Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Conservation Easement Deduction Limitations: Contiguous Parcel and Enhancement Rules

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Office of Chief Counsel Memorandum 201334039 (August 23, 2013) provides useful guidance regarding the Contiguous Parcel rules for conservation easements. Those rules are explained as follows:

Under the Contiguous Parcel Rule found in § 1.170A-14(h)(3)(i) (fourth sentence), in the case of a charitable contribution of a conservation easement covering a portion of contiguous property owned by a donor and the donor’s family, the amount of the deduction is the difference between the fair market value of the entire contiguous parcel of property before and after the granting of the easement.1 For purposes of the Contiguous Parcel Rule, “family” includes brothers and sisters (whether by whole or half-blood), spouse, ancestors, and lineal descendants. Section 267(c)(4). “Family” does not include an entity, such as a corporation or partnership, that is classified as separate from its owner under the entity classification rules described below.

Under the Enhancement Rule found in § 1.170A-14(h)(3)(i) (fifth sentence), if the granting of a conservation easement increases 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 that other property is contiguous. For purposes of the Enhancement Rule, “related person” has the same meaning as in either § 267(b) or § 707(b). Section 1.170A-14(h)(3)(i) (eighth sentence).

The relationships listed in § 267(b) include, but are not limited to, the relationships between (1) an individual and members of a family (as defined in § 267(c)(4)), and (2) an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual. The relationships listed in § 707(b) are those between (1) a partnership and a person owning, directly or indirectly, more than 50% of the capital interest, or the profits interest, in such partnership, and (2) two partnerships in which the same persons own, directly or indirectly, more than 50% of the capital interests or profits interests.

Whether parties are related for purposes of the Contiguous Parcel Rule and the Enhancement Rule may depend on property constructively owned by the donor, the donor’s family, or a related party. Section 267(c) sets forth rules to determine constructive ownership of stock under § 267(b). Under § 707(b)(3), the ownership of a capital or profits interest in a partnership is determined in accordance with the rules for constructive ownership of stock provided in § 267(c) (other than § 267(c)(3)).

The Memorandum analyses a dozen commonly occurring fact patterns. Scenario 2 is an example:

SCENARIO 2: CONTIGUOUS AND NONCONTIGUOUS PARCELS OWNED BY DONOR

Donor owns Parcel A and contiguous Parcel B. Donor also owns non-contiguous Parcel C, located near Parcel A. Donor places a conservation easement on Parcel A, and as a result Parcel C will always have a view of a river that abuts Parcel A, thereby increasing the value of Parcel C.

Under the Contiguous Parcel Rule, the amount of the deduction is equal to the difference between the fair market value of the entire contiguous parcel owned by the donor and the donor’s family (as defined in § 267(c)(4)) before and after the granting of the easement.

Additionally, the Enhancement Rule provides that, if the granting of the restriction increases the value of any other property owned by the donor or a related person (within the meaning of § 267(b) or § 707(b)), the amount of the deduction for the conservation contribution is reduced by the amount of the increase in the value of the other property, whether or not that other property is contiguous.

Accordingly, because Donor owns Parcel A and contiguous Parcel B, the amount of the deduction is first determined by valuing the entire contiguous parcel comprised of Parcel A and Parcel B before and after the granting of the easement. Second, because non-contiguous Parcel C is also owned by Donor, the amount of the deduction is reduced by the value of the enhancement to Parcel C from the granting of the easement.

Turney P. Berry
Louisville, Kentucky

Author: robmalinesq

I am an estate planning and probate attorney in Memphis, Tennessee.

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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