|
Wednesday, May 1, 2024
 |
Case Studies |
The Dirtiest CRT Ever Created, Part 2 of 2
|
Case:
Sam Morello, 50, has been in the mining business for many years and his company, Hard Hat Drillers, a sole proprietorship, owns and operates several mines in the northeast part of the country. The company's sole source of revenue is from its mining efforts. However, a national landscaping company has recently expressed an interest in purchasing the rights to extract dirt from Hard Hat Drillers' Pennsylvania mine. It is estimated that 12,000 tons of dirt could be extracted from the site. There has not yet been any contract or other formal agreement between the two parties.
At the same time Sam was contemplating selling his dirt rights, he was approached about making a gift to a local hospital. He has been a strong supporter of the hospital after it provided excellent care to his father. Sam wants to make a current gift to the hospital and wonders if it is possible to give his dirt rights directly to the hospital.
Question:
What will the tax treatment be when Sam transfers his dirt rights to the hospital? How much, if any, will Sam's charitable deduction be?
Solution:
Sam owns the land, and accordingly owns the underlying dirt as well. Sam desires to transfer just the rights to extract the dirt. However, he wishes to keep all other rights relating to the land. Thus, he is attempting to give some of his property interests to the hospital, and keep the remaining property interests for himself. Such a transaction is deemed a gift of a partial interest.
In general, an income tax deduction is not allowed for a contribution of an interest in property that consists of less than the taxpayer's entire interest in such property. See Sec. 170(f)(3). A gift of the remainder interest in a personal residence or farm is one of the few exceptions to the general rule. However, Sam's transaction does not fall within one of the exceptions. Sam owns 100% of the land, but plans on gifting only his rights to the dirt. In other words, Sam is giving less than his entire interest. Therefore, he is not entitled to a charitable deduction when he transfers his dirt rights to the hospital.
Editor's Note: It is important to distinguish the partial interest gift from a gift of an undivided interest that is deductible under Sec. 170. This case study illustrates a partial interest gift. In contrast, if Sam had chosen to transfer an undivided portion (e.g., 25%) in all of his land to the hospital, then a deduction would have been allowed.
|
|
|
|
