                            149 T.C. No. 6



                  UNITED STATES TAX COURT



         MARK A. RUTKOSKE, SR., Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent

FELIX RUTKOSKE, JR. AND KAREN E. RUTKOSKE, Petitioners v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 16300-14, 16301-14.              Filed August 7, 2017.



       In 2009 a limited liability company (LLC) in which Ps were
members owned 355 acres of land (property) that it leased to others
who used it as farmland. In 2009 LLC conveyed a conservation
easement restricting the development rights on the property to E, a
public charity, in exchange for $1,504,960. Ps reported the bargain
element of the transaction (allegedly $1,335,040) as a noncash
charitable contribution. Following the conveyance of the
development rights, the LLC sold its interest in the property to Q, an
unrelated party, for $1,995,040.

       On their respective income tax returns, Ps classified themselves
as “qualified farmers” within the purview of I.R.C. sec. 170(b)(1)(E).
A qualified farmer, defined as a taxpayer whose gross income from
the trade or business of farming (as defined by I.R.C. sec.
2032A(e)(5)) is greater than 50% of his/her total gross income for the
                                  -2-

year, may deduct the value of a qualified conservation contribution of
up to 100% of his/her contribution base for the year of contribution.
I.R.C. sec. 2032A(e)(5) sets forth specific activities that constitute the
trade or business of farming. Ps maintain that the proceeds from the
sale of the property, as well as the proceeds from the sale of
development rights attached thereto, while not specifically listed in
I.R.C. sec. 2032A(e)(5), constitute income from the trade or business
of farming.

       Held: Pursuant to sec. 1.703-1(a)(2)(iv), Income Tax Regs., Ps
are treated as having directly conveyed the conservation easement to
E.

       Held, further, Ps are not “qualified farmers” within the purview
of I.R.C. sec. 170(b)(1)(E). Neither the sale of the property nor the
sale of development rights attached thereto constitutes an activity that
is included in the trade or business of farming as defined by I.R.C.
sec. 2032A(e)(5).

       Held, further, Ps are limited by I.R.C. sec. 170(b)(1)(E)(i) to a
charitable contribution deduction of 50% of their respective
contribution bases with respect to the conveyed conservation
easement.



Jay S. Block, for petitioners.

David A. Indek and Nancy M. Gilmore, for respondent.
                                        -3-

                                     OPINION


      JACOBS, Judge: These consolidated cases are before the Court on the

parties’ cross-motions for partial summary judgment. The issue raised in each

party’s motion is whether petitioners Mark and Felix Rutkoske were “qualified

farmers” at the time they, through Browning Creek, LLC (Browning Creek), a

limited liability company of which they were the only members, conveyed a

conservation easement restricting the development rights on 355 acres to a public

charity for a bargain price. That conveyance gave rise to the allowance of a

charitable contribution deduction under section 170(b)(1)(E).1 Mark and Felix

Rutkoske maintain they are qualified farmers; respondent asserts they are not. 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


      1
      As will be seen infra pp. 11-12, pursuant to sec. 1.703-1(a)(2)(iv), Income
Tax Regs., petitioners are treated as having directly made the contribution of the
conservation easement.
                                         -4-

contribution bases, less the amount of all other charitable contributions allowable

under paragraph (1) of subsection (b) in the year of contribution.

      Unless otherwise indicated, all section references are to the Internal

Revenue Code (Code), as amended, for the relevant years, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

                                    Background

      At the time they filed their respective petitions, petitioners resided in

Delaware. Petitioner in docket No. 16300-14 is Mark A. Rutkoske, Sr. Petitioners

in docket No. 16301-14 are Felix Rutkoske, Jr., and Karen E. Rutkoske, husband

and wife. Mark Rutkoske and Felix Rutkoske are brothers. Karen Rutkoske is a

party by virtue of having filed a joint income tax return with her husband.

      In 2009 Mark and Felix Rutkoske were in the business of farming. Through

numerous entities they owned seven parcels of land in Maryland and Delaware,

totaling 1,455 acres in 2009. One such parcel of land, as is relevant in this matter,

was 355 acres of land (property) known as Browning Creek Farm in Earleville,

Maryland. The property was owned by Browning Creek, and each Rutkoske

brother was a 50% member of Browning Creek. For Federal income tax purposes,
                                       -5-

Browning Creek was treated as a partnership.2 Browning Creek was in the

business of leasing land. Browning Creek leased the property to Rutkoske Farms,

a Delaware general partnership through which the Rutkoske brothers farmed the

property and the six other parcels of land.3 During 2009 the brothers each



      2
        Partnerships, in general, are subject to the unified audit and litigation
procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. No. 97-248, sec. 1(a), 96 Stat. at 324. Sec. 6226(f) provides that in a
TEFRA proceeding we have jurisdiction to determine all partnership items of the
partnership for the partnership tax year to which a notice of final partnership
administrative adjustment relates, including the proper allocation of such items
among the partners, penalties, additions to tax, or other amounts which relate to a
partnership item adjustment. However, sec. 6231(a)(1)(B)(i) provides that an
entity will not be treated as a “partnership” for purposes of the TEFRA procedures
if the entity has “10 or fewer partners each of whom is an individual (other than a
nonresident alien), a C corporation, or an estate of a deceased partner.” Browning
Creek’s two members are individuals; consequently, it falls within the sec.
6231(a)(1)(B)(i) exception and the TEFRA procedures are inapplicable.
      3
        The Rutkoske brothers employed a complex structure to own and operate
their farming business. The property owned by Browning Creek was leased to and
operated by Rutkoske Farms. The partners of Rutkoske Farms were Felix
Rutkoske (holding a 20% interest), Mark Rutkoske (holding a 20% interest),
Superior Ag, Inc. (a corporation holding a 20% interest), Sassafras Ag, Inc. (a
corporation holding a 20% interest), and Russet Ag, Inc. (a corporation holding a
20% interest). The stockholders of Superior Ag, Inc., were Felix and Mark
Rutkoske, each holding 50% of the outstanding stock. The stockholders of
Sassafras Ag, Inc., were Felix Rutkoske and Mark Bice, each holding 50% of the
outstanding stock. The shareholders of Russet Ag, Inc., were Mark Rutkoske and
Mark Bice, each holding 50% of the outstanding stock. Another business,
Rutkoske Brothers, Inc. (an S corporation owned by the Rutkoske brothers, each
of whom held 50% of the corporation’s outstanding stock), owned the machinery
and equipment used in working the farms.
                                        -6-

rendered at least 2,500 hours of physical labor and management services in

growing and harvesting corn, barley, wheat, and soybeans on all of their

properties. They borrowed money when necessary and joined the U.S. Department

of Agriculture’s Farm Service Agency subsidy programs. In fall 2008, the

brothers, through Rutkoske Farms, planted wheat on the property and reserved to

themselves its harvesting and the proceeds derived from the sale thereof.

      On June 5, 2009, Browning Creek conveyed a conservation easement to

Eastern Shore Land Conservancy, Inc.,4 restricting the development rights

attached to the property in exchange for $1,504,960. In connection with the

granting of the easement, Browning Creek obtained an appraisal which set forth

the fair market value of the unencumbered property as of June 5, 2009, as

$4,970,000 and the fair market value of the property after the granting of the

conservation easement as $2,130,000. After conveying the conservation

easement, later on June 5, 2009, Browning Creek sold its interest in the property to

Quiet Acre Farm, Inc. (Quiet Acre), for $1,995,040.5


      4
       Eastern Shore Land Conservancy, Inc., is a sec. 501(c)(3) public charity.
See IRS EO Select Check, https://www.irs.gov/charities-non-profits/exempt-
organizations-select-check (last visited Jul. 26, 2017).
      5
       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,
                                                                        (continued...)
                                          -7-

      Browning Creek reported that its total basis in the property was $1,745,885.

Browning Creek allocated $240,828 of this amount to the conservation easement

and $1,505,057 to its remaining interest in the property. Browning Creek reported

a capital gain of $1,754,115 from the sale of the property: $1,264,132 from the

sale of the conservation easement, and $489,983 from the sale of its remaining

property interest. Browning Creek also reported a noncash charitable contribution

for the conservation easement of $1,335,040--the difference between the purported

value of the property before the conveyance of the conservation easement, i.e.,

$4,970,000, and the purported value of the property after the conveyance of the

easement, i.e., $2,130,000, minus the $1,504,960 Browning Creek received from

the sale of the conservation easement.6

      Petitioners each filed their 2009 Forms 1040, U.S. Individual Income Tax

Return, late. As 50% partners of Browning Creek, the Rutkoske brothers each

claimed, as a passthrough item, noncash charitable contribution deductions of

$667,520 on Schedules A, Itemized Deductions. The Rutkoske brothers reported

the gain from the sale of Browning Creek’s interest in the property to Quiet Acre


      5
      (...continued)
growing and harvesting wheat, soybeans, corn, and barley.
      6
       Respondent disputes the amount claimed as the noncash charitable
contribution deduction for the conservation easement.
                                        -8-

on Schedules D, Capital Gains and Losses, of their respective income tax returns

as long-term capital gain passed through from Browning Creek, with Mark

Rutkoske reporting $877,057 and Felix and Karen Rutkoske reporting $877,058.7

      For 2009 Mark Rutkoske reported wage income of $16,800, interest income

of $453, and a loss from partnerships and S corporations of $177,524. For 2009

Felix and Karen Rutkoske reported wage income of $28,745, interest income of

$586, and a loss from partnerships and S corporations of $177,526.

                                    Discussion

      Summary judgment is appropriate if the pleadings and other materials show

that there is no genuine dispute as to any material fact and that a decision may be

rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98

T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). The moving party bears

the burden of showing that there is no genuine dispute of material fact, and the

Court views all factual materials and inferences in the light most favorable to the

nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). Rule

121(d) provides that where the moving party properly makes and supports a

motion for summary judgment “an adverse party may not rest upon the mere


      7
       The difference between the amounts reported by the brothers most likely is
due to rounding.
                                          -9-

allegations or denials of such party’s pleading” but rather must set forth specific

facts, by affidavits or otherwise, “showing that there is a genuine dispute for trial.”

The parties agree that there are no facts in dispute as to the “qualified farmer”

issue.

         Subparagraph (E) of section 170(b)(1)8 governs the deductibility of a

“qualified conservation contribution” by an individual.9 Section 170(b)(1)(E)(i)

generally limits the deduction from such a donation10 to 50% of the donor’s

“contribution base”, defined by section 170(b)(1)(G) as the taxpayer’s adjusted



         8
        When this section was first enacted, sec. 170(b)(1)(E)(vi) provided that
“[t]his subparagraph shall not apply to any contribution made in taxable years
beginning after December 31, 2007.” Pension Protection Act of 2006, Pub. L. No.
109-280, sec. 1206(a)(1), 120 Stat. at 1069. The sunset provision was extended in
subsequent years, and in 2015 the Consolidated Appropriations Act, 2016, Pub. L.
No. 114-113, div. Q, sec. 111(a)(1), 129 Stat. at 3046 (2015), repealed this sunset
provision.
         9
        Sec. 170(a) is the general rule governing charitable contributions. It
provides that an individual is allowed a deduction for any charitable contribution
(as defined in sec. 170(c)) payment of which is made within the taxable year. Sec.
170(b)(1)(A) generally limits the amount of the deduction to 50% of the
individual’s contribution base. Donating taxpayers, in general, may carry forward
a suspended donation to each of the five succeeding taxable years, subject to the
50% contribution base limitation. Sec. 170(d)(1).
         10
        Sec. 170(h)(1) defines qualified conservation contribution as a
contribution of a qualified real property interest to a qualified organization
exclusively for conservation purposes. Respondent does not dispute that the
conservation easement in this case is a qualified conservation contribution.
                                         - 10 -

gross income (computed without regard to any net operating loss carryback for the

taxable year) less the value of his/her other charitable contributions for the year.

        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.

        Section 2032A(e)(5) sets forth activities, the revenues of which constitute

income from the trade or business of farming:

              (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; and
                                         - 11 -

             (C) (i) the planting, cultivating, caring for, or cutting of trees,
             or

                 (ii) the preparation (other than milling) of trees for market.[11]

      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 sec.

170(b)(1)(E)(v). The parties disagree as to the numerator amount. They agree as

to the denominator amount.

      We are mindful that although Browning Creek owned the property, it is the

Rutkoske brothers who are treated as having contributed the conservation

easement to Eastern Shore Land Conservancy, Inc. Browning Creek is treated as a

partnership for Federal tax purposes and, as such, is not subject to the income tax

imposed by chapter 1. See sec. 701. Thus, pursuant to section 703(a), while the

taxable income of a partnership is generally computed in the same manner as in

the case of an individual, the deduction for charitable contributions provided in

section 170 is not allowed to the partnership. Specifically, section 1.703-

      11
        Sec. 2032A is a special rule regarding the valuation of certain farm and
real property for purposes of the estate tax. Specifically, pursuant to sec.
2032A(a) the property is valued according to the use under which it qualifies as
qualified real property.
                                        - 12 -

1(a)(2)(iv), Income Tax Regs., provides that “[e]ach partner is considered as

having paid within his taxable year his distributive share of any contribution or

gift, payment of which was actually made by the partnership within its taxable

year ending within or with the partner’s taxable year. This item shall be accounted

for separately by the partners as provided in section 702(a)(4).” Section 702(a)(4)

provides that in determining his/her income tax, each partner shall take into

account separately his/her distributive share of the partnership’s charitable

contributions. Thus, in resolving the problem at hand, we ignore Browning Creek

and look at each Rutkoske brother to determine whether he is a qualified farmer.

      Respondent’s assertion with regard to each Rutkoske brother’s numerator

amount is straightforward: Section 2032A(e)(5) sets forth a list of specific

activities, the revenues derived from which constitute farming income. Sale of

land and the sale of the rights to develop land (i.e., the conservation easement

bargain sale) are not activities listed in section 2032A(e)(5); therefore proceeds

from the sale of land and the sale of the rights to develop land do not constitute

income from the trade or business of farming for purposes of section

170(b)(1)(E)(v). Moreover, we are mindful that under respondent’s

interpretation, Felix Rutkoske’s capital gain income of $877,057 arising from the

sale of the property alone is greater than 50% of his gross income for 2009.
                                         - 13 -

Likewise, Mark and Karen Rutkoske’s capital gain income of $877,058 arising

from the sale of the property alone is greater than 50% of their gross income for

2009.

        Petitioners have a different position. They assert that the income derived

from the sale of the conservation easement as well as from the sale of the property

constitutes income derived from the trade or business of farming. Petitioners point

out that section 170(b)(1)(E)(v) provides: “[T]he term ‘qualified farmer or

rancher’ means a taxpayer whose gross income from the trade or business of

farming (within the meaning of section 2032A(e)(5)) is greater than 50 percent of

the taxpayer’s gross income for the taxable year.” Petitioners maintain that the

business of farming requires monetary capital and investment in tangible physical

capital, including land, buildings and structures, and machinery and equipment.

Hence they posit:

        proceeds from a sale of an asset used in the business of farming
        constitute income from the business of farming. Accordingly, the
        proceeds of sale of a tractor used in the business of farming would be
        characterized as income from the business of farming. Proceeds from
        a sale of real estate used in the business of farming likewise generates
        income from the business of farming.

Petitioners argue 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
                                       - 14 -

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.” Thus petitioners assert that

proceeds from the sale of real estate used in the business of farming generates

income from the trade of business of farming.

      Petitioners state:

      The phases of a life cycle in the business of farming are similar to the
      life cycle phases of other businesses; there exists a start period, a
      maturation or growth period, a transitional wind up period, and a
      termination/cessation. Continuation of business activity during the
      wind up period includes communications and correspondence with
      suppliers and customers; adjusting, altering, and prorating periodic
      monetary arrangements such as periodic business insurance
      arrangements; management of and disposition of seed inventory;
      management of and disposition of packing supplies inventory;
      management of and disposition of fuel inventory; continued
      compliance with tax filing and tax payment responsibilities; payment
      of bills and payment on outstanding debts. As illustrated in the below
      examples, proceeds from disposition of a business asset constitute
      business income, regardless whether such sale occurs during the
      maturation and growth phase of the business life cycle or whether
      such disposition occurs during the transitional wind up phase.

      If a farmer receives non-refundable money from a developer in
      exchange for the farmer granting the developer an option to buy the
      farmer’s farmland exercisable for a six month period, and if at the end
      of the six months the developer fails to exercise the option, the
      income to the farmer on non exercise of the option should be
      characterized as income generated in the business of farming.
                                        - 15 -

      When Utility Company A seeks to acquire Utility Company B, and
      Utility Company A subsequently walks away from the potential
      acquisition and pays Utility Company B an acquisition cancellation
      fee, then Utility Company B’s income from such transaction should
      be considered as income from the utility business.

      If a farmer rents from a landlord under a long term lease, and the
      landlord seeks to break the lease in order to sell the land to a
      shopping center developer, the lease cancellation fee paid by the
      landlord to the farmer should be characterized as income from the
      business of farming.

      Publicly traded business have disclosed in separate sections of their
      Profit & Loss Statements, income from discontinued operations.
      Such income from discontinued operations is still characterized as
      income from that company’s business, despite that such income is
      realized during the wind down period.

      In resolving the parties’ cross-motions, we look to the wording of the statute

to construe its meaning. See Consumer Prod. Safety Comm’n v. GTE Sylvania,

Inc., 447 U.S. 102, 108 (1980); Frontier Chevrolet Co. v. Commissioner, 116 T.C.

289, 293 (2001), aff’d, 329 F.3d 1131 (9th Cir. 2003). When a statute is clear on

its face, we require unequivocal evidence of legislative purpose before

interpreting the statute to override the plain meaning of the words used therein.

Frontier Chevrolet Co. v. Commissioner, 116 T.C. at 293.

      Section 170(b)(1)(E)(v) is written in straightforward terms: A qualified

farmer or rancher is a individual whose gross income from the trade or business of

farming, which is defined as the activities listed in section 2032A(e)(5), is greater
                                        - 16 -

than 50% of his/her gross income for the year. Neither the disposal of property

nor the disposal of the development rights attached thereto is an activity listed in

section 2032A(e)(5).

      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.

      We do not agree with petitioners’ assertion that the disposal of property

(and the development rights attached thereto) constitutes cultivating the soil,

raising agricultural or horticultural commodities, the handling of such

commodities, or tree farming. To cultivate means “[t]o prepare and improve
                                        - 17 -

(land), as by fertilizing or plowing, for raising crops”. Webster’s II New Riverside

University Dictionary 335 (1988); to “raise” in the context of agriculture means

“[t]o grow or breed”; id. at 972; and to “harvest” means “[t]he act or process of

gathering a crop”; id. at 566. For the contribution of the conservation easement to

qualify for the special rule of section 170(b)(1)(E)(iv), we look to the income

derived from the sale of the agricultural and/or horticultural products created when

engaging in these activities, not from the sale of the land on which the agricultural

and/or horticultural products are grown.

      We acknowledge that the Rutkoske brothers are farmers and that they

continued in the agricultural business after the property was sold. We further

acknowledge that they used most of the proceeds derived from the sale of the

property in their continuing farming operations; but being a farmer does not make

one a “qualified farmer” for purposes of section 170(b)(1)(E)(iv)(I). The statute is

unambiguous: A qualified farmer or rancher is defined as a taxpayer whose gross

income from the trade or business of farming is greater than 50% of his/her gross

income for the year. The statute speaks to income, not spending.

      In any case, even if we were to agree with petitioners with respect to their

interpretation of section 170(b)(1)(E), they still would not prevail. Although

petitioners are treated as having directly contributed the property, section 702(b)
                                        - 18 -

provides that “[t]he character of any item of income, gain, loss, deduction, or

credit included in a partner’s distributive share under paragraphs (1) through (7) of

subsection (a) [of sec. 702] shall be determined as if such item were realized

directly from the source from which realized by the partnership, or incurred in the

same manner as incurred by the partnership.” Browning Creek was not in the

business of farming; it was in the business of leasing real estate. Thus, for Federal

income tax purposes, the characterization of income from the sale of the property

by Browning Creek (i.e., income from the sale of a real estate asset) flows through

to the Rutkoske brothers, and in their hands the sale proceeds do not constitute

income from the trade or business of farming.

      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.

      To conclude, we will grant respondent’s motion for partial summary

judgment, filed September 2, 2016, and deny petitioners’ motion for partial

summary judgment, filed September 2, 2016. Because respondent disputes

petitioners’ valuation for the conservation easement, a trial with respect to the

valuation likely will be necessary.
                            - 19 -

To reflect the foregoing,


                                     An appropriate order will be issued.
