Gibbs v. United States

Opinions of the United

1998 Decisions States Court of Appeals

for the Third Circuit

12-1-1998

Gibbs v. United States

Precedential or Non-Precedential:

Docket 97-5815,98-5099

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Filed December 1, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 97-5815 and 98-5099

ESTATE OF JAMES C. GIBBS, SR.;

JAMES C. GIBBS, JR., EXECUTOR,

Appellants in No. 98-5099

v.

UNITED STATES OF AMERICA,

Appellant in No. 97-5815

On Appeal from the United States District Court

for the District of New Jersey

(D.C. No. 96-cv-00685)

Argued October 6, 1998

BEFORE: SLOVITER and COWEN, Circuit Judges and

POLLAK,* District Judge

(Filed December 1, 1998)

Gilbert S. Rothenberg, Esq.

Thomas J. Sawyer, Esq. (Argued)

Annette M. Wietecha, Esq.

U.S. Department of Justice

Tax Division

P.O. Box 502

Washington, DC 20044

Counsel for Appellant/Cross-

Appellee

_________________________________________________________________

*Honorable Louis H. Pollak, U.S. District Judge for the Eastern District

of Pennsylvania, sitting by designation.

Brian M.P. Monahan, Esq.

Lauer & Monahan

704 Washington Street

Easton, PA 18042

Joseph C. Hollywood, Esq. (Argued)

732 Washington Street

Easton, PA 18042

Counsel for Appellees/

Cross-Appellants Estate of

James C. Gibbs, Sr. and

James C. Gibbs, Jr., Executor

Joseph L. Yannotti, Esq.

Office of the Attorney General of

New Jersey

Richard J. Hughes Justice Complex

Trenton, NJ 08625

Counsel for Amicus Curiae-

Appellees/Cross-Appellants

Estate of James C. Gibbs, Sr. and

James C. Gibbs, Jr., Executor

OPINION OF THE COURT

COWEN, Circuit Judge.

James C. Gibbs, Jr. ("taxpayer"), executor of the estate of

James C. Gibbs, Sr., initiated this action in the District

Court for the District of New Jersey against the United

States for a refund of estate taxes paid under the recapture

tax provision of S 2032A of the Internal Revenue Code. The

lawsuit turns on the resolution of a question offirst

impression: did taxpayer dispose "of any interest" in his

family farm by granting the State of New Jersey a

development easement in that farm in exchange for $1.4

million? The district court, relying on New Jersey state law,

answered in the negative and granted summary judgment

to taxpayer.

Contrary to the district court, we conclude that, under

applicable federal law, the grant of a development easement

2

was a disposition of an interest in the farmland.

Accordingly, we will reverse.

I.

James C. Gibbs, Sr. owned and operated a dairy farm at

the time of his death on November 7, 1984. At that time,

the property had a fair market value of $988,000 based on

its highest and best use. Its highest and best use, however,

was not as a dairy farm, but for development. If the

property could only be used for farming purposes, its value

was $349,770.

Taxpayer was the executor of his father's estate and its

sole heir. On July 24, 1985, he filed an estate tax return on

behalf of the estate. In that return, pursuant to S 2032A of

the Internal Revenue Code, taxpayer elected to value the

real property component of the farm based on its special

use as farmland instead of its highest and best use for

development. This election resulted in tax savings of

$218,328. In making this election, taxpayer, as required

under the statute, agreed to be personally liable for any

additional estate tax due (the "recapture tax") if he disposed

of any interest in the property within ten years of his

father's death.

On December 21, 1993, taxpayer and the State of New

Jersey executed a "Deed of Easement" pursuant to which

New Jersey received a development easement in the

farmland and taxpayer received $1,433,493.72.1 New Jersey

purchased this development easement pursuant to the

"Agriculture Retention and Development Act," N.J. Stat.

Ann. SS 4:1C-11 to 48 ("Agriculture Retention Act"), which

was enacted, among other reasons, to strengthen New

_________________________________________________________________

1. Although not expressly articulated in the New Jersey statute,

development easements are closely akin to the more commonly

referenced "conservation easements," which one commentator has

described as "interests in land that represent the right to prevent the

development or improvement of the land for any purpose other than

conservation." Vivian Quinn, Preserving Farmland with Conservation

Easements: Public Benefit or Burden?, 1992/1993 Ann. Surv. Am. L.

235, 238 (1994); see also Uniform Conservation Easement Act S1(1), 12

U.L.A. 170 (1996) (defining conservation easement).

3

Jersey's agricultural industry and to preserve farmland in

the State. See N.J. Stat. Ann. S 4:1C-12 (setting forth

legislative findings). In conjunction with related legislation,

the Agriculture Retention Act created a state agriculture

committee to oversee New Jersey's conservation efforts, and

county agricultural boards to carry them out. See N.J. Stat.

Ann. SS 4:1C-4, 4:1C-14. The committee and boards are

authorized to "acquire development easements, [and] to

purchase fee simple absolute title to farmland for resale

with agricultural deed restrictions for farmland preservation

purposes." N.J. Stat. Ann. S 4:1C-8; see also N.J. Stat. Ann.

S 4:1C-31.

The Deed of Easement specifies that the "Grantor" of the

easement is James C. Gibbs, Jr., both in his individual

capacity and as executor of the estate, along with his

daughter, Diane Gibbs; the Warren County Board of

Chosen Freeholders -- acting as an arm of the State of New

Jersey -- is designated as the "Grantee."2 The operative

language of the Deed of Easement is as follows: "The

Grantor, Grantor's heirs . . . successors and assigns grants

and conveys to the Grantee a development easement" on

the farmland. It also provides that "[a]ny development of the

Premises for nonagricultural use is expressly prohibited,"

and that such restrictions "shall be construed as a

restriction running with the land and shall be binding upon

any person to whom title to the Premises is transferred." In

the following provision, the Deed of Easement makes clear

that the development rights in the property are transferred

to New Jersey:

Grantor ... further transfer[s] and conveys to Grantee

all of the nonagricultural development rights and

development credits appurtenant to the lands and

Premises described herein. Nothing contained herein

shall preclude the conveyance or retention of said

rights by the Grantee as may be permitted by the laws

of the State of New Jersey in the future.

_________________________________________________________________

2. For the sake of clarity, we will hereafter refer to the State of New

Jersey as the recipient of the Deed of Easement, rather than the Warren

County Board of Chosen Freeholders.

4

Taxpayer and the Internal Revenue Service ("IRS")

disagreed as to whether this conveyance was a disposition

of an interest in the property for purposes of triggering the

S 2032A recapture tax. Taxpayer paid the $159,823

recapture tax and filed a claim for refund with the IRS.

After the IRS denied taxpayer's claim, he filed the present

suit in the district court seeking a refund of the entire

recapture tax.

Following the parties' cross-motions for summary

judgment, the district court held for taxpayer. At issue, the

court recognized, was whether the sale by taxpayer of the

development easement was a disposition of an interest in

property that triggered the recapture tax. In resolving this

question, the district court first observed that under the

applicable New Jersey statute, a development easement is

considered an "equitable servitude" and not a true

easement. The district court then looked to the New Jersey

law of equitable servitudes and determined that New Jersey

follows the minority rule that treats equitable servitudes as

creating contract rights, not property rights. Based on this,

the district court ruled that taxpayer did not part with a

real property interest in granting the development easement

to the state. Accordingly, the court held that the sale of the

development easement was not a "dispos[ition] of any

interest" in the farmland under S 2032A, the tax recapture

provision was not triggered, and taxpayer was owed a

refund of $159,823 plus statutory interest. In a subsequent

decision, the court denied taxpayer's motion for attorneys'

fees under 26 U.S.C. S 7430 on the ground that the

government's litigation position, while incorrect, was

substantially justified given that the case was one of first

impression and involved complex issues of statutory

interpretation.

The United States appeals from the order of the district

court to award taxpayer a refund of the recapture tax, and

taxpayer cross-appeals from the denial of attorneys' fees.

The district court had jurisdiction pursuant to 26 U.S.C.

S 7422 and 28 U.S.C. S 1346(a)(1). We have jurisdiction

pursuant to 28 U.S.C. S 1291. We exercise plenary review

5

over the district court's grant of summary judgment. Reitz

v. County of Bucks, 125 F.3d 139, 143 (3d Cir. 1997).3

II.

As a general matter, in calculating estate taxes, the value

of real property included in the gross estate of a decedent

is its fair market value. See 26 U.S.C. S 2031; 26 C.F.R.

20.2031-1(b). Section 2032A of the Internal Revenue Code

is an exception to that general rule; it allows for certain

family farms and other closely held businesses to be

valued, for estate tax purposes, "according to its actual use

(e.g., as a farm), rather than at its fair market value based

on its highest and best use (e.g., as a housing development

or a shopping mall)." Estate of Lucas v. United States, 97

F.3d 1401, 1404 (11th Cir. 1996). The statute was intended

to grant relief to the heirs of family farms who might

otherwise find that valuation of inherited farmland at its

fair market value would result in such large estate taxes

that they would be required to sell the farm in order to pay

the tax. See H.R. Rep. No. 94-1380, at 21-22 (1976),

reprinted in 1976 U.S.C.C.A.N. 3356, 3375-76; see also

Williamson v. Commissioner, 974 F.2d 1525, 1527 (9th Cir.

1992); Estate of Sherrod v. Commissioner, 774 F.2d 1057,

1061-62 (11th Cir. 1985). By allowing this "special use"

valuation, S 2032A is designed to encourage the

continuation of family farms and other closely-held

businesses.

An estate must satisfy many conditions to obtain the

benefits of S 2032A. See Estate of Lucas, 97 F.3d at 1404-

05 (reviewing conditions). Only the recapture tax

requirements of S 2032A(c)(1) are at issue here. That section

provides:

If, within 10 years after the decedent's death and

before the death of a qualified heir --

(A) the qualified heir disposes of any interest in

qualified real property (other than by a disposition to a

member of his family), or

_________________________________________________________________

3. The Attorney General of the State of New Jersey has submitted an

amicus curiae brief in support of the district court's decision.

6

(B) the qualified heir ceases to use for the qualified use

the qualified real property which was acquired (or

passed) from the decedent,

then, there is hereby imposed an additional estate tax.

Under this provision, a recapture tax must be paid if the

qualified heir disposes of any interest in the property or

fails to use the property for a qualified purpose within ten

years from the decedent's date of death. As noted above,

the district court held that the taxpayer did not owe the

recapture tax under subsection (1)(A) of S 2032A because

taxpayer's grant of a development easement to the State of

New Jersey was not a "dispos[ition] of any interest" in his

farmland.

The United States contends that the district court erred

in holding that taxpayer did not owe the recapture tax

because, under New Jersey law, a development easement

purportedly gives rise to contract rights as opposed to

property rights. The government argues that once the

district court determined that the development easement

created rights that were recognized under state law, it

should have turned to federal law to determine whether the

transfer of those rights was a "dispos[ition] of any interest"

that triggered the recapture tax. According to the United

States, whether the interest created by the Deed of

Easement was labeled a "contract right" or a"real property

interest" under New Jersey law is irrelevant. 4

_________________________________________________________________

4. The United States argues in the alternative that the district court

erred in its interpretation of New Jersey law. According to the

government, under New Jersey law, a development easement is regarded

as a true easement, giving rise to an interest in land, not as an

equitable

servitude giving rise to contract rights. It cites two principal

authorities

in support of this position. First, the New Jersey statute which created

the development easement granted by taxpayer specifically provides that

a " `[d]evelopment easement means an interest in land, less than fee

simple absolute title thereto." N.J. Stat. AnnS 4:1C-13(f). Second, in a

decision involving a property tax dispute over the value of land subject

to a conservation easement, the New Jersey Supreme Court stated that

"[c]onservation easements of the kind here considered are easements in

gross." Village of Ridgewood v. Bolger Foundation, 517 A.2d 135, 137

(N.J. 1986).

7

We agree with the government that the district court

erred in predicating its decision on the manner in which

development easements are classified under New Jersey

law. It has long been recognized that the Internal Revenue

Code creates "no property rights but merely attaches

consequences, federally defined, to rights created under

law." United States v. National Bank of Commerce, 472 U.S.

713, 722 (1985) (quoting United States v. Bess, 357 U.S.

51, 55 (1958)). In applying a federal revenue act, therefore,

"state law controls in determining the nature of the legal

interest which the taxpayer had in the property." National

Bank of Commerce, 472 U.S. at 722. However,"the state-

law consequences of that definition are of no concern to the

operation of the federal tax law." Id. at 723; see also Morgan

v. Commissioner, 309 U.S. 78, 81 (1940) ("[i]f it is found in

a given case that an interest or right created by local law

was the object intended to be taxed, the federal law must

prevail no matter what name is given to the interest or right

by state law"); 21 West Lancaster Corp. v. Main Line

Restaurant, Inc., 790 F.2d 354, 356 (3d Cir. 1986) ("[w]hile

state law creates legal interests and defines their incidents,

the ultimate question whether an interest thus created and

defined falls within a category stated by a Federal statute

requires an interpretation of that statute, which is a

Federal question") (internal quotation omitted).

The point is demonstrated by National Bank of

Commerce, where the issue was whether the IRS had the

right to levy on a jointly-held Arkansas bank account for

delinquent federal taxes owed by only one of the account

holders. 472 U.S. at 715. The governing statute, 26 U.S.C.

S 6321, provided that: "[i]f any person liable to pay any tax

neglects or refuses to pay the same after demand, the

amount ... shall be a lien in favor of the United States upon

all property and rights to property, whether real or

_________________________________________________________________

We believe that the district court's conclusion that a development

easement is an equitable servitude and not a true easement under New

Jersey law is questionable. Nevertheless, we need not reach that issue

because, as explained infra, the district court's conclusion to base its

holding on the doctrinal classification of development easements under

New Jersey law was a more fundamental error.

8

personal, belonging to such person." Id. at 719. The case

hinged on whether the delinquent taxpayer's interest in the

joint account was "property" or "rights to property," within

the meaning of S 6321. Looking to Arkansas law to define

the nature of the taxpayer's interest in the property, the

Supreme Court held that because state law provided that

the delinquent taxpayer had an unrestricted right to

withdraw funds from his joint account, the account was

subject to levy by the IRS. Id. at 724. Further application of

state law in this situation, according to the Court, was

erroneous. In particular, the Court rejected the view that

Arkansas' creditors' rights law could limit the IRS' power to

levy, once it was determined that the joint account was

taxpayer's property. Id. at 727. Attributing such importance

to state law in the operation of a federal revenue act

"misconceives the role properly played by state law in

federal tax-collection matters." Id.

The rationale of National Bank of Commerce suggests that

New Jersey law is relevant here only to the extent that it

defines the development easement that taxpayer deeded to

the state. The state law consequences of that definition,

however, as well as the state's doctrinal classification of the

development easement -- be it as an easement, restrictive

covenant, equitable servitude, or anything else-- have no

bearing on the application of the recapture tax provision.

See, e.g., Helvering v. Stuart, 317 U.S. 154, 162 (1942)

("[o]nce rights are obtained by local law, whatever they may

be called, these rights are subject to the federal definition

of taxability"). Having determined that the development

easement is recognized under state law, the district court

should have turned to federal law to decide whether the

transfer of the development easement constituted a

"dispos[ition] of any interest" in taxpayer's farmland within

the meaning of S 2032A.

Taxpayer contends that the extent of the district court's

reliance on New Jersey law in determining whether the

transfer of a development easement triggers the recapture

tax is required by Treasury Regulation S 20.2032A-8(c)(2),

which provides, in part:

An interest in property is an interest which, as of the

date of the decedent's death, can be asserted under

9

applicable local law so as to affect the disposition of the

specially valued property by the estate. Any person in

being at the death of the decedent who has any such

interest in the property, whether present or future, or

vested or contingent, must enter into the agreement.

. . .

26 C.F.R. S 20.2032A-8(c)(2). Taxpayer claims that this

regulation sets forth a test for determining whether a

particular disposition triggers the recapture tax, and

dictates that local law, not federal law, controls that

determination.

We disagree. Contrary to taxpayer's assertion, the plain

meaning of Treasury Regulation S 20.2032A-8(c) does not

purport to define the events that trigger the recapture tax.

Instead, the regulation articulates who, at the time a

S 2032A special use election is made, must sign the

agreement to pay the recapture tax in the event that the tax

becomes payable. See Estate of Lucas, 97 F.3d at 1407.

Taxpayer cites no authority in support of his novel

interpretation of the regulation, and we have found none.

Even the district court, which agreed with taxpayer's

assessment of S 2032A, concluded that the treasury

regulations were "silent" on the question presented.

Taxpayer's reliance on Treasury Regulation S 20.2032A-

8(c)(2) is misplaced.

III.

What remains to be decided is whether taxpayer's

transfer of the development easement in his farm to New

Jersey constitutes a disposition of "any interest" within the

meaning of S 2032A. In resolving this question, we do not

have the benefit of precedent, as there are no published

judicial opinions addressing this aspect of S 2032A.

Nonetheless, relying on well-established principles of

property law and estate taxation, we conclude that the

conveyance of the development easement was a disposition

of an interest in the farm.

The property laws have long referred to the metaphor

that owning property is like owning a "bundle of rights."

See, e.g., Loretto v. Teleprompter Manhattan CATC Corp.,

10

458 U.S. 419, 435 (1982); see generally Gerald Korngold,

Comparing the Concepts of `Property' and `Value' in Real

Estate Law and Real Property Taxation, 25 Real Est. L.J. 7,

9 (1996) (discussing the related "bundle of sticks"

metaphor). Here, the real property that passed to taxpayer

on the death of his father can be viewed in two portions:

first, the "bundle of rights" relating to the agricultural use

of the land, and second, the additional value represented by

the "bundle of rights" relating to development uses of the

land. Cf. Sullivan v. United States, 618 F.2d 1001, 1005 (3d

Cir. 1980) (noting that "there is no theoretical obstacle to

breaking up the bundle of rights that comprise a fee simple

interest in property," and that when taxpayers "sever the

rights incident to a fee interest . . . such interests may be

treated separately for federal tax purposes").

If the special use provision of S 2032A did not exist, it is

undisputed that taxpayer would have been required to pay

estate taxes on the entire bundle of rights associated with

the farm, including those rights related to the development

of the land, when the property passed to taxpayer from his

father. See 26 U.S.C. S 2033 (defining the gross estate to

include "the value of all property to the extent of the

interest therein of the decedent at the time of his death").

Taxpayer avoided paying estate taxes on the bundle of

rights associated with the development uses of the land by

electing to value the farm under the special use provision.

He did so on the understanding that he would not realize

the value of those rights within the ten year recapture

period. In executing the Deed of Easement, however,

taxpayer conveyed to New Jersey "all of the nonagricultural

development rights and development credits appurtenant to

the lands and premises." In exchange for these valuable

development rights, taxpayer received consideration of over

$1.4 million. Through this transaction, taxpayer disposed of

valuable property rights that the Internal Revenue Code

would have otherwise taxed when those rights were passed

from taxpayer's father, but did not because of theS 2032A

election. Because this disposition occurred within ten years

of the decedent's death, the recapture tax was due.

Taxpayer argues that he has not disposed of any interest

in the farmland because the Deed of Easement conveyed

11

"nothing to anyone." Taxpayer's Br. at 9. Taxpayer asserts

that the deed imposed land-use restrictions on the

property, but did not convey any property interest to New

Jersey.

We are not persuaded by taxpayer's characterization of

the transaction. At the core of his argument is the

erroneous premise that the development easement is merely

a land-use restriction, and not an interest in land. That,

however, is contrary to the New Jersey Agriculture

Retention Act, which defines a development easement as:

an interest in land, less than a fee simple absolute title

thereto, which enables the owner to develop the land

for any nonagricultural purpose as determined by the

provisions of this act . . ..

N.J. Stat. Ann S 4:1C-13(f) (emphasis added).

In addition to the statutory provision, the language of the

Deed of Easement is quite clear that a sale of an interest in

land has taken place. First, the Deed of Easement states

that taxpayer "grants and conveys to the Grantee a

development easement on the Premises . . . for and in

consideration of the sum of $1,433,493.72." Second, the

deed provides that taxpayer "transfer[s] and conveys to

Grantee all of the nonagricultural development rights and

development credits appurtenant to the lands and Premises

described herein."5 Third, the deed references the

Agriculture Retention Act, which clearly contemplates the

sale or conveyance of development easements. See N.J.

Stat. Ann S 4:1C-24(a)(2) ("[a]ny landowner . . . may enter

into an agreement to convey a development easement on

the land to the board"); N.J. Stat. Ann S 4:1C-31(a) ("[a]ny

landowner applying to the board to sell a development

easement . . . shall offer to sell the development easement

at a price which, in the opinion of the landowner,

_________________________________________________________________

5. As evidence that he did not sell anything to New Jersey, taxpayer

points to one passage in the Deed of Easement that states that the

document should be construed as a "restriction running with the land."

Whatever the meaning of that provision, and we believe it is far from

clear, it certainly does not contradict the statement in the Deed of

Easement that taxpayer has conveyed to New Jersey all of the

development rights associated with the property.

12

represents a fair value of the development potential of the

land for nonagricultural purposes"). Accordingly, taxpayer's

effort to recast the Deed of Easement as something other

than a sale or conveyance of an interest in land is

unavailing.

Taxpayer also asserts that the fact that he is entitled to

sell the farmland without the permission of the State of

New Jersey demonstrates that he did not dispose of any

interest in the farmland. We disagree. While the Deed of

Easement does provide that "the land and its buildings

which are affected may be sold [by taxpayer] .. . for

continued agricultural use," it is also clear that taxpayer,

as a consequence of the transaction, is no longer in a

position to sell the nonagricultural rights associated with

the farm. Those rights now belong to New Jersey. As stated

in the deed:

Nothing contained herein shall preclude the

conveyance or retention of said [development] rights by

the Grantee as may be permitted by the laws of the

State of New Jersey in the future.

Thus, anyone interested in using the property for

development purposes must purchase those rights from the

State. While taxpayer may still sell the agricultural rights

associated with the farm, that does not alter the fact that

taxpayer conveyed an interest in the property by execution

of the Deed of Easement.6

Taxpayer contends the Tax Court's decision in Williamson

v. Commissioner, 93 T.C. 242 (1989), aff'd, 974 F.2d 1525

(9th Cir. 1992), counsels that we affirm the district court.

_________________________________________________________________

6. In arguing that New Jersey purchased nothing by operation of the

Deed of Easement, taxpayer makes much of the fact that under existing

New Jersey law, the State may not sell a development easement. See N.J.

Stat. Ann S 4:1C-32(a) ("[n]o development easement purchased pursuant

to the provisions of this act shall be sold, given, transferred or

otherwise

conveyed in any manner"). That the statute currently precludes a

transfer of a development easement by the State, however, does not

mean that New Jersey does not own valuable rights capable of transfer;

to the contrary, the statutory provision supports the conclusion that a

development easement is an interest in land that could, but for the

statute, be separately purchased and sold.

13

In that case, taxpayer Williamson entered into a cash lease

of his farmland -- which had previously been the subject of

a S 2032A election -- with his nephew. The Commissioner

contended that the leasing of the property triggered the

recapture tax because a cash lease was not a "qualified

use" of the property under S 2032A(c)(1)(B). As an

alternative argument, Williamson maintained that no

recapture tax should be imposed because a lease was a

"disposition" of the farmland, and a disposition of the

farmland to a family member does not trigger the recapture

tax under S 2032A(c)(1)(A). The court rejected that view,

noting that Williamson did not dispose of any interest in

the farm by entering into a lease with his nephew. Id. at

251. Taxpayer asserts that this statement in Williamson

supports his position that it is inappropriate to read

S 2032A(c)(1)(A) literally, and that we should hold that a

development easement is not the type of interest that

Congress had in mind when they stated that the recapture

tax was payable if a taxpayer "dispose[d] of any interest" in

his qualified real property.

Contrary to taxpayer's characterization of the case, the

court in Williamson did not hold, and did not even suggest,

that S 2032(c)(1)(A)'s "any interest" provision should not be

interpreted literally. Instead, the court held that a lease was

not a disposition of an interest in the farmland because a

disposition "ordinarily refers to a sale, exchange, or gift." Id.

at 252. Here, in contrast, there is no question that

taxpayer's grant of a development easement was a

permanent sale. Thus, Williamson is readily distinguishable

from the instant case. Indeed, in affirming the Tax Court's

decision, the Court of Appeals for the Ninth Circuit

recognized as much by drawing a distinction between a

temporary lease, which the court agreed did not qualify as

a disposition, and the conveyance of an easement, which

the court recognized would constitute a disposition because

of its permanency. See Williamson, 974 F.2d at 1534.

We also reject taxpayer's contention that the legislative

history of S 2032A compels the conclusion that the

recapture tax should not be triggered by the grant of a

development easement. Initially, we note that scrutiny of

the statute's legislative history is not necessary in this case

14

because we have determined, based on the plain meaning

of the statute, informed by our understanding of relevant

legal principles, that taxpayer's grant of a development

easement was a disposition of an interest in his farm. See,

e.g., Ford v. Schering-Plough Corp., 145 F.3d 601, 613 (3d

Cir. 1998) (no cause to analyze statute's legislative history

when its plain meaning is clear). Nevertheless, even if we

were to consider the legislative history of S 2032A, we would

reach the same conclusion. The relevant portion of the

House Committee Report, addressing the need for the

recapture tax provision, states:

[y]our committee recognizes that it would be a windfall

to the beneficiaries of an estate to allow real property

used for farming or closely held business purposes to

be valued for estate tax purposes at its farm or

business value unless the beneficiaries continue to use

the property for farm or business purposes, at least for

a reasonable period of time after the decedent's death.

Also, your committee believes that it would be

inequitable to discount speculative values if the heirs of

the decedent realize these speculative values by selling

the property within a short time after the decedent's

death. For these reasons, your committee has provided

for special use valuation in situations involving real

property used in farming or in certain other trades or

businesses, but has further provided for recapture of

the estate tax benefit where the land is prematurely

sold or is converted to nonqualifying uses.

H.R. Rep. No. 94-1380 at 22 (1976), reprinted in 1976

U.S.C.C.A.N. 3356, 3376 (emphasis added).

By including the recapture tax provision in S 2032A, it

appears that Congress intended to prevent a taxpayer from

obtaining a special use valuation on property for estate tax

purposes, and then, by sale or other disposition within a

relatively short period, obtaining the value of the property's

highest and best use. In other words, Congress sought to

prevent the exact result that taxpayer urges here: an heir to

a family farm avoiding estate taxes on the nonagricultural

15

uses of the property and shortly thereafter reaping the

monetary benefits of those same nonagricultural uses.7

Both taxpayer and the Attorney General of New Jersey as

amicus curiae argue that the legislative history of

S 2032A(c)(1)(A) indicates that Congress intended the

recapture tax to be triggered only by the sale of the entire

property, not a portion thereof. We do not read the relevant

committee reports to suggest such a result. See , e.g., H.R.

Rep. No. 94-1380 at 26 (1976), reprinted in 1976

U.S.C.C.A.N. 3356, 3380 ("Disposition . . . of a portion of

an interest [in the qualified real property] may result in a

full or partial recapture."). In any event, taxpayer's

interpretation is foreclosed by the actual statutory language

chosen by Congress, which provides that a recapture tax is

owed if a taxpayer "disposes of any interest in the qualified

real property." 26 U.S.C. S 2032A(c)(1)(A) (emphasis added).

If Congress meant for the recapture tax to be triggered only

by the sale of an entire fee simple interest, we must

presume that it would have enacted language to that effect.

See Connecticut National Bank v. Germain, 503 U.S. 249,

253-54 (1992) ("We have stated time and again that courts

must presume that a legislature says in a statute what it

means and means in a statute what it says there.").8

_________________________________________________________________

7. We are aware that as part of the Taxpayer's Relief Act of 1997, S 508,

Pub. L. No. 105-34, 111 Stat. 788, 860, Congress amended S 2032A to

provide that a charitable contribution of a conservation easement does

not trigger the recapture tax. See 26 U.S.C.S 2032A(c)(8) (West Supp.

1998). The amendment does not affect the instant case for two reasons:

first, the Deed of Easement at issue here was executed well before

December 31, 1997, the effective date of the amendment, see S 508(e)(2),

Pub. L. No. 105-34, 111 Stat. 788, 860; second, the amendment pertains

to a charitable contribution of a conservation easement, but does not

apply to an individual such as taxpayer, who sells a conservation

easement for valuable consideration.

8. For similar reasons, we cannot accept the Attorney General's

argument that, even if taxpayer disposed of an interest in his property,

we should still conclude that taxpayer does not owe the recapture tax

because the purpose of S 2032A and the Agriculture Retention Act is to

preserve farmland, and taxpayer's property is still being used as a farm.

The Attorney General predicts that if we a hold that a recapture tax is

due under the circumstances herein, farmers will be discouraged from

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IV.

The district court erred in holding that the grant of a

development easement to the State of New Jersey by

taxpayer did not constitute the disposition of any interest in

property under 26 U.S.C. S 2032A(c)(1)(A). Accordingly, we

will reverse the October 30, 1997 order of the district court

and remand with instructions to grant summary judgment

in favor of the United States. As taxpayer is no longer the

prevailing party, we will dismiss as moot his cross-appeal

challenging the district court's refusal to award attorneys'

fees.

Each party to bear its own costs.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

_________________________________________________________________

selling development easements to New Jersey, which, in turn, will

undermine the State's effort to conserve farmland. Essentially, the State

asks us to disregard the express terms of a federal statute in order to

further its policy objectives. This we are not free to do. See Estate of

Applebaum v. Commissioner, 724 F.2d 375, 377 (3d Cir. 1983) (plain

language of a statute cannot be ignored for policy reasons).

17