CONTRIBUTION OF LAND AND FACILITIES TO CONSERVATION ORGANIZATION DEDUCTIBLE

Reference:

Section 170 -- Charitable Deduction

Full Text:

May 27, 1981

Legend
X = ***
S = ***
X = ***
Y = ***
Z = ***

ISSUE:

Is the contribution of property to a conservation organization deductible in accordance with section 170 of the Internal Revenue Code under the facts and circumstances as set forth below?

FACTS:

Taxpayers were members and shareholders of Y, an incorporated social club that owned and operated hunting facilities and land in the state of S. On June 12, 1974, all the shareholders of Y donated their shares in Y to X, an organization described in section 170(c)(2) and (b)(1)(A)(vi) of the Code that is engaged in conservation activities. X, as sole shareholder of Y, then conveyed the land, which totals in excess of 22x acres, and hunting facilities to itself and liquidated Y.

At the time of the donation of the shares of Y to X, there existed an understanding between the parties that X would, subsequent to the donation, engage in good faith negotiations with those members of Y who wished to continue to hunt on the property for the leasing and licensing of the facilities and land for hunting purposes.

After the donation, the taxpayers, along with certain other persons, incorporated another social club, Z. Z entered into an agreement with X for the lease of the hunting facilities and a license to hunt on part of the land. At no time was X controlled by Y or Z or their members.

At the behest of X the agreement contained restrictions on the number of persons who could hunt on the property (a maximum of 10 during any single day), as well as restrictions on the number of persons who could otherwise use the premises (a maximum of 20 at any one time). Further, the agreement provided that Z would not alter the present natural state of the licensed premises nor in any way disturb the habitat or plant or animal populations, except for the proper management and operation of a hunting preserve. The restrictions were imposed because X had dedicated the property to scientific and educational purposes by the preservation and protection of the scientic, educational and aesthetic aspects thereof, and by its maintenance as a wildlife sanctuary. The hunting in accordance with the restrictions was not inconsistent with the dedication of the land for conservation purposes.

X chose appraisers to determine the fair market value of the annual lease*slicense charge, and the appraisers determined that the annual fair market value of the charge should be approximately $34x. Even so, X insisted upon, and Z agreed to, a substantially higher annual charge of $45x. The agreement also provided that the annual charge would be adjusted in accordance with changes in the United States consumer price index.

APPLICABLE LAW AND RATIONALE:

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. X is an organization described in section 170(c)(2).

Section 170(f)(3)(A) of the Code provides, in part, that 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, a deduction shall be allowed only to the extent that the value of the interest contributed would be allowable as a deduction under section 170 if such interest had been transferred in trust. A contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer's entire interest in property.

Section 170(f)(3)(B) of the Code and section 1.170A - 7(b)(1)(i) of the Income Tax Regulations provide, in pertinent part, as an exception to section 170(f)(3)(A), that a deduction is allowed under section 170 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, section 1.170A - 7(b)(1)(i) of the regulations is complied with if the only rights retained by the donor are insubstantial. See Rev. Rul. 75-66, 1975 - 1 C.B. 85.

Black's Law Directionary (5th ed. (1979) defines "interest," in part, as follows:

The most general term that can be employed to denote a right, claim, title, or legal share in something. In its application to lands or things real, it is frequently used in connection with the terms "estate," "right," and "title." More particularly it means a right to have the advantage accruing from anything; any right in the nature of property, but less than title.

* * *

The word "interest" is used in the Restatement of Property both generically to include varying aggregates of rights, privileges, powers and immunities and distributively to mean any one of them.

Rev. Rul. 75-66, 1975 - 1 C.B. 85, holds that the contribution of a tract of land to the United States by an individual who retained the right during his lifetime to train his personal hunting dog on the trails extending over the entire tract, and to maintain paths and lanes relating to the reserved use, is deductible in the manner and to the extent provided by section 170 of the Code. The rights retained by the donor were not substantial enough to affect the deductibility of the property contributed.

Rev. Rul. 76-151, 1976 - 1 C.B. 59, holds that a corporation is entitled to a charitable contribution deduction for a lodging facility that it transferred to a charitable organization that, for an annual payment from the corporation, would then make the facility available for the use of the corporation's employees. Rev. Rul. 78-197, 1978 - 1 C.B. 83, holds that a taxpayer, with voting control of a corporation and an exempt private foundation, who donates shares of the corporation's stock to the foundation and, pursuant to a prearranged plan, causes the corporation to redeem the shares from the foundation, does not realize income as a result of the redemption. The Service will treat the proceeds of such redemptions as income to the donor under facts similar to those in Palmer v. Commissioner, 62 T.C. 684 (1974), only if the donee is legally bound, or can be compelled by the corporation, to surrender the shares for redemption.

The understanding between X and the interested members of Y did not entitle them to compel X to liquidate Y or to grant the lease*slicense to Z. X was an independent charitable organization with a fiduciary duty to carry out its charitable purposes. Thus, Rev. Rul. 78-197 applies to this situation, and the donation must be considered without regard to the subsequent lease*slicense agreement. However, while the subsequent lease*slicense agreement would not be considered as part of the gift, the understanding at the time of the gift (that the parties would enter into negotiations for a lease*slicense) must be considered as an integral part of the transaction.

The right to enter into negotiations for a lease or a license is one of the rights and powers that is incident to ownership of the property, and the retention of such a right could be the retention of a partial interest in property donated. However, because the right in this case was the right to enter into negotiations for a lease*slicense at an annual fair market charge, and because the use of the property by the taxpayers is not inconsistent with X's ownership and use of the property, the retained right is not substantial enough to affect the deductibility of the property contributed. See, Rev. Rul. 75-66 and Rev. Rul. 76-151.

The facts surrounding the subsequent lease*slicense agreement (X imposed restrictions on the property to carry out its conservation purposes and chose the appraisers for the annual charge for the lease*slicense agreement, and the annual charge was at fair market value and is required to be adjusted to coincide with changes in the consumer price index) indicate that the understanding at the time of the gift was bona fide and not a subterfuge to avoid the partial interest rule of section 170(f)(3) of the Code.

Accordingly, the contribution of property to X is deductible by the taxpayers in the manner and to the extent provided by section 170 of the Code.

CONCLUSION:

The contribution of property to X is deductible by the taxpayers in the manner and to the extent provided by section 170 of the Code.

A copy of this technical advice memorandum is to be given to the taxpayers. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.