Rev. Rul. 73-339

Advice has been requested whether a deduction is allowable under sections 170 and 2522 of the Internal Revenue Code of 1954 for a charitable contribution of an open space (or scenic) easement in perpetuity and, if so, how the value of such a gift may be determined.

Rev. Rul. 64-205, 1964-2 C.B. 62, holds that the gratuitous charitable contribution of a restrictive easement in perpetuity results in a contribution deduction to the donor under section 170 of the Code, subject to the prescribed limitations, in the amount of the fair market value of the easement. Further, the basis of the property must be adjusted by elimination of that part of the total basis that is properly allocable to the restrictive easement granted.

Section 170(f)(3)(A) of the Code, applicable to contributions made after July 31, 1969, restricts income tax deductions for certain contributions of interests in property which consist of less than a taxpayer's entire interest in such property and section 2522(c)(2) places a similar restriction on gift tax deductions. Under sections 170(f)(3)(B)(ii) and 2522(c)(2), however, these restrictions do not apply to a contribution of an undivided portion of a taxpayer's entire interest in property.

Section 1.170A-7(b)(1)(ii) of the Income Tax Regulations provides that a charitable contribution of an open space easement in gross in perpetuity shall be considered a contribution of an undivided interest in property to which section 170(f)(3)(A) of the Code does not apply. For Gift Tax purposes an undivided portion of a donor's entire interest in property includes an open space easement in gross in perpetuity as defined in section 1.170A-7(b)(1)(ii) of the regulations.

An easement in gross is a mere personal interest in, or right to use, the land of another; it is not supported by a dominant estate but is attached to, and vested in, the person to whom it is granted. The regulations provide, by way of example, that a deduction is allowable under section 170 for "the value of a restrictive easement gratuitously conveyed to the United States in perpetuity whereby the donor agrees to certain restrictions on the use of his property, such as restrictions on the type and height of buildings that may be erected, the removal of trees, the erection of utility lines, the dumping of trash, and the use of signs."

With regard to contributions of property, section 1.170A-1(c) of the regulations provides generally that if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution reduced as provided in section 170(e) of the Code and section 1.170A-4(a) of the regulations. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

Section 170(e) of the Code provides, in part, that if a taxpayer donates property that would have resulted in gain that would not have been long-term capital gain if the property had been sold at its fair market value on the date of contribution, the value of the gift must be reduced by the amount of such gain.

Open space easements in perpetuity may be valued separately and distinctly. However, more often than not open space easements in perpetuity are granted by deed of gift so there is usually no substantial record of market place sales to use as a meaningful or valid comparison. As a consequence, the valuation of an open space easement in perpetuity is generally made on the basis of the "before and after" approach. Thus, the difference between the fair market value of the total property before the granting of the easement and the fair market value of the property after the grant is the fair market value of the easement given up.

Application of the "before and after" approach is illustrated in the following example: Ten acres of farm land that would have resulted in gain that would have been long-term capital gain if the property had been sold at its fair market value on the date of contribution are involved. Sales of similar land support a fair market value of $2,000 per acre. Land in the general area restricted to farm use has a fair market value of $1,500 per acre. A governmental body, in order to preserve open space on this particular tract, and preclude its development with a structure of any kind, secured from the owner of the land a contribution of an enforceable easement in perpetuity to preclude development but permit continued use as farm land. The valuation of this open space or scenic easement in perpetuity may be determined as follows:

 Total FMV of entire tract - 10 A. at $2,000        = $20,000

Thus, in this example, since the reduction provided in section 170(e) of the Code and section 1.170A-4(a) of the regulations does not apply, the amount of the charitable contribution deduction allowable under section 170 and the amount of the gift deductible under section 2522 in computing taxable gifts for the calendar quarter for this donation is $5,000. However, a transfer of property to an organization described in section 170(c) of the Code made with a reasonable expectation of an economic benefit to the taxpayer in his trade or business is not a charitable contribution. See Larry G. Sutton and Marjorie V. Sutton, 57 T.C. 239 (1971), and Jordon and Essie Perlmutter, 45 T.C. 311 (1965).