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Rev. Rul. 76-253, 1976-2 CB 51

REV-RUL, Charitable contribution; bargain sale

Section 170.--Charitable, Etc., Contributions and Gifts

26 CFR 1.170A-1: Charitable, etc., contributions and gifts; allowance of deduction.
(Also Section 1031; 1.1031(a)-1.)

[IRS Headnote] Charitable contribution; bargain sale.--
A corporation's exchange of timberland, with the corporation reserving the timber-cutting rights, for state-owned timberland of lesser fair market value is not a bargain sale within the meaning of section 170 of the Code, and the corporation is not entitled to a charitable contribution deduction; however, the exchange qualifies for nonrecognition of gain or loss under section 1031(a).

Advice has been requested whether, under the circumstances described below, the transfer by a corporation of certain timberland to a state in exchange for timberland owned by the state is a bargain sale of property within the meaning of section 170 of the Internal Revenue Code of 1954.

The corporation, a manufacturer of paper and paper products, owns a significant amount of timberland in the state, and interspersed among the corporation's timberland holdings are numerous small tracts of public timberland owned by the state. The corporation conveyed to the state by quitclaim deed all right, title, and interest to one of its large tracts of timberland, but reserved to itself the timber-cutting rights in the land. The state in turn conveyed to the corporation by quitclaim deed all right, title, and interest to its various timberland holdings interspersed among the remaining tracts of timberland owned by the corporation. The land acquired by the corporation in this exchange was to be held for investment.

The acreage exchanged was approximately equal, but the fair market value of the interest in the land transferred by the corporation was greater than the fair market value of the land received from the state. The purpose of the exchange was to enable the state to obtain one large, contiguous tract of land for recreational or commercial development.

Section 170 of the Code provides, subject to certain limitations, a deduction for gifts and contributions to or for the use of organizations described in section 170(c), payment of which is made within the taxable year.

Section 170(c)(1) of the Code provides, in part, that the term "charitable contribution" means a contribution or gift to or for the use of a State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.

Section 170(f)(3)(A) of the Code provides that in the case of a contribution (not made by a transfer in trust) of an interest in property that consists of less than the taxpayer's entire interest in such property, a deduction shall be allowed under this section only to the extent that the value of the interest contributed would be allowed as a deduction under this section if such interest had been transferred in trust. However, section 170(f)(3)(B)(ii) provides that section 170(f)(3)(A) does not apply to the contribution of an undivided portion of the taxpayer's entire interest in property.

Section 1.170A-7(b)(1)(i) of the Income Tax Regulations provides, in part, that a deduction is allowed under section 170 of the Code for the value of a charitable contribution, other than in trust, of an undivided portion of a donor's entire interest in property. An undivided portion of a donor's entire interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the donor in such property, must extend over the entire term of the donor's interest in such property, and must include other property into which such property is converted.

Section 1.170A-4(c)(2)(i) of the regulations provides the rules for determining the amount of a charitable contribution deduction where there is a bargain sale of property to a charitable organization.

Section 1.170A-4(c)(2)(iii) of the regulations provides that the term "bargain sale" means a transfer of property that is in part a sale or exchange of the property and in part a charitable contribution, as defined in section 170(c) of the Code, of the property.

Thus, a bargain sale of an undivided portion of a taxpayer's entire interest in property to a state, accompanied by a donative intent on the part of the vendor gives rise to a deductible charitable contribution.

However, in the instant case, the exchange of property between the taxpayer and the state, subject to the retention by the taxpayer of the timber-cutting rights, is not a contribution of an undivided portion of the donor's entire interest in the property within the meaning of section 1.170A-7(b)(1)(i) of the regulations, because retention of the right to cut timber is a substantial right in the property transferred to the state.

Accordingly, the exchange of properties between the taxpayer and the state is not a bargain sale of property within the meaning of section 170 of the Code, and the taxpayer is not entitled to a charitable contribution deduction on the exchange of the properties. However, under the provisions of section 1031(a), no gain or loss is recognized on the exchange of the properties, since they are of a like-kind to be held for investment or productive business use. See Rev. Rul. 72-515, 1972-2 C.B. 466.