Friday April 26, 2024

Rev. Rul. 78-303

GiftLaw Note: A gift of a life estate in a home or farm qualifies for a charitable income tax deduction under Sec. 170(f)(3). In this ruling, the farmer owned 8X acres of pastureland and 2X acres of non-pasture land. He kept the non-pasture land and gave 4X acres of pastureland outright to an educational organization qualified as a public charity. The farmer also retained a life estate in the 4X remaining acres of pasture land and is leasing that property to a tenant.

A farm is defined as land used for the "production of crops, fruits, or other agricultural products or for the sustenance of livestock." Reg. 1.170A-7(b)(4). This property did qualify as a farm, since the tenant was raising cattle on the 4X acres. The charitable deduction for income tax purposes was qualified.

Rev. Rul. 78-303, 1978-2 C.B. 122

Sec. 170

Service Headnote

Charitable contributions; retained life estate; leased farmland. A retired farmer, a portion of whose farm is leased to an unrelated third party, may deduct as a charitable contribution a gift not in trust to an exempt educational organization of an irrevocable unrestricted remainder interest in a portion of the leased land in which the farmer retains a life estate.

Full Text
Rev. Rul. 78-303

ISSUE

Is a taxpayer's gift of a remainder interest in a portion of a farm deductible as a charitable contribution under section 170 of the Internal Revenue Code of 1954?

FACTS

The taxpayer, a farmer, owns a 10x acre farm comprised of 8x acres of pasture land and 2x acres of non-pasture land. The 2x acres of non-pasture land includes a lake, the taxpayer's house, tenant houses, farm structures, fences and roads. The taxpayer was initially engaged in the business of raising cattle for commercial purposes. However, the taxpayer retired from cattle raising and leased the farm, except for the residence, tenant homes, and certain structures, on an annual basis to an unrelated third party for that party's use for the raising of cattle and the production of agricultural products. Thereafter, the taxpayer made a gift of an irrevocable unrestricted remainder interest, not in trust, of 4x acres of the pasture land to an educational organization described in sections 170(c)(2) and 170(b)(1)(A)(ii) of the Code with a retention of a life estate in the 4x acres for the taxpayer's life. The taxpayer continued to lease the 4x acres after contributing the unrestricted remainder interest. The lessee does not reside on any portion of the farm.

LAW AND ANALYSIS

The applicable sections of the Code and regulations are 170(f)(3)(B)(i) and 1.170-A-7(b)(4) pertaining to the deductibility of a contribution not in trust of a remainder interest in a farm.

Section 1.170A-7(b)(4) of the regulations provides that a deduction is allowed under section 170 of the Code for the value of a charitable contribution not in trust of an irrevocable remainder interest in a farm that is not the donor's entire interest in such property. Thus, for example, if a taxpayer contributes not in trust to an organization described in section 170(c), a remainder interest in a farm and retains an estate in such farm for life or for a term of years, a deduction is allowed under section 170 for the value of the remainder interest. Also, for purposes of section 170(f)(3)(B)(i) and section 1.170A-7(b)(4), the term farm means "any land" used by the taxpayer or the taxpayer's tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock. The term livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, captive fur-bearing animals, chickens, turkeys, pigeons, and other poultry. A farm includes improvements thereon.

The term "any land" in section 1.170A-7(b)(4) of the regulations is not restricted to mean the entire farm acreage owned and used by the taxpayer or his tenant for the production of crops or the sustenance of livestock, but can include any portion of farm acreage so used. When the taxpayer made a gift of the remainder interest in a portion of the pasture land, it was being used by the taxpayer's tenant for raising cattle and producing agricultural products. Thus, the taxpayer contributed a remainder interest in a farm within the meaning of section 1.170A-7(b)(4) of the regulations.

HOLDING

In the instant case the taxpayer's gift of a remainder interest in the 4x acres of farm property is deductible as a charitable contribution under section 170 of the Code, subject to the limitations and exceptions contained in section 170.