Deductible Conservation Easements Must Satisfy Federal Perpetuity Requirements

Deductible Conservation Easements Must Satisfy Federal Perpetuity Requirements

News story posted in Information Release on 16 April 2013| comments
audience: National Publication | last updated: 18 April 2013
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Summary

An information request to the IRS asked about the deductibility under § 170(h) of a conservation easement that allows for extinguishment under state law if changed conditions make impractical or impossible the continued use of the property for conservation purposes. In response, the IRS has advised that, while state law may provide a means for extinguishing a conservation easement for state law purposes, the requirements of section 170(h) and the Treasury Regulations thereunder must nevertheless be satisfied for the contribution to be deductible for federal income tax purposes.  In that regard, the letter cites IRC § 170(h)(5)(A), requiring that the conservation purpose of the contribution must be protected in perpetuity, and Treasury Regulation § 1.170A-14(g)(6)(i), requiring that the conservation purpose may be treated as protected in perpetuity if, upon a subsequent change in conditions that makes impossible or impractical the continued use of the subject property for conservation purposes, the easement is extinguished by judicial proceeding and all of the donee’s proceeds from a subsequent sale, exchange, or involuntary conversion of the property (calculated as provided in Treasury Regulation § 1.170A-14(g)(6)(ii)) are used by the donee in a manner consistent with the conservation purposes of the original contribution.  What the IRS essentially is telling us here is that even though state law may provide a particular mechanism for extinguishing an easement, a conservation easement donated pursuant to such state law will not qualify for a deduction unless it also meets the provisions of the Treasury Regulations that require a judicial proceeding to extinguish a conservation easement.

INFO 2013-0014

Full Text:

UIL: 170.14-00
Release Date: 3/29/2013

Date: September 18, 2012

Refer Reply To: CC:ITA:B01 - GENIN-131378-12

Attention: * * *

Dear * * *:

This letter responds to your request for information dated July 19, 2012.

In your request, you asked whether a contribution of an easement can be a qualified conservation contribution if the easement deed simply allows for extinguishment under applicable State law upon subsequent, unexpected changes in the conditions surrounding the property that make impractical or impossible the continued use of the property for conservation purposes.

Property rights have been described "as a 'bundle of sticks' -- a collection of individual rights which, in certain combinations, constitute property." U.S. v. Craft, 535 U.S. 274, 278 (2002) (citations omitted). State law dictates what rights make up a person's bundle. Id. Once a person's property rights are established under State law, the tax consequences of a transaction involving that property are decided under Federal law. Patel v. Commissioner, 138 T.C. No. 23, slip op. 16, 2012 WL 2427326 at *7 (2012) (citing Commissioner v. Estate of Bosch, 387 U.S. 456 (1967); Aquilino v. United States, 363 U.S. 509, 512-513 (1960); Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940)).

A "qualified conservation contribution" is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. I.R.C. § 170(h)(1). A contribution is not exclusively for conservation purposes unless it protects the conservation purpose in perpetuity. I.R.C. § 170(h)(5)(A).

Under the Treasury regulations, a conservation purpose may be treated as protected in perpetuity if, upon a subsequent change in conditions that makes impossible or impractical the continued use of the subject property for conservations purposes, the easement is extinguished by judicial proceeding and all of the donee's proceeds from a subsequent sale, exchange, or involuntary conversion of the property are used by the donee in a manner consistent with the conservation purposes of the original contribution. Treas. Reg. § 1.170A-14(g)(6)(i). The donee's proceeds must be at least equal to the proportionate value of the perpetual conservation restriction. Treas. Reg. § 1.170A-14(g)(6)(ii).

State law may provide a means for extinguishing an easement for State law purposes. However, the requirements of § 170(h) and the regulations thereunder must nevertheless be satisfied for a contribution to be deductible for Federal income tax purposes.

This letter has called your attention to certain general principles of the law. It is intended for informational purposes only and does not constitute a ruling. See section 2.04 of Rev. Proc. 2012-1, 2012-1 I.R.B. 7 (Jan. 3, 2012). If you have any additional questions, please contact me or * * * at * * *.

    • Sincerely,

      Karin Goldsmith Gross
      Acting Branch Chief, Branch 1
      (Income Tax & Accounting)

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