October 16, 2024 IRS issues final regulations identifying certain syndicated conservation easement transactions as listed transactions
The IRS has issued final regulations (TD 10007) identifying certain syndicated conservation easement transactions and substantially similar transactions as listed transactions under IRC Sections 6111 and 6112. The IRS previously identified certain syndicated conservation easement transactions as listed transactions in Notice 2017-10. The issuance of these final regulations clarifies that participants and material advisors must report these transactions, including any transactions that were completed in tax years that are still open. The final regulations adopt, with modifications, the proposed regulations (REG-106134-22) published in the Federal Register on December 8, 2022. TD 10007 is effective October 8, 2024. Background Under IRC Section 170(h)(7)(A), a contribution by a partnership "is not treated as a qualified conservation contribution for purposes of IRC Section 170 if the amount of such contribution exceeds 2.5 times the sum of each partner's relevant basis in such partnership, as defined in IRC Section 170(h)(7)(B)." IRC Sections 170(h)(7)(C) through (E) contain exceptions to IRC Section 170(h)(7)(A) — an exception for contributions by a pass-through entity that satisfy a three-year holding period, an exception for contributions made by family pass-through entities, and an exception for contributions made to preserve a building that is a certified historic structure. Under IRC Section 170(f)(19), taxpayers have additional reporting requirements for qualified conservation contributions made by a partnership for preserving certified historic structures, if the contribution is 2.5 times the sum of each partner's basis in the partnership. This provision also applies to S corporations and other pass-through entities. Taxpayers are not allowed a deduction for those contributions unless the entity making the contribution includes a statement that it made the contribution on its return and submits information about the contribution. Final regulations Transactions covered The final regulations cover three classes of abusive syndicated conservation easement transactions, as well as substantially similar transactions. Those transactions include:
Transactions before December 30, 2022 Because IRC Section 170(h)(7)(A) does not apply to contributions made on or before December 30, 2022, the final regulations impose a reporting requirement on taxpayers who did not previously disclose their participation in a transaction that is the same as, or substantially similar to, a syndicated conservation easement transaction. The disclosure requirement applies if the participation in the transaction occurred in one or more tax years for which the statute of limitations had not run as of the date the final regulations identified the transaction as a listed transaction. If a taxpayer fully disclosed their participation in the transaction pursuant to Notice 2017-10, the taxpayer does not need to disclose the transaction again under the final regulations. Transactions for which a charitable contribution deduction is not automatically disallowed The final regulations point out two transactions for which a charitable contribution deduction is not automatically disallowed under IRC Section 170(h)(7), but the IRS still considers them listed transactions:
Transactions involving other contributions of real property The final regulations clarify that a transaction involving a fee simple interest or real property interest, instead of a conservation easement, is substantially similar to a transaction in Treas. Reg. Section 1.6011-9(b), if it meets all the requirements of that provision. The final regulations include an example to illustrate how a contribution of a fee simple interest is substantially similar to the transaction described in Treas. Reg. Section 1.6011-9(b). Elements of the listed transaction identified 2.5 times rule The final regulations adopt the 2.5 times threshold of the proposed regulations. Under that rule, certain deductions are disallowed at the partnership level for contributions exceeding 2.5 times the sum of each partner's relevant basis. The final regulations require the following transactions to be disclosed under the 2.5 times rule:
If the promotional materials offer the possibility of a charitable contribution deduction of less than 2.5 times the investment and the taxpayer actually receives an amount less than 2.5 times the investment, the transaction will not be substantially similar to the listed transaction described in the final regulations. The final regulations also add Treas. Reg. Section 1.6011-9(d)(1) to establish the 2.5 times threshold as a bright line test. The final regulations clarify, however, that if a pass-through entity engages in a series of transactions with the principal purpose of avoiding the 2.5 times rule, "the series of transactions may be disregarded … or recharacterized in accordance with its substance." All the facts and circumstances will determine whether the pass-through entity is conducting the series of transactions with the principal purpose of avoiding the bright-line test. Additionally, the final regulations adopt the proposed regulations' provision requiring the highest suggested or implied deduction in the promotional materials to determine whether the 2.5 times rule is satisfied. Rebuttable presumption The proposed regulations included a rebuttable presumption under which the 2.5 times rule would be met if the pass-through entity:
The rebuttable presumption also would have applied if the taxpayer claimed a deduction in an amount that equals or exceeds 2.5 times the amount of the investment. The final regulations retain this rule. Determining the amount of the investment Under the anti-stuffing rule established in the proposed regulations, a taxpayer's investment amount in a pass-through entity is determined by only taking into account the portion (1) attributable to the portion of real property on which the entity places a conservation easement and (2) that produces the charitable contribution deduction. The final regulations allow a taxpayer to determine their investment amount in the pass-through entity by using one of the methods in Treas. Reg. Section 1.6011-9(d)(4), which includes the anti-stuffing method. For contributions occurring on or after December 30, 2022, the final regulations establish taxpayers may use the relevant basis method in IRC Section 170(h)(7)(B) as another method for determining their investment amount in the pass-through entity. Timing rules The final regulations clarify that the order in which the steps occur for a syndicated conservation easement transaction is not relevant and include an example illustrating the application of the anti-stuffing method if the pass-through entity acquires the property after the taxpayer invests in the entity. Definitions The final regulations modify the definition of "conservation easement" by clarifying that "it is a restriction (granted in perpetuity) on the use that may be made of the real property, within the meaning of [IRC Section] 170(h)(2)(C), exclusively for conservation purposes, within the meaning of [IRC Section] 170(h)(1)(C) and (h)(4)." The final regulations also adopt the proposed regulations definition of "promotional materials" without modification. IRC Section 4965 carveout The proposed regulations included the IRC Section 4965 carveout, which excluded "a qualified organization from treatment as a party to a syndicated conservation easement transaction under [IRC Section] 4965." In the preamble to the final regulations, the IRS notes that while it is retaining the IRC Section 4965 carveout, it might propose eliminating or limiting the carveout in the future "if qualified organizations continue to facilitate the syndicated conservation easement transactions (or substantially similar transactions)." Implications General considerations Even though Congress enacted IRC Section 170(h)(7) to the Code as part of the Secure 2.0 Act of 2022 (included within the Consolidated Appropriation Act of 2023), the IRS and Treasury declined to follow the public's request to withdraw the regulation package. The IRS makes it clear in the preamble that even though IRC Section 170(h)(7) applies to contributions made after December 29, 2022, there still may be a reporting requirement. For example, the regulations would apply to a charitable contribution of a fee simple interest in property if the transaction is "substantially similar" to the targeted transaction involving easements, even though that gift is outside the scope of IRC Section 170(h)(7). Given the odd interaction between IRC Section 170(h)(7) and these new reporting regulations, taxpayers operating in pass-through form that intend to make gifts of appreciated property (real estate or otherwise) will need to consider the applicability of both IRC Section 170(h)(7) and the reporting requirements because they may be subject to both provisions, only one of the provisions, or none of the provisions.
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