Rev. Rul. 76-331

Advice has been requested concerning the deductibility under section 170 of the Internal Revenue Code of 1954 of donations of real property to a charitable organization under the circumstances described below.

Situation 1. A corporation transferred a tract of land to an organization described in section 170(c)(2) of the Code. However, it retained all mineral rights with respect to the property, including the sole right to exploit and sell any minerals obtained from the property.

Situation 2. An individual, aged 50 and in good health, owned timberland that the individual leased to a corporation in 1975 for a term of 60 years. In 1976, the individual transferred this land to an organization described in section 170(c)(2) of the Code, subject to the individual's receiving, during the individual's lifetime, all the payments due under the lease. Upon the individual's death, all rights under the lease will pass to the charitable organization.

Section 170 of the Code provides, subject to certain limitations, a deduction for gifts and contributions 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 provides, in part, that the term "charitable contribution" means 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 170(f)(3)(A) of the Code denies a deduction 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. However, section 170(f)(3)(B) provides that section 170(f)(3)(A) shall not apply to a contribution of an undivided portion of the taxpayer's entire interest in property.

Section 1.170A-7(b)(1)(i) of the Income Tax Regulations provides 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.

Thus, with respect to property contributed to a charitable organization, if the only rights retained by the donor are insubstantial, then there has been compliance with section 1.170A-7(b)(1)(i) of the regulations and a deduction would be allowed under section 170 of the Code.

In Situation 1, the corporation retained all mineral rights to the land and had the sole right to exploit and sell the minerals. In Situation 2, the right to receive the remaining payments due from the corporation from the leasing of the timberland was retained by the individual. Thus, in each situation, the taxpayer retained a substantial interest or right in the property and cannot be considered as donating an undivided portion of the taxpayer's entire interest in the property.

Accordingly, in Situation 1 and Situation 2, no deduction for the property is allowable to the taxpayer under section 170 of the Code. Compare Rev. Rul. 75-373, 1975-2 C.B. 77, relating to the grant of an easement under which the grantor retained all mineral rights in the land underlying the easement but agreed to drill or mine only by slant from adjacent property so that the surface of the land would not be disturbed.