REMAINDER INTEREST IN LEASED LAND QUALIFIES AS CHARITABLE CONTRIBUTION

Section 170 -- Charitable Deduction
Index Nos.: 0170.00-00

FULL TEXT:

March 29, 1982

Refer Reply to: T:I:I:3:2
Taxpayers ***
X ***
Y ***

Dear ***

This is in reply to a letter, submitted on behalf of the Taxpayers, in which rulings are requested concerning the proposed transfer of a remainder interest in a farm to several charitable organizations.

According to the information submitted, the Taxpayers propose to give an irrevocable remainder interest in land to X and Y, organizations described in sections 170(c) and 501(c)(3) of the Internal Revenue Code. In the submissions it is also indicated that the property is owned by a trust and that the Taxpayers, who are the grantors of the trust, are treated as owners of all the interests in the trust under sections 671 through 679. Taxpayers will retain a life interest in the property for their joint lifetimes and the lifetime of the survivor. Additionally, Taxpayers will reserve the right to receive all income derived from the property during their lifetimes, arrange for the care and maintenance of the property, and pay all expenses relating to it.

The property is currently leased to tenants who utilize it for agricultural production. The property has a fair market value of $635,140 and has no structural improvements other than an irrigation pump and irrigation lines.

Section 170 of the Code provides, subject to certain limitations, a deduction for contributions and gifts to or for the use of organizations described in section 170(c), payment of which is made within the taxable year.

Section 170(c)(2) of the Code defines a charitable contribution as a contribution or gift to or for the use of a corporation, trust, or community chest, fund or foundation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.

Section 1.170A - 1(c)(1) of the Income Tax Regulations states generally that if a charitable contribution is made in property other than money, the amount of the deductible contribution is the fair market value of the property at time of the contribution reduced as provided in section 170(e)(1) of the Code and section 1.170 - 4(a) of the regulations. Section 170(f)(3)(A) of the Code provides, in part, that in the case of a contribution (not made by a transfer in trust) of an interest in property that consists of less than the taxpayer's entire interest in such property, a deduction shall be allowed only to the extent that the value of the interest contributed would be allowable as a deduction under section 170 if such interest had been transferred in trust.

Section 1.170A - 7(b)(1) of the regulations provides, in part, that a deduction is allowed under section 170 of the Code for the value of a charitable contribution not in trust of an undivided portion of a donor's entire interest in property. An undivided portion of a donor's entire interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the donor in such property and must extend over the entire term of the donor's interest in such property and in other property into which such property is converted. However, for purposes of this subparagraph a charitable contribution in perpetuity of an interest in property not in trust in a situation in which the donor transfers some specific rights and retains other substantial rights will not be considered a contribution of an undivided portion of the donor's entire interest in property to which section 170(f)(3)(A) does not apply.

Section 170(f)(3)(B)(i) of the Code provides that section 170(f)(3)(A) shall not apply to a contribution of a remainder interest in a personal residence or farm.

Section 1.170A - 7(b)(4) of the regulations states that a deduction is allowed under section 170 of the Code for the value of a charitable contribution not in trust of an irrevocable remainder interest in a farm that is not the donor's entire interest in such property. Thus, for example, if a taxpayer contributes not in trust to an organization described in section 170(c) a remainder interest in a farm and retains an estate in such farm for life or for a term of years, a deduction is allowed under section 170 for the value of such remainder interest not transferred in trust. For purposes of section 170(f)(3)(B)(i) and this subparagraph, the term "farm" means any land used by the taxpayer or his tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock.

Section 1.170A - 7(c) of the regulations provides, in part, that the amount of the deduction under section 170 in the case of a charitable contribution of a partial interest in property to which section 1.170A - 7(b) applies is the fair market value of the partial interest at the time of the contribution. The fair market value of such partial interest must be determined in accordance with section 20.2031 - 10 of this chapter (Estate Tax Regulations), except that, in the case of a charitable contribution of a remainder interest in real property which is not transferred in trust, the fair market value of such interest must be determined in accordance with section 170(f)(4) and 1.170A - 12.

Section 170(f)(4) of the Code states that for purposes of this section, in determining the value of a remainder interest in real property, depreciation (computed on the straight line method) and depletion of such property shall be taken into account, and such value shall be discounted at the rate of 6 percent per annum, except that the Secretary may prescribe a different rate.

In Rev. Rul. 78-303, 1978 - 2 C.B. 122, the taxpayer made an irrevocable gift of an unrestricted remainder interest in a portion of a farm to an educational organization described in section 170(c)(2) of the Code and retained a life estate in such property for the taxpayer's life. The taxpayer leased the property to an unrelated third party for use in agricultural production and cattle raising prior to contributing the remainder interest and continued to do so thereafter. The revenue ruling concludes that the taxpayer contributed a remainder interest in a farm within the meaning of section 1.170A - 7(b)(4) of the regulations although he donated only a portion of the land that was used in agricultural production by the tenant. Therefore, the taxpayer's gift of a remainder interest in the farm is deductible as a charitable contribution under section 170.

Based on the information submitted, we conclude as follows:

(1) Taxpayer's proposed gift of the remainder interest in the farm is deductible as a charitable contribution under section 170 of the Code, subject to the limitations contained therein.

(2) Section 170(f)(4) of the Code applies in determining the value of the remainder interest in the farm that is deductible by the Taxpayers as a charitable contribution.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

Except as specifically ruled upon above, no opinion is expressed as to the federal income tax consequences of the transaction described above under any other provision of the Internal Revenue Code.

A copy of this letter should be attached to the next income tax return filed by Taxpayers. We are enclosing a copy for that purpose.

Sincerely yours,

Anthony Manzanares, Jr.
Chief, Individual Income Tax Branch