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Private Letter Ruling: 9601046The Service has ruled that a proposed perpetual conservation easement and a fee interest in proposed replacement property will qualify as like-kind property under state law. [1] This letter is in response to your request for a private letter ruling dated September 5, 1995, submitted on behalf of the above referenced taxpayer. Specifically, you requested a ruling that the proposed perpetual conservation easement and a fee simple interest in the proposed replacement real property qualify as like- kind property under section 1031 of the Internal Revenue Code. [2] The taxpayer (and its predecessor) has owned, operated and leased real property in State Z (the “Property”) for more than 10 years for productive use in the trade or business of cattle grazing and duck hunting. The United States of America, acting through the Department of Interior, Fish and Wildlife Service, wishes to acquire a perpetual conservation easement over the Property. The purpose of the proposed transfer will be to permit the Fish and Wildlife Service to maintain and use the lands and waters thereon for a seasonal habitat of migratory waterfowl, as authorized and set forth in the Migratory Bird Conservation Act of 1929 (16 U.S.C. section 17 et seq.), as amended. [3] The taxpayer has entered into an Option Agreement with the United States Department of Interior, Fish and Wildlife Service, for the acquisition by the United States of a perpetual conservation easement over the Property. Under the proposed conservation easement, the taxpayer will not be able to develop or alter the present character of the Property or interfere with its use as a waterfowl habitat without the express written approval of the Fish and Wildlife Service. Also, the Fish and Wildlife Service will be given certain water rights, including the right to use water from the taxpayer's wells and any other water rights appurtenant to the Property to the extent reasonably required to maintain a seasonal habitat for migrating waterfowl during a specified period of each year. The taxpayer will retain the right to all minerals underlying the Property and the right to hunt and operate a hunting club on the Property. [4] The transfer of the conservation easement is conditioned on the taxpayer acquiring in a multi-party exchange transaction, in accordance with section 1.1031(k)-1(g)(4)(i)-(iii) of the Income Tax Regulations, property of like kind which will qualify for nonrecognition of gain under section 1031 of the Code. The taxpayer desires to acquire either farm land, ranch land, or commercial real property as the replacement property. The taxpayer represents that it will hold the replacement real property for productive use in a trade or business or for investment. [5] Section A of the State Z Civil Code provides, in part, that a conservation easement is an interest in real property voluntarily created and freely transferable in whole or in part for the purposes stated in Section B of the State Z Civil Code. Section B of the State Z Civil Code provides, in part, that a conservation easement means any limitation in a deed in the form of an easement, restriction, covenant, or condition, the purpose of which is to retain land predominantly in its natural, scenic, historical, agricultural, forested, or open-space condition. Section C of the State Z Civil Code provides that a conservation easement shall be perpetual in duration. [6] Section 1031(a)(1) of the Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. [7] Section 1.1031(a)-1(b) of the regulations provides, in part, that, as used in section 1031(a) of the Code, the words “like kind” have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not be exchanged for property of a different kind or class. The fact that any real estate involved is improved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale. Section 1.1031(a)- 1(c) provides, as an example, that no gain or loss is recognized if a taxpayer who is not a dealer in real estate exchanges city real estate for a ranch or farm, or exchanges a leasehold of a fee with 30 years or more to run for real estate, or exchanges improved real estate for unimproved real estate. [8] Rev. Rul. 55-749, 1955-2 C.B. 295, holds that where, under applicable state law, water rights are considered real property rights, the exchange of perpetual water rights for a fee interest in land constitutes a nontaxable exchange of property of like kind within the meaning of section 1031(a) of the Code. [9] Rev. Rul. 72-549, 1972-2 C.B. 472, holds that an easement and right-of-way that the taxpayer granted to an electric power company and the improved real properties acquired by the taxpayer are both continuing interests in real property and of the same nature and character, and as such qualify as like-kind property under section 1031 of the Code. [10] In the instant case, the proposed grant of a conservation easement in perpetuity, by virtue of state law, is an interest in real property. Based upon the above authorities and facts and representations that were submitted, the proposed conservation easement and the proposed replacement real property will qualify as like-kind property under section 1031 of the Code. [11] No opinion is expressed as to the tax treatment of these items (or transactions) under the provisions of any other section of the Code or regulations which may be applicable thereto, or the tax treatment of any conditions existing at the time of, or effects resulting from, the items (or transactions) described which are not specifically covered in the above ruling. Specifically, no opinion is expressed with respect to whether the proposed transaction meets the deferred like-kind exchange requirements of section 1.1031(k)-1 of the regulations. [12] A copy of this letter should be attached to the federal return for the year in which the transactions in question occurs. [13] This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. Sincerely, Assistant Chief Counsel
David L. Crawford, Chief |
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