Retained surface-mining rights disqualify a conservation easement deduction under section 170(h)

Plain-English summary

This is internal legal advice from IRS Chief Counsel to a field attorney
about conservation easement charitable deductions. To deduct the value of
a conservation easement, the gift must be made exclusively for
conservation purposes and protected in perpetuity. The tax law says that
if the landowner keeps a mineral interest and the easement deed allows
any possibility of extracting those minerals by surface mining, the
easement generally fails this test. There is one narrow exception: it
applies only where ownership of the surface land and the minerals has
always been separated and surface mining is so unlikely as to be
negligible. Here, the same owner held both the surface and the minerals,
which had never been separated, so the exception could not apply. The
deed let the owner surface-mine the minerals if the charity (the donee)
approved. Chief Counsel concluded that the donee's approval does not fix
the problem, because if approval is given, surface mining can still
happen. The result: the easement is not a qualified conservation
contribution, and no charitable deduction is allowed. The advice matters
because it confirms the IRS position that a retained surface-mining
possibility, even one gated behind the charity's consent, kills the
deduction when surface and mineral ownership were never split.

Ruling snapshot

• Question: Does a conservation easement qualify under section 170(h)
  when the donor retains a mineral interest never separated from the
  surface estate and the deed allows surface mining with the donee's
  approval?
• Outcome: Advice given (no; deduction not allowed)
• Key authorities: IRC § 170(f)(3), (h)(1), (h)(5)(A), (h)(5)(B);
  Treas. Reg. § 1.170A-14(g)(4); Great Northern Nekoosa Corp. v. U.S.,
  38 Fed. Cl. 645 (1997)

Full text (IRS public release)

          Office of Chief Counsel
          Internal Revenue Service
          Memorandum
          Number: 202236010
          Release Date: 9/9/2022
          CC:ITA:B02:RCGano
          POSTU-105674-20

 UILC:    170.00-00

  date:   September 27, 2021

    to:   Keith L. Gorman
          General Attorney
          (Large Business & International)

  from: Bridget E. Tombul
          Branch Chief, Branch 2
          (Income Tax & Accounting)


subject: Retained Surface-Mining Rights in Conservation Easement Deeds

          This Chief Counsel Advice responds to your request for assistance. This advice may
          not be used or cited as precedent.


          ISSUE

          Does a conservation easement satisfy the requirements of section 170(h) of the Code if
          the donor of the easement retains a qualified mineral interest, the ownership of the
          surface estate and mineral interest has never been separated, and under the terms of
          the deed the donor can use a surface-mining method to extract the subsurface minerals
          with the donee's approval?

          CONCLUSION

          No. If the donor of a conservation easement owns both the surface estate and a
          qualified mineral interest that has never been separated from the surface estate, and
          the deed retains any possibility of surface mining to extract the subsurface minerals, the
          conservation easement does not satisfy the requirements of section 170(h) even if the
          donee would have to approve the surface-mining method, because the contribution is
          not treated as made exclusively for conservation purposes under section 170(h)(5).

LAW AND ANALYSIS

Section 170(f)(3)(A) generally precludes a charitable contribution deduction for a gift of
a partial interest in property. Section 170(f)(3)(B)(iii), however, provides an exception
for a qualified conservation contribution. Section 170(h)(1) defines a qualified
conservation contribution as a contribution of a qualified real property interest to a
qualified organization exclusively for conservation purposes.

Under section 170(h)(5)(A), a conservation easement is not treated as exclusively for
conservation purposes unless the conservation purpose is protected in perpetuity.
Under section 170(h)(5)(B)(i), if the donor retains a qualified mineral interest, the
conservation easement is generally not treated as exclusively for conservation purposes
if at any time there may be extraction or removal of minerals by any surface-mining
method. The only exception to this rule is in section 170(h)(5)(B)(ii), which states that if
the ownership of the surface estate and mineral interests has been and remains
separated, and the probability of surface mining occurring on the property is so remote
as to be negligible, then the contribution may be treated as exclusively for conservation
purposes.

Section 1.170A-14(g)(4)(i) clarifies the rules regarding the retention of qualified mineral
interests in conservation contributions and whether those retained interests preclude a
charitable contribution deduction. Section 1.170A-14(g)(4)(i) restates the general
statutory rule that no deduction is allowed if there is a retention by any person of a
qualified mineral interest and the minerals may be extracted or removed by any surface-
mining method. Section 1.170A-14(g)(4)(i) also states that the requirement that the
conservation purposes be protected in perpetuity is not satisfied in the case of a
qualified mineral interest gift if any method of mining that is inconsistent with the
particular conservation purposes of a contribution is permitted at any time. Finally,
section 1.170A-14(g)(4)(i) provides that a deduction under § 1.170A-14 will not be
denied in the case of certain methods of mining that may have limited, localized impact
on the real property and are not irremediably destructive of significant conservation
interests. However, as stated above, surface mining is specifically prohibited.
Therefore, surface mining is not a mining method that is allowable if it has limited,
localized impact on the real property and is not irremediably destructive of significant
conservation interests.

Section 1.170A-14(g)(4)(ii)(A) provides an exception to the prohibition on surface mining
for contributions made after July 18, 1984, but this regulation section pre-dates, and is
different than, the statutory exception in current section 170(h)(5)(B)(ii). Section
1.170A-14(g)(4)(ii)(A) does not apply to conservation easements donated after the
applicability date of section 170(h)(5)(B)(ii) as amended, i.e., conservation easements
granted after December 31, 1997.

In Great Northern Nekoosa Corp. v. U.S., 38 Fed. Cl. 645, 649-50 (1997), the taxpayer
contributed two conservation easements but retained the right to surface-mine
subsurface minerals. The government filed a motion for partial summary judgment
claiming the contribution was not deductible because the taxpayer's contribution was
not exclusively for conservation purposes due to the retained surface-mining rights. Id.
at 654. The taxpayer argued that the deduction was allowed, based on the third
sentence in Treas. Reg. §1.170A-14(g)(4)(i), which provides an exception to the
disallowance rule where the impact of the mining has a limited, localized impact but is
not irremediably destructive of significant conservation interests. Id. at 658. The court
dismissed this argument, stating that the taxpayer's interpretation of the regulation was
contrary to the regulation as a whole and the statute itself, both of which prohibit surface
mining. Id. at 659. In addition, the court noted that the taxpayer's argument would
conflict with, and subvert, the fundamental conservation purposes of the statute. Id.
The court in Great Northern Nekoosa Corp. cited the law as it existed in 1981, which did
not provide for an exception for the prohibition on surface mining. 1 However, the court's
analysis is relevant here because the change in law, which added the only exception to
the prohibition on surface mining, does not apply in situations where the ownership of
the surface estate and the mineral interest has never been separated.

Under section 170(h)(5) and section 1.170A-14(g)(4)(i), unless the exception in section
170(h)(5)(B)(ii) applies, a contribution is not treated as made exclusively for
conservation purposes if there is an owner of a qualified mineral interest and the deed
permits the owner of that interest to extract or remove those minerals by a surface-
mining method. Here, the ownership of the surface estate and mineral interest has
never been separated. As such, the exception under section 170(h)(5)(B)(ii) does not
apply. The contribution is not treated as made exclusively for conservation purposes
because, with the donee's approval, the deed allows surface mining of the donor's
subsurface minerals. A donee's approval does not rectify the problem, because if the
approval is granted, surface mining can occur. Because the contribution is not treated
as made exclusively for conservation purposes, it is not a qualified conservation
contribution. Therefore, because the gift is a less than the donor's entire interest and is
not a qualified conservation contribution, a charitable contribution deduction is not
allowed under section 170(f)(3)(B)(iii).

If you have any questions, please contact Richard C. Gano IV at (202) 317-7011.




1
  Congress added section 170(h)(5)(B)(ii) in 1984. See Pub. L. No. 98-369, § 1035(a), 98 Stat. 494, 1042
(1984). Congress subsequently amended section 170(h)(5)(B)(ii) in 1997. See Pub. L. No. 105-34,
§ 508(d), 111 Stat. 788, 860 (1997).