IRS Provides Safe Harbor Language for Conservation Easement Deeds

(Parker Tax Publishing April 2023)

The IRS issued a notice setting forth the safe harbor deed language for extinguishment and boundary line adjustment clauses required by Section 605(d) of the SECURE 2.0 Act of 2022 (Pub. L. 117-328). The notice also describes the process donors may use to amend an original eligible easement deed to substitute the safe harbor language for the corresponding language in the original deed and provides that taxpayers have until July 24, 2023, to record their safe harbor deed amendments. Notice 2023-30.

Background

Code Sec. 170(f)(3)(A) denies a deduction under Code Sec. 170 in the case of a contribution of a partial interest in property, except as provided in Code Sec. 170(f)(3)(B). Code Sec. 170(f)(3)(B)(iii) provides an exception to the deduction denial in the case of a qualified conservation contribution as defined in Code Sec. 170(h).

Under Code Sec. 170(h)(1), the term qualified conservation contribution means a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. For this purpose, a qualified real property interest is defined in Code Sec. 170(h)(2)(C) to include a restriction (granted in perpetuity) on the use that may be made of the real property. Reg. Sec. 1.170A-14(b)(2) provides that a perpetual conservation restriction includes an easement or other interest in real property that under state law has attributes similar to an easement. Code Sec. 170(h)(4) defines the term conservation purpose, which must be protected in perpetuity for the qualified conservation contribution to be treated as exclusively for conservation purposes.

Reg. Sec. 1.170A-14 provides further guidance on qualified conservation contributions. Reg. Sec. 1.170A-14(g) requires that such a restriction be enforceable in perpetuity. Reg. Sec. 1.170A-14(g)(6)(i) provides a rule pertaining to extinguishment. It provides that if a subsequent unexpected change in the conditions surrounding the property that is the subject of a perpetual conservation restriction makes it impossible or impractical to continue to use the property for conservation purposes, the conservation purpose can nonetheless be treated as protected in perpetuity if (1) the restrictions are extinguished by judicial proceeding, and (2) all of the donee's proceeds from a subsequent sale or exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution.

Reg. Sec. 1.170A-14(g)(6)(ii) provides that, for a deduction to be allowed under Code Sec. 170(a), at the time of the gift, the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time. That proportionate value of the donee's property rights must remain constant. Accordingly, under Reg. Sec. 1.170A-14(g)(6)(ii), if a change in conditions gives rise to the extinguishment of a perpetual conservation restriction under Reg. Sec. 1.170A-14(g)(6)(i), the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, generally must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction.

Neither the Code nor the regulations specifically address boundary line adjustments. Under Code Sec. 170(h)(2)(C), however, the restriction the donor grants on the use of the real property subject to the conservation easement must be made in perpetuity.

The SECURE 2.0 Act of 2022 was enacted as part of the Consolidated Appropriations Act, 2023 (Pub. L. 117-328) on December 29, 2022. Section 605(d)(1) of the SECURE 2.0 Act directs the IRS to publish safe harbor deed language for extinguishment clauses and boundary line adjustment clauses within 120 days after the date of the enactment of the SECURE 2.0 Act (i.e., April 28, 2023). Section 605(d)(2) of the SECURE 2.0 Act provides that, beginning on the date the safe harbor language is published, donors have a 90-day period in which to amend an original eligible easement deed to substitute the safe harbor language for the corresponding language in the original deed.

Notice 2023-30

In accordance with Section 605(d) of the SECURE 2.0 Act, the IRS issued Notice 2023-30, which sets for the safe harbor deed language for extinguishment (Section 4.01) and boundary line adjustment clauses (Section 4.02). The notice also describes the process donors may use to amend an original eligible easement deed to substitute the safe harbor language for the corresponding language in the original deed.

To amend an original "eligible easement deed" to substitute the safe harbor language in Section 4.01 or 4.02 of Notice 2023-30 for the corresponding language in the original deed, (1) the amended deed must be signed by the donor and donee and recorded on or before July 24, 2023; and (2) the amendment must be treated as effective as of the date of the recording of the original easement deed.

Observation: Notice 2023-30 will be published in the Internal Revenue Bulletin on April 24, 2023. The 90th day is therefore July 22, 2023. Because that date is a Saturday, the date is extended to Monday, July 24, 2023. Thus, the amended deed must be signed by the donor and donee and recorded by July 24, 2023, and the amendment must be treated as effective as of the date of the recording of the original easement deed.

The term "eligible easement deed" does not include an easement deed relating to any contribution:

(1) which is part of a reportable transaction (as defined in Code Sec. 6707A(c)(1)), or is described in Notice 2017-10;

(2) which, by reason of Code Sec. 170(h)(7), is not treated as a qualified conservation contribution;

(3) if a deduction under Code Sec. 170 has been disallowed by the IRS and the donor is contesting such disallowance in a case that is docketed in a federal court on a date before the date the amended deed is recorded by the donor; or

(4) if a claimed deduction for such contribution under Code Sec. 170 resulted in an underpayment to which a penalty under Code Sec. 6662 or Code Sec. 6663 applies, and (i) the penalty has been finally determined administratively, or (ii) if the penalty is challenged in court, the judicial proceeding with respect to such penalty has been concluded by a decision or judgment which has become final.

If a donor substitutes the safe harbor language in Sections 4.01 or 4.01 of Notice 2023-30 for the corresponding language in the original eligible easement deed and the amended deed is signed by the donor and donee and recorded on or before July 24, 2023, the amended eligible easement deed will be treated as effective for purposes of Code Sec. 170, Section 605(d)(2) of the SECURE 2.0 Act, and Notice 2020-23 as of the date the eligible easement deed was originally recorded, regardless of whether the amended eligible easement deed is effective retroactively under relevant state law.

For a discussion of the rules for deducting a charitable contribution of a conservation easement, see Parker Tax ¶84,155.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com