Chief Counsel Advice 1334039 Released August 23, 2013 Advice

IRS explains conservation easement valuation for contiguous and related parcels

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This page covers one taxpayer's ruling from 2013, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

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Plain-English summary

Chief Counsel Advice addressed how to value charitable conservation easements when the donated property is contiguous to other property or when the easement increases the value of other property. The advice explains that the Contiguous Parcel Rule generally uses the change in value of the entire contiguous parcel owned by the donor and the donor's family. The Enhancement Rule reduces the deduction by increases in the value of other property owned by the donor or a related person. The memorandum applies those rules to individuals, family members, disregarded entities, corporations, and partnerships, including ownership traced through multiple entities.

Ruling snapshot

Question: How should a conservation easement be valued when related or contiguous property is involved?
Outcome: Advice given, the deduction is based on the applicable before-and-after valuation and reduced for covered enhancements.
Key authorities: IRC §§ 170, 267, and 707; Treas. Reg. §§ 1.170A-1(c), 1.170A-14(a), 1.170A-14(h)(3), 301.7701-2, and 301.7701-3.

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201334039
       Release Date: 8/23/2013

       CC:ITA:B01:JKristall                      Third Party Communication: None
       PRENO-132667-13                           Date of Communication: Not Applicable

UILC: 170.14-00

date: July 25, 2013

 to:   Marc Caine, Senior Counsel
       Office of the Division Counsel
       (Small Business/Self-Employed)
       CC:SB:1:LI

from: Susan J. Kassell, Senior Counsel
Office of the Associate Chief Counsel
(Income Tax & Accounting)
CC:ITA:B01

subject: Valuing Conservation Easements under § 1.170A-14(h)(3) of the Income Tax
Regulations

       This Chief Counsel Advice responds to your request for assistance regarding the
       valuation of perpetual conservation restrictions, or “conservation easements.”
       Specifically, you have asked about the application of the “Contiguous Parcel Rule” and
       the “Enhancement Rule” found in § 1.170A-14(h)(3)(i) of the Income Tax Regulations.

       Section 170 of the Internal Revenue Code allows as a deduction any charitable
       contribution payment of which is made within the taxable year.

       Under § 170(f)(3), no deduction is allowed for a contribution of an interest in property
       that consists of less than the taxpayer's entire interest in the property. However,
       under § 170(f)(3)(B)(iii), a deduction is allowed for a qualified conservation
       contribution, even though it is a contribution of a partial interest.

       Section 170(h)(1) and § 1.170A-14(a) provide that a qualified conservation
       contribution is a contribution of a qualified real property interest to a qualified
       organization exclusively for conservation purposes. One such qualified real property
       interest is a conservation easement.

PRENO-132667-13 2

Section 1.170A-1(c) 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. The fair market value is the price at which the property
would change hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
For purposes of § 170(h), the value of a contribution of a conservation easement is its
fair market value at the time of the contribution. Section 1.170A-14(h)(3)(i) (first
sentence). Section 1.170A-14(h)(3)(i) (second sentence) provides that, if there is a
substantial record of sales of easements comparable to the donated easement, the
fair market value of the donated easement is based on the sales prices of the
comparable easements.

Section 1.170A-14(h)(3)(i) (third sentence) provides that, if no substantial record of
market-place sales of comparable easements is available to use as a meaningful or
valid comparison, as a general rule (but not necessarily in all cases) the fair market
value of a conservation easement is equal to the difference between the fair market
value of the property it encumbers before the granting of the easement and the fair
market value of the encumbered property after the granting of the easement. This is
generally referred to as “before and after” valuation.

Under § 1.170A-14(h)(3)(ii), if before and after valuation is used, the fair market value
of the property before the contribution of the easement must take into account not only
the current use of the property but also an objective assessment of how immediate or
remote the likelihood is that the property, absent the easement, would in fact be
developed, as well as any effect from zoning, conservation, or historic preservation
laws that already restrict the property’s potential highest and best use. Additionally,
an appraisal of the property after contribution of the easement must take into account
the effect of restrictions that will result in a reduction of the potential fair market value
represented by highest and best use but will, nevertheless, permit uses of the property
that will increase its fair market value above that represented by the property’s current
use.

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.

1
Whether the entire contiguous parcel is valued as one large property or as separate properties
depends on the highest and best use of the entire contiguous parcel. See § 1.170A-14(h)(3)(ii).
PRENO-132667-13 3

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)).

Section 301.7701-3(a) of the Procedure and Administration Regulations provides that
a business entity that is not classified as a corporation under § 301.7701-2(b)(1), (3),
(4), (5), (6), (7), or (8) (an “eligible entity”) can elect its classification for federal tax
purposes. An eligible entity with at least two members can elect to be classified as
either an association (and thus a corporation under § 301.7701-2(b)(2)) or a
partnership, and an eligible entity with a single owner can elect to be classified as an
association or to be disregarded as an entity separate from its owner. Under
§ 301.7701-3(b), unless the entity elects otherwise, a domestic eligible entity is a
partnership if it has two or more members, or is disregarded as an entity separate
from its owner if it has a single member. All of the assets of a disregarded entity are
treated as if they are owned by the single member. See § 301.7701-2(a); Ann.
99-102, 1999-2 C.B. 545.

Included below are examples applying § 1.170A-14(h)(3) and the other above
provisions to various factual scenarios. Any entities involved herein are domestic
eligible entities for purposes of § 301.7701-3(b). In no scenario is there a substantial
record of market-place sales of comparable easements.

SCENARIO 1: CONTIGUOUS PARCEL OWNED BY DONOR AND DONOR’S
FAMILY
PRENO-132667-13 4

Scenario 1(a). Contiguous Parcel Owned by Donor. Donor owns Parcel A and
contiguous Parcel B. Donor places a conservation easement on Parcel A.

Accordingly, the amount of the deduction is equal to the difference between the fair
market value of the entire contiguous parcel comprised of Parcels A and B before and
after the granting of the easement.

Scenario 1(b). Contiguous Parcel Owned by Donor’s Family. Donor owns Parcel A,
and Donor’s mother owns contiguous Parcel B. Donor places a conservation
easement on Parcel A.

Since Donor’s mother is a member of Donor’s family as defined in § 267(c)(4), the
entire contiguous parcel comprised of Parcels A and Parcel B is owned by Donor and
Donor’s family. Accordingly, the amount of the deduction is equal to the difference
between the fair market value of the entire contiguous parcel comprised of Parcels A
and B before and after the granting of the easement.

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.

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
PRENO-132667-13 5

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.

SCENARIO 3: CONTIGUOUS PARCELS OWNED BY DONOR AND
DISREGARDED ENTITY

Scenario 3(a). Contiguous Parcel Owned by a Limited Liability Company, of Which
Donor Is the Single Member. Donor owns Parcel A and is the single member of
SMLLC. SMLLC owns contiguous Parcel B. Donor places a conservation easement
on Parcel A. SMLLC has not made an entity classification election under § 301.7701-
3(c).

Under § 301.7701-3(b), a domestic eligible entity with a single member generally is
disregarded, unless the entity elects to be regarded separately from its owner. All of
the assets of a disregarded entity are treated as if they are owned by the single
member.

Since SMLLC did not make an entity classification election, SMLLC is disregarded,
and Donor is treated as the owner of both Parcel A and Parcel B. Accordingly, the
amount of the deduction is equal to the difference between the fair market value of the
entire contiguous parcel comprised of Parcels A and B before and after the granting of
the easement.

Scenario 3(b). Contiguous Parcel Owned by a Limited Liability Company, of Which
Donor’s Child Is the Single Member. Donor owns Parcel A. SMLLC owns contiguous
Parcel B, and Donor’s daughter is the single member of SMLLC. Donor places a
conservation easement on Parcel A. SMLLC has not made an entity classification
election under § 301.7701-3(c).
PRENO-132667-13 6

Since SMLLC did not make an entity classification election, SMLLC is disregarded,
and Donor’s daughter is treated as the owner of Parcel B. Accordingly, since Parcel A
and Parcel B are treated as owned by Donor and Donor’s family, the amount of the
deduction is equal to the difference between the fair market value of the entire
contiguous parcel comprised of Parcels A and B before and after the granting of the
easement.

Scenario 3(c). Contiguous Parcels Owned by Limited Liability Companies, of Which
Donor and Donor’s Parent Are the Single Members. SMLLC 1 owns Parcel A, and
Donor is the single member of SMLLC 1. SMLLC 2 owns contiguous Parcel B, and
Donor’s mother is the single member of SMLLC 2. SMLLC 1 places a conservation
easement on Parcel A. Neither SMLLC 1 nor SMLLC 2 has made an entity
classification election under § 301.7701-3(c).

Since neither SMLLC 1 nor SMLLC 2 made an entity classification election, both
SMLLC 1 and SMLLC 2 are disregarded. Donor is treated as the owner of Parcel A,
and Donor’s mother is treated as the owner of Parcel B. Accordingly, since Parcel A
and Parcel B are treated as owned by Donor and Donor’s family, the amount of the
deduction is equal to the difference between the fair market value of the entire
contiguous parcel comprised of Parcels A and B before and after the granting of the
easement.
PRENO-132667-13 7

SCENARIO 4: CONTIGUOUS PARCELS OWNED BY DONOR AND REGARDED
ENTITY

Scenario 4(a). Contiguous Parcel Owned by a Limited Liability Company Classified
As a Corporation, of Which Donor Is the Single Member. Donor owns Parcel A, and
LLC owns contiguous Parcel B. Donor is the single member of LLC. Donor places a
conservation easement on Parcel A, and as a result Parcel B will always have a view
of a river that abuts Parcel A, thereby increasing the value of Parcel B. LLC elects
under § 301.7701-3(c) to be classified as a corporation.

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. “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. The Contiguous Parcel Rule does not apply when an entity classified as a
corporation owns the contiguous property.

The Enhancement Rule provides that, if the granting of a conservation easement
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.

Under § 267(b)(2), an individual is related to a corporation if that individual owns,
directly or indirectly, more than 50% of the value of the outstanding stock of that
corporation.

Since Donor owns all of the outstanding shares of LLC, LLC is related to Donor.
Accordingly, the amount of the deduction is first determined by valuing Parcel A before
and after the granting of the easement. Second, because a related party that is not a
family member (LLC) owns contiguous Parcel B, the amount of the deduction is
reduced by the value of the enhancement to Parcel B from the granting of the
easement.

Scenario 4(b). Contiguous Parcel Owned by a Limited Liability Company Classified
As a Partnership, of Which Donor and Donor’s Family Are Members. Donor owns
Parcel A, and LLC owns contiguous Parcel B. Donor owns 48% of LLC, Donor’s wife
owns 30% of LLC, and Donor’s son owns 22% of LLC. Donor places a conservation
easement on Parcel A, and as a result Parcel B will always have a view of a river that
abuts Parcel A, thereby increasing the value of Parcel B. LLC has not made an entity
classification election under § 301.7701-3(c).

Under § 301.7701-3(b), a domestic eligible entity is a partnership if it has two or more
members, unless the entity elects otherwise.
PRENO-132667-13 8

A partnership and a person owning, directly or indirectly, more than 50% of the capital
or profits interest in the partnership are related for purposes of § 707(b). Under
§§ 707(b)(3) and 267(c)(2), an individual is considered to own all of the partnership
interests owned by himself and by his family members.

Since LLC did not make an entity classification election, LLC is a partnership.
Because Donor owns 48% of LLC, and the remaining interests are held by Donor’s
family (wife and son), Donor is considered to own 100% of LLC. Therefore, LLC is
related to Donor. Accordingly, the amount of the deduction is first determined by
valuing Parcel A before and after the granting of the easement. Second, because a
related party that is not a family member (LLC) owns contiguous Parcel B, the amount
of the deduction is reduced by the value of the enhancement to Parcel B from the
granting of the easement.

Scenario 4(c). Contiguous Parcel Owned by a Limited Liability Company Classified
As a Partnership, of Which Donor’s Spouse and Unrelated Individuals Are Members.
Donor owns Parcel A, and LLC owns contiguous Parcel B. Donor’s wife owns 60% of
LLC, and two unrelated individuals own 25% and 15% of LLC, respectively. Donor
places a conservation easement on Parcel A, and as a result, Parcel B will always
have a view of a river that abuts Parcel A, thereby increasing the value of Parcel B.
LLC has not made an entity classification election under § 301.7701-3(c).

Under § 301.7701-3(b), a domestic eligible entity is a partnership if it has two or more
members, unless the entity elects otherwise.

rules. The Contiguous Parcel Rule does not apply when an entity classified as a
partnership owns the contiguous property.

The Enhancement Rule provides that, if the granting of a conservation easement
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.

Since LLC did not make an entity classification election, LLC is a partnership. Donor’s
wife owns 60% of the capital or profits interest in LLC, and an individual is considered
to own all of the partnership interests owned by his family members. Therefore, Donor
is considered to own 60% of LLC. In addition, because Donor is considered to own
more than 50% of the capital or profits interest in LLC, LLC is related to Donor.
Accordingly, the amount of the deduction is first determined by valuing Parcel A before
and after the granting of the easement. Second, because a related party that is not a
family member (LLC) owns contiguous Parcel B, the amount of the deduction is
reduced by the value of the enhancement to Parcel B.

Scenario 4(d). Contiguous Parcel Owned by a Limited Liability Company Classified
As a Partnership, of Which Donor and an Unrelated Individual Are Members. Donor
owns Parcel A, and LLC owns contiguous Parcel B. Donor and an unrelated person
each own 50% of LLC. Donor places a conservation easement on Parcel A. LLC has
not made an entity classification election under § 301.7701-3(c).

Under § 301.7701-3(b), a domestic eligible entity is a partnership if it has two or more
members, unless the entity elects otherwise.

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.

A partnership and a person owning, directly or indirectly, more than 50% of the capital
or profits interest in the partnership are related for purposes of § 707(b).

Since LLC did not make an entity classification election, LLC is a partnership.
Because Donor does not own more than 50% of the capital or profits interest in LLC,
LLC is not related to Donor. Accordingly, the amount of the deduction is equal to the
difference between the fair market value of only Parcel A before and after the granting
of the easement.

SCENARIO 5: CONTIGUOUS PARCEL SCENARIOS INVOLVING MULTIPLE
REGARDED ENTITIES

Scenario 5(a). Contiguous Parcel Owned by a Limited Liability Company Classified
As a Partnership, of Which Donor Is Considered to Own More Than 50%. Donor
owns Parcel A, and LLC 2 owns contiguous Parcel B. LLC 1 owns 90% of LLC 2, and
X, an unrelated party, owns the remaining 10% of LLC 2. Donor owns 60% of LLC 1,
and Y, another unrelated party, owns the remaining 40% of LLC 1. Donor places a
conservation easement on Parcel A, and as a result, Parcel B will always have a view
of a river that abuts Parcel A, thereby increasing the value of Parcel B. Neither LLC 1
nor LLC 2 has made an entity classification election under § 301.7701-3(c).

Under § 301.7701-3(b), a domestic eligible entity is a partnership if it has two or more
members, unless the entity elects otherwise.

for a corporation, partnership, estate, or trust is considered to be owned
proportionately by or for its shareholders, partners, or beneficiaries.

Since neither LLC 1 nor LLC 2 made an entity classification election, both LLC 1 and
LLC 2 are partnerships. Because Donor owns 60% of LLC 1, Donor is considered to
own 54% of LLC 2 (i.e., 60% of 90%). In addition, because Donor is considered to
own more than 50% of the capital or profits interest in LLC 2, LLC 2 is related to
Donor. Accordingly, the amount of the deduction is first determined by valuing Parcel
A before and after the granting of the easement. Second, because a related party that
is not a family member (LLC 2) owns contiguous Parcel B, the amount of the
deduction is reduced by the value of the enhancement to Parcel B from the granting of
the easement.

Scenario 5(b). Contiguous Parcel Owned by a Limited Liability Company Classified as
a Partnership, of Which Donor Is Considered to Own Less Than 50%. Donor owns
Parcel A, and LLC 2 owns contiguous Parcel B. LLC 1 owns 60% of LLC 2, and X, an
unrelated party, owns the remaining 40% of LLC 2. Donor owns 51% of LLC 1, and Y,
another unrelated party, owns the remaining 49% of LLC 1. Donor places a
conservation easement on Parcel A, and as a result, Parcel B will always have a view
of a river that abuts Parcel A, thereby increasing the value of Parcel B. Neither LLC 1
nor LLC 2 has made an entity classification election under § 301.7701-3(c).

Under § 301.7701-3(b), a domestic eligible entity is a partnership if it has two or more
members, unless the entity elects otherwise.

A partnership and a person owning, directly or indirectly, more than 50% of the capital
or profits interest in the partnership are related for purposes of § 707(b). Under
§§ 707(b)(3) and 267(c)(1), a partnership interest owned, directly or indirectly, by or
for a corporation, partnership, estate, or trust is considered to be owned
proportionately by or for its shareholders, partners, or beneficiaries.
PRENO-132667-13 12

Since neither LLC 1 nor LLC 2 made an entity classification election, both LLC 1 and
LLC 2 are partnerships. Because Donor owns 51% of LLC 1, Donor is considered to
own 30.6% of LLC 2 (i.e., 51% of 60%). Accordingly, because Donor does not own
more than 50% of LLC 2, Donor and LLC 2 are not related, and the amount of the
deduction is equal to the difference between the fair market value of only Parcel A
before and after the granting of the easement.

Please contact Jason Kristall at (202) 622-5020 if you would like further assistance or
have any questions about the contents of this memorandum.

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On this page

Document type

Chief Counsel Advice

IRS subject

Qualified Conservation Contribution

Topics

Income and deductions

Code sections

§ 170, § 267, § 707, § 301.7701, § 6110

Ruling dated

July 25, 2013

Publicly released

August 23, 2013

View Official PDF