's gain be treated as Ordinary income rather than loag-term capital gain, ‘These provisions essentially limita dealer's charitable contribution of property the basis of the property. 1s there a heavy presumption that real estate deal crs generally make donations of appreciated property ‘with some expectation of personal benefit? And even, the desler surmounts the" gift" harrer, will her cha table deduction always be lumited to basis? In DuVal Tax Court Judge Chiceli held that the DuVale wore Entided to a charitable contabution deduction and that {ie amount of the deduction was not limited by section YPC Facts ‘William and Gene DaVal, husband and wife, were engaged in the business of acquiring rai land and ‘eveloping it for residential use. The business e- ‘quired having the Land rezoned to be consistent with te Intended use, subdividing the land into building lots (inost of which would be sold to builders of single family homes), and roadway and sewer development work, Ia July 1985, the DuVals purchased approximately. 1429 acres, for $2,143,000 ("Deer Run Land”). The Tand was located adjacent to Route 360 in Chesterfield County, Virginia. It was originally zoned for agricul- tural use. Initially, the DuVals only wanted to por. chase the rear parcelt of land that were not located ddirecuy slong Rovie 360. However. the owner in- Formed them that they could only acquise the rear pareels by purchasing the entire property. The DuVals ‘Sid aot intend to use the front parcels in their develop- ‘ment business, They intended to hold the front pareels investment property for five years before selling them and carried those parcel oa their books as “Deer Rua Commercial” Before purchasing the Deer Run Land. DuVal ap- plied to have the land rezoned pursuant to their Cond- tional Ure Planned Development program. The rear Parcels were t0 be developed into residential lots and Beer Run Commercial was to be rezoned for various business ses to allow a future purchaser of that prop- ceny maximum Nexibility. ‘The lead zoning planner for the county was Roy Crawford, He was responsible for reviewing and mak- ing a recommendation to the planning committee re garding DuVal's request. Crawford was also respon. ble for making sure the request complied with the County"s development plan and zoning ordinance, ne- otiauing any improvements that the county wanted, Sind negotiating any donations of land or other property by developers for public purposes. Most of the contact, between the county and the Duals regarding the zon- ing request was through Crawford During 1985 and 1986 the county experienced a period of rapid growth that was stripping its resources For capital development, Because the county was eX ppanding very rapidly and the county's resources were limited, the county had a policy of soliciting land dona tons from developers whenever # proposed develop ‘ment was in the vicinity of planned eapital improve ment” During the course of discussions with Duval regarding the rezoning request, county officials im Formed him that the county's improvement plan pro posed a library site in the general area where Deer Run Land was located. DuVal was asked if he would be willing to donate a portion of the land as a site for the brary. DuVal discussed the proposal with his wife ‘and tiey decided to donate land for the library becatise the DaVals wished lo give something back to the com: ‘miunity where all of their por land developments Were March/April 1996ease the newsletter of land conservation law located and because Mr, DuVal was an advocate of education, [Neither Crawford aor any other county represen: tative suggested to DuVal that the sezoning request ‘would be denied if they did not donate the land for a library. “On June 26, 1985, the DuVals" rezoning re- ‘quest was approved with languageindicating the DuV als trould donate land to the county." According to the ‘Tax Court's fiadiags of fac, that language was written, into the request as a procedural matier and was aot Entended to impore a condition precedeat to the ap- Proval of the rezoning request. Duval and Delmonte Towis, the engineer for the Deer Run development ‘meta few umes with county representatives to discuss the exact size and location of the parcel that would be donated as the library site. On November 17, 1986, Duval donated four acres of Deer Rum Land located directly along Route 360. Case Holding “The Tax Court addressed two issues which tumed ‘on questions of fact. The first was whether there was 3 ‘Chantable contnbution and the second, if the taxpayer Drevated on the first, was whether the amount of the ‘eduction was limited to the basis of the property The Second issue was dependent om whether the and was held as “dealer” property: if so, IRC section 170(e)(1)(A) would reduce the value to basis Whether There W: Charitable Contribution As stated previously, a transfer does not qualify as a siftit itis primarily mouvated by the prospect of an economic benefit C'quid pro quo"). ‘The court ana- lyzed the DuVals” primary inteatia making the dona- om. ‘The court relied on Petit v. Commissioner. 64 TC, 634 (1974), In Peri, the court stated: probing of the subjective atitude of the donor and Inent roavon for‘maning tte Wanefer ofthe land Ia DuVal, Beverly Musselman, a principal plan- ning administrator with the county, testified generally. ‘Shout the policy im cifectin the couaty during 18S and 1986. She testified that when a county capital im- provement was planned ia an area near where a devel- Sper made a reroning request he county would diseuss With the developer the possiblity of his donating land for thote improvements, If the developer refused to, donate the land. the county would either approve the rezoning application with the condition that the land. Giscussed would be donated or deny the rezoning re quest. However, Musselman also testified that she did. ot know if that policy was followed in the Duval ‘Duval testified that no one from the county in formed of siggested that the rezoning request would bbe denied if land was aot donated, and Delmonte Lewis corroborated DuVal's testimony ® Inaddition, Crawford, teotfied that he was “ecstatic” to Learn that DuVal was [Boing to make the donation and testified that the rezon- {ng application would have been approved even if he and war not donated, Crawford also explained that the language in the approved rezoning request was merely procedural and war not 2 condition precedent {0 the county's approval ‘Based on the record, the court noted that the Duals had fo reason to believe, oF anticipate, thatthe rezon- ing sequest would be denied if they did not wansfer the property to the County. Further, the court noted tbat the DaVals had developed several projects similar in size lo Deer Run tn the county belore that ume and Were not required to dedicate land as a condition prece dent to approval of their rezoning requests, Conse- ‘Quently, the court held shat the DuVals were entitled 10 2 chantable contribution deduction under IRC sestion, 170(a) forthe 1986 donation, Whether the Deduction Was Limited to the Basis in the Contributed Property ‘The IRS did not dispute that the DuVals held the property for one year prior to their doaation. “There Fore, the land would be long-term auset. However the IRS maintained that IRC section 1221(1) defeated the DuVale" deduction because of their statis ae deal fer. Inits analysis the court selied on Graver v. Com. ‘missioner, 867 F 2d 199 (4th Csr. 1989). In Graves the Court stated factors used ta determine whether property js held for sale in the ordinary course of a wade oF ‘business. ‘Those factors are (1) die purpose for which, the property was acquired, (2) the purpose for which it twas beld, @) the extent of improvements made to the Property by the taxpayer, (2) the frequency. aunber ‘and continuity of sales of the propery. (5) the extent land substantiality of the disposition of the property. (6) the nature and extent ofthe taxpayer's business, (7) the extent of any advertising of the properts. and (8) the listing of the property for sale direely or dough a broker. 1d. at 202, ‘March/April 1996 3‘The Back Forty “The DuVals argued that Deer Run Commercial was different in character from the rear Deer Run parcels and that Deer Run Commercial was acquired find held by them for investment purposes. ‘They pur- Chased the entire Deer Run Land because they could uly acquire the sear parcels by purchasing the entire property. They distiaguished the front parcels from {he rear parcels on their books. The front parcels were rezoned only to facilitate their sale as investment prop Gry, ‘The DuVals did not have their engineer produce [plans for the front paresis. The DuVals never adver Used the front parcels for sale. Finally, the fromt par ‘cols were purchased by a commercial developer who Spproachied the DuVals and offered a price that they thought was far greater than the propert¥ was worth “The court concluded that the front parcels were rot held for sale in the ordinary course of business, ‘Although a taxpayer im the feal estate business may [acquice and bold real property for sale o customers in the otdinary course of that business, he or she may hold ‘ther real property as capital investment.” DuVal at SU (quoting Turner v. Commissioner. S10 F.2d 1249, 1252 (ith Cir. 1976), revg. TC. Memo. 1974-264). ‘The court held that IRC section 170€)((A) did not Apply in this case and that the DaVals were ented to ‘deduct the fair market value of the property subject (0 the percentage limitations of IRC sections 170(6)(1)(A) fand 170¢b)(1 XC}. Discussion ‘Despite the inescapably factual gature of the ease, Duval provides some useful guidance 33 to land doa: tions by those with a history of real estate acuvides. It appears that if a dealer merely holds property and Keeps i€distinet irom “regular” realestate sales activi- ties, the IRS mist recopnize the possiblity of a chari- fable donation of rach property and that suck 3 don tion may not be subject t the limits of IRC section THON ICA). Duval has provided @ paradigm for dealers desiring to hold property as a capital asset and, te donate such property st fair market value. “The Tax Court has not, however, opened the pro: verbial floodgates to allow dealers © donate apprect ited property. and be entitled to.a fair market value deduction. ‘The DuVals divided Deer Rua Land into two parts and continuously held the froat parcel a3 an, investment asset until its sale. They never considered. the front parcel for use in their development business fand never used the land as such. From the facts of Dual, it appears to be fairly clear that the land was held aya capital asset rather than in the ordinary course Of their business. And the facts, not reconstructed with faa eye to tax benefits, will dictate the results im the Ievitable parade of future eases on these issues Enonores ‘rhe language in the rezoning request regarding the Aonation stated: “In conjunction with the frst scho- matic) tentative plan subinission, the developer shall Submit an acceptable proposal for dedication of a Inininnua of four (8) actes for a ibrary site either om Sein the vicinity af Parcel F. Dedication shall be ‘Siablishod at the time of schematic plan review." 2'The court stated that it found DaVal’s and Lewis! testimony "totally credible.” Regina Walton is @ second-year student at Hastings College of the Lav Questions & Answers The questions below are based on actual problems faced by land trusts, Most originate from The Back Forty Research Service. Distinguishing facts have been changed to. preserve the anonymity of the organizations and individuals involved. “The Back Forty welcomes your questions. Please send your questions to Questions & Answers, The Back Forty. Hastings College of the Law. 200 Meaitister Street, San Francisco, California 94102. QQ Cases the stamtory law of our state certain “equi- table servitudes” may be acquired and held “in gross": He, without the necessity of am appurtenant ownership in foe Among those servitudes 1s “ihe right of con Serving open space to preserve park, recreational, his- forte, aesthetic, cultural and natural Values on or re- Iated to land.” 1k occurs to us, then, that a conservation-minded purchaser might sequire such a conservation servitude ‘ver a substantial property. pethaps at a dramatic bar~ {Baia price. For example, suppose a rancher with mod- Sstincome owns a ranch worth $6 million, and wishes fo reduce the potential estate tax attributable to Usat property. A conservation easement would result in a Aloe dinatautioa i value, but most of the benefits would be Lost on account of our landowner s modest income level ‘Suppose, instead, that a conservation buyer pur- chates a conservation servitude (virtually identical in Its terms to a conservation easement), and then, after Waiting the requisite one-year period to attain Tong~ tenn eapital asset stars, donates that servitude £0 our Tend trust? It would seem that the contribution meets all of the IRC §170{h) standards for deducublity. since {eis functionally identical o the typteal conservation ‘Casement and advances the same open-space protec: ‘March/Apail 1996The Back Forty Hastings College of the Law 200 MeAllister Street San Franeiseo, California 94102 (15) 565-4857 (415) 565-4818 (facsimile) About The Back Forty The Back Forty is dedicated to serving the land conservation community's need for accessible legal information, The Back Forty covers developments in ‘eal extate, land use, taxation, and exempt organization Tw that affect conservation and preservation efforts Publisher ‘The Hyperion Society, a conservation law center ‘operated in connection with the University of Califor- nia, Hastings College of the Law Editorial Staft William T. Huttoo, Eaitor-in-Chiet Brian E. Gray. Associate Editor ‘Stephanie Ziesel, Chief Student Editor Dana Maloch Landrum, Business Manager Mare Brainich, Student Editor James Chapman, Student Editor Katrina Decker, Senior Student Editor Grog Hendrickson, Student Editor Myreon Hodur, Student Editor Scott K. Johnson, Senior Stud: Abert Liu, Student Editor Mario Prats, Student Editor Matthew Ruyak, Senior Stadent Faitor Esitor Contributing Editors Terri Amold Ron Chimpous ‘Tara L. Meller Bret C. Birdsong ‘Todd D. Mayo John Wadsworth Advisory Committ Lisle Baker ‘Thomas Barrett Darby: Bradley Kingsbury Browne ‘Thomas Coughlia Andrew Dana Susan French Feanie Gerard William Ginsberg Jean Hocker Sohn A. Hombach Robert Knight Jerry J. MeCoy sane Probaska ‘Thomas Schmidt Waller Slocombe Edward Thompson Subscription Information ‘The Back Forty ia published bimonthly. A. one year subscription is SL10 and a two-year subseripuon ig $195, To subseribe or (o receive more information. please call, fax, or write. [7 You fail to receive an issue or have any other problems conceraiag your subserip- ton, please contact us immediately. ISSN 1019-3972 Back Prior issues of The Back Forty are available at $25 per copy. Legal Research Service “The legal research service is available to subserib- ers of The Back Forty. A subscriber may fax, phone, oF ‘mail a question involving any legal issue pertinent to a land trust or a proposed transaction to The Back Forty offices, If we are able to provide guidance without esearch, the cost ofthis service is S35. If the request involves substantial research time, we will discuss ith the inquiring subscnber the probable time involved. with an estimate of our research fe. Seminars, The Back Forty penodically sponsors seminars 10 educate individuals on particular aspects of land com- servation law. Also, The Back Forty conducts and assists in conducting seminars on behalf of other orga nizations. For more information, please contact us. ‘Comments and Questions ‘The Back Forty welcomes all comments and ques- tions, Your input is invaluable in aur effort to best serve your needs for information on land conservation, Ia Notice ‘This publication is designed to provide accurate and reliable information i reyard to the subject matter covered. [tis sold upon the understanding that the fauthors, editors, and publisher are not eagaged in ren- ering iegal advice or services, If legal services or other expert assistance is required, the reader should, seck the assistance of a competent professional Copyright Copyright © 1996 by The lIsperion Society. All rights reserved, For information on reprints, please contact The Back Fort Printed on recycled paper. we ‘March/Apail 1906