WHEN DONOR RESTRICTS USE OF CONTRIBUTED PROPERTY, DEDUCTION IS FAIR MARKET VALUE AT TIME OF GIFT TAKING INTO ACCOUNT THE RESTRICTION

Rev. Rul. 85-99

ISSUE

Under the described conditions, is the amount of a charitable contribution deduction affected by a restriction placed by the donor on the use of the donated property?

FACTS

An agricultural college sought to acquire a certain parcel of land to use in connection with its operations in farming research and development of new farming techniques. The college is an organization described in section 501(c)(3) and 170(c) of the Internal Revenue Code. In 1982, the owner of the property, an individual, gave 50 acres of a 100 acre parcel of land to the college under a deed of gift that carried a restrictive covenant providing that the land be used for agricultural purposes only. The donor retained the remaining 50 acres but retained no interest in the donated property. Use of the land for agricultural purposes would not result in a special benefit to the donor. The highest and best use of the land was for a more valuable use than agricultural purposes.

LAW AND ANALYSIS

Section 170(a) of the Code provides that there shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made in the taxable year.

Section 1.170A-1(c) of the Income Tax Regulations provides 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 by section 170(e)(1) of the Code and section 1.170A-4(a) of the regulations.

Although the highest and best use of the contributed property, if unencumbered, would be for a more valuable use than as agricultural land, the deed of gift to the land carried a restrictive covenant providing that the land be used solely for agricultural purposes.

The value of property contributed under section 170 is the price that a reasonably knowledgeable willing buyer would pay a reasonably knowledgeable willing seller for the property subject to any restrictions imposed at the time of contribution. See section 1.170A-1(c) of the regulations. Property otherwise intrinsically more valuable that is encumbered by some restriction or condition limiting its marketability or use, must be valued in the light of such limitation. See Cooley v. Commissioner, 33 T.C. 223, 225 (1959), aff'd per curiam, 238 F.2d 945 (2d Cir. 1960); Deukmejian v. Commissioner, T.C.M. 1981-24; Silverman v. Commissioner, T.C.M. 1968-216; Klopp v. Commissioner, T.C.M. 1960-185; Dresser v. Commissioner, T.C.M. 1956-54.

HOLDING

Subject to the reductions imposed by section 170(e)(1) of the Code, the amount of the taxpayer donor's charitable contribution deduction is the fair market value of the property at the time of the contribution determined in the light of the restriction placed by the donor on the use of the property.