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Estate of Gibbs v. U.S.

December 01, 1998


Before: Sloviter and Cowen, Circuit Judges and POLLAK,*fn* District Judge

The opinion of the court was delivered by: Cowen, Circuit Judge.

On Appeal from the United States District Court for the District of New Jersey (D.C. No. 96-cv-00685)

Argued October 6, 1998


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 § 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 was a Disposition of an interest in the farmland. Accordingly, we will reverse.


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 § 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.*fn1 New Jersey purchased this development easement pursuant to the "Agriculture Retention and Development Act," N.J. Stat. Ann. §§ 4:1C-11 to 48 ("Agriculture Retention Act"), which was enacted, among other reasons, to strengthen New Jersey's agricultural industry and to preserve farmland in the State. See N.J. Stat. Ann. § 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. §§ 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. § 4:1C-8; see also N.J. Stat. Ann. § 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."*fn2 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."

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 § 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 ยง 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 ...

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