TAX INCENTIVES FOR LAND CONSERVATIONo

A CONTINUING ED UCATION SEMINAR

Sponsored by SOUTHEAST ALASKA LAND TRUST

Juneau, AK March 2, 2001

Thomas F. ~ a e n s l ~ * Attorney at Law

144 Railroad Avenue, Suite 21 7 Edmonds, WA 98020 Tel(425) 77.5-4803

Toll Free (800) 611-8100 FUX(42.5) 77.5-9839

Thomas F. Haensly advises individuals and closely heldlfamily businesses on estate and successional planning, including land and asset protection options, choice of entities for managinglpreserving family businesses and lands, and tax consequences of charitable contributions and land conveyances. He also advises individuals, private companies, and public agencies on real estate, land use, and environmental matters, including environmental due diligence in property acquisitions, land conservation strategies, permitting, subdivision, and regulation of sensitive areas. He received his J.D. from Stanford Law School and has a B.S. and M.S. in wildlife ecology. He is a frequent speaker on land conservation, real estate, and tax-exempt organization topics and is the lead author of the recent chapter on "Conservation Easements" in the Washington Real Property Deskbook.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Incentives for Open Space Preservation 3

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realizing Tax Benefits 3

Basic Tax Rules on Qualifying for a Charitable Deduction for Gifts of Real Property . . . . . . . . 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Donation Must be a Charitable Gift 3

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Donation Must Be Made To A Permissible Donee 4 Donation Limited to the Portion of the Property Actually Donated . . . . . . . . . . . . . . . . . 4

Basic Tax Rules on Assessing the Tax Consequences of a Charitable Gift of Real Property . . . . 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IncomeTaxConsequences 5

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estate and Gift Tax Consequences 6

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conservation Easements . General Considerations 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conservation Easements 8

Reasons for Granting a Conservation Easement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Satisfying IRS Requirements for Donation of a Conservation Easement . . . . . . . . . . . . . . . . . . . 8 Must be a "Qualified Real Property Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Must be Donated to a "Qualified Conservation Organization" . . . . . . . . . . . . . . . . . . . . . 8 Must be "for Conservation Purposes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Must be Enforceable in Perpetuity 9

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estate Tax Planning Under IRC Section 203 1 (c) 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EstateTaxBenefits 10

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying for Section 203 1 (c) Treatment 11 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TheElection 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . EstateIConservation Planning Under IRC 5 203 1 (c) 14

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Protecting Open Space Through Bargain Sales 14

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bargain Sales . General Considerations 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . When to Consider a Bargain Sale 15

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Key Considerations in Making a Bargain Sale 15

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mechanics of Bargain Sales 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AllocationofBasis 16

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The "Sale" Portion of Bargain Sales 16

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The "Gift" Portion of Bargain Sales 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bargain Sales Involving Like-Kind Exchanges 17

2.1.3 For there to be a charitable gift, property must be received by the donee.

2.2 Donation Must Be Made To A Permissible Donee. IRC 5 170(a).

2.2.1 Entire interests. Permissible donees for donations of entire interests in real property include the following:

2.2.1.1 Governmental entities;

2.2.1.2 Publicly supported charities or supporting organizations ("public charities"); and

2.2.1.3 Private foundations.

2.2.2 Partial interests. Qualified donees for donations of partial interests in real property (e.g., conservation easements) include governmental entities and public charities, but do not include private foundations supporting organizations not "controlled" by a governmental entity or public charity. IRC 5 170(f)(3); Treas. Reg. 5 1.170A-7.

2.2.3 Value. Value of charitable donation depends upon the classification of the donee. Generally, higher income tax deduction possible for charitable donations to preferred charities, such as a governmental entity or public charity (see Section 3.1.5 below).

2.3 Donation Limited to the Portion of the Property Actuallv Donated.

2.3.1 Use restrictions. Where donor imposes deed restrictions that restrict the government or land trust's uses of the property to certain uses (e.g., open space), donor may only be able to receive a charitable deduction for the restricted value of the property. Rev. Rul. 85-99, 1985-2 C.B. 83.

2.3.2 Bargain sales. Where donor sells land at less than its fair market value, donor may treat the difference between the sale price and the fair market value as a charitable donation. See Sections 7 and 8 below for a more detailed discussion. IRC 5 101 1.

2.3.3 Partial interests. Generally, donations of partial interests are not deductible; where donor donates less than his or her entire interest in the property, donor may treat the value of the 'gift as a charitable donation, provided that the partial interest is either:

2.3.3.1 A remainder interest in a personal residence or farm (e.g., creation of life estates);

2.3.3.2 An undivided interest in the property (i.e., creation of tenancy in common); or

2.3.3.3 A qualified conservation contribution. IRC 5 170(f)(3)(B); Treas. Reg. 5 1.170A-7(b)(l).

Haensly/Tax Incentives 0 4 March 2, 2001

3 Basic Tax Rules on Assessing the Tax Consequences of a Charitable Gift of Real Property

3.1 Income Tax Consequences.

3.1.1 Tax benefits. Donor of charitable gift may receive an income tax deduction for the donation (the income tax benefit of the charitable gift for the donor may be viewed as the amount of income the gift protects from being taxed). IRC tj 170. Donors of appreciated, long-term capital gain property also avoid paying capital gains tax.

3.1.2 Level of benefit. For gifts of appreciated real property, this figure principally depends on the following:

3.1.2.1 The tax rates that apply to the donor and the donor's adjusted gross income;

3.1.2.2 The nature of the property; and

3.1.2.3 The classification of the donee.

3.1.3 RatesIIncome. The federal income tax rates currently range from a low of 15% to a high of 39.6%. Capital gains are taxed at a top rate of 20% for real property held over 12 months. Certain itemized deductions, including charitable contributions, are limited for taxpayers whose adjusted gross income exceeds certain levels (for tax year 2000, limitation begins to apply for individuals at $128,950; $64,475 for married person filing separately). IRC 5 68.

3.1.4 Nature of the appreciated propertv (i.e., property for which its value exceeds its basis in the hands of the donor).

3.1.4.1 Long-term capital gain property. Value of the charitable gift is the fair market value (FMV) of the property, unless donated to a nonoperating private foundation.

3.1.4.1.1 Long-term capital gain property is land (a capital asset) held more than 12 months (holding period) for use in a trade or business, for investment, or for personal residential or recreational purposes, then sold or exchanged. IRC 5 170(e).

3.1.4.112 Property acquired by gift entitles donee to add the donor's holding period to his own, and property acquired by bequest, devise or inheritance may be sold or exchanged immediately for long-term treatment.

3.1.4.2 Ordinaw-income property. Value of the charitable gift is the donor's basis in the property regardless of the charitable donee's identity. Ordinary-income property includes inventory property and property held primarily for sale to customers in the ordinary course of a trade or business (e.g., lots in a real estate subdivision). IRC 5 170(e)(l); Treas. Reg. 5 1.170A-4(b)(l).

Haensly/Tax Incentives O 5 March 2, 2001

3.1.4.3 Dealer property. "Dealer property" is real estate held by a person who has a significant history of dealing in such properties and is considered ordinary-income property. See Rev. Rul. 79-256. Showing that land is capital gain property is inherently factual.

3.1.4.4 Conservation easements. Valued at the difference between the FMV of the property before and after conservation easement placed on the property. E.g.,

FMV of property (before): $1,500,000 FMV of property (after): 600,000 Difference $ 900,000

3.1.4.5 Remainder interests. Valued at the difference between the FMV of the property and the FMV of the life estate (determined under Treasury Department actuarial tables) and depreciation or depletion.

3.1.5 Classification of donee (with gifts of long-term capital gains property).

3.1.5.1 Public charities and governmental entities

3.1.5.1.1 A taxpayer cannot eliminate all tax due with a large charitable donation; donations only deductible up to 30% of adjusted gross income (AGI) for individuals and 10% of taxable income for corporations. IRC 5 170(b)(l)(C)(I); IRC 5 170(b)(2); Treas. Reg. 5 1.170A-1 l(a).

3.1.5.1.2 Deductions carry forward for 5 years (subject to same 30% limitation each year); any value after 6 years disappears. IRC 5 170(b)(l)(B).

3.1.5.1.3 Contributions are deductible up to 50% of AGI if taxpayer elects to use basis (useful where the land has little or no appreciated value). IRC 5 170(b)(l)(C)(iii).

3.1.5.2 Private foundations. Donation only deductible up to 20% of AGI for individuals. Deduction carries forward for 5 years; any value after 6 years disappears. IRC 5 170(b)(l)(D).

3.2 Estate and Gtfl Tax Conse~uences.

3.2.1 General considerations.

3.2.1.1 Estate tax. An excise tax levied on the privilege of transferring property at death and usually measured by the size of the estate. IRC 5 2001.

3.2.1.2 Gift tax. A transfer tax imposed on gifts made during life, since such a transfer serves to reduce the estate subject to the estate tax at death. IRC 5 2501.

Haensly/Tax Incentives 0 6 March 2, 2001

are used in calculating value of estate). Treas. Reg. 5 25.2703-1(a)(4).

3.2.5 Lifetime nivinn versus gifts by devise. Generally, making a lifetime charitable gift will result in more tax benefits than waiting and making the gift at death. Donor may receive combination of income tax deduction, property tax relief as well as estate tax savings.

4 Conservation Easements - General Considerations

4.1 Conservation Easements. A legal agreement a property owner makes to restrict the activities and uses that may take place on his or her property.

4.1.1 Restrictions may include:

4.1.1.1 The right to construct buildings.

4.1.1.2 The right to subdivide the land.

4.1.1.3 The right to harvest timber.

4.1.2 Conservation easement agreement also conveys the right to enforce these restrictions to a qualified conservation recipient, such as a local government or a land trust.

4.2 Reasons for Granting a Conservation Easement

4.2.1 Permanently protects significant and irreplaceable natural resources.

4.2.2 Landowner still owns the property.

4.2.3 Provides flexibility. Each easement is tailored to the particular landowner and the particular piece of property.

4.2.4 May yield considerable tax savings (income tax deduction, estatelgift tax benefits and property tax relief).

5 Satisjjing ZRS Requirements for Donation of a Conservation Easement

5.1 '

Must be a "Oualified Real Pro~ertv Interest " Treas. Reg. 5 1.170A- 14(b). A conservation easement is a "qualified real property interest" because it is a restriction (granted in perpetuity) on the use of the real property. Must make sure conservation easement is a valid interest in real property under local law.

5.2 Must be Donated to a "Oualified Conservation Ornanization " Treas. Reg. 5 1.170A- 14(c)

5.2.1 Must be a governmental unit or a tax-exempt 501(c)(3) organization which meets the

Haensly/Tax Incentives O 8 March 2, 2001

.4.4 That a conservation easement must be "granted in perpetuity" does not mean that it last forever. Easement may be judicially extinguished for unexpected, changed circumstances which render the conservation purposes impossible or impractical. But, if easement is extinguished, grantee must be entitled to a portion of the proceeds of any subsequent sale or exchange, proportionate to the value the easement bears to the unrestricted property as of the date of the conveyance. Treas. Reg. 5 1.170A-14(g)(6).

5.4.5 Grantee may assign its interests in the conservation easement but only to an organization that is a qualified organization at the time of transfer and that agrees to carry out the conservation purposes of the easement. Treas. Reg. 5 1.170A- 14(c).

5.4.6 Section 508 of the Taxpayer Relief Act of 1997 made an important change in the previous law related to severed mineral rights, which had prevented some taxpayers from granting conservation easements. The Tax Code before the Act essentially precluded easements on property for which mineral rights were severed after 1976. The Act removes this barrier for easements granted after December 3 1, 1997 and allows an easement on any property where mineral interests have been severed so long as the probability of surface mining is so remote as to be negligible. IRC 5 170(h)(5)(B)(ii), as amended.

6 Estate Tax Planning Under IR C Section 2031 (c)

6.1 Estate Tax Benefits:

6.1.1 Section 203 1 (c), enacted as part of the Taxpayer Relief Act of 1997 and amended by the Internal Revenue Reform Act of 1998 ("Act"), provides a new tax regime for the treatment of land subject to a qualified conservation easement (see Section 5 above regarding conservation easements). IRC 5 203 1 (c).

6.1.2 Section 203 1(c) permits, as to certain properties and at the election of the estate, an exclusion equal to as much as 40% of the value of the land.4

6.1.3 The exclusion is subject to a ceiling, which is $400,000 in 2001 and goes up in annual increments of $100,000 to a cap of $500,000 for the estates of decedents dying in 2002 or thereafter.

6.1.4 This exclusion is in addition to the reduction in the value of an estate from a conservation easement itself and to the credit for a qualified family-owned business under 26 U.S.C. 4 2057 (another new provision established by the Act). This means that some taxpayers

4 It is not clear to what extent, if any, the Section 203 1(c) exclusion applies for generation skipping transfer (GST) tax purposes. Land subject to a conservation easement, therefore, should if possible not be devised to skip persons.

Haensly/Tax Incentives 0 10 March 2, 2001

could potentially exclude more than $1,800,000 from estate taxes once the Act's provisions have been phased in fully ($1,300,000 from the family-owned business credit; $500,000 from Section 203 1(c); plus the value of the conservation easement itself).

6.1.5 The election can be exercised with each generation (so long as all criteria are satisfied). IRC 5 203 1 (c)(8)(C).

6.1.6 Section 203 1 (c) also applies to interests in partnerships, corporations, and trusts, if at least 30% of the entity is owned (directly or indirectly) by the de~eden t .~

6.2 Qualifirinafor Section 2031 fc) Treatment. To qualify for the Section 203 1 (c) benefit, the Act requires that:

6.2.1 the subject property must be located:

6.2.1.1 in or within 25 miles of a national park or wilderness area (unless it is determined by the Secretary of the Treasury that such land is not under significant development pressure);

6.2.1.2 in or within 25 miles of a metropolitan area;6 or

6.2.1.3 in or within 10 miles of an area which is an Urban National ore st;^ and

6.2.2 the property must have been owned by the decedent or a member of the decedent's family at all times during the three-year period ending on the date of the decedent's death (appears to allow tacking -- that is adding together periods of ownership of different family members);

6.2.3 that the conservation easement prohibit more than a de minimis commercial recreational use (this provision likely means that an easement must expressly prohibit such use); and

5 Section 203 l(c) does not specifically mention limited liability companies ("LLCs") as one of the forms of entities subject to the election. LLCs are becoming one of the more commonly used entities for estate and business planning, and the inability to claim the election with respect to property held by an LLC could complicate such planning. The fact that these entities are typically taxed, for federal tax purposes, as partnerships may be sufficient, however, to bring them within the scope of Section 2031(c).

6 At present, there are 259 metropolitan statistical areas. A list of metropolitan areas can be obtained from the National Technical Information Service (NTIS), Document Sales, 5285 Port Royal Road, Springfield, VA 221 6 1 (703-487-4650).

7 As of August 1997, there were only a handful of "urban forests." They are: Arapaho National Forest (CO); Roosevelt National Forest (CO); Pike National Forest (CO); San Isabel National Forest (CO); Wasatch-Cache National Forest (UT); Uinta National Forest (UT); White Mountain National Forest (NH); Tonto National Forest (AZ); Angeles National Forest (CA); Cleveland National Forest (CA); Los Padres National Forest (CA); San Bernardino National Forest (CA); Chattahoochee-Oconee National Forest (GA); Mount Baker- Snoqualmie National Forest (WA); Mount Hood National Forest (OR); and Gifford Pinchot National Forest (WA).

Haensly/Tax Incentives O 11 March 2, 2001

5 203 1 (c)(4)(A). This means that the amount of any debt on conserved property is subtracted from the restricted value of the land and the resulting value is then multiplied by the applicable percentage to determine the exclusion amount.

6.3.6 To the extent of the exclusion, the land will retain the same basis it had in the hands of the landownerldecedent rather than a stepped-up basis that a bequest would ordinarily receive. IRC 5 1014(a).8

6.4 The Election.

6.4.1 Treatment under Section 203 1(c) is made as an irrevocable election by the decedent (via hislher will) or as a "postmortem election" by the estate of the decedent - that is, it can be made after the decedent's death and regardless of whether the decedent's will provides for the election or for granting a conservation easement.

6.4.2 The election must be made by the due date (including extensions) for filing the decedent's estate tax return; this is only a 9-month period following the decedent's death if no extensions are obtained. IRC 5 203 l(c)(6).

6.4.3 The 1998 amendments to Section 2031(c) made it clear that the election allows both the Section 203 l(c) exclusion as well as a deduction from the estate of the value of the conservation easement (provided that no one takes an income tax charitable deduction with respect to such a post-mortem grant). IRC 5 203 l(c)(9).

6.4.4 A decedent's heirs can also choose to extinguishing some or all of the reserved development rights to maximize the amount of the exclusion. The agreement must be executed within nine months of the decedent's death, but the actual extinguishment can occur up to two years after the decedent's death

6.4.5 The conservation easement can be granted by the decedent either as a gift during hislher lifetime or at death (testamentary bequest)

6.4.6 The election can be exercised with each generation

6.4.7 Issue: State laws regarding the authority of an executor of an estate may preclude use of the postmortem election (i.e., if a person's Will does not provide for a testamentary

' bequest of a conservation easement and the applicable state probate laws do not allow an executor to make charitable donations fiom an estate without express instructions, the decedent's estate may be deprived of the deduction under 203 l(c)). Outcome of this issue could vary from estate to estate even within the same jurisdiction, depending on the terms of each Will. This potential issues suggests that, a minimum, land owners should

8 It will generally make greater financial sense to avoid estate taxes than capital gains taxes, because estate tax rates range from 37 - 55% whereas capital gains are taxed only at a 20% (or less) rate.

Haensly/Tax Incentives O 13 March 2, 2001

include a provision in their Will giving the executor the authority to make the Section 203 1 (c) election.

6.5 Estate/Consewation Planning Under IRC 6 2031 (c).

6.5.1 Land owners wanting to ensure the maximum benefit under 203 1 (c) and minimize potential problems in obtaining the benefits should:

6.5.1.1 Make sure the easement expressly prohibits more than a de minimis amount of commercial recreational use

6.5.1.2 Donate the easement either during their lifetime or explicitly provide a testamentary bequest for the easement in their Will

6.5.1.3 Make sure easements donated during their lifetime result in a reduction in land value by more than 30%

6.5.1.4 Make sure their executor (and the executor's professional advisors) are aware of the need to affirmatively make the election under 203 1(c)

6.5.1.5 Make sure the easement meets the requirements of IRC $ 170(h) (see Section 5 above)

6.5.2 Land owners who are also farmers or ranchers should also look for planning opportunities under the provisions for qualified family-owned businesses (IRC $ 2057), the benefits of which can be combined with deductions resulting from conservation easements qualifying under IRC $ 5 203 1(c) and 2055(f). It may be easier to qualify for the Section 203 1(c) exclusion than for the Section 2057 benefits.

6.5.3 Estates seeking qualification under 203 1(c) when no conservation planning has been done prior to the decedent's death will have to move very quickly because the window for making the 203 1(c) election is only nine months (getting everything done that needs to be done to plan and qualify under 203 1(c), such as getting the easement drafted, conducting an appraisal, dealing with mortgage subordination, and dealing with severed minerals is likely to be a formidable task).

7 Protecting Open Space Through Bargain Sales

7.1 Barpain Sales - General Considerations. Connell v. Comr., 5 1 T.C.M. 1657, 1660 (1986), afdper curium, 842 F. 2d. 285 (1 lth Cir. 1988); Clayton v. Comr., 42 T.C.M. 670, 710-12 (1981).

7.1.1 A bargain sale is generally a transfer of property to a charitable organization at a sales price that is less than the FMV of the property.

7.1.2 A sale of property at less than fair market value can comprise both:

Haensly/Tax Incentives O 14 March 2, 2001

7.1.2.1 a taxable sale; and

7.1.2.2 A charitable contribution.

7.1.3 A seller in a bargain sale will have a deductible donation to the extent that the fair market value of the property is greater than the selling price.

7.1.4 The landowner must have the intention of accepting less than FMV as a gift.

7.1.5 Contributions of encumbered property are also treated as bargain sales if the FMV of the property exceeds the encumbrance. See Treas. Reg. fj 1.10 1 1 -2(a)(3).

7.2 When to Consider a Bargain Sale.

7.2.1 Bargain sales may be most advantageous if

7.2.1.1 the current market value of the property exceeds the amount the donor wishes to contribute; and

7.2.1.2 it is not practical to divide the property between a portion to be donated and a portion to be retained by the donor; or

7.2.1.3 the property is encumbered with a loan that the charitable institution will assume or pay off in connection with the transfer.

7.2.2 Lower capital gains: selling appreciated property at a price below its FMV could result in lower capital gains.

7.3 Kev Considerations in Makinn a Bargain Sale.

7.3.1 Generally, in transactions where sales price to a qualified nonprofit is greater than 80% of FMV, deductibility becomes questionable.

7.3.2 Charitable organizations may be unwilling to acknowledge a donation where an asserted contribution is less than 10% of a property's FMV; where the asserted donation is between 10% and 20% of FMV, a charitable organization is likely to scrutinize the "gift."

7.3.3 Property owners should make sure that they have a defensible appraisal with a bargain sale.

7.3.4 Many smaller charitable organizations will not have sufficient capital to be involved in bargain sales.

Haensly/Tax Incentives O March 2, 2001

8.3.2 The part of the bargain sale that is treated as a charitable contribution is equal to the excess of the FMV of the property over the purchase price paid by the charity. This portion is deductible as a charitable contribution.

8.3.3 Charitable contribution deduction: subject to certain limitations, a charitable deduction is allowed from an individual's adjusted gross income or a corporation's taxable income (income tax benefits associated with bargain sales).

8.4 Barnain Sales Involvina Like-Kind Exchanaes. Treas. Reg. 9 1.170A-4(c)(2)(ii); IRC 9 1031(a).

8.4.1 Bargain sale rules and like-kind exchange rules can work in tandem to permit a taxpayer holding property to donate such property to a charity and receive back a different property of the taxpayer's choosing.

8.4.2 No gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property received is of a like kind and is held either for productive use in a business or for investment.

8.4.3 Under the like-kind exchange rules, the taxpayer will not have income on the exchange, but will only be taxable if and when she later sells the property received in the exchange.

8.4.4 Instead, the taxpayer will have a basis in the property he received from the charitable organization equal to the basis in that portion of the property he transferred to the charity in exchange for the property received.

8.4.5 The gift portion of the exchange will equal the extent to which the FMV of the property transferred to the charity exceeds the FMV of the property transferred to the taxpayer.

8.4.6 These types of exchanges probably can involve transfers of conservation easements to charitable organizations in exchange for fee interest property. See Rev. Rul. 55-749, 1955-2 C.B. 295; Rev. Rul. 72-549, 1972-2 C.B. 472.

Haensly/Tax Incentives O March 2, 2001