Contribution of “Appropriative” Interest May Not Be Deductible

In CCAs 201212009 and 201212010 an attorney in the Chief Counsel’s Office advised that the partial interest rule may make a charitable contribution of a taxpayer’s “appropriative” interest in water rights non-deductible. The extended summary as found at ChartiablePlanning.com is below, in full:

In CCA 201212009, the interest being contributed was treated as a separate property interest under state law and in the marketplace. The question was whether this categorization was sufficient to allow it to be treated as the taxpayer’s “entire interest” in the property under the partial interest rules.

This rule states a contribution of less than all of the taxpayer’s entire interest in property is not deductible unless it is in the form of a lead or remainder interest in an annuity or unitrust. Exceptions exist for the contribution of an undivided interest in the entire property, a remainder interest in a residence or farm, or a conservation easement.

The memo did not recite the underlying facts. It quoted from a General Counsel Memorandum and made reference to a Revenue Ruling, but did not identify either by number. It is possible the Revenue Ruling in question is Rev. Rul. 88-37, stating that an overriding interest in an oil and gas lease was not separate from the underlying working interest for purposes of the partial interest rule. By analogy, the memo suggested the interest in question should not be treated as a property interest distinct from the taxpayer’s underlying water rights, and thus a deduction therefore should not be allowed.

The second memo, CCA 201212010, referred to a law journal article on the subject, mentioning the author’s last name, Hicks. It seems likely the reference is to an article published last year in “West/Northwest,” the Journal of Environmental Law and Policy of the University of California at Hastings.

Specifically, the memo noted the taxpayer’s representative should have argued the contribution in question was in the nature of a conservation easement, rather than trying to characterize the “appropriative” right as a separate property interest.

Emil Kallina, Chief Counsel: Contribution of “Appropriative” Interest May Not Be Deductible, CharitablePlanning.com, Mar. 26, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.