Klauer v. Comm'r

T.C. Memo. 2010-65

UNITED STATES TAX COURT

WILLIAM R. KLAUER, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 18181-07, 15147-08, Filed April 5, 2010.
15148-08, 15149-08,
15150-08, 15151-08,
15152-08, 15153-08.

Gary J. Streit, for petitioners.

Steven W. LaBounty, for respondent.

1
Cases of the following petitioners are consolidated here-
with: Justin E. Klauer, docket No. 15147-08; William M. and
Dionne T. Klauer, docket No. 15148-08; James D. and Kathleen A.
Klauer, docket No. 15149-08; Michael R. and Kristen A. Igo,
docket No. 15150-08; Robert E. and Judy A. Klauer, docket No.
15151-08; James F. and Nancy A. Klauer, docket No. 15152-08; and
Michael J. and Emily Klauer, docket No. 15153-08.
 -2-

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined deficiencies in peti-

tioners’ Federal income tax (tax) as follows:

Petitioner(s) 2001 2002 2003
William R. Klauer $158,079 $175,237 $58,609
Justin E. Klauer 4,134 2,377 (1)
William M. and Dionne T. Klauer 14,162 8,638 2,745
James D. and Kathleen A. Klauer 16,683 8,293 11,238
Michael R. and Kristen A. Igo2 17,795 10,979 1,989
Robert E. and Judy A. Klauer 160,436 210,915 59,480
James F. and Nancy A. Klauer3 213,325 88,971 85,910
Michael J. and Emily Klauer4 12,971 7,908 5,755

1
During 2003, petitioner Justin E. Klauer was a stockholder
of Klauer Manufacturing Co. The record does not contain a tax
return that he filed for his taxable year 2003. Nor does the re-
cord contain a notice of deficiency (notice) issued to him for
that taxable year raising the issue that we address herein.
2
Respondent sent to petitioners Michael R. and Kristen A.
Igo a separate notice for their taxable year 2004 in which
respondent determined a deficiency of $4,353 for that year. That
determination is based, inter alia, on the disallowance of a cer-
tain credit carried over to that year. Resolution of that credit
carryover issue flows from our resolution of the issue that we
address herein.
3
Respondent sent to petitioners James F. and Nancy A. Klauer
a separate notice for their taxable year 2004 in which respondent
determined a deficiency of $30,808 for that year. That determi-
nation is based, inter alia, on the disallowance of a certain
credit carried over to that year. Resolution of that credit car-
ryover issue flows from our resolution of the issue that we ad-
dress herein.
4
The parties stipulated that petitioner Michael J. Klauer’s
first name is “William”. That stipulation is clearly contrary to
the facts that we have found are established by the record, and
we shall disregard it. See Cal-Maine Foods, Inc. v. Commis-
sioner, 93 T.C. 181, 195 (1989). The record establishes, and we
have found, that respondent sent a notice to petitioner Michael
J. Klauer, who was not married in 2001, for his taxable year
 -3-

2001. The record further establishes, and we have found, that
respondent sent a separate notice addressed to both petitioners
Michael J. and Emily Klauer, who were married in 2002 and 2003,
for each of their taxable years 2002 and 2003.

The only issue that we must decide is whether Klauer Manu-

facturing Co. is entitled for each of its taxable years 2001,

2002, and 2003 to a charitable contribution deduction under sec-

tion 170(a)2 with respect to the transfer of certain real prop-

erty.3 We hold that it is.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found

except as stated herein.

At the time petitioners William R. Klauer, Justin E. Klauer,

William M. and Dionne T. Klauer, Michael R. and Kristen A. Igo,

Robert E. and Judy A. Klauer, and James F. and Nancy A. Klauer

filed their respective petitions, they resided in Iowa. At the

time petitioners James D. and Kathleen A. Klauer filed their

petition, they resided in Massachusetts. At the time petitioners

2
All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
3
As discussed below, for each of its taxable years 2001,
2002, and 2003 Klauer Manufacturing Co. (Klauer Manufacturing or
Company) was an S corporation. As a result, any charitable
contribution deduction that it claimed for each of those years
flowed through to its stockholders, certain petitioners herein
(stockholder petitioners).
 -4-

Michael J. and Emily Klauer filed their petition, they resided in

Nebraska.

At all relevant times, petitioners James D. Klauer, James F.

Klauer, Judy A. Klauer, Justin E. Klauer, Michael J. Klauer,

Nancy A. Klauer, Robert E. Klauer, William M. Klauer, William R.

Klauer, and Kristen A. Igo were stockholders of Klauer Manufac-

turing.4

In 1870, Peter Klauer organized Klauer Manufacturing in Iowa

as a hardware and tin shop. At all relevant times, members of

Peter Klauer’s family (Klauer family) owned the Company, an S

corporation that maintained its principal place of business in

Iowa. At those times, Klauer Manufacturing manufactured and sold

a variety of sheet metal building products, including steel and

aluminum gutters, panels, and roofing materials.

In 1919, Klauer Manufacturing began acquiring land in New

Mexico. By 2001, the Company owned approximately 9,800 acres of

vacant land in Taos County, south of the Town of Taos, New Mexico

(Taos). William J. Klauer, who died in February 2001, was the

Klauer family member most directly involved with the land that

4
Petitioners Dionne T. Klauer, Kathleen A. Klauer, Michael
R. Igo, and Emily Klauer are petitioners in their respective
cases solely because each filed a joint tax return with his or
her spouse, who was a stockholder of Klauer Manufacturing during
the years at issue.
 -5-

Klauer Manufacturing owned in Taos, which he visited on a regular

basis.

Included in the 9,800 acres of land that the Company owned

in Taos were approximately 2,581 acres known as the Taos Valley

Overlook (Taos Overlook), from which one can view the Rio Grande

Gorge and the Rio Grande River.5 At all relevant times, Klauer

Manufacturing paid the real estate taxes on and the costs of

maintaining the acres of the Taos Overlook that it owned. The

Klauer family felt strongly that the Taos Overlook should be

preserved from commercial development.

Before 2001, Klauer Manufacturing leased for $1 annually

approximately 700 acres of the Taos Overlook to the U.S. Depart-

ment of the Interior Bureau of Land Management (Bureau of Land

Management), which owned property adjacent to the Taos Overlook.

The Bureau of Land Management used and managed those leased acres

as part of an area known as the Orilla Verde Recreation Area.

At various times, the Bureau of Land Management discussed

with Klauer Manufacturing its interest in acquiring the 700 acres

of the Taos Overlook that it was leasing. Those discussions

included a proposal for the exchange of certain respective prop-

5
At all relevant times, New Mexico State Highway 68 bordered
the southern edge of the Taos Overlook, from which one can view
the Rio Grande Gorge.
 -6-

erties that the Bureau of Land Management and the Company owned.

However, the Bureau of Land Management and the Company were not

able to reach an agreement.

Around August 1999, representatives of the Trust for Public

Land (Trust), which was organized in 1972 and which was at all

relevant times an organization described in sections 501(c)(3)

and 170(c)(2), approached representatives of the Company, includ-

ing William J. Klauer, to discuss the Trust’s interest in the

Taos Overlook. The Trust’s interest was consistent with its

mission to protect open space from development, create parks and

provide recreational opportunities, safeguard water supplies,

protect wildlife, and conserve important natural resources. In

order to accomplish that mission, at all relevant times the Trust

searched for land that was of interest to certain public agen-

cies, such as the Bureau of Land Management, acquired certain of

those properties, and conveyed the acquired properties to those

agencies. In other words, at all relevant times the Trust acted

as a third-party facilitator for the acquisition of certain prop-

erties of interest to certain public agencies and conveyed those

acquired properties to those agencies. In initiating discussions

with Klauer Manufacturing in the summer of 1999, the Trust con-

templated conveying to the Bureau of Land Management any portion
 -7-

of the Taos Overlook that it was able to acquire from the Com-

pany.6

At all relevant times, the Trust supported its operations

through appropriations of funds (appropriations) that the U.S.

Congress (Congress) made and, to a lesser extent, through philan-

thropic donations. At those times, the Trust prepared and main-

tained a list of various projects for the acquisition of certain

land of interest to certain public agencies. It sought funding

for those acquisitions by, inter alia, lobbying members of Con-

gress for appropriations and requesting philanthropic donors to

provide funds.7

At a time not disclosed by the record before August 1999,

the Trust learned that conservation of the Taos Overlook was a

high priority of the Taos community and that the New Mexico of-

fice of the Bureau of Land Management had given the highest pri-

ority to the acquisition of that property. During the discus-

sions and the negotiations that followed the meeting in August

1999 between representatives of the Trust and representatives of

6
The Trust was not, however, an agent for the Bureau of Land
Management.
7
In soliciting funds, the Trust relied on so-called grass-
roots campaigns. The grassroots campaigns included volunteer-
based letter writing and telephone calls to congressional repre-
sentatives and philanthropic donors in support of the Trust’s
requests for funds.
 -8-

Klauer Manufacturing, the Trust’s representatives informed the

Company’s representatives about certain matters that the Trust

considered critical to its ability to acquire, and its continuing

interest in acquiring, a portion or all of the Taos Overlook.

First, the Trust’s representatives informed Klauer Manufac-

turing’s representatives that the Trust anticipated that its only

source of funding for its acquisition of a portion or all of the

Taos Overlook land would be appropriations that Congress might

authorize.8 That was because in the past the Trust’s funding for

land acquisition projects relied extensively, sometimes entirely,

on appropriations by Congress.

Second, the Trust’s representatives informed the Company’s

representatives that the Trust was not in a financial position to

be contractually and thus legally bound to purchase all of the

Taos Overlook (i.e., all of the approximately 2,581 acres of that

8
Any appropriation that Congress might authorize would be to
the U.S. Land and Water Conservation Fund (Land and Water Conser-
vation Fund). According to the U.S. Forest Service’s Web site,
the Land and Water Conservation Fund was created by Congress in
1964 and “provides money to federal, state and local governments
to purchase land, water and wetlands for the benefit of all
Americans.” Http://www.fs.fed.us/land/staff/LWCF/index.shtml.
Congress decides for each fiscal year of the Federal Government
whether to appropriate any funds to, inter alia, the Land and
Water Conservation Fund and, if so, the amount to appropriate.
If Congress had decided to appropriate certain funds for a
particular fiscal year to the Land and Water Conservation Fund,
the Trust would not have been able to use any portion of such
funds unless it were authorized to do so.
 -9-

property). That was because congressional appropriations for

land acquisition projects were uncertain, limited, and varied

from year to year. There simply were no guaranties that the

Trust, which had to solicit funds on an annual basis for speci-

fied possible acquisitions, would receive any congressional (or

other) funding for the purchase of a portion, let alone all, of

the Taos Overlook.9 As a result, during their discussions with

the Company’s representatives the Trust’s representatives in-

sisted that the Company grant it an option to purchase annually a

portion of the Taos Overlook if and when during each year the

Trust had the funds to purchase such a portion. Although Klauer

Manufacturing was willing to do so, its representatives insisted

that any portion of the Taos Overlook with respect to which the

Company were to grant the Trust an option to purchase during the

initial year border an exterior boundary of the Taos Overlook.

That was because Klauer Manufacturing wanted to ensure that if

the Trust were to decide not to exercise its option to purchase

thereafter any of the remaining specified portions of the Taos

9
In fact, at the time of the discussions between the Trust’s
representatives and Klauer Manufacturing’s representatives
regarding the Trust’s interest in the Taos Overlook, the largest
single annual appropriation that Congress had made to the Land
and Water Conservation Fund for land acquisition projects in New
Mexico was $3 million.
 -10-

Overlook, Klauer Manufacturing, and not the Trust, would own the

property in the interior of the Taos Overlook.

Third, the Trust’s representatives informed the Company’s

representatives that there should be some bargain-sale component

to a sale by the Company of a portion or all of the Taos Over-

look. That was because the Trust’s management had concluded that

the Trust would be in a better position to obtain funding if

there were such a charitable component.

When the Trust’s representatives first began discussions in

August 1999 with Klauer Manufacturing’s representatives regarding

the Trust’s interest in the Taos Overlook, the Company did not

have a professional appraisal made of all or any portion of that

property. However, Klauer Manufacturing was generally familiar

with the fair market value of property in the Taos area and be-

lieved that the approximately 2,581 acres known as the Taos Over-

look had a fair market value of between $20 and $21 million.10

10
Klauer Manufacturing’s familiarity with the fair market
value of property in the Taos area was attributable in large part
to its history of donating, and therefore of having appraisals
made of, property that it owned in the Taos area. For example,
in 1993, Klauer Manufacturing donated 80 acres of land that it
owned in the Taos area to the New Mexico School System for a
campus and made a bargain sale of 10 acres of land that it owned
in that area to the City of Taos for use as a location for a new
National Guard armory.
 -11-

At a time not disclosed by the record after the initial

meeting in August 1999 and before January 23, 2001, the Trust

presented Klauer Manufacturing with a proposed option agreement

reflecting the discussions and the negotiations between the re-

spective representatives of the Trust and the Company. The

Trust’s attorney had drafted that proposed option agreement by

using as a model an option agreement that the Trust typically

employed when it was attempting to acquire land. The Company

could have rejected the Trust’s proposed option agreement. How-

ever, it decided to accept it.

On January 23, 2001, Klauer Manufacturing and the Trust

executed a document entitled “OPTION AGREEMENT” (Option Agree-

ment) that was effective as of that date. The Option Agreement

provided in pertinent part:

This is an Agreement with the Effective Date [of
January 23, 2001] * * * between KLAUER MANUFACTURING
COMPANY, an Iowa corporation (“Sellers”), and THE TRUST
FOR PUBLIC LAND, a nonprofit California public benefit
corporation authorized to do business in New Mexico
(“Buyer”).

RECITALS

* * * * * * *

B. Sellers are the owners of 2,581 acres, more
or less, of real property located in Taos County, New
Mexico * * *. Said real property, together with any
and all improvements, fixtures, timber, water and/or
minerals located thereon and any and all rights appur-
tenant thereto including but not limited to timber
 -12-

rights, water rights, grazing rights, access rights,
mineral rights, development rights, and all governmen-
tal licenses, permits and certificates applicable
thereto, shall be referred to in this Agreement as the
“Property” or the “Subject Property”.

* * * * * * *

D. It is the mutual intention of Sellers and
Buyer that the Subject Property be preserved and used
eventually for public, open space and habitat purposes.
However this intention shall not be construed as a
covenant or condition to this Agreement. Buyer makes
no representation that any efforts it may undertake to
secure the eventual government acquisition of the Sub-
ject Property will be successful.

E. Sellers acknowledge that Buyer is entering
into this Agreement in its own right and that Buyer is
not an agent of any governmental agency or entity.

* * * * * * *

THE PARTIES AGREE AS FOLLOWS:

1. Subject Property: Phases. For purposes of
this Agreement, the Subject Property shall be divided
into three (3) parcels, each consisting of 860.33
acres, more [or] less.

Phase I: The first phase would consist of
approximately one-third of the total acreage, more or
less.

Phase II: The second phase would consist of
approximately one-third of the total acreage, more or
less.

Phase III: The third phase would consist of
approximately one-third of the total acreage, more or
less.

The first Phase shall be referred to herein as
Phase I (“Phase I”). The second Phase shall be re-
ferred to herein as Phase II (“Phase II”). The third
 -13-

Phase shall be referred to herein as Phase III (“Phase
III”). Together the phases may be called the “Phases”.
Seller will sell and convey to Buyer, and Buyer hereby
agrees to purchase and accept from Seller, the Subject
Property on the terms and conditions set forth in this
Agreement. Conveyance of the Subject Property to Buyer
shall occur in three (3) separate closings * * *, one
for each Phase. Each Phase shall be finally determined
by a survey of said Phase to be conducted by a surveyor
mutually agreed to by the parties. Prior to a survey
being conducted, the parties shall meet and agree as to
the portion of the Property to be included in each
Phase. The parties state that it is their agreement
that the Phases will run north to south * * * and that
Phase I shall include the most westerly portion of the
Property, Phase II shall be adjacent to Phase I and
shall include the middle portion of the Property and
Phase III shall include the most easterly portion of
the Property.

2. Options. In consideration of the payment by
Buyer to Seller of the payment of Ten Thousand Dollars
($10,000.00) (the “Option Consideration”), receipt of
which is hereby acknowledged, Seller grants to Buyer an
exclusive and irrevocable option to purchase the Sub-
ject Property in three Phases on the terms and condi-
tions set forth in this Agreement (the “Option”). Any
Option Consideration paid shall be credited toward the
Purchase Price (as defined below) of Phase III of the
Subject Property in the event Buyer exercises the Op-
tion(s) and closes on the purchase of the three Phases
of the Subject Property. Seller shall return the Op-
tion Consideration to Buyer if the sale of the Property
is not consummated under this Agreement because of
Seller’s affirmative default under this Agreement,
otherwise said option consideration shall be
nonrefundable. If Buyer’s existence should terminate
at any time, then this Agreement shall automatically
terminate. The Option Consideration, without interest,
shall be credited to the purchase of the Phase III
Property. If Phase I is exercised, but either Phase II
or Phase III are not exercised, then the Option Consid-
eration shall be retained by Seller, unless the failure
to exercise is caused by Seller’s affirmative default
 -14-

under this Agreement, in which event the Option Consid-
eration shall be paid to Buyer.

3. Term. Buyer’s Phase I Option shall run from
the Effective Date of this Agreement to and through
February 28, 2001 * * *, within which time, Buyer may
exercise said Option. If, and only if, Buyer exercises
the Phase I Option and closes on the purchase of Phase
I, then Buyer shall have an Option to purchase Phase
II, which shall run from the Closing of Phase I to
February 28, 2002. If, and only if, Buyer exercises
the Phase II Option and closes on the purchase of Phase
II, then Buyer shall have an Option to purchase Phase
III, which shall run from the date of closing on Phase
II to February 28, 2003. If the Option for any Phase
is not timely exercised, then it and the balance of any
Options existing hereunder shall automatically termi-
nate unless extended by mutual agreement of the par-
ties.

4. Exercise. In the event Buyer exercises the
Option for either Phase I, Phase II, or Phase III, it
shall do so by notifying Seller (the “Notice of Exer-
cise”) prior to the end of the Option period(s) speci-
fied in Section 3 above. The Notices of Exercise shall
be deemed timely if deposited in the mail, first class
postage prepaid, telecopied or delivered personally by
courier or Express Mail within the terms and upon the
condition specified in Section 3. If Buyer does not
timely deliver the Notice of Exercise for Phase I, then
this entire Option shall terminate, and Seller shall
retain all Option Consideration previously paid by
Buyer, together with any accrued interest thereon. If
Buyer has closed on Phase I and Buyer does not timely
deliver the Notice of Exercise for Phase II, then the
remainder of this Agreement shall terminate, and Seller
shall retain all Option Consideration previously paid
or deposited by Buyer, together with any accrued inter-
est thereon. If Buyer has closed on Phase II and Buyer
does not timely deliver the Notice of Exercise for
Phase III, then the remainder of this Agreement shall
terminate, and Seller shall retain all Option Consider-
ation previously paid or deposited by Buyer, together
with any accrued interest thereon.
 -15-

5. Purchase Terms.

a. Price.

(1) The Purchase Price for Phase I
shall be Four Million Dollars ($4,000,000.00). The
Purchase Price for Phase II shall be Five Million Dol-
lars ($5,000,000.00). The Purchase Price for Phase III
shall be Five Million Five Hundred Thousand Dollars
($5,500,000.00).

(2) Notwithstanding the foregoing, if
prior to Closing of any Phase, any governmental regula-
tion, action, statute or ordinance is adopted that
negatively, materially affects the fair market value of
the Subject Property, Buyer may at its option terminate
this Agreement in which case Buyer shall have no obli-
gation to purchase the Subject Property.

b. Method of Payment. Buyer shall pay to
Seller in cash or certified funds the Purchase Price
for each Phase which is closed at the closing of each
Phase. The parties agree to coordinate payment by wire
transfer in order to expedite timely payment.

c. Appraisal. Buyer and Seller shall have
an appraisal performed on each Phase of the Property,
by appraiser(s) approved by both parties, which ap-
praisals shall be conducted in accordance with the
requirements of the Internal Revenue Code for purposes
of claiming charitable gifts of real property because
the parties believe, as set forth in subsection (d)
below that the Property is being sold at less than fair
market value.

d. Bargain Sale. Buyer and Seller acknowl-
edge that Buyer is a non-profit corporation qualified
under §501(c)(3) of the Internal Revenue Code, is an
“eligible donee” as described in Treasury Regulation
1.170A-l4(c). The parties believe the Purchase Price
in paragraph 5a. above is significantly less than each
Phase’s fair market value, thereby making a bargain
sale to Buyer. The Seller intends to take a charitable
deduction for the difference between the purchase price
and the fair market value of the Property. Notwith-
 -16-

standing the foregoing, Seller, at its sole expense,
shall pay all costs, expenses and fees incurred in
connection with its attempt to realize a charitable
deduction in connection with the sale of the Property
under this Option Agreement, including, but not limited
to, attorneys’ fees and accountants’ fees. Seller
hereby acknowledges and agrees that Buyer has made no
warranty or representation as to Seller’s entitlement
or ability to realize any tax benefits in connection
with this Option Agreement, and Seller will retain
independent legal and tax counsel in its attempt to
realize any tax benefits therefrom.

6. Closing. Final settlement of the obligations
of the parties hereto (“Closing”) shall be on or before
ninety (90) days after the Buyer’s exercise of the
Option on any particular Phase, or as otherwise agreed
to by the parties, at such date, place and time as the
parties shall mutually agree. * * * The parties agree
that Buyer may arrange a simultaneous closing with a
public agency and Sellers will cooperate in coordinat-
ing such a simultaneous closing.

7. Title and Survey.

a. At closing, Sellers shall convey to Buyer
by a General Warranty Deed marketable title to each and
every Phase of the Subject Property which is east of
the river line and a Quitclaim Deed for any portion of
the property in the Rio Grande River.

b. This Agreement is entered into without
the benefit of a current title commitment on the Sub-
ject Property. Within thirty (30) days after the Ef-
fective Date, Buyer shall order such a commitment from
a title insurance company authorized to do business in
Taos County, New Mexico (Escrow Holder), together with
copies of all of the documents referred to therein as
exceptions. Not later than thirty (30) days prior to
Closing on Phase I or within fourteen (14) days of
receipt of the current title commitment and copies of
the documents referred to above, whichever date is
later, Buyer shall advise Sellers of any nonstandard
exceptions in the title commitment which Buyer will
require to be removed on or before Closing. Thereafter
 -17-

Sellers shall use their best efforts to assure the
removal of any such objectionable exceptions by Closing
of Phase I, or the Closing on the Phase which contains
the title exception. In the event Sellers are unable
to remove any such exceptions to which Buyer has ob-
jected Buyer may elect to (1) terminate this Agreement
as to a particular Phase or as to all Phases, in which
case Buyer shall have no obligation to purchase the
Subject Property or any Phase thereof unless already
purchased, (2) proceed with the purchase of the Subject
Property or any Phase thereof and accept a policy of
title insurance with the exceptions to which Buyer
objected or (3) defer Closing until the exceptions are
removed if Sellers can remove the exceptions with addi-
tional time. In any event, Sellers shall satisfy and
discharge all monetary liens and encumbrances (except
any statutory liens for nondelinquent real property
taxes) affecting the Subject Property. The parties
stipulate and agree that title to the property shall be
subject to any and all reservations as set forth in the
original patent from the United States of America to
the Gijosa land grant.

In the event Buyer terminates this Agreement pur-
suant to this Section 7(b), Buyer shall be entitled to
immediate repayment of all Option Consideration paid
for any Phases not then closed.

c. Survey. This Agreement is entered into
without the benefit of a current survey of the Prop-
erty. During the term of this Agreement, Buyer, at
Buyer[’s] sole cost and expense, through its employees,
agents or assigns, shall enter upon the Subject Prop-
erty for the purpose of preparing a survey of the Sub-
ject Property, which shall delineate the Phases of the
Subject Property. A copy of the survey shall be deliv-
ered by Buyer to Seller, all pursuant to Paragraph 1
hereof. The parties shall mutually agree on the survey
at least thirty (30) days prior to Closing.

The purchase price for each of the three so-called phases of

the Taos Overlook set forth in the Option Agreement (i.e., $4

million for phase I, $5 million for phase II, and $5.5 million
 -18-

for phase III) did not bear any relationship to the fair market

value of each such phase. Instead, each such price was based on

the Trust’s estimate of the amount of funds that the Trust hoped

Congress might appropriate for the Trust’s acquisition of each

such phase during each year specified in the Option Agreement.

If the Trust had been unable to obtain the funds needed to

purchase a portion of the Taos Overlook specified in the Option

Agreement, it would not have exercised its option under that

agreement to purchase any such portion. In that event, Klauer

Manufacturing would have retained the portion of the Taos Over-

look as to which the Trust did not exercise its option to pur-

chase under the Option Agreement.

The Option Agreement did not require the Trust to exercise

any or all of its options to acquire the phases of the Taos Over-

look specified in that agreement. Under that agreement, the

Trust’s exercise of its option to acquire one phase did not obli-

gate it to exercise its option to acquire any other phase.

Klauer Manufacturing and the Trust did not have an express or

implied agreement or understanding that the Trust would exercise

all of its options under the Option Agreement. Nor did Klauer

Manufacturing and the Trust have an express or implied agreement

or understanding that the Trust would buy, and Klauer Manufactur-

ing would sell, all of the Taos Overlook.
 -19-

Around February 2001, the Trust believed that it would be

able to use certain funds that Congress had appropriated in order

to exercise its option to acquire and to acquire phase I of the

Taos Overlook. However, the Trust needed more time than that set

forth in the Option Agreement in order to know with certainty

that it would be able to use those appropriated funds and to

decide whether to exercise its option to acquire and to acquire

that phase. As a result, the Trust asked the Company to extend

the date in that agreement (i.e., February 28, 2001) by which the

Trust was required to exercise that option. The Company agreed

to extend that date to March 30, 2001.

On February 23, 2001, Klauer Manufacturing and the Trust

executed a document entitled “FIRST AMENDMENT TO OPTION AGREE-

MENT” (First Amendment) that was effective as of that date. The

First Amendment provided in pertinent part:

RECITALS

A. Seller [Klauer Manufacturing] and Buyer [the
Trust] have previously entered into that certain Option
Agreement (the “Option Agreement”) for the acquisition
of 2,581 acres, more or less, of real property, located
in Taos County, New Mexico, in three phases.

B. Due to additional time being required to com-
plete and review due diligence matters, the parties
[the Trust and Klauer Manufacturing] desire to amend
the Option Agreement as set forth below.
 -20-

TERMS

THE PARTIES AGREE AS FOLLOWS:

1. Paragraph 2 of the Option Agreement is amended
to provide that the term of the Option [on Phase I] is
extended to run to and through March 30, 2001.

2. Paragraph 5 of the Option Agreement is amended
to provide that Closing [on Phase I] shall occur on or
before March 31, 2001.

3. All terms of the Option Agreement necessarily
modified or changed by this amendment are hereby modi-
fied and changed and all terms of the Option Agreement
not modified or amended hereby remain the same and in
full force and effect between the parties.

On March 21, 2001, the board of directors (board) of Klauer

Manufacturing passed a resolution approving the sale to the Trust

of approximately 860.3 acres of the Taos Overlook that the Com-

pany and the Trust agreed constituted what they, and we shall,

refer to as phase I. However, any such sale was subject to all

of the requirements of the Option Agreement as amended having

been satisfied, including those relating to a survey, an ap-

praisal, due diligence regarding title, and due diligence regard-

ing environmental matters, and the Trust’s having sent to the

Company the notice of exercise of the Trust’s option to acquire

that phase, as required by the Option Agreement as amended.

Around March 21, 2001, the Trust sent to Klauer Manufacturing

that notice, which Peter Ives, regional counsel for the Trust,
 -21-

signed on behalf of the Trust. The subject line of that notice

stated: “RE: Notice of Exercise of Option”.

After the Trust sent to Klauer Manufacturing the notice of

exercise of its option to purchase phase I and exercised that

option and after all the other requirements of the Option Agree-

ment as amended were satisfied, the Company was obligated to sell

that phase to the Trust for $4 million. On March 30, 2001,

Klauer Manufacturing sold phase I to the Trust for that amount.

On January 30, 2001, the fair market value of phase I was $6.782

million.11

After its sale of phase I to the Trust, Klauer Manufacturing

continued to pay the real estate taxes on and the costs of main-

taining the approximately 1,720.7 acres of the Taos Overlook that

it continued to own after that sale.

After the Trust acquired phase I of the Taos Overlook, it

continued to seek the funding that would enable it to exercise

the option that it had under the Option Agreement as amended to

acquire the next phase, i.e., phase II.12 At a time not dis-

11
The parties agree that on Mar. 30, 2001, the fair market
value of phase I was the same as its fair market value on Jan.
30, 2001, the date as of which that phase was appraised.
12
The Trust’s search for funds required its representatives
(and others who supported the Trust’s objectives) to lobby for
congressional funding by, for example, meeting with certain
(continued...)
 -22-

closed by the record before April 15, 2001, the Trust learned

that the Bureau of Land Management unexpectedly had certain funds

to provide to the Trust that would enable the Trust to decide

whether it would be in a financial position to exercise its op-

tion to acquire and to acquire phase II of the Taos Overlook.13

The Trust concluded that, even with the unanticipated funds from

the Bureau of Land Management, it did not have enough money to

exercise its option to acquire and to acquire phase II. However,

the Trust believed that those unexpected funds would enable it to

acquire approximately 218.6 acres of that phase, provided that

Klauer Manufacturing were willing to amend the Option Agreement

as amended by the First Amendment in order to grant the Trust

separate options to acquire at different times separate portions

of phase II of the Taos Overlook. The Company agreed to amend

that agreement.

12
(...continued)
representatives of Congress, including members of certain con-
gressional committees and their staffs, and sustaining and
increasing its grassroots campaigns. Local organizations as-
sisted the Trust in its grassroots campaigns by, inter alia,
organizing tours of the Taos Overlook and undertaking a letter-
writing campaign to representatives of Congress from New Mexico.
13
The Bureau of Land Management had funds that were unex-
pectedly available to the Trust because the Bureau of Land
Management’s proposed acquisition of certain property had failed
to close and the funds that were to have been used for that
proposed acquisition became available.
 -23-

On April 15, 2001, Klauer Manufacturing and the Trust exe-

cuted a document entitled “SECOND AMENDMENT TO OPTION AGREEMENT”

(Second Amendment) that was effective as of that date. The Sec-

ond Amendment provided in pertinent part:

RECITALS

A. Seller [Klauer Manufacturing] and Buyer [the
Trust] have previously entered into that certain Option
Agreement (the “Option Agreement”) for the acquisition
of 2581 acres, more or less, of real property, located
in Taos County, New Mexico, in three phases.

B. Due to anticipated opportunities to move por-
tions of the transaction forward on timeframes differ-
ent than those originally contemplated, the parties
[the Trust and Klauer Manufacturing] desire to modify
the Option Agreement as set forth below.

TERMS

THE PARTIES AGREE AS FOLLOWS:

1. Paragraph 1 of the Option Agreement is amended
to provide that Buyer may exercise its options as to
portions of the Phase II and Phase III[14] tracts of the
Property as set forth below. Exercise of an option on
a portion of a Phase shall preserve the option as to
any remaining portion of that Phase within the time
frame set forth in the Option Agreement for that op-
tion. The Phase II option shall be exercised upon in
its entirety before any portion of the Phase III option
may be exercised upon. Any portion of any Phase so
exercised shall abut and share a common line with that

14
Klauer Manufacturing and the Trust included phase III in
the Second Amendment to provide for the possibility that, as was
true of phase II, the Trust would not have the funds that would
enable it to exercise its option to acquire and to acquire all of
phase III but would have the funds to acquire one or more por-
tions of that phase.
 -24-

portion of the entire Property previously conveyed by
the Seller to the Buyer.

2. Paragraph 5(c) of the Option Agreement is
amended to provide that an appraisal shall be performed
of each and every portion of any Phase of the Property
and that the appraisal, and the Closing on any such
portion of any Phase, shall be subject to the review
and approval of the appraisal by the Seller and the
Buyer.

3. All terms of the Option Agreement necessarily
modified or changed by this amendment are hereby modi-
fied and changed and all terms of the Option Agreement
not modified or amended hereby remain the same and in
full force and effect between the parties.

Pursuant to the Option Agreement as amended, the Trust exer-

cised its option to acquire with the unanticipated funds from the

Bureau of Land Management approximately 218.6 acres of phase II,

which the Company and the Trust agreed constituted what they, and

we shall, refer to as phase IIA.

On August 30, 2001, Klauer Manufacturing’s board passed a

resolution approving the sale to the Trust of phase IIA. How-

ever, any such sale was subject to all of the requirements of the

Option Agreement as amended having been satisfied, including

those relating to a survey, an appraisal, due diligence regarding

title, and due diligence regarding environmental matters, and the

Trust’s having sent to the Company the notice of exercise of the

Trust’s option to acquire that phase, as required by the Option

Agreement as amended. Around August 30, 2001, the Trust sent to

Klauer Manufacturing that notice.
 -25-

After (1) the Trust sent to Klauer Manufacturing the notice

of exercise of its option to purchase phase IIA and exercised

that option, (2) both Klauer Manufacturing and the Trust reviewed

and approved the appraisal of the fair market value of phase IIA

(i.e., $1.687 million) that had been obtained, and (3) all the

other requirements of the Option Agreement as amended were satis-

fied, the Company was obligated to sell phase IIA to the Trust.

On September 5, 2001, Klauer Manufacturing sold phase IIA to the

Trust for $1.687 million.15

After its sale of phase IIA to the Trust, Klauer Manufactur-

ing continued to pay the real estate taxes on and the costs of

maintaining the approximately 1,502.1 acres of the Taos Overlook

that it continued to own after that sale.

The Trust continued to seek the funding that would enable it

to exercise the option that it had under the Option Agreement as

amended to acquire a portion or all of the remainder of phase

II.16 As was true of the unexpected funding that became avail-

able to the Trust with respect to its purchase of phase IIA, the

Trust learned of another unexpected source of funds that would

enable it to decide whether it would be in a financial position

15
The parties agree that on Sept. 5, 2001, the fair market
value of phase IIA was the same as its fair market value on June
3, 2001, the date as of which that phase was appraised.
16
See supra note 12.
 -26-

to exercise its option to acquire and to acquire a portion or all

of the remainder of phase II. That unexpected source of funds

was the Native American Tribe from San Felipe Pueblo (San Felipe

Pueblo tribe).

At a time not disclosed by the record after February 23,

2001, and before June 3, 2001, the Trust became aware that the

San Felipe Pueblo tribe was interested in acquiring certain land

that the Bureau of Land Management owned and that was of cultural

significance to that tribe. However, that tribe was unable to

acquire directly from the Bureau of Land Management the land that

it wanted. In an effort to assist the San Felipe Pueblo tribe in

acquiring that land and to provide itself with the funds that it

needed to exercise its option to acquire and to acquire a portion

of the remainder of phase II of the Taos Overlook, the Trust

proposed the following arrangement to that tribe and the Bureau

of Land Management: The San Felipe Pueblo tribe would provide to

the Trust the funds that the Trust would need to acquire approxi-

mately 268.7 acres of the remainder of phase II of the Taos Over-

look, which the Company and the Trust agreed constituted what

they, and we shall, refer to as phase IIB. The Trust would exer-

cise its option to, and would, acquire phase IIB, and it would

then convey that phase to the San Felipe Pueblo tribe. Thereaf-

ter, the Bureau of Land Management would convey to that tribe the
 -27-

land that it owned and that that tribe wanted in exchange for

phase IIB. The San Felipe Pueblo tribe and the Bureau of Land

Management agreed to the Trust’s proposed arrangement. That

tribe provided the Trust with the funds that it needed to acquire

phase IIB from the Company.

On August 14, 2001, the Trust sent to Klauer Manufacturing

the notice of exercise of the Trust’s option to acquire phase

IIB.17 The subject line of that notice stated: “Re: Klauer Man-

ufacturing Company/The Trust For Public Land”. In addition, the

Trust and Klauer Manufacturing undertook to satisfy all of the

other requirements of the Option Agreement as amended.

After (1) the Trust sent to Klauer Manufacturing the notice

of exercise of its option to purchase phase IIB and exercised

that option, (2) both Klauer Manufacturing and the Trust reviewed

and approved the appraisal of the fair market value of phase IIB

(i.e., $1.89 million) that had been obtained, and (3) all the

other requirements of the Option Agreement as amended were satis-

fied, the Company was obligated to sell phase IIB to the Trust.

17
The record does not establish whether the Company’s board
passed a resolution approving the sale of phase IIB, but we
presume that it did.
 -28-

On December 10, 2001, Klauer Manufacturing sold phase IIB to the

Trust for $1.89 million.18

After the Company’s sale to the Trust of phase IIB, as pre-

viously arranged with the San Felipe Pueblo tribe and the Bureau

of Land Management, the Trust conveyed that phase to that tribe.

Thereafter, the San Felipe Pueblo tribe exchanged phase IIB for

the land that the Bureau of Land Management owned and that the

tribe wanted to acquire.

After its sale of phase IIB to the Trust, Klauer Manufactur-

ing continued to pay the real estate taxes on and the costs of

maintaining the approximately 1,233.4 acres of the Taos Overlook

that it continued to own after that sale.

After the Trust acquired phase IIB of the Taos Overlook, it

continued to seek the funding that would enable it to exercise

the options that it had under the Option Agreement as amended to

acquire the remainder of phase II and a portion or all of phase

III.19 The Trust’s efforts focused on obtaining approval to use

$5 million that Congress had appropriated to the Land and Water

Conservation Fund.

18
The parties agree that on Dec. 10, 2001, the fair market
value of phase IIB was the same as its fair market value on June
3, 2001, the date as of which that phase was appraised.
19
See supra note 12.
 -29-

At a time not disclosed by the record after June 3, 2001,

and before February 15, 2002, the Trust became aware that Klauer

Manufacturing was dissatisfied with the appraised value of cer-

tain property that the Trust had acquired from the Company pursu-

ant to the Option Agreement as amended. In an effort to minimize

the likelihood that Klauer Manufacturing would not approve the

appraisal, which Klauer Manufacturing (as well as the Trust) had

the right to do under paragraph 2 of the Second Amendment, of one

or more portions of the Taos Overlook which the Company still

owned and with respect to which the Trust were to exercise its

option to acquire under the Option Agreement as amended, the

Trust proposed a $500,000 increase in the aggregate amount of

consideration that it would pay to Klauer Manufacturing in the

event that the Trust were to decide to exercise its remaining

options under that agreement. Klauer Manufacturing agreed to

that proposal.20

On February 15, 2002, Klauer Manufacturing and the Trust

executed a document entitled “THIRD AMENDMENT TO OPTION AGREE-

MENT” (Third Amendment) that was effective as of that date. The

Third Amendment provided in pertinent part:

20
The Company also agreed to extend by one month the date in
the Option Agreement as amended by which the Trust was required
to exercise its option to acquire the remainder of phase II.
 -30-

RECITALS

A. Seller [Klauer Manufacturing] and Buyer [the
Trust] have previously entered into that certain Option
Agreement, as amended (collectively the “Option Agree-
ment”) for the acquisition of 2581 acres, more or less,
of real property, located in Taos County, New Mexico,
in three phases.

B. In order to increase the total consideration
to be paid and eliminate problems associated with the
appraisal process, the parties [the Trust and Klauer
Manufacturing] desire to modify the Option Agreement as
set forth below.

TERMS

THE PARTIES AGREE AS FOLLOWS:

1. Paragraph 5(a)(1) of the Option Agreement is
amended to provide that Buyer shall pay to Seller a
total of $15,000,000 for acquisition of all of the
three Phases and portions thereof.

2. Buyer’s option on the remainder of Phase II
shall be extended from February 28, 2002, to and
through March 28, 2002. Closing shall occur on or
before March 31, 2002.

3. All terms of the Option Agreement necessarily
modified or changed by this amendment are hereby modi-
fied and changed and all terms of the Option Agreement
not modified or amended hereby remain the same and in
full force and effect between the parties.

Around the end of 2001 or the beginning of 2002, the Trust

learned that it was authorized to use $4.5 million, but not the

$5 million that the Trust had sought, of funds that Congress had

appropriated to the Land and Water Conservation Fund. The Trust

decided to use those funds in order to acquire 700 acres of the

Taos Overlook, which the Company and the Trust agreed constituted
 -31-

what they, and we shall, refer to as phase IIC. As a result, the

Trust decided to exercise its option under the Option Agreement

as amended to acquire that phase.

On March 28, 2002, Klauer Manufacturing’s board passed a

resolution approving the sale to the Trust of phase IIC. How-

ever, any such sale was subject to all of the requirements of the

Option Agreement as amended having been satisfied, including

those relating to a survey, an appraisal, due diligence regarding

title, and due diligence regarding environmental matters, and the

Trust’s having sent to the Company the notice of exercise of the

Trust’s option to acquire that phase, as required by the Option

Agreement as amended. On March 28, 2002, the Trust sent to

Klauer Manufacturing that notice, which Sarae Leuckel (Ms.

Leuckel),21 regional counsel for the Trust, signed. The subject

line of the notice that the Trust sent to the Company stated:

Re: Notice of Exercise pursuant to Option Agreement
effective as of January 23, 2001, as amended,
between Klauer Manufacturing Company, an Iowa
corporation and The Trust for Public Land, a non-
profit California public benefit corporation au-
thorized to do business in New Mexico pertaining
to approximately 2,581 acres, more or less, of
real property located in Taos County, New Mexico
(the “Property”)

21
Ms. Leuckel had personal knowledge of (1) the Trust’s
interest in the Taos Overlook and (2) the Option Agreement.
 -32-

After (1) the Trust sent to Klauer Manufacturing the notice

of exercise of its option to purchase phase IIC and exercised

that option, (2) both Klauer Manufacturing and the Trust reviewed

and approved the appraisal of the fair market value of phase IIC

(i.e., $5.721 million) that had been obtained, and (3) all the

other requirements of the Option Agreement as amended were satis-

fied, the Company was obligated to sell phase IIC to the Trust.

On March 28, 2002, Klauer Manufacturing sold phase IIC to the

Trust for $4.5 million.22

After its sale of phase IIC to the Trust, Klauer Manufactur-

ing continued to pay the real estate taxes on and the costs of

maintaining the approximately 533.4 acres of the Taos Overlook

that it continued to own after that sale.

The Trust continued to seek the funding that would enable it

to exercise the option that it had under the Option Agreement as

amended to acquire a portion or all of the next phase, i.e.,

phase III.23 As was true of the unexpected funding that became

available to the Trust with respect to its purchases of phase IIA

and phase IIB, the Trust learned of another unexpected source of

funds that would enable it to decide whether it would be in a

22
The parties agree that on Mar. 28, 2002, the fair market
value of phase IIC was the same as its fair market value on Feb.
5, 2002, the date as of which that phase was appraised.
23
See supra note 12.
 -33-

financial position to exercise its option to acquire and to ac-

quire a portion or all of phase III. That unexpected source of

funds was the Native American Tribe from Santo Domingo Pueblo

(Santo Domingo Pueblo tribe).

At a time not disclosed by the record before February 5,

2002, the Trust became aware that the Santo Domingo Pueblo tribe

was interested in acquiring certain land that the Bureau of Land

Management owned and that was of cultural significance to that

tribe. However, as was true of the San Felipe Pueblo tribe, the

Santo Domingo Pueblo tribe was unable to acquire directly from

the Bureau of Land Management the land that it wanted. In an

effort to assist the Santo Domingo Pueblo tribe in acquiring that

land and to provide itself with the funds that it needed to exer-

cise its option to acquire and to acquire a portion of phase III,

the Trust proposed the following arrangement to that tribe and

the Bureau of Land Management: The Santo Domingo Pueblo tribe

would provide to the Trust the funds that the Trust would need to

acquire approximately 161.3 acres of phase III of the Taos Over-

look, which the Company and the Trust agreed constituted what

they, and we shall, refer to as phase IIIA. The Trust would

exercise its option to, and would, acquire phase IIIA, and it

would then convey that phase to the Santo Domingo Pueblo tribe.

Thereafter, the Bureau of Land Management would convey to that
 -34-

tribe the land that it owned and that that tribe wanted in ex-

change for phase IIIA. The Santo Domingo Pueblo tribe and the

Bureau of Land Management agreed to the Trust’s proposed arrange-

ment. That tribe provided the Trust with the funds that it need-

ed to acquire phase IIIA from the Company.

On May 13, 2002, Klauer Manufacturing’s board passed a reso-

lution approving the sale to the Trust of phase IIIA. However,

any such sale was subject to all of the requirements of the Op-

tion Agreement as amended having been satisfied, including those

relating to a survey, an appraisal, due diligence regarding ti-

tle, and due diligence regarding environmental matters, and the

Trust’s having sent to the Company the notice of exercise of the

Trust’s option to acquire that phase, as required by the Option

Agreement as amended. Around May 13, 2002, the Trust sent to

Klauer Manufacturing that notice.

After (1) the Trust sent to Klauer Manufacturing the notice

of exercise of its option to purchase phase IIIA and exercised

that option, (2) both Klauer Manufacturing and the Trust reviewed

and approved the appraisal of the fair market value of phase IIIA

(i.e., $1.31 million) that had been obtained, and (3) all the

other requirements of the Option Agreement as amended were satis-

fied, the Company was obligated to sell phase IIIA to the Trust.
 -35-

On May 14, 2002, Klauer Manufacturing sold phase IIIA to the

Trust for $1.31 million.24

After the Company’s sale to the Trust of phase IIIA, as

previously arranged with the Santo Domingo Pueblo tribe and the

Bureau of Land Management, the Trust conveyed that phase to that

tribe. Thereafter, the Santo Domingo Pueblo tribe exchanged

phase IIIA for the land that the Bureau of Land Management owned

and that the tribe wanted to acquire.

After its sale of phase IIIA to the Trust, Klauer Manufac-

turing continued to pay the real estate taxes on and the costs of

maintaining the approximately 372.1 acres of the Taos Overlook

that it continued to own after that sale.

After the Trust acquired phase IIIA of the Taos Overlook, it

continued to seek the funding that would enable it to exercise

the option that it had under the Option Agreement as amended to

acquire a portion or all of the remainder of phase III.25 At a

time not disclosed by the record in late 2002 or early 2003, the

Trust believed that it would be able to use certain funds that

Congress had appropriated to the Land and Water Conservation Fund

in order to acquire the remainder of phase III consisting of

24
The parties agree that on May 14, 2002, the fair market
value of phase IIIA was the same as its fair market value on Feb.
5, 2002, the date as of which that phase was appraised.
25
See supra note 12.
 -36-

approximately 372 acres of the Taos Overlook, which the Company

and the Trust agreed constituted what they, and we shall, refer

to as phase IIIB. However, the Trust needed more time than that

set forth in the Option Agreement in order to know with certainty

that it would be able to use those funds and to decide whether to

exercise its option to acquire and to acquire phase IIIB. As a

result, the Trust asked the Company to extend the date in that

agreement (i.e., February 28, 2003) by which the Trust was re-

quired to exercise that option. The Company agreed to extend

that date to March 28, 2003.

On February 28, 2003, Klauer Manufacturing and the Trust

executed a document entitled “FOURTH AMENDMENT TO OPTION AGREE-

MENT” (Fourth Amendment). The Fourth Amendment provided in per-

tinent part:

RECITALS

A. Seller [Klauer Manufacturing] and Buyer [the
Trust] have previously entered into that certain Option
Agreement, as amended (collectively the “Option Agree-
ment”), for the acquisition of 2,581 acres, more or
less, of real property, located in Taos County, New
Mexico, in three phases.

B. The parties [the Trust and Klauer Manufactur-
ing] desire to amend the Option Agreement as set forth
below.
 -37-

TERMS

THE PARTIES AGREE AS FOLLOWS:

1. Buyer’s option on Phase III shall be extended
from February 28, 2003, to and through March 28, 2003.
Closing shall occur on or before March 31, 2003.

2. All terms of the Option Agreement necessarily
modified or changed by this amendment are hereby modi-
fied and changed and all terms of the Option Agreement
not modified or amended hereby remain the same and in
full force and effect between the parties.

At a time not disclosed by the record after February 28,

2003, the Trust learned that it was authorized to use certain

funds that Congress had appropriated to the Land and Water

Conservation Fund. The Trust decided to use those funds in order

to acquire phase IIIB. As a result, the Trust decided to

exercise its option under the Option Agreement as amended to

acquire that phase.

On March 13, 2003, Klauer Manufacturing’s board passed a

resolution approving the sale to the Trust of phase IIIB. How-

ever, any such sale was subject to all of the requirements of the

Option Agreement as amended having been satisfied, including

those relating to a survey, an appraisal, due diligence regarding

title, and due diligence regarding environmental matters, and the

Trust’s having sent to the Company the notice of exercise of the

Trust’s option to acquire that phase, as required by the Option

Agreement as amended. On March 28, 2003, the Trust sent to
 -38-

Klauer Manufacturing that notice, which Peter Ives signed. The

subject line of that notice stated:

Re: Notice pursuant to Option Agreement effective
as of January 23, 2001, as amended, between
* * * Klauer Manufacturing Company and The
Trust for Public Land, a nonprofit California
public benefit corporation authorized to do
business in New Mexico pertaining to 2,581
acres, more or less, of real property located
in Taos County, New Mexico

After (1) the Trust sent to Klauer Manufacturing the notice

of exercise of its option to purchase phase IIIB and exercised

that option, (2) both Klauer Manufacturing and the Trust reviewed

and approved the appraisal of the fair market value of phase IIIB

(i.e., $3.06 million) that had been obtained, and (3) all the

other requirements of the Option Agreement as amended were satis-

fied, the Company was obligated to sell that phase to the Trust.

On March 30, 2003, Klauer Manufacturing sold phase IIIB to the

Trust for $1.613 million.26

After the Trust exercised its options under the Option

Agreement as amended and acquired all of the Taos Overlook, it

transferred to the Bureau of Land Management any portion of the

Taos Overlook that had not previously been transferred to that

Bureau. Thereafter, that Bureau incorporated the Taos Overlook

26
The parties agree that on Mar. 30, 2003, the fair market
value of phase IIIB was the same as its fair market value on Jan.
15, 2003, the date as of which that phase was appraised.
 -39-

into an area known as the Orilla Verde Recreation Area that it

owned.27

Klauer Manufacturing filed Form 1120S, U.S. Income Tax Re-

turn for an S Corporation (Form 1120S), for taxable year 2001

(2001 S corporation return). In that return, Klauer Manufactur-

ing claimed a charitable contribution deduction of $2,935,619,

which included an amount that Klauer Manufacturing claimed with

respect to the sale of phase I. The Company reported the chari-

table contribution deduction claimed with respect to the sale of

that phase in Form 8283, Noncash Charitable Contributions (Form

8283), that it included with the 2001 S corporation return (2001

Form 8283).28

Klauer Manufacturing issued to each stockholder petitioner

2001 Schedule K-1. In each of those schedules, Klauer Manufac-

turing reported as a charitable contribution deduction each

stockholder petitioner’s proportionate share of the Company’s

27
In March 2003, a plaque was erected at the Taos Overlook
to commemorate William J. Klauer and his commitment to the
preservation of the Taos Overlook.
28
The Court is unable to reconcile (1) certain amounts
claimed in the 2001 Form 8283 and certain amounts reported in
Schedule K-1, Shareholder’s Share of Income, Credits, Deductions,
etc. (Schedule K-1), that Klauer Manufacturing issued to each of
its stockholders for 2001 (2001 Schedule K-1) with (2) certain
amounts that the parties stipulated. However, reconciliation of
those amounts is not necessary to our resolution of the issue
presented in these cases.
 -40-

claimed charitable contribution deduction, including the amount

that Klauer Manufacturing claimed with respect to the sale of

phase I.29

Petitioners or petitioner, as the case may be, in each of

these cases filed Form 1040, U.S. Individual Income Tax Return

(Form 1040), for taxable year 2001 that included Schedule A--

Itemized Deductions (Schedule A) for that year (2001 Schedule A).

Those respective 2001 Schedules A showed charitable contribution

deductions which included stockholder petitioners’ respective

proportionate shares of Klauer Manufacturing’s claimed charitable

contribution deduction that Klauer Manufacturing showed in the

2001 Schedules K-1 that the Company issued to them, including the

amount that Klauer Manufacturing claimed with respect to the sale

of phase I.

Klauer Manufacturing filed Form 1120S for taxable year 2002

(2002 S corporation return). In that return, Klauer Manufactur-

ing claimed a charitable contribution deduction of $1,227,934,

which included an amount that Klauer Manufacturing claimed with

respect to the sale of phase IIC. The Company reported the char-

itable contribution deduction claimed with respect to the sale of

29
See supra note 28.
 -41-

that phase in Form 8283 that it included with the 2002 S corpora-

tion return (2002 Form 8283).30

Klauer Manufacturing issued to each stockholder petitioner

2002 Schedule K-1. In each of those schedules, Klauer Manufac-

turing reported as a charitable contribution deduction each

stockholder petitioner’s proportionate share of the Company’s

claimed charitable contribution deduction, including the amount

that Klauer Manufacturing claimed with respect to the sale of

phase IIC.31

Petitioners or petitioner, as the case may be, in each of

these cases filed Form 1040 for taxable year 2002 that included

Schedule A for that year (2002 Schedule A). Those respective

2002 Schedules A showed charitable contribution deductions which

included stockholder petitioners’ respective proportionate shares

of Klauer Manufacturing’s claimed charitable contribution deduc-

tion that Klauer Manufacturing showed in the 2002 Schedules K-1

that the Company issued to them, including the amount that Klauer

Manufacturing claimed with respect to the sale of phase IIC.

30
The Court is unable to reconcile (1) certain amounts
claimed in the 2002 Form 8283 and certain amounts reported in
Schedule K-1 that Klauer Manufacturing issued to each of its
stockholders for 2002 (2002 Schedule K-1) with (2) certain
amounts that the parties have stipulated. However, reconcilia-
tion of those amounts is not necessary to our resolution of the
issue presented in these cases.
31
See supra note 30.
 -42-

Klauer Manufacturing filed Form 1120S for taxable year 2003

(2003 S corporation return). In that return, Klauer Manufactur-

ing claimed a charitable contribution deduction of $1,665,251,

which included an amount that Klauer Manufacturing claimed with

respect to the sale of phase IIIB. The Company reported the

charitable contribution deduction claimed with respect to the

sale of that phase in Form 8283 that it included with the 2003 S

corporation return.

Klauer Manufacturing issued to each stockholder petitioner

Schedule K-1 for taxable year 2003 (2003 Schedule K-1). In each

of those schedules, Klauer Manufacturing reported as a charitable

contribution deduction each stockholder petitioner’s proportion-

ate share of the Company’s claimed charitable contribution deduc-

tion, including the amount that Klauer Manufacturing claimed with

respect to the sale of phase IIIB.

Petitioners or petitioner, as the case may be, in each of

these cases filed Form 1040 for taxable year 2003 that included

Schedule A for that year (2003 Schedule A).32 Those respective

2003 Schedules A showed charitable contribution deductions which

included stockholder petitioners’ respective proportionate shares

of Klauer Manufacturing’s claimed charitable contribution deduc-

32
As noted previously, the record does not contain a tax
return for petitioner Justin E. Klauer for his taxable year 2003.
 -43-

tion that Klauer Manufacturing showed in the 2003 Schedules K-1

that the Company issued to them, including the amount that Klauer

Manufacturing claimed with respect to the sale of phase IIIB.

Respondent issued respective notices for taxable year 2001

to petitioners in these cases.33 In those notices, respondent

determined to disallow the amount claimed by Klauer Manufacturing

as a charitable contribution deduction with respect to its sale

of phase I. As a result, respondent further determined (1) to

disallow each stockholder petitioner’s proportionate share of

Klauer Manufacturing’s claimed charitable contribution deduction

attributable to that sale and (2) to decrease the itemized deduc-

tions claimed in each such petitioner’s 2001 Schedule A.

Respondent issued respective notices for taxable year 2002

to petitioners in these cases.34 In those notices, respondent

determined to disallow the amount claimed by Klauer Manufacturing

as a charitable contribution deduction with respect to its sale

of phase IIC. As a result, respondent further determined (1) to

disallow each stockholder petitioner’s proportionate share of

Klauer Manufacturing’s claimed charitable contribution deduction

33
Respondent issued to petitioner William R. Klauer in the
case at docket No. 18181-07 one notice for all three of his
taxable years 2001, 2002, and 2003.
34
See supra note 33.
 -44-

attributable to that sale and (2) to decrease the itemized deduc-

tions claimed in each such petitioner’s 2002 Schedule A.

Respondent issued respective notices for taxable year 2003

to petitioners in these cases.35 In those notices, respondent

determined to disallow the amount claimed by Klauer Manufacturing

as a charitable contribution deduction with respect to its sale

of phase IIIB. As a result, respondent further determined (1) to

disallow each stockholder petitioner’s proportionate share of

Klauer Manufacturing’s claimed charitable contribution deduction

attributable to that sale and (2) to decrease the itemized deduc-

tions claimed in each such petitioner’s 2003 Schedule A.

OPINION

Petitioners bear the burden of proving that the determina-

tions that remain at issue in their respective notices are

wrong.36 See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Petitioners bear the burden of proving entitlement to

any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992).

35
As noted previously, the record does not contain a notice
issued to petitioner Justin E. Klauer for his taxable year 2003.
See supra note 33 with respect to petitioner William R. Klauer.
36
Petitioners do not claim that the burden of proof shifts
to respondent under sec. 7491(a).
 -45-

Section 170(a) allows a deduction for any charitable contri-

bution, as defined in section 170(c), that is made during the

taxable year. A taxpayer who sells property for less than its

fair market value (i.e., makes a “bargain sale”) to a charitable

organization is entitled to a charitable contribution deduction

under section 170(a) that is equal to the difference between the

fair market value of the property and the amount realized from

its sale. See sec. 170; Stark v. Commissioner, 86 T.C. 243, 255-

256 (1986). In order to be entitled to a deduction under section

170, a taxpayer must satisfy certain requirements prescribed by

regulations under that section. See sec. 170(a)(1); Stark v.

Commissioner, supra at 256; sec. 1.170A-1, Income Tax Regs. The

parties agree that Klauer Manufacturing complied with those re-

quirements. The parties’ sole disagreement here concerns whether

the respective sales of phase I in 2001, phase IIC in 2002, and

phase IIIB in 2003 were bargain sales by Klauer Manufacturing to

the Trust for which the Company is entitled to charitable contri-

bution deductions for those respective years.

It is petitioners’ position that the Company’s respective

sales to the Trust of phase I in 2001, phase IIC in 2002, and

phase IIIB in 2003 were bargain sales. That is because, accord-

ing to petitioners, Klauer Manufacturing sold each of those
 -46-

phases to the Trust for a sale price that was less than its fair

market value on the date of sale.37

It is respondent’s position that none of the sales of phase

I in 2001, phase IIC in 2002, and phase IIIB in 2003 was a bar-

gain sale. That is because, according to respondent, under the

step transaction doctrine Klauer Manufacturing should be treated

as having sold to the Trust in a single transaction on January

23, 2001, the effective date of the Option Agreement, the approx-

imately 2,581 acres of the Taos Overlook, which the parties agree

had a fair market value on that date of $15 million, for which

the Company received from the Trust total cash consideration of

$15 million, which is the total amount that the Trust paid to the

Company in 2001, 2002, and 2003 to acquire all of the various

phases of the Taos Overlook.

In order to resolve the parties’ disagreement over whether

the Company made a bargain sale to the Trust in each of the years

2001, 2002, and 2003, we must determine whether, as respondent

argues, it is appropriate to apply the step transaction doc-

trine.38

37
The parties are in agreement as to the respective fair
market values of phase I, phase IIC, and phase IIIB on the dates
on which Klauer Manufacturing transferred those phases to the
Trust.
38
The parties agree that if the Court were to find that the
(continued...)
 -47-

The step transaction doctrine is intended to ensure that the

tax consequences of a transaction turn on its substance rather

than its form. King Enters., Inc. v. United States, 189 Ct. Cl.

466, 476, 418 F.2d 511, 517 (1969). In a case in which substance

and form do not diverge, the doctrine has no application. See

Sheppard v. United States, 176 Ct. Cl. 244, 256, 361 F.2d 972,

978 (1966).

The step transaction doctrine developed from the substance

over form doctrine.39 See Associated Wholesale Grocers, Inc. v.

United States, 927 F.2d 1517, 1521 (10th Cir. 1991). We have

considered the principles of the step transaction doctrine on

many occasions. Those principles can be summarized by restating

what we said about them in Penrod v. Commissioner, 88 T.C. 1415,

1428-1430 (1987):

38
(...continued)
step transaction doctrine applies, petitioners would not be
entitled to the charitable contribution deductions at issue and
that if the Court were to find that the step transaction doctrine
does not apply, petitioners would be entitled to those
deductions.
39
Under the substance over form doctrine, although the form
of a transaction may literally comply with the provisions of the
Code, that form will not be given effect where it has no business
purpose and operates simply as a device to conceal the true
character of a transaction. See Gregory v. Helvering, 293 U.S.
465, 469-470 (1935). If, however, the substance of a transaction
accords with its form, that form will be upheld and given effect
for tax purposes. See Blueberry Land Co. v. Commissioner, 361
F.2d 93, 100-101 (5th Cir. 1966), affg. 42 T.C. 1137 (1964).
 -48-

The step transaction doctrine is in effect another rule
of substance over form; it treats a series of formally
separate “steps” as a single transaction if such steps
are in substance integrated, interdependent, and fo-
cused toward a particular result. * * * There is no
universally accepted test as to when and how the step
transaction doctrine should be applied to a given set
of facts. Courts have applied three alternative tests
in deciding whether to invoke the step transaction doc-
trine in a particular situation.

The narrowest alternative is the “binding commit-
ment” test, under which a series of transactions are
collapsed if, at the time the first step is entered
into, there was a binding commitment to undertake the
later step. See Commissioner v. Gordon, 391 U.S. 83,
96 (1968); * * *

At the other extreme, the most far-reaching alter-
native is the “end result” test. Under this test, the
step transaction doctrine will be invoked if it appears
that a series of formally separate steps are really
prearranged parts of a single transaction intended from
the outset to reach the ultimate result. See King En-
terprises, Inc. v. United States, 418 F.2d at 516;
* * *

The third test is the “interdependence” test,
which focuses on whether “the steps are so interdepen-
dent that the legal relations created by one transac-
tion would have been fruitless without a completion of
the series.” Redding v. Commissioner, 630 F.2d at
1177; * * *

Steps that are transitory, meaningless, or lacking in a

nontax, business purpose may be disregarded for purposes of de-

termining the true nature of a transaction. See Minn. Tea Co. v.

Helvering, 302 U.S. 609, 613 (1938).

Substance over form and related doctrines all require “a

searching analysis of the facts to see whether the true substance
 -49-

of the transaction is different from its form or whether the form

reflects what actually happened.” Harris v. Commissioner, 61

T.C. 770, 783 (1974). The determination of whether the step

transaction doctrine should be applied involves an intensely fac-

tual inquiry. See Gordon v. Commissioner, 85 T.C. 309, 327

(1985).

Although a particular set of facts might satisfy more than

one of the tests that is used to determine whether to apply the

step transaction doctrine to that particular situation, satisfac-

tion of only one of those tests is sufficient to cause that doc-

trine to apply. True v. United States, 190 F.3d 1165, 1174-1175

(10th Cir. 1999).

We shall now consider each of the three tests that is used

in determining whether to invoke the step transaction doctrine.

That is because respondent argues that each of those tests re-

quires the Court to apply that doctrine in resolving the issue

presented in these cases.

We turn first to the binding commitment test, which is the

most restrictive test. That test “requires telescoping several

steps into one transaction only if a binding commitment existed

as to the second step at the time the first step was taken.”

Sec. Indus. Ins. Co. v. United States, 702 F.2d 1234, 1245 (5th
 -50-

Cir. 1983) (citing Commissioner v. Gordon, 391 U.S. 83, 96

(1968)).40

Respondent argues that “The Option Agreement between Klauer

Manufacturing and the TPL [Trust] is an example of a binding com-

mitment by a taxpayer to take a series of steps towards a prede-

termined goal.” In support of that argument, respondent asserts:

By taking the first step of entering into the Option
Agreement, Klauer Manufacturing was bound and obligated
to convey to the TPL [Trust] the parcels of property
making up the three phases of the Option Agreement on
receipt of a timely notice by the TPL of its intent to
exercise an option and on the appearance at a closing
of the TPL ready and willing to pay the purchase price.
Klauer Manufacturing could not unreasonably refuse to
convey the property for each of the several phases as
they came due over the several years of the Option
Agreement so long as the TPL abided by its terms.

40
According to the U.S. Court of Appeals for the Fifth
Circuit in Sec. Indus. Ins. Co. v. United States, 702 F.2d 1234,
1245 (5th Cir. 1983),

Subsequent decisions, however, have tended to confine
[Commissioner v.] Gordon[, 391 U.S. 83, 96 (1968),] to
its facts. The Seventh Circuit, for example, has
concluded that lack of a “binding commitment” should be
determinative only in cases involving multi-year trans-
actions; in other situations, the presence or absence
of a “binding commitment” is simply one factor to be
considered. See McDonald’s Restaurants v. Commis-
sioner, 688 F.2d 520, 525 (7th Cir. 1982); Redding, 630
F.2d at 1178. Similarly, the Court of Claims has read
Gordon’s “binding commitment” requirement as limited to
an interpretation of particular statutory language in
section 355 concerning divisive reorganizations. See
King Enterprises[, Inc. v. United States], 418 F.2d at
517-18. * * *
 -51-

On the other hand, the TPL turned over every fund-
ing rock that it could find to complete the acquisition
of the TVO [Taos Overlook]. They lobbied Congress for
appropriations. They joined in a grass roots campaign
to urge the community, local elected officials and
business leaders to send letters to the New Mexico Con-
gressional Delegation in support of the acquisition of
the TVO. They procured funding through the reprogram-
ming of money appropriated for use by the BLM [Bureau
of Land Management] in a project that did not close.
They used an exchange of land with a Native American
tribe to facilitate the closing of three of the phases.
The TPL was committed to the purchase of the 2,581
acres of the TVO. Its commitment then bound Klauer
Manufacturing to the sale [for $15 million41] of the TVO
from the date of signing of the Option Agreement in
[January] 2001.

On the record before us, we reject various assertions of

respondent in support of respondent’s argument that the binding

commitment test is applicable in these cases. Those assertions

ignore facts that we have found on the record before us, includ-

ing the following facts.

The Trust’s funding for land acquisition projects had in the

past relied extensively, sometimes entirely, on appropriations by

Congress. Appropriations that Congress made each year for land

acquisition projects were uncertain, limited, and varied from

year to year. As a result, there simply were no guaranties that

the Trust, which had to solicit funds on an annual basis for

41
According to respondent, “Klauer Manufacturing promised to
convey the TVO [Taos Overlook] to the TPL [Trust] for $15,000,000
within the periods described in their [Option] agreement [signed
on Jan. 23, 2001].”
 -52-

specified possible acquisitions, would receive any congressional

(or other) funding for the purchase of a portion, let alone all,

of the Taos Overlook.42

If the Trust had been unable to obtain the funds needed to

purchase a portion of the Taos Overlook specified in the Option

Agreement, it would not have exercised its option under that

agreement to purchase any such portion. In that event, Klauer

Manufacturing would have retained the portion of the Taos Over-

look as to which the Trust did not exercise its option to pur-

chase under the Option Agreement. The Option Agreement did not

require the Trust to exercise any or all of its options to ac-

quire the phases of the Taos Overlook specified in that agree-

ment. Nor did the Trust’s exercise of its option to acquire one

phase obligate it to exercise its option to acquire any other

phase. Klauer Manufacturing and the Trust did not have an ex-

press or implied agreement or understanding (1) that the Trust

would exercise all of its options under the Option Agreement and

(2) that the Trust would buy, and Klauer Manufacturing would

sell, all of the Taos Overlook.43

42
In fact, the Trust’s funding for three of the purchases
that it made under the Option Agreement as amended was from
sources that were unanticipated when Klauer Manufacturing and the
Trust executed the Option Agreement on Jan. 23, 2001.
43
On the record before us, we reject respondent’s assertions
(continued...)
 -53-

On the record before us, we find that on January 23, 2001,

the effective date of the Option Agreement between Klauer Manu-

facturing and the Trust, Klauer Manufacturing did not have an

obligation to sell to the Trust, and the Trust did not have an

obligation to buy from Klauer Manufacturing, the approximately

2,581 acres of the Taos Overlook for $15 million.44 On that re-

43
(...continued)
(1) that the Trust’s efforts to seek the funding that would
enable it to exercise in each of the years 2001, 2002, and 2003
the option that it had under the Option Agreement as of Jan. 23,
2001, to acquire a specified portion or phase of the Taos Over-
look “committed” the Trust as of that date to purchase the
approximately 2,581 acres of the Taos Overlook and (2) that the
Trust’s “commitment then bound Klauer Manufacturing to the sale
of the TVO [Taos Overlook] from the date of the signing of the
Option Agreement * * * [on Jan. 23,] 2001.”
44
In fact, the Option Agreement that Klauer Manufacturing
and the Trust executed on Jan. 23, 2001, provided that the Trust
had (1) the option through Feb. 28, 2001, to purchase phase I for
$4 million, (2) the option through Feb. 28, 2002, to purchase
phase II for $5 million, and (3) the option to purchase through
Feb. 28, 2003, phase III for $5.5 million. Thus, pursuant to the
Option Agreement executed on Jan. 23, 2001, if by the respective
dates specified in that agreement the Trust were to have exer-
cised its options to purchase phase I, phase II, and phase III
and if Klauer Manufacturing were to have sold and the Trust were
to have purchased those three phases, it would have been required
to pay to Klauer Manufacturing only $14.5 million, and not $15
million. It was only at a time not disclosed by the record after
June 3, 2001, and before Feb. 15, 2002, that the Trust became
aware that Klauer Manufacturing was dissatisfied with the ap-
praised value of certain property that the Trust had acquired
from the Company pursuant to the Option Agreement as amended as
of that time. In an effort to minimize the likelihood that
Klauer Manufacturing would not approve the appraisal, which
Klauer Manufacturing (as well as the Trust) had the right to do
under par. 2 of the Second Amendment, of one or more portions of
the Taos Overlook which the Company still owned and with respect
(continued...)
 -54-

cord, we further find that the binding commitment test does not

apply in these cases.

We turn next to the end result test. Under that test, “pur-

portedly separate transactions are to be amalgamated when the

successive steps were designed and executed as part of a plan to

achieve an intended result.” Sec. Indus. Ins. Co. v. United

States, 702 F.2d at 1246; see also Penrod v. Commissioner, 88

T.C. at 1429. The inquiry under the end result test focuses on

whether the taxpayer intended to reach a particular result by

structuring a series of transactions in a certain way. See King

Enters., Inc. v. United States, 189 Ct. Cl. at 475, 418 F.2d at

516. In this regard,

The taxpayer’s subjective intent is especially relevant
* * * because it allows us to determine whether the

44
(...continued)
to which the Trust were to exercise its option to acquire under
the Option Agreement as amended, the Trust proposed a $500,000
increase in the aggregate amount of consideration (i.e., $14.5
million) that it would pay to Klauer Manufacturing in the event
that the Trust were to decide to exercise its remaining options
under that agreement. Klauer Manufacturing agreed to that
proposal, which was implemented in the Third Amendment to the
Option Agreement that was effective as of Feb. 15, 2002. It was
only at the trial in these cases that the parties agreed that on
Jan. 23, 2001, the date on which Klauer Manufacturing and the
Trust executed the Option Agreement, the approximately 2,581
acres of the Taos Overlook had a fair market value of $15 mil-
lion. Around August 1999, when the Trust representatives first
approached Klauer Manufacturing’s representatives regarding the
Trust’s interest in the Taos Overlook, Klauer Manufacturing
believed that the approximately 2,581 acres of the Taos Overlook
had a fair market value of between $20 and $21 million.
 -55-

taxpayer directed a series of transactions to an in-
tended purpose. See Brown v. United States, 782 F.2d
559, 563 (6th Cir. 1986) (“[e]nd result test” for de-
termining when to apply “step transaction doctrine”
makes intent a necessary element for application of
doctrine). The intent we focus on under the end result
test is not whether the taxpayer intended to avoid
taxes. Prior case law clearly instructs that tax re-
duction and avoidance motives are permissible and do
not alone invalidate a transaction. * * * Instead, the
end result test focuses on whether the taxpayer in-
tended to reach a particular result by structuring a
series of transactions in a certain way. * * * [Some
citations omitted; fn. ref. omitted.]

True v. United States, 190 F.3d at 1175.

Respondent argues that “The evidence developed in this case

[sic] easily supports a finding that Klauer Manufacturing in-

tended to sell the 2,581 acres of the TVO [Taos Overlook] to the

TPL [Trust] even though, to achieve this result, the sale was

structured as a series of transactions.” In support of that ar-

gument, respondent asserts:

The TVO [Taos Overlook] was a very special place for
* * * [William J. Klauer] and the Klauer family. The
family always felt that the TVO should be preserved.
Mr. Klauer was a party to the discussions with TPL
about the sale of the 2,581 acres of the TVO. He liked
the proposal by the TPL and was excited about its ac-
quisition of the TVO. Mr. Klauer, the Klauer family
and, through them, Klauer Manufacturing, intended to
sell the 2,581 acres of the TVO to the TPL so that it
could be maintained as a very special place.

* * * Although the Option Agreement breaks the
sale into three phases over three years, when TPL exer-
cised its option to purchase and arrived at closing
with the money, Klauer Manufacturing tendered a deed as
it was bound to do under the agreement. As contem-
 -56-

plated by the Option Agreement, the 2,581 acres of the
TVO was sold by Klauer Manufacturing to TPL.

Admittedly, the Option Agreement was very much a
“take it or leave it” deal offered by TPL. TPL gener-
ally controlled the shape of the agreement and was the
source for use of three phases over three years due to
its concerns about funding. Yet, Klauer Manufacturing
did not walk away from the proposal. On January 23,
2001, James Klauer, Vice President of Klauer Manufac-
turing signed the Option Agreement.

Regardless, by breaking the acquisition into
phases, the likelihood of its success was substantially
increased. It made the project manageable by TPL’s
standards.

Just as Klauer Manufacturing wanted to sell the
TVO when it signed the Option Agreement, Klauer Manu-
facturing willingly entered into four amendments of the
Option Agreement to keep the sale on track and avoid
any possible default by TPL. All of the amendments
begin with the recitation that:

Seller [Klauer Manufacturing] and Buyer
[TPL] have previously entered into that cer-
tain Option Agreement * * * for the acquisi-
tion of 2,581 acres, more or less, of real
property, located in Taos County, New Mexico,
in three phases.

* * * * * * *

Klauer Manufacturing was so committed to the ac-
quisition of the 2,581 acres of the TVO by the TPL, it
and the TPL did not let the Option Agreement stand in
their way. According to the Option Agreement, the pur-
chase price of Phase I was to be $4,000,000 for 860.33
acres more or less. Phase I comprised of 860.33 acres
closed in March 2001 for $4,000,000 just as scheduled
by the Option Agreement.

The Option Agreement provided that the sale price
of the 860.33 acres comprising Phase II was to be
$5,000,000. Phase II, by amendment between Klauer Man-
ufacturing and TPL, was divided into Phase IIA, Phase
 -57-

IIB and Phase IIC. These three sub-phases of Phase II
were closed by March 2002. The total purchase price
for Phase II was $8,077,000 for 1187.3 acres.

Phase III was intended to include 860.33 acres
with a purchase price of $5,500,000. The amendments by
Klauer Manufacturing and the TPL divided Phase III into
two sub-phases, Phase IIIA and Phase IIIB. These sub-
phases were closed by March 2003 for the purchase price
of $2,923,000 for 533.3 acres.

Only Phase I closed for the acreage and at the
purchase price described in the Option Agreement. The
closings of Phase II and Phase III deviated substan-
tially from the schedule found in the Option Agreement.
Klauer Manufacturing and the TPL did not adhere to the
purchase price or the acreage of Phase II and Phase III
as scheduled in the Option Agreement. Together, Klauer
Manufacturing and the TPL were willing to fudge the
terms of the Option Agreement, as amended, in order to
complete their deal for the sale of the 2,581 acres of
the TVO.

As Klauer Manufacturing wanted to sell the 2,581
acres of the TVO, the TPL wanted to purchase those
2,581 acres. The TVO fit into the development plans of
the BLM [Bureau of Land Management]. * * *

* * * * * * *

There was no question that through all of these
different sources [that the Trust searched for funding]
and whatever entrepreneurial creative land conservation
expertise TPL could apply, TPL would draw on these sev-
eral sources to achieve in the end a $15 million acqui-
sition price for all of the phases collectively.

The end result of the Option Agreement entered
into between Klauer Manufacturing and the TPL in Janu-
ary, 2001, its objective, and its aim was the sale of
the 2,581 acres of the TVO to the TPL. For purposes of
valuing the sale of the TVO and determining the bargain
element of the sale, the several phases of the sale
should be disregarded. The transaction between Klauer
Manufacturing and the TPL should be found to be the
 -58-

sale of a single parcel of property comprised of 2,581
acres and valued as of January, 2001.

On the record before us, we reject various assertions of

respondent in support of respondent’s argument that the end re-

sult test is applicable in these cases. Those assertions ignore

facts that we have found on the record before us, including the

following facts.

When representatives of the Trust initially approached rep-

resentatives of Klauer Manufacturing in August 1999 about the

Trust’s interest in the Taos Overlook, the Trust’s representa-

tives informed the Company’s representatives that the Trust was

not in a financial position to be contractually and thus legally

bound to purchase all of the Taos Overlook (i.e., all of the ap-

proximately 2,581 acres of that property). That was because con-

gressional appropriations for land acquisition projects of the

Trust were uncertain, limited, and varied from year to year.

There simply were no guaranties that the Trust, which had to so-

licit funds on an annual basis for specified possible acquisi-

tions, would receive any congressional (or other) funding for the

purchase of a portion, let alone all, of the Taos Overlook.45 As

a result, the Trust’s representatives insisted that the Company

45
On the record before us, we reject respondent’s assertion
that there was “no question” that the Trust would be able to use
“different sources” in order “to achieve in the end a $15 million
acquisition price for all of the phases collectively”.
 -59-

grant it an option to purchase annually a portion of the Taos

Overlook if and when during each year the Trust had the funds to

purchase such a portion. Representatives of Klauer Manufacturing

insisted that any portion of the Taos Overlook with respect to

which the Company were to grant the Trust an option to purchase

during the initial year border an exterior boundary of the Taos

Overlook. That was because Klauer Manufacturing wanted to ensure

that if the Trust were to decide not to exercise its option to

purchase thereafter any of the remaining specified portions of

the Taos Overlook, Klauer Manufacturing, and not the Trust, would

own the property in the interior of the Taos Overlook.46

If the Trust had been unable to obtain the funds needed to

purchase a portion of the Taos Overlook specified in the Option

Agreement, it would not have exercised its option under that

agreement to purchase any such portion. In that event, Klauer

Manufacturing would have retained the portion of the Taos Over-

46
Similarly, in order to avoid having the Trust own any
portion of the Taos Overlook that was located between other
portions of that property that Klauer Manufacturing continued to
own, par. 1 of the Second Amendment to the Option Agreement
provided as follows:

The Phase II option shall be exercised upon in its
entirety before any portion of the Phase III option may
be exercised upon. Any portion of any Phase so exer-
cised shall abut and share a common line with that
portion of the entire property previously conveyed by
the Seller [Klauer Manufacturing] to the Buyer [Trust].
 -60-

look as to which the Trust did not exercise its option to pur-

chase under the Option Agreement. The Option Agreement did not

require the Trust to exercise any or all of its options to ac-

quire the phases of the Taos Overlook specified in that agree-

ment. Under the Option Agreement, the Trust’s exercise of its

option to acquire one phase did not obligate it to exercise its

option to acquire any other phase. Klauer Manufacturing and the

Trust did not have an express or implied agreement or understand-

ing that the Trust would exercise all of its options under the

Option Agreement. Nor did Klauer Manufacturing and the Trust

have an express or implied agreement or understanding that the

Trust would buy, and Klauer Manufacturing would sell, all of the

Taos Overlook.

At a time not disclosed by the record before April 15, 2001,

the Trust learned that the Bureau of Land Management unexpectedly

had certain funds to provide to the Trust that would enable the

Trust to decide whether it would be in a financial position to

exercise its option to acquire and to acquire phase II of the

Taos Overlook. The Trust concluded that, even with the unantici-

pated funds from the Bureau of Land Management, it did not have

enough money to exercise its option to acquire and to acquire

phase II. However, the Trust believed that those unexpected

funds would enable it to acquire approximately 218.6 acres of
 -61-

that phase, provided that Klauer Manufacturing were willing to

amend the Option Agreement as amended by the First Amendment in

order to grant the Trust separate options to acquire at different

times separate portions of phase II (and phase III) of the Taos

Overlook. The Company agreed to amend that agreement and did so

on April 15, 2001, when it and the Trust executed the Second

Amendment to the Option Agreement. The Second Amendment provided

in pertinent part:

TERMS

THE PARTIES AGREE AS FOLLOWS:

1. Paragraph 1 of the Option Agreement is amended
to provide that Buyer may exercise its options as to
portions of the Phase II and Phase III tracts of the
Property as set forth below. Exercise of an option on
a portion of a Phase shall preserve the option as to
any remaining portion of that Phase within the time
frame set forth in the Option Agreement for that op-
tion. The Phase II option shall be exercised upon in
its entirety before any portion of the Phase III option
may be exercised upon. Any portion of any Phase so
exercised shall abut and share a common line with that
portion of the entire Property previously conveyed by
the Seller to the Buyer.

2. Paragraph 5(c) of the Option Agreement is
amended to provide that an appraisal shall be performed
of each and every portion of any Phase of the Property
and that the appraisal, and the Closing on any such
portion of any Phase, shall be subject to the review
and approval of the appraisal by the Seller and the
Buyer.

3. All terms of the Option Agreement necessarily
modified or changed by this amendment are hereby modi-
fied and changed and all terms of the Option Agreement
 -62-

not modified or amended hereby remain the same and in
full force and effect between the parties.[47]

After the Trust exercised its option to acquire a portion of

the property specified in the Option Agreement as amended, it

continued to seek the funding that would enable it to exercise

the option that it had under the Option Agreement as amended to

acquire all or a portion of the next phase. Moreover, after the

Trust exercised its option to acquire a portion of the property

specified in the Option Agreement as amended and Klauer Manufac-

turing sold such portion to the Trust, Klauer Manufacturing con-

tinued to pay the real estate taxes on and the cost of maintain-

ing the remaining acres of the Taos Overlook that the Company

continued to own.

On the record before us, we find that the Trust’s exercise

of each of various options that it had under the Option Agreement

as amended and its purchase of each of specified portions of the

Taos Overlook pursuant to the exercise of each of those options

47
On the record before us, we reject respondent’s assertion
that “Klauer Manufacturing and the TPL [Trust] were willing to
fudge the terms of the Option Agreement, as amended, in order to
complete their deal for the sale of the 2,581 acres of the TVO
[Taos Overlook].” On that record, we find that the events that
took place after Apr. 15, 2001, the date on which Klauer Manufac-
turing and the Trust executed the Second Amendment to the Option
Agreement, are consistent with the Option Agreement as amended by
that Second Amendment (quoted in pertinent part above) (and by
the Third Amendment and the Fourth Amendment executed on Feb. 15,
2002, and Feb. 28, 2003, respectively).
 -63-

were not component parts of a single transaction that Klauer Man-

ufacturing intended and prearranged from the outset be taken in

order to sell to the Trust the approximately 2,581 acres of the

Taos Overlook.48 On that record, we find that the end result test

does not apply in these cases.

We turn finally to the interdependence test. That test fo-

cuses on

whether the individual steps in a series had independ-
ent significance or whether they had meaning only as
part of the larger transaction. This test concentrates
on the relationship between the steps, rather than on
their “end result.” * * * Thus, under this test we ex-
amine this tandem of transactional totalities to deter-
mine whether each step had a reasoned economic justifi-
cation standing alone. * * * [Citation omitted.]

Sec. Indus. Ins. Co. v. United States, 702 F.2d at 1246-1247.

Respondent argues that “Klauer Manufacturing and the TPL

[Trust] intended from the outset to transfer the whole of the TVO

[Taos Overlook] and that the options contained in the Option

Agreement were interdependent steps to reach that goal.” In sup-

port of that argument, respondent asserts:

48
Respondent asserts that each of the four amendments to the
Option Agreement that Klauer Manufacturing and the Trust executed
recited that they executed the Option Agreement “for the acquisi-
tion of 2,581 acres, more or less, of real property, located in
Taos County, New Mexico, in three phases.” Those recitations do
not require us to find on the record before us that Klauer
Manufacturing had a prearranged plan pursuant to which the Trust
would buy, and Klauer Manufacturing would sell, the approximately
2,581 acres of the Taos Overlook.
 -64-

Pursuant to the Option Agreement Klauer Manufac-
turing agreed to sell and convey to the TPL [Trust] and
the TPL agreed to purchase and accept from Klauer Manu-
facturing, the TVO [Taos Overlook] in three phases.
Klauer Manufacturing granted the TPL an option to pur-
chase the TVO in the three phases. The option was ex-
clusive to the TPL and was irrevocable by Klauer Manu-
facturing. * * *

* * * * * * *

From the point of view of Klauer Manufacturing,
the steps of the Option Agreement were interdependent.
The steps of the Option Agreement were so interdepen-
dent that the Option Agreement is aptly described as an
agreement to sell the 2,581 acres of the TVO to the TPL
with provisions for financing contingencies. So long
as the TPL timely exercised its option, found the fi-
nancing, and was ready and willing to close, Klauer
Manufacturing was obligated to provide the necessary
deeds to convey title to the property. Klauer Manufac-
turing then had to wait for the TPL to exercise the
next option until all phases of the Option Agreement
closed.

As a series of interdependent steps, the several
phases for the acquisition by the TPL of the TVO from
Klauer Manufacturing should be collapsed into one
transaction representing the sale by Klauer Manufactur-
ing of the 2,581 acres of the TVO on January 23, 2001,
the date of signing of the Option Agreement.

On the record before us, we reject various assertions of

respondent in support of respondent’s argument that the interde-

pendence test is applicable in these cases. Those assertions

ignore facts that we have found on the record before us, includ-

ing the following facts.

When the Trust’s representatives were discussing with Klauer

Manufacturing’s representatives the Trust’s interest in the Taos
 -65-

Overlook, the Trust’s representatives informed the Company’s rep-

resentatives that the Trust was not in a financial position to be

contractually and thus legally bound to purchase all of the Taos

Overlook (i.e., all of the approximately 2,581 acres of that

property). That was because congressional appropriations for

land acquisition projects were uncertain, limited, and varied

from year to year. There simply were no guaranties that the

Trust, which had to solicit funds on an annual basis for speci-

fied possible acquisitions, would receive any congressional (or

other) funding for the purchase of a portion, let alone all, of

the Taos Overlook. As a result, during their discussions with

the Company’s representatives the Trust’s representatives in-

sisted that Klauer Manufacturing grant it an option to purchase

annually a portion of the Taos Overlook if and when during each

year the Trust had the funds to purchase such a portion. Al-

though Klauer Manufacturing was willing to do so, its representa-

tives insisted that any portion of the Taos Overlook with respect

to which the Company were to grant the Trust an option to pur-

chase during the initial year border an exterior boundary of the

Taos Overlook. That was because Klauer Manufacturing wanted to

ensure that if the Trust were to decide not to exercise its op-

tion to purchase thereafter any of the remaining specified por-

tions of the Taos Overlook, Klauer Manufacturing, and not the
 -66-

Trust, would own the property in the interior of the Taos Over-

look.49

The Trust presented Klauer Manufacturing with a proposed

option agreement reflecting the discussions and the negotiations

between the respective representatives of the Trust and the Com-

pany that had begun in August 1999. The Trust’s attorney had

drafted that proposed option agreement by using as a model an

option agreement that the Trust typically employed when it was

attempting to acquire land. The Company could have rejected the

Trust’s proposed option agreement. However, it decided to accept

it. On January 23, 2001, Klauer Manufacturing and the Trust exe-

cuted the Option Agreement that was effective as of that date.50

49
See supra note 46.
50
On the record before us, we reject respondent’s assertion
that “The steps of the Option Agreement were so interdependent
that the Option Agreement is aptly described as an agreement to
sell the 2,581 acres of the TVO [Taos Overlook] to the TPL
[Trust] with provisions for financing contingencies.” The Option
Agreement contained the following pertinent “RECITALS”:

RECITALS

* * * * * * *

B. Sellers are the owners of 2,581 acres, more or
less, of real property located in Taos County, New
Mexico * * *

* * * * * * *

(continued...)
 -67-

If the Trust had been unable to obtain the funds needed to

purchase a portion of the Taos Overlook specified in the Option

Agreement, it would not have exercised its option under that

agreement to purchase any such portion. In that event, Klauer

Manufacturing would have retained the portion of Taos Overlook as

to which the Trust did not exercise its option to purchase under

the Option Agreement.

The Option Agreement did not require the Trust to exercise

any or all of its options to acquire the phases of Taos Overlook

specified in that agreement. Under that agreement, the Trust’s

exercise of its option to acquire one phase did not obligate it

to exercise its option to acquire any other phase. Klauer Manu-

facturing and the Trust did not have an express or implied agree-

ment or understanding that the Trust would exercise all of its

options under the Option Agreement. Nor did Klauer Manufacturing

50
(...continued)
D. It is the mutual intention of Sellers and
Buyer that the Subject Property be preserved and used
eventually for public, open space and habitat purposes.
However this intention shall not be construed as a
covenant or condition to this Agreement. Buyer makes
no representation that any efforts it may undertake to
secure the eventual government acquisition of the
Subject Property will be successful.

On the record before us, we find that the above-quoted
recitations in the Option Agreement do not require us to find, as
respondent asserts, that the Option Agreement was “an agreement
to sell the 2,581 acres of the TVO to the TPL with provisions for
financing contingencies.” See also supra note 48.
 -68-

and the Trust have an express or implied agreement or understand-

ing that the Trust would buy, and Klauer Manufacturing would

sell, all of the Taos Overlook.

On the record before us, we find that the Trust’s exercise

of one or more but not all of the various options that it had

under the Option Agreement as amended and its purchase of each of

specified portions of the Taos Overlook pursuant to any such ex-

ercise would not have been fruitless without the Trust’s exercise

of all of those various options and its purchase of all of the

specified portions of the Taos Overlook pursuant to any such ex-

ercise. On that record, we find that the interdependence test

does not apply in these cases.

Based upon our examination of the entire record before us,

we find that the step transaction doctrine does not apply in

these cases. The parties agree that if the Court were to find,

as we have, that the step transaction does not apply here, peti-

tioners would be entitled to the charitable contribution deduc-

tions at issue.51

We have considered all of respondent’s contentions and argu-

ments that are not discussed herein, and we find them to be with-

out merit, irrelevant, and/or moot.

51
See supra note 38.
 -69-

To reflect the foregoing,

Appropriate decisions will be

entered.52

52
At least in certain of these cases the respective defi-
ciencies that respondent determined are based not only on the
disallowance of the charitable contribution deductions at issue
that the stockholder petitioners dispute here but also on certain
other determinations that petitioners in those certain cases do
not dispute here. Thus, at least in those cases computations
under Rule 155 will be required. It is not altogether clear
whether computations under Rule 155 will be required in certain
other cases. Therefore, the Court will issue an Order directing
the parties to inform the Court with respect to each of these
cases whether computations under Rule 155 will be required.