## Facts

- A taxpayer granted the United States government an easement in connection with a flood-control project.
- The easement was negotiated at arm’s length for a fair price.
- The record reflects no threat of eminent domain, condemnation proceedings, or litigation as part of the negotiations.
- In exchange for the easement, the government paid the taxpayer an amount equal to 20% of the land’s fee (full ownership) value.
- The taxpayer retained title to the land after granting the easement.
- The easement did not bar the taxpayer from full use of the land during periods when the land was not flooded.
- The IRS treated the easement transaction as affecting the property’s basis and concluded that it required an adjustment to the land’s adjusted basis for purposes of computing gain or loss on a later sale or other disposition.

## Issues

1. When a taxpayer grants a flood-control easement for consideration while retaining title and continued use when not flooded, must the taxpayer treat the easement as a disposition of a property interest that requires a basis adjustment?
2. Must the taxpayer allocate a portion of the land’s adjusted basis to the easement interest conveyed so that gain or loss can be properly determined on a later sale or other disposition of the land?

## Decision

- The IRS concluded that granting the easement for consideration is a disposition of a property interest, even though the taxpayer keeps title and may continue to use the land when it is not flooded.
- Because the taxpayer disposed of a portion of its rights in the property, the IRS determined that the transaction requires an adjustment to the property’s basis.
- The IRS treated the payment for the easement as consideration received for the transferred interest and required the taxpayer to account for that transfer by allocating basis to the easement interest conveyed.
- As a result, the taxpayer’s remaining adjusted basis in the land must reflect the basis allocated to the conveyed easement interest, and that adjusted (reduced) basis is used to compute gain or loss on any later sale or other disposition of the land.

## Legal Principles

- A grant of an easement for consideration can constitute a sale or exchange of a portion of the taxpayer’s property rights, even if the taxpayer retains legal title to the underlying land.
- When a taxpayer disposes of part of a property (including by conveying a permanent or long-term easement), the taxpayer generally must allocate the property’s adjusted basis between the part transferred and the part retained using relative value.
- The amount received for the easement is taken into account in determining the tax consequences of the partial disposition and in determining the adjusted basis of the retained property interest.
- The adjusted basis remaining in the land after the easement conveyance is used to compute gain or loss on a subsequent sale, exchange, or other disposition of the land.
- Continued use of the land by the taxpayer (when conditions permit) does not by itself prevent the easement transfer from being treated as a taxable disposition of an interest in property for basis purposes.

## Conclusion

Revenue Ruling 70-510 addresses a taxpayer’s grant of a flood-control easement to the government for a negotiated payment equal to 20% of the land’s fee value, where the taxpayer keeps title and can continue using the land when not flooded. The IRS treated the easement conveyance as a partial disposition that requires allocating basis to the transferred easement interest and adjusting the land’s remaining basis, which in turn affects the computation of gain or loss on any later sale or other disposition of the land.


Revenue Ruling 70-510, 1970-2 C.B. 159 (1970)