Taking a Deduction Out of Thin Air

Taking a Deduction Out of Thin Air

News story posted in Field Service Advice on 2 June 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

In an undated Field Service Advice, the IRS holds that a contribution of a facade easement in real property, which does not otherwise qualify as a certified historic structure, qualifies for deduction as an open space easement based on the fact the Gift Deed prohibits either vertical or horizontal additions to the property.

PGDC SUMMARY:

In FSA 1999-1167 (Undated), taxpayers granted a perpetual facade easement in real property to a qualifying donee. The Deed of Gift provided that no construction, alteration, or remodeling shall be undertaken on the premises which would affect or alter in any way the exterior appearance or increase the height of the property. Thus, any vertical development of the entire property is precluded.

At the time of the transfer, the property failed classification as a "certified historic structure" within the meaning of I.R.C. section 170(h)(4)(A)(iv). Accordingly, the taxpayers conceded their entitlement to a charitable deduction for the contribution of a facade easement; nevertheless, they maintained the donation qualified as an open space easement within the meaning of I.R.C. section 170(h)(4)(A)(iii) and Rev. Rul. 75-358, 1975-2 C.B. 76. The Service agreed based on its belief the transfer of an open space easement was a "qualified conservation transfer."

FULL TEXT:

INTERNAL REVENUE SERVICE
MEMORANDUM
CC:TL-N * * *
FS:IT&A * * *
date: * * *
to: District Counsel, * * *
from: Assistant Chief Counsel (Field Service) CC:FS
subject: * * *
Docket No. * * *
Docket No. * * *

This is in response to your memorandum of * * * requesting field service advice in respect of the above referenced cases. Because the issue is of substantial significance, we sought the views of the Assistant Chief Counsel (Income Tax and Accounting). The views of that office are attached and incorporated below.

ISSUES

1) Whether the contribution of a facade easement which fails to meet the criteria for deductibility under I.R.C. section 170(h)(4)(A)(iv) may nevertheless qualify as an open space easement under I.R.C. section 170(h)(4)(A)(iii).

2) Whether the holding of Rev. Rul. 75-358, 1975-2 C.B. 76 is applicable to the contribution of a facade easement in * * *

CONCLUSIONS

1) The contribution of a facade easement which prohibits either vertical or horizontal additions to the encumbered property qualifies as an open space easement under the statute.

2) In light of our conclusion in Issue 1, this issue is now moot.

FACTS

During * * * petitioners granted to a qualifying donee a facade easement in perpetuity over the * * * (the * * * which is located in suburban * * * At the time of donation, the * * * was not designated as a "certified historic structure" within the meaning of I.R.C. section 170(h)(4)(A)(iv).

The Deed of Gift provided that no construction, alteration, or remodeling shall be undertaken on the premises which would affect or alter in any way the exterior appearance or increase the height of the property. Thus, any vertical development of the entire property is precluded.

Petitioners have conceded their entitlement to a charitable deduction for the contribution of a facade easement; nevertheless, petitioners maintain that the donation qualifies as an open space easement within the meaning of I.R.C. section 170(h)(4)(A)(iii) and Rev. Rul. 75-358, 1975-2 C.B. 76.

DISCUSSION

Issue 1.

I.R.C. section 170(a)(1) provides that there shall be allowed as a deduction any charitable contribution payment of which is made within the taxable year. Section 170(f) imposes restrictions on the deduction of contributions to charity of partial interests in property. Section 170(f)(3)(B)(iii) provides an exception for a qualified conservation contribution.

Section 170(h)(1) defines the term "qualified conservation contribution" as a contribution of a "qualified real property interest" to a "qualified organization," "exclusively for conservation purposes." Section 170(h)(2)(c) provides that the term "qualified real property interest" includes a restriction (granted in perpetuity) on the use which may be made of the real property.

Treas. Reg. section 1.170A-14(b)(2) provides that a perpetual conservation restriction is a qualified real property interest. A "perpetual conservation restriction" is a restriction granted in perpetuity on the use which may be made of real property including, an easement or other interest in real property that under state law has attributes similar to an easement (e.g., a restrictive covenant or equitable servitude). Thus, we conclude that petitioners' contribution of an architectural, facade and preservation easement is a qualified real property interest within the meaning of the statute and regulations.

Since there is no challenge to the qualification of the donee organization, the only remaining question involves the construction of the term "conservation purpose".

Section 170(h)(4)(A) defines the term "conservation purpose" as (i) the preservation of land areas for outdoor recreation by, or the education of, the general public (ii) the protection of relatively natural habitat of fish, wildlife, or plants, or similar ecosystem, (iii) the preservation of open space (including farmland and forest land) where such preservation is (I) for the scenic enjoyment of the general public, or (II) pursuant to a clearly delineated Federal, State, or local government preservation policy, and will yield significant public benefit or (iv) the preservation of an historically important land area or a certified historic structure. Thus, a contribution must serve one of the four enumerated purposes.

In your view, petitioners believed that their contribution would further the preservation of a certified historic structure and, having failed the requirements of the statute and regulations with respect to this purpose, respondent should argue on brief that their contribution fails to further any of the other enumerated purposes.

Prior to 1980, the statute did not specifically address whether an open space easement qualified as an undivided portion of a taxpayer's entire interest in property under section 170. In the Tax Treatment Extension Act of 1980, Pub. L. No. 96-541, 94 Stat. 3204 (1980), Congress revised section 170 to provide that a deduction would be allowable for a "qualified conservation contribution." Section 170(h) was added to define the term "qualified conservation contribution." We believe that the legislative history of the Tax Treatment Extension Act sheds considerable light on whether the grant of an easement may serve more than a single conservation purpose.

The Senate Finance Committee Report on the Tax Treatment Extension Act of 1980 states that:

The bill revises in several respects the present definition of conservation purposes. The bill defines the term "conservation purpose" to include four objectives. Although many contributions may satisfy more than one of these objectives (it is possible, for example, that the protection of a wild and scenic river could further more than one of the objectives), it is only necessary for a contribution to further one of the four.

Sen. Rep. No. 96-1007, 96th Cong., 2d Sess. 10, 1980-2 C.B. 604.

In light of Congressional intent that the term "conservation purposes" be liberally construed with regard to the types of property with respect to which deductible conservation easements may be granted, Conf. Rep. No. 95-263, 95th Cong., 1st Sess. 30, 1977-1 C.B. 523, and its further recognition that a contribution may satisfy more than one of the four stated objectives, we conclude that a facade easement which also prohibits vertical construction on the encumbered property qualifies as an open space easement.

Issue 2.

Prior to the 1980 amendment, the Service published its position that the contribution of an easement in gross over an historic structure and appurtenant land qualified as a scenic easement and an open space easement within the meaning of Treas. Reg. section 1.170A-7(b)(1)(ii). Rev. Rul. 75-358, 1975-2 C.B. 76. The current version of the regulation limits its application to contributions made on or before December 17, 1980, the effective date of the amendment, and provides that the deductibility of a qualified conservation contribution is to be determined under Treas. Reg. section 1.170A-14. This limitation is consistent with the legislative history of the amendment which states that "a deduction for an open space easement in gross is not allowable under the undivided portion exception in Code section 170(f)(3)(B)(ii). Sen. Rep. No. 96-1007 2d Sess. (1980), published at 1980-2 C.B. 599, 604.

Thus, we conclude that Rev. Rul. 75-358 is not applicable to petitioners' charitable contribution which was made in * * * However, in light of the conclusion reached on the first issue, this question is moot.

This document may include confidential information subject to the attorney-client and deliberative process privileges, and may also have been prepared in anticipation of litigation. This document should not be disclosed to anyone outside the IRS, including the taxpayer (s) involved, and its use within the IRS should be limited to those with a need to review the document in relation to the subject matter or case discussed herein.

Any questions concerning this matter may be referred to * * * at FTS (202) * * *

By: Daniel J. Wiles
Income Tax and Accounting Branch
Field Service Division

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