Easement Relocation Costs Includible in Site's Eligible Basis

Facts: An owner requested a letter ruling on whether certain easement relocation costs incurred while constructing a site are includible in the eligible basis for purposes of Section 42(d)(1) of the Internal Revenue Code.

The land upon which the single building with 76 low-income units was built was initially zoned for commercial use and, therefore, was required to obtain a Conditional Use Permit (CUP) to allow for residential development. The city council issued a resolution approving the final design of the site, subject to the satisfaction of a number of conditions. One of these conditions was that a specific third-party easement on the land underlying the site be relocated before the city would issue any building permits for the site. Had the owner elected a different use for the site that didn’t require a CUP (such as the development of a commercial building), it would have been able to undertake construction without the city-imposed requirement of relocating the easement. However, the owner wanted to construct a residential rental building, and the city was unwilling to recommend and/or approve any designs that didn’t require relocation of the easement for initiating construction.

The easement granted the grantee an easement and right to maintain on the land underlying the site an existing pylon sign and electrical conduit. The owner reached agreement with the grantee of the easement for the relocation of the easement. The owner paid the grantee and all of the costs necessary to relocate the infrastructure supporting the existing pylon sign.

Ruling: The IRS ruled that the easement relocation cost should be included in the eligible basis.

Reasoning: The IRS pointed to the cause-and-effect relationship between the incurred costs and the site’s development as justification to include the costs in the eligible basis. The easement relocation costs were incurred because of the owner’s plans to construct the residential rental building. Further, the scope of the easement relocation and, accordingly, the amount of the relocation costs, were determined by the characteristics of the residential rental building. The city had authority over and approved the final design of the residential rental building (having rejected prior designs). And the approved design of the residential rental building necessitated complete relocation of the easement. If the approved design had been different, then the scope and cost of the easement relocation would have been different.

Because of these factors, a cause-and-effect or other reasonable relationship exists between the relocation costs and the residential rental building. Therefore, the relocation costs directly benefit, or are incurred by reason of, the construction of the residential rental building and are indirect costs in the basis of the site.

• PLR 120247-14, No. 201515007 (4/10/15)