Charitable Deductions for Rail-Trail Conversions: Reconciling the Partial Interest Rule and the National Trails System Act

This Article examines an undeveloped legal topic at the intersection of tax law and real property law: charitable deductions from income tax liability for donations of railroad corridors that are to be converted into recreational trails. The very popular rails-to-trails program assists in the conversion of abandoned railroad corridors into hiking and biking trails. However, the legal questions surrounding the property rights of these corridors have been complex and highly litigated. In 1983, Congress amended the National Trails System Act to provide a mechanism for facilitating these conversions, a process called railbanking. In essence, a railroad transfers its real property interests in its corridor to a trail sponsor for interim trail use and retains a right to re-enter in the event that rail service needs to be reactivated on the line. Thus, the dual purposes of the statute-interim trail use and rail preservation-are furthered by a process that prevents the corridor from being broken up and irrevocably lost. An important element of railbanking and trail conversion is the prospect for the railroads of a deduction from their income tax liability when they donate these corridors for public trail use. Recently, however, the Internal Revenue Service ( IRS ) has begun to question the donations by invoking the so-called partial interest rule. Should the IRS prevail in applying this rule, the deduction would be entirely disallowed under current Internal Revenue Code provisions. This Article discusses the interaction of these two areas of law and proposes ways the railroads can draft their trail use agreements to minimize the likelihood of being challenged by the IRS, and ways the IRS, the Surface Transportation Board, Congress, and the railroads can work together to reconcile the conflict in these different laws. In the end, we believe that the rail preservation function is critical to the public welfare and that it is in everyone\u27s best interest to further railbanking and interim trail use. However, doing so requires careful drafting and perhaps regulatory changes to ensure that railroads do not unfairly take advantage of the tax system, while at the same time maintaining an incentive for railroads to railbank and offer their corridors for future public use