Section 2055 of the Internal Revenue Code provides that no charitable contribution is deductible (with a few exceptions) if an interest in property passes from a decedent to a charity and a partial interest in the same property passes to a noncharitable beneficiary for less than fair value.
In a private letter ruling, the IRS held that the estate of a deceased farmer, which left an entire farm to a charitable organization, was entitled to a charitable contribution deduction despite the fact that the will also required the charity to lease the farm to two of the farmer's relatives for a period of five years at which time they would have an option to purchase the land.
The IRS ruling was conditioned on the assumption that the annual rental payments (and option purchase price) would be fair and reasonable. In determining whether the annual lease payments are fair and reasonable, they must be compared with "rentals paid for comparable properties." Similarly, the reasonableness of the option purchase price would be based on an evaluation of purchase prices of comparable properties in the same area. IRS Letter Ruling 8812003.
