IRS Explains Easement Extinguishment Requirements

Internal Revenue Service

In a legal memorandum, the IRS concluded that a conservation easement fails to satisfy the requirements of <a href="/research/federal/usc26/170#cpyg-0000314" resolve="/lr/resolve/section-170h/cpyg#cpyg-0000314" title="section 170(h)">section 170(h)</a> if the deed’s judicial extinguishment clause subtracts from the donee’s share of proceeds the value of post-donation improvements or the post-donation increase in the property’s value attributable to improvements. The IRS explained that for a conservation easement to qualify as a deductible charitable contribution, a property interest must be granted in perpetuity under <a href="/research/federal/usc26/170#cpyg-0000322" resolve="/lr/resolve/section-170h2c/cpyg#cpyg-0000322" title="section 170(h)(2)(C)">section 170(h)(2)(C)</a> and enforceable in perpetuity under <a href="/research/federal/usc26/170#cpyg-0000351" resolve="/lr/resolve/section-170h5a/cpyg#cpyg-0000351" title="section 170(h)(5)(A)">section 170(h)(5)(A)</a>. Reg. <a href="/research/federal/cfr26/1.170A-14#cw6v-0000106" resolve="/lr/resolve/section-1170a-14g6i/cw6v#cw6v-0000106" title="section 1.170A-14(g)(6)(i)">section 1.170A-14(g)(6)(i)</a> provides that if conditions surrounding the property unexpectedly change, and those changes make continued use of the property for conservation purposes impossible or impractical, the conservation purpose can still be treated as protected in perpetuity if the easement is judicially extinguished and the donee uses all of its proceeds from the sale or exchange of the property in a way that is consistent with the original contribution’s conservation purposes. Under the allocation formula set out in reg. <a href="/research/federal/cfr26/1.170A-14#cw6v-0000107" resolve="/lr/resolve/section-1170a-14g6ii/cw6v#cw6v-0000107" title="section 1.170A-14(g)(6)(ii)">section 1.170A-14(g)(6)(ii)</a>, the donee must be entitled to a proportionate share of the extinguishment proceeds, unless state law provides that the donee is entitled to the full amount. The IRS noted that the Tax Court has held that the requirements of reg. <a href="/research/federal/cfr26/1.170A-14#cw6v-0000107" resolve="/lr/resolve/section-1170a-14g6ii/cw6v#cw6v-0000107" title="section 1.170A-14(g)(6)(ii)">section 1.170A-14(g)(6)(ii)</a> are strictly construed, and if a donee isn’t absolutely entitled to a proportionate share of extinguishment proceeds, the conservation purpose isn’t protected in perpetuity. The Tax Court has further held that reducing the donee’s share by the value of any post-donation improvements or any post-donation increase in the property’s value attributable to improvements reduces the donee’s proportionate share of proceeds, thereby violating reg. <a href="/research/federal/cfr26/1.170A-14#cw6v-0000107" resolve="/lr/resolve/section-1170a-14g6ii/cw6v#cw6v-0000107" title="section 1.170A-14(g)(6)(ii)">section 1.170A-14(g)(6)(ii)</a> unless state law provides otherwise.

In a legal memorandum, the IRS concluded that a conservation easement fails to satisfy the requirements of section 170(h) if the deed’s judicial extinguishment clause subtracts from the donee’s share of proceeds the value of post-donation improvements or the post-donation increase in the property’s value attributable to improvements.

In a legal memorandum, the IRS concluded that a conservation easement fails to satisfy the requirements of section 170(h) if the deed’s judicial extinguishment clause subtracts from the donee’s share of proceeds the value of post-donation improvements or the post-donation increase in the property’s value attributable to improvements. The IRS explained that for a conservation easement to qualify as a deductible charitable contribution, a property interest must be granted in perpetuity under section 170(h)(2)(C) and enforceable in perpetuity under section 170(h)(5)(A). Reg. section 1.170A-14(g)(6)(i) provides that if conditions surrounding the property unexpectedly change, and those changes make continued use of the property for conservation purposes impossible or impractical, the conservation purpose can still be treated as protected in perpetuity if the easement is judicially extinguished and the donee uses all of its proceeds from the sale or exchange of the property in a way that is consistent with the original contribution’s conservation purposes. Under the allocation formula set out in reg. section 1.170A-14(g)(6)(ii), the donee must be entitled to a proportionate share of the extinguishment proceeds, unless state law provides that the donee is entitled to the full amount. The IRS noted that the Tax Court has held that the requirements of reg. section 1.170A-14(g)(6)(ii) are strictly construed, and if a donee isn’t absolutely entitled to a proportionate share of extinguishment proceeds, the conservation purpose isn’t protected in perpetuity. The Tax Court has further held that reducing the donee’s share by the value of any post-donation improvements or any post-donation increase in the property’s value attributable to improvements reduces the donee’s proportionate share of proceeds, thereby violating reg. section 1.170A-14(g)(6)(ii) unless state law provides otherwise.

Sec. 170 Charitable, etc., contributions and gifts

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IRS Explains Easement Extinguishment Requirements