Rev. Rul. 76-376

Advice has been requested concerning the method of determining the fair market value of real property for purposes of the charitable contributions deduction under section 170 of the Internal Revenue Code of 1954.

A taxpayer who owned in fee simple 10x acres of real property granted an open space easement in perpetuity in 8x of the 10x acres to Y, an organization described in section 170(c) of the Code. Subsequent to the granting of the easement to Y, the taxpayer conveyed in fee the taxpayer's remaining interest in the 8x acres to Z, also an organization described in section 170(c).

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.

With regard to contributions of property, section 1.170A-1(c) of the Income Tax 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). 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.

Rev. Rul. 73-339, 1973-2 C.B. 68, states that 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.

Rev. Rul. 73-339 provides an example in which an easement was granted in an entire tract of land. Because the easement was granted in all of the property, the term "total property" could be interpreted as referring merely to the property in which the easement was granted. However, "total property," as used in Rev. Rul. 73-339, means the entire property, not merely the property in which the easement is granted. Thus, in the instant case, the taxpayer's total property was the 10x acres owned by the taxpayer, that is, the 8x acres in which the easement was granted plus the contiguous 2x acres.

Accordingly, in the instant case, for purposes of the charitable contributions deduction provided by section 170 of the Code, the fair market value of the easement in perpetuity in the 8x acres granted to Y is the difference between the fair market value of the entire 10x acres before the granting of the easement and the fair market value of the 10x acres after the grant.

Further, the fair market value of the taxpayer's remaining interest in the 8x acres conveyed in fee to Z is the fair market value of the 8x acres encumbered by the easement granted to Y.

Rev. Rul. 73-339 is clarified.