Sunday, August 25, 2013

IRS Chief Counsel Memorandum Addresses Conservation Easement Valuation

IRS image copyThe IRS Office of Chief Council has published a memorandum (Number 201334039, Release Date 8/23/2013)* that provides helpful guidance on valuing conservation easements in accordance with some of the more technical requirements of Treasury Regulation § 1.170A-14(h)(3)(i). The memorandum specifically addresses the "contiguous parcel" and "enhancement" rules.

Pursuant to the contiguous parcel rule (found in the fourth sentence of Treasury Regulation § 1.170A-14(h)(3)(i)), the amount of the deduction in the case of a conservation easement covering a portion of contiguous property owned by the donor and the donor's family (as defined in § 267(c)(4)) is the difference between the fair market value of the entire contiguous parcel before and after the granting of the easement.

Pursuant to the enhancement rule (found in the fifth sentence of Treasury Regulation § 1.170A-14(h)(3)(i)), if the granting of a conservation easement after January 14, 1986, has the effect of increasing the value of any other property owned by the donor or a related person, the amount of the deduction must be reduced by the amount of the increase in the value of the other property, whether or not such property is contiguous. Related person has the same meaning as in either § 267(b) or § 707(b).

The Chief Counsel memorandum discusses (i) the meaning of the term “family” for purposes of the contiguous parcel rule, (ii) the meaning of “related person” for purposes of the enhancement rule, and (iii) rules relating to constructive ownership and entity classification and their impact on both the contiguous parcel and enhancement rules.

The Chief Counsel memorandum also explains (in footnote 1) that, for purposes of the contiguous parcel rule, whether the entire contiguous parcel is valued as one large property or as separate properties depends on the highest and best use of the entire contiguous parcel.

The examples provided in the memorandum address the following scenarios.

Scenario 1(a). Contiguous Parcel Owned by Donor.

Scenario 1(b). Contiguous Parcel Owned by Donor’s Family.

Scenario 2: Contiguous and Noncontiguous Parcels Owned by Donor.

Scenario 3(a). Contiguous Parcel Owned by a Limited Liability Company, of Which Donor Is the Single Member.

Scenario 3(b). Contiguous Parcel Owned by a Limited Liability Company, of Which Donor’s Child Is the Single Member.

Scenario 3(c). Contiguous Parcels Owned by Limited Liability Companies, of Which Donor and Donor’s Parent Are the Single Members.

Scenario 4(a). Contiguous Parcel Owned by a Limited Liability Company Classified As a Corporation, of Which Donor Is the Single Member.

Scenario 4(b). Contiguous Parcel Owned by a Limited Liability Company Classified As a Partnership, of Which Donor and Donor’s Family Are Members.

Scenario 4(c). Contiguous Parcel Owned by a Limited Liability Company Classified As a Partnership, of Which Donor’s Spouse and Unrelated Individuals Are Members.

Scenario 4(d). Contiguous Parcel Owned by a Limited Liability Company Classified As a Partnership, of Which Donor and an Unrelated Individual Are Members.

Scenario 5(a). Contiguous Parcel Owned by a Limited Liability Company Classified As a Partnership, of Which Donor Is Considered to Own More Than 50%.

Scenario 5(b). Contiguous Parcel Owned by a Limited Liability Company Classified as a Partnership, of Which Donor Is Considered to Own Less Than 50%.

For an additional insightful discussion of some of the conservation easement-specific valuation rules in Treasury Regulation § 1.170A-14(h)(3), see Browning v. Comm’r, 109 T.C. 303 (1997).

*IRS Office of Chief Counsel advice documents are legal advice, signed by executives in the National Office of the IRS Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The documents are issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. However, they are not to be used or cited as precedent.

NAMcL

 

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