Rev. Rul. 76-69

Advice has been requested whether, under the circumstances described below, a sale of a scenic easement is an involuntary conversion of an interest in real property for purposes of section 1033(g) of the Internal Revenue Code of 1954.

The taxpayer is the owner of ranchland that is used in its agricultural trade or business, including the breeding, raising, and selling of livestock. The ranch is located in a valley area within state M.

In order to assure the preservation and protection of the natural beauty and historic values of this valley area, the United States Congress passed a specific Act that provides, in part that the Secretary of Agriculture is authorized to acquire any lands or interests in the valley for the protection of the historic, cultural, and scenic values of the area. These interests include "scenic easements" that are defined in the Act as the right to control the use of the land in order to protect the aesthetic values of the land.

Following the passage of the Act, the taxpayer was informed in writing by the Department of Agriculture that unless the taxpayer and the United States were able to agree voluntarily upon terms for the sale of a scenic easement over the taxpayer's property, condemnation proceedings would be initiated.

The taxpayer subsequently entered into a legally enforceable easement agreement with the United States that set forth certain covenants restricting the taxpayer from using the ranch in a manner inconsistent with the Act, such as constructing buildings with non-rustic exteriors. However, the taxpayer was permitted to continue its ranching operations and was allowed to develop a dude ranch on the property. As consideration for the sale of the easement the taxpayer received 200x dollars, which resulted in a gain.

Section 1033(a)(3)(A) of the Code provides, in part, that if property, as the result of the threat of condemnation, is compulsorily or involuntarily converted into money, and the taxpayer, within a certain replacement period, purchases other property similar or related in service or use to the converted property, the gain, at the election of the taxpayer shall be recognized only to the extent that the amount realized upon the conversion exceeds the cost of the replacement property.

Section 1033(g) of the Code provides, in part, that if real property held for productive use in trade or business or for investment is, as the result of the threat of condemnation, compulsorily or involuntarily converted, property of a like kind to be held either for productive use in trade or business or for investment shall be treated as property similar or related in service or use to the property so converted.

Rev. Rul. 59-121, 1959-1 C.B. 212, involves a situation in which the taxpayer retained the use of land that was subject to an easement. That Revenue Ruling holds that the consideration received for the granting of an easement with respect to land is proceeds from the sale of an interest in real property.

In Rev. Rul. 72-549, 1972-2 C.B. 472, the relief provisions of section 1033(g) of the Code were held applicable when the taxpayer granted an electric power company an easement and right of way over part of its property and such taxpayer retained a substantial beneficial interest in the property.

In the instant case, even though the taxpayer retained legal title to the land and retained rights and privileges that could be used and enjoyed without abridging the easement conveyed, the taxpayer in conveying the scenic easement, gave up a beneficial use of the property, and therefore disposed of a real property interest.

Accordingly, the involuntary sale of a scenic easement with respect to the taxpayer's ranch is an involuntary conversion of an interest in real property for purposes of section 1033(g) of the Code.