CCA 1319010: Park restrictions can affect the value of donated mineral property

Plain-English summary

Chief Counsel Advice addresses the valuation of land and mineral rights donated to the National Park Service for purposes of a charitable contribution deduction under IRC § 170. The advice states that if the property's location in a national park restricts its highest and best use, that restriction affects fair market value. The valuation should reflect the restriction or the reasonable cost and time required to remove it, but only if the restricted highest and best use has a strong possibility of achievement and is not remote, speculative, or conjectural. The advice directs the examining function to determine whether mining was the property's highest and best use and whether the property became worthless when mining operations ceased.

Ruling snapshot

• Question: Does locating a substantial portion of donated property within a national park affect its fair market value under section 170?
• Outcome: Advice given.
• Key authorities: IRC § 170; Treas. Reg. § 1.170A-1(c); Thornton v. Commissioner, T.C. Memo. 1988-479; United States v. Meadow Brook Club, 259 F.2d 41 (2d Cir. 1958)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201319010
       Release Date: 5/10/2013
       CC:ITA:B03: Lewis Saideman
       POSTF-122642-11

UILC: 170.02-00

date: December 28, 2012

 to:   -----------------
       Attorney
       Phoenix
       (Large Business & International)

from: Sean Dwyer
Assistant to Branch Chief, Branch 3
(Income Tax & Accounting)

subject: ---------------------------------------------------

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       LEGEND

       Taxpayer = --------------------------------------------
       Sub = --------------
       National Park = -----------------------------------
       Claim A = -------------------
       Mineral A = --------
       Date 1 = --------------------------
       Date 2 = --------------------------
       Year 1 = ------
       Year 25 = ------
       Year 30 = ------
       $a = ---------------

POSTF-122642-11 2

ISSUE

Is the location of a substantial portion of donated property within the boundaries of a
national park a factor affecting the determination of the property’s fair market value
under § 170 of the Internal Revenue Code?

CONCLUSION

If the location of a substantial portion of donated property within the boundaries of a
national park results in a restriction on the property’s highest and best use, the
restriction is a factor affecting the fair market value of the property. The fair market
value must reflect the restriction or the cost of removing the restriction, so long as the
highest and best use that is restricted, still has a strong possibility of achievement and is
not remote, speculative, or conjectural.

FACTS

On Date 1 (Year 30), Sub, a wholly owned subsidiary of Taxpayer, donated land and
mineral rights located in National Park to the National Park Service. A majority of the
donated property is located within National Park. Taxpayer filed its Year 30 return on
Date 2 and claimed a charitable contribution deduction of $a for the donated property
based on two appraisals. The donated property consists of the Claim A patented claims
of Mineral A mineralization, patented long ago. In 1976, Congress passed the Mining in
Parks Act, which closed National Park to filing of new mining claims and began to phase
out mining in National Park. In Year 1, mining resumed on a limited basis with stricter
environmental standards. Mine operators were required to obtain approval for a plan of
operations which would mitigate damage to the environment. In Year 25, the last of the
mines in National Park closed.

LAW AND ANALYSIS

Deductions are a matter of legislative grace and a taxpayer must satisfy the specific
statutory requirements of the deductions he claims. Indopco, Inc. v. Commissioner, 503
U.S. 79, 84 (1992); Deputy v. du Pont, 308 U.S. 488 (1940); New Colonial Ice Co. v.
Helvering, 292 U.S. 435 (1934). Taxpayers bear the burden of proving entitlement to
the deductions they claim. Welch v. Helvering, 290 U.S. 111 (1933).

Section 170 allows a deduction for any charitable contribution (as defined in subsection
(c)) made within the taxable year.

Section 1.170A-1(c)(1) of the Income Tax Regulations provides that if a charitable
contribution is made in property other than money, the amount of the contribution is the
fair market value of the property at the time of the contribution.
POSTF-122642-11 3

Section 1.170A-1(c)(2) provides that fair market value is the price at which property
would change hands between a willing buyer and a willing seller, neither being under
compulsion to buy or sell and both having reasonable knowledge of the relevant facts.

The fair market value of property is determined on the basis of a hypothetical willing
buyer and a hypothetical willing seller (the characteristics of these hypothetical persons
are not necessarily the same as the personal characteristics of the parties to the
transaction),and reflects its highest and best use as of the date of its valuation. See,
Cohan v. Commissioner, T.C. Memo. 2012-8 and the authorities cited therein. The fair
market value of property is not affected by whether an owner has actually put the
property to its highest and best use. The reasonable and objective possibilities for the
highest and best use of property control its value. See United States v. Meadow Brook
Club, 259 F.2d 41, 45 (2d Cir. 1958); Stanley Works & Subs. v. Commissioner, 87 T.C.
389, 400 (1986). A potential highest and best use for the property can be considered
even though the potential use is prohibited on the valuation date by some restriction in a
deed, statute or zoning regulation. Thornton v. Commissioner, T.C. Memo. 1988-479,
citing Ebben v. Commissioner, T.C. Memo. 1983-200, aff’d. on this issue 783 F.2d 906,
910 (9th Cir. 1986). In such a case the proper approach is to value the property at its
highest and best use even though its highest and best use is prohibited at the date of
valuation by the applicable restriction and then to proceed to reduce or discount such
value by a reasonable estimate of the cost of removing the restriction and for the time
needed to accomplish such removal. Thornton v. Commissioner, supra. However, the
projected highest and best use must have a strong possibility of achievement. It should
not be remote, speculative or conjectural. See Olsen v. United States, 292 U.S. 246,
257 (1934); McGovern v. New York, 229 U.S. 363, 372 (1913). See also Crock v.
Commissioner, T.C. Memo. 1983-351 and Fiske v. Commissioner, T.C. Memo. 1984-
494.

Exam must determine if the donated property’s highest and best use is for mining of
mineral A and what restrictions the Mining in Parks Act and other relevant legislation
and regulations place on the ability of a potential owner to use the property for mining of
mineral A. It must reduce or discount the fair market value based on use for mining
Mineral A by a reasonable estimate of the cost of removing the legal restrictions on
such use and for the time needed to accomplish their removal. Exam must determine if
the possibility of removing the legal restrictions on mining the property is likely to be
achieved or if it is remote, speculative, or conjectural.

If Exam concludes that the property only has value as a mine, and that due to the
restrictions on mining the property is worthless, Exam should consider whether the
property became worthless in Year 25 when mining operations ceased in National Park.

CASE DEVELOPMENT, HAZARDS, AND OTHER CONSIDERATIONS

This Chief Counsel Advice addresses only the facts pertaining to the Taxpayer. This
office does not opine on any situation outside the facts set out above.
POSTF-122642-11 4

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call me or Lewis Saideman at (202) 622-4950 if you have any further questions.