When is a Farmer Not a Farmer? Tax Court Case Highlights Complexity in Federal Tax Law

Paul Goeringer
4 min readSep 1, 2017
Talbot County Maryland Farmland by Chesapeake Bay Program via flickr.com

This post is not legal advice

A group of Maryland farmers recently learned an important lesson, sometimes how a federal tax law defines a “farmer” can have large impacts. Brothers donated a conservation easement on a farm, then sold the property. The brothers then claimed the donation on their taxes. The tax court ruled that the brothers did not qualify as “qualified farmers” who could deduct 100 percent of the contribution because their gross incomes from the farm were less than 50 percent of their total gross incomes. The sale of farmland and the sale of the conservation easement did not count as an activity included in the business of farming. The brothers were limited to a 50 percent of the charitable contribution for the conservation easement.

In Rutkoske v. Commissioner of Internal Revenue, two brothers owned a 355-acre farm in Maryland. The brothers used numerous business entities, but with this farm, the farm was owned by a partnership. In 2009, the brothers conveyed a conservation easement on the farm. According to the appraisal the brothers obtained, the farm was valued at $4,970,000 before the conservation easement, and the fair market value after granting the easement was $2,130,000. The brothers received $1,504,960 for the conservation easement. On the same day the conservation easement was granted, the brothers sold the farm for $1,995,040.

On their taxes, the brothers reported a $1,335,040 charitable contribution for the conservation easement (the difference between $4,970,000 minus $2,130,000 minus $1,504,960). Each brother deducted $667,520 on their tax returns as a charitable contribution. The brothers each reported the sale of the farm on their tax returns. The Internal Revenue Service (IRS) limited the brothers to only being able to claim a deduction of 50 percent of the charitable donation of the conservation easement because the brothers did not qualify as farmers in that year. In other words, the IRS wanted to limit each brother to a deduction of $333,760 for the charitable contribution. The brothers appealed this decision.

Tax Court’s Ruling

Farmland in Maryland along the Choptank River by Chesapeake Bay Program via flickr.com

The Tax Court points out, the brothers are farmers, but the brothers do not qualify as farmers under this provision of tax law. The statute did not include the sale of the farmland in the definition of farm income. The income from the sale of the conservation easement also was not listed in the statute as farm income. The tax court upholds the decision of the IRS. Looking at 26 U.S.C. § 2032A(e)(5), income from the sale of farmland is not specifically listed as a “farming purpose.”

The other issue the Tax Court had was with the use of the LLC by the brothers. The farm was owned by an LLC and leased to another business entity controlled by the brothers. The income from the LLC to the brothers flowed from the LLC’s business of leasing land, not from the business of farming. The brothers could not then classify the income as farming income. The brothers could not claim 100 percent of the charitable donation on their taxes, but could only claim 50 percent.

Why Care?

Roger McEowen at Washburn University points out on this blog post related to this case other issues associated with the Tax Court’s decision (I defer to Roger on these because he is a tax law expert, I am not). But as he highlights, one way around the sale, in this case, is to structure the sale of farmland as an installment sale. That would have allowed the brothers to meet the 50 percent gross farm income test.

This case highlights a common problem when a landowner donations a conservation easement and sells the property in the same tax year. If you are considering donating a conservation easement then selling the property, you want to make sure you check with your accountant to properly structure all this to guarantee you get 100 percent of the donation.


McEowen, Roger, When Is A Farmer Not A “Qualified Farmer” For Conservation Easement Donation Purposes?, Agricultural Law and Taxation Blog. Law Professor Blogs Network (Aug. 10, 2017).

Rutkoske v. Commissioner, 149 T.C. №9 (2017).



Paul Goeringer

Extension Legal Specialist @UofMaryland posts do not represent my employer & retweets ≠ endorsements