Gift of Land with Retained Timber or Mineral Rights

IRS Headnote:

Charitable contributions; retained timber or mineral rights. A gift of timber land to a charitable organization for transfer to the U.S. for use as a wildlife preserve is not disallowed under section 170(f)(3)(A) of the Code by the grantor's retention of mineral or timber rights that can be exercised only upon the remote possibility of approval of the Government.

Reference:

Section 170 -- Charitable Deduction

Full Text:

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

A corporation manufactures wood products and owns extensive tracts of timberland in the United States. The corporation transferred one of these tracts by deed of gift to an organization whose purpose is to promote the preservation of wilderness areas. The organization is described in section 170(c)(2) of the Code, is exempt under section 501(c)(3), and is not a private foundation within the meaning of section 509. Pursuant to a pre-arranged agreement among all the parties involved, the organization deeded the property to the United States, which planned to use it as a wildlife preserve.

The deed of gift from the organization to the United States refers to the prior conveyance from the corporation to the organization and stipulates that the conveyance from the organization to the United States is made subject to certain restrictions and reservations regarding the removal of timber and gas and oil set forth in the deed from the corporation to the organization.

In the deed conveying the timberland from the corporation to the organization there is a right of reverter of all timber rights to the corporation if at any time during a period of 90 years beginning with the conveyance the grantee offers for sale, attempts to sell, or otherwise disposes of timber of any kind. Likewise, the deed from the organization to the United States prohibits the grantee from removing or disturbing timber, except in reasonable amounts for the management and enhancement of the property.

Furthermore, with respect to the mineral rights, the deed from the corporation to the organization reserves to the corporation the right to explore for and extract any oil or gas on the property. These mineral rights are exercisable only upon an express advance finding in writing by the Secretary of the Interior of the United States that such exploration and extraction is "in the national interest," and then, only to the extent specified by the Secretary. There were no known deposits of oil or gas on the land at the time of the contribution.

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)(1) of the Code provides, in part, that the term "charitable contribution" means a contribution or gift to or for the use of the United States.

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 1.170A-1(e) of the Income Tax Regulations provides, in part, that, if an interest in property passes to, or is vested in, charity on the date of the gift and the interest would be defeated by the subsequent performance of some act or the happening of some event, the possibility of occurrence of which appears on the date of the gift to be so remote as to be negligible, a deduction is allowable. For example, a gift of land made to a city as a public park is deductible if, on the date of the gift, the city does plan to use the land as a public park and the possibility that the city will not use the land for a public park is so remote as to be negligible.

Section 170(f)(3)(A) of the Code provides that generally no deduction is allowed under section 170 for any charitable contribution, not made by a transfer in trust, that consists of less than the donor's entire interest in the property transferred. However, under section 1.170A-7(a)(3) of the regulations, a deduction is not disallowed under section 170(f)(3)(A) merely because the interest that passes to, or is vested in, the charity may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.

In this case, the right to use the property as a wildlife preserve could be restricted by the corporation's exercise of its timber or mineral rights. However, the corporation's only right to the timber is a mere right of reverter that may be invoked only in the event the grantee attempts to dispose of the trees or timber. Further, the corporation has no power to exploit the oil or gas rights on the deeded tract in the absence of an express advance finding in writing by the Secretary of the Interior that exploitation of such right is "in the national interest," and then, only to the extent specified by the Secretary.

Thus, in effect, the corporation's exercise of its mineral or timber rights is conditioned upon the approval of the ultimate donee, the United States Government. The possibility that it will grant such approval is so remote as to be negligible, since, on the date of the gift, the United States planned to use the property as a wildlife preserve.

Accordingly, the fair market value of the real property donated by the corporation is deductible as a charitable contribution under the provisions of section 170 of the Code, subject to the limitations contained therein.