The opinion
T.C. Memo. 1997-255
UNITED STATES TAX COURT
WILLIAM P. SHORT, JR. AND MARY E. SHORT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13666-95. Filed June 9, 1997.
Mark D. Olson and Eugene H. Bayard, for petitioners.
Alan R. Peregoy, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent determined deficiencies in
petitioners' Federal income taxes of $5,828 for 1991 and $35,681
for 1992. These deficiencies result from respondent's disallowance
of petitioners' carryforwards of the unused portions of a
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$5,810,000 charitable contribution deduction claimed on their 1988
amended Federal income tax return.
The issue for decision is whether petitioners made a
charitable contribution of land to the State of Delaware within the
meaning of section 170(a) and, if so, the fair market value of the
contribution on the date of donation.
All section references are to the Internal Revenue Code in
effect for the years under consideration. All Rule references are
to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are found
accordingly. The stipulation of facts and the attached exhibits
are incorporated herein by this reference.
Petitioners William P. Short, Jr. and Mary E. Short, husband
and wife,1 resided in Bethany Beach, Delaware, at the time they
filed the petition herein. For convenience, we refer to William P.
Short, Jr. as petitioner.
The Disputed Land
Petitioners owned substantial tracts of undeveloped land
along the Atlantic Ocean beaches in Sussex County, Delaware (Sussex
County). They claimed title to certain parcels of land (the
disputed land) in the same vicinity. The State of Delaware also
1
At the time of trial, both petitioners were ill and
unable to testify. The Court has made no adverse inferences as a
result of their failure to testify. Petitioners' son, Rodney
Short, testified on petitioners' behalf.
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claimed title to the disputed land. Petitioners never paid real
estate taxes on the disputed land.
The 1988 Gift Land
At issue is petitioners' ostensible 1988 contribution of
approximately 8-acres of the disputed land (the 1988 gift land) to
the State of Delaware. At the time of the purported donation, the
State of Delaware considered the disputed land, including the 1988
gift land, part of the Delaware Seashore State Park.
Petitioners' claim of title to the 1988 gift land is based on
a quitclaim deed that petitioner purchased on August 16, 1982, for
$100 (the 1982 quitclaim deed) from J. Bennett Hill, a purported
heir to one-fourth of the property interest of a Colonel William D.
Waples. Any interest obtained by petitioner apparently derived
from an 1839 recorded three-fourths tenants-in-common interest held
by Colonel Waples and two other individuals. The 1839 title was
the last title interest recorded with respect to the 1988 gift
land; and, the chain of title that followed this interest is
uncertain and uncorroborated. It appears that Colonel Waples'
interest in the 1988 gift land was likely abandoned, and
subsequently acquired by the State of Delaware in the early 1900's.
In addition to claiming title to the 1988 gift land under the
1982 quitclaim deed, petitioners also claimed title to the land by
adverse possession.
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The State Court Action
On August 3, 1987, F. Michael Parkowski, special counsel and
attorney for the State of Delaware, initiated a proceeding against
petitioner in the Delaware Chancery Court for Sussex County (the
State court action) seeking to quiet title to the disputed land, as
well as other relief. The State of Delaware argued that the
disputed land (including the 1988 gift land) had been abandoned by
any record title owner or heirs dating back to at least 1914 and
had then been acquired by the State through adverse possession long
before petitioner began taking action to establish a claim.
Moreover, State surveys conducted in 1914, 1926, 1929, 1955, and
1977 consistently showed the disputed land as part of the Delaware
Seashore State Park. Maps also showed the disputed land as part of
State park lands.
On October 6, 1987, petitioners responded to the State's
complaint by an answer and counterclaim. Petitioners argued that
they had legal title to the property based on the 1982 quitclaim
deed as well as through adverse possession. In essence, the State
considered petitioners' claim of title frivolous.
Petitioners' Appraisal
In November 1988, appraiser Laurence P. Moynihan valued the
disputed land for petitioners "in order to facilitate a possible
donation of the property" to the State of Delaware. Mr. Moynihan
valued an unencumbered fee simple interest in the disputed land at
$30,130,000, including $5,810,000 for the 1988 gift land.
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The 1988 Deed
On December 29, 1988, petitioners executed and recorded in the
Office of the Recorder of Deeds for Sussex County a special
warranty deed (the 1988 deed), which purportedly transferred the
1988 gift land to the State of Delaware. (At this time, the State
court action was in the discovery phase, and settlement discussions
had not begun.) Petitioners did not submit the 1988 deed to any
State of Delaware official in 1988, other than to the Sussex County
Recorder of Deeds, who did not have discretion to reject or not
record the deed. Between 1988 and November 1991, the State neither
knew of nor accepted any gift from petitioners.
On November 11, 1991, petitioners' attorney, Mark D. Olson,
submitted a letter to Edwin H. Clark II, Secretary of the Delaware
Department of Natural Resources, transmitting a copy of the 1988
deed. This was the first time the "gift" was officially brought to
the State's attention. However, the State rejected the attempted
gift in accordance with its position in the State court action.
1992 Settlement Agreement and Dismissal of the State Court Action
Following lengthy settlement negotiations, the State court
action was resolved pursuant to an April 15, 1992, Settlement
Agreement (the agreement). Pursuant to the agreement, petitioners
conveyed to the Nature Conservancy,2 which immediately conveyed to
2
The Nature Conservancy was a nonprofit environmental
preservation organization with its principal office in Arlington,
Virginia.
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the State, all the disputed land, including the 1988 gift land.
The agreement included a side agreement whereby Secretary Clark,
who was authorized to sign Internal Revenue Forms 8283 (Noncash
Charitable Contributions) on behalf of the Delaware Department of
Natural Resources, executed the donee acknowledgment portion of
Form 8283 with regard to the 1988 gift land.
Pursuant to the terms of the agreement, deeds and documents
were recorded to finalize the property transfer, including a May
29, 1992, quitclaim deed to the 1988 gift land (the 1992 quitclaim
deed).3 The State also had an option under the agreement to
purchase additional land from petitioners at a bargain sales price.
A July 25, 1992, Stipulation of Dismissal concluded the State court
action.
Petitioners' Federal Income Tax Returns
Petitioners did not claim a charitable contribution deduction
with regard to the 1988 gift land on their original 1988 Federal
income tax return.4 On April 15, 1992, petitioners amended their
1988 return to claim a refund based on their entitlement to a
$5,810,000 charitable contribution deduction, arising from their
3
The parties utilized a quitclaim deed because Delaware
law treats a quitclaim deed as conveying any title that the donor
has. It is not, however, an acknowledgment of title. Thus, by
accepting petitioners' 1982 quitclaim deed, the State of Delaware
did not recognize that petitioners ever held title to the 1988
gift land.
4
Petitioners reported capital gains in excess of $8
million on their 1988 return.
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purported donation of the 1988 gift land.5 Petitioners
subsequently filed amended 1989 and 1990 returns, claiming
charitable contribution carryforwards.
On their 1991 and 1992 Federal income tax returns, petitioners
carried forward charitable contribution deductions in the
respective amounts of $66,741 and $103,784, in connection with the
purported donation of the 1988 gift land. These are the deductions
at issue herein.
Notice of Deficiency and Amended Answer
In the notice of deficiency, respondent disallowed
petitioners' 1991 and 1992 charitable contribution deductions
because petitioners failed to establish that they had legal title
to the donated property. In the amended answer, respondent
alleged, among other things, that because the 1988 gift land was at
5
Petitioners attached the following explanation to their
1988 amended return:
The taxpayers made a gift of appreciated
real property to a charitable donee on
December 29, 1988. At the time their 1988
return was filed, however, the taxpayers had
not been able to obtain the donee's
acknowledgment of the gift on Form 8283. As
a result, and acting in accordance with the
substantiation requirements of Treas. Regs.
section 1.170A-13(c)(2), the taxpayers did
not claim a deduction related to the gift on
the originally filed return. Subsequently
the taxpayers obtained the donee's
acknowledgment of the gift on Form 8283 and
now file this amended return for the purpose
of claiming the deduction as herein set
forth.
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the center of a lawsuit between petitioners (the purported donors)
and the State of Delaware (the purported donee), no donative intent
existed and a completed gift was neither made nor was it accepted
by the State.
OPINION
Initially, we must determine whether petitioners made a
charitable contribution of land to the State of Delaware within the
meaning of section 170(c)(1). Assuming we find such a
contribution, we must then determine the fair market value of the
land. See sec. 1.170A-1(c)(1), Income Tax Regs. Where respondent
has disallowed a charitable contribution deduction, the taxpayer
must show error in respondent's determination. Rule 142(a).
In determining the existence and timing of a charitable
contribution, we apply the same analysis as that in determining the
existence and timing of a gift. We have consistently held that
there are six essential elements of a bona fide inter vivos gift.
These six elements are:
(1) a donor competent to make the gift; (2) a
donee capable of taking the gift; (3) a clear
and unmistakable intention on the part of the
donor to absolutely and irrevocably divest
himself of the title, dominion, and control of
the subject matter of the gift, in praesenti;
(4) the irrevocable transfer of the present
legal title and of the dominion and control of
the entire gift to the donee, so that the
donor can exercise no further act of dominion
or control over it; (5) a delivery by the
donor to the donee of the subject of the gift
or of the most effectual means of commanding
the dominion of it; (6) acceptance of the gift
by the donee * * *
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Guest v. Commissioner, 77 T.C. 9, 15-16 (1981) (quoting Weil v.
Commissioner, 31 B.T.A. 899, 906 (1934), affd. 82 F.2d 561 (5th Cir.
1936)). An objective inquiry must be made into the nature of the
transaction to determine whether that which is labeled as a gift is
in substance a gift. Pettit v. Commissioner, 61 T.C. 634, 638-639
(1974); Grinslade v. Commissioner, 59 T.C. 566 (1973).
A prerequisite to the required irrevocable transfer is that the
donors possess legal title to the property prior to the purported
donation. Assuming the donors held title, the donee must then
accept the gift.
The parties agree that the State of Delaware is a qualified
donee within the meaning of section 170(c)(1). The parties,
however, disagree as to: (1) Whether petitioners had good legal
title to the 1988 gift land at the time of the purported donation;
(2) whether the gift was completed and accepted by the State of
Delaware; and (3) whether petitioners had donative intent.
We do not believe that petitioners are entitled to 1991 or 1992
charitable contribution deductions with regard to the 1988 gift land
for several reasons. First, petitioners have not satisfied their
burden of proving that they possessed good legal title to the 1988
gift land. At the time of the purported donation, it was doubtful
whether petitioners possessed good legal title to the property.
Chain of title was uncertain. Prior to petitioner's purchase of the
1982 quitclaim deed, the last record title to the interest
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petitioners claimed was recorded in 1839. Colonel Waples' heirs
apparently abandoned their partial interest in the land. The State
of Delaware subsequently conducted public surveys showing the 1988
gift land as public land. These surveys were recorded in public
records, providing evidence of title for the State. The 1988 gift
land was also considered part of the Delaware Seashore State Park.
Moreover, petitioners never paid real estate taxes on the disputed
land. The existence of pending litigation between petitioner and
the State of Delaware is a further indication that petitioners did
not possess good legal title to the 1988 gift land at the time of
the purported donation.
Petitioners have also not established that they held title to
the 1988 gift land by adverse possession. Delaware law permitting
adverse possession against the State was repealed in 1953. See
Phillips v. State, 449 A.2d 250, 255 (Del. 1982). And nothing in
the record supports a conclusion that petitioners adversely
possessed the 1988 gift land against the State before (or after)
1953.
Second, even assuming petitioners held title to the 1988 gift
land, it does not appear that the State accepted the 1988 deed from
petitioners because it had no knowledge of the deed's recording.
Delivery to and acceptance by the donee of a deed may not be
presumed by mere recording when a deed is not beneficial to the
donee or imposes an obligation on the donee and when the donee does
not know of its existence. Estate of Mortimer v. Commissioner, 17
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T.C. 579, 583 (1951); see also Equitable Trust Co. v. Gallagher, 67
A.2d 50, 55 (Del. Ch. 1949), affd. 77 A.2d 548 (Del. 1950).
Accepting the 1988 deed might not have been beneficial to the State
of Delaware because it might have been construed as an
acknowledgment of petitioners' interest in the disputed land and
thus detrimental to the State's position in the State court action.
Petitioners' recording of the 1988 deed without communicating its
existence to the State attorney who was litigating the State court
action clearly indicates that petitioners never attempted to
effectuate proper delivery to and acceptance by the State.
Accordingly, we hold that petitioners have not established that
they are entitled to any charitable contribution deduction connected
to the 1988 gift land in 1991 or 1992.
_____________________________
A final note. At the time of the purported donation, the
outcome of the State court action was unknown, and the fair market
value6 of petitioners' interest in the 1988 gift land was either
minimal or had mere speculative value. One of respondent's real
estate title experts, Daniel Kristol, testified that a speculator
might have paid a maximum of $5,000 for petitioners' interest in the
6
The parties presented experts who appraised the 1988
gift land as an unencumbered fee simple interest. Respondent's
appraisal expert, Diane R. Maiden, valued the 1988 gift land at
$3.5 million. Petitioners' appraisal expert, Mr. Moynihan, valued
the 1988 gift land at $5.8 million. These appraisals do not
address the fair market value of petitioners' interest in the
1988 gift land because of the questions surrounding petitioners'
interest at the time of the purported donation.
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1988 gift land in December 1988. We found Mr. Kristol credible.
Thus, assuming arguendo petitioners would be entitled to
carryforwards in 1991 and 1992 arising from the 1988 charitable
contribution deduction, we would hold that the fair market value of
petitioners' interest in the 1988 gift land was no more than $5,000
in December 1988.
To reflect the foregoing,
Decision will be
entered for respondent.