Final Regulations Identify Syndicated Conservation Easements as Listed Transactions

(Parker Tax Publishing October 2024)

The IRS issued final regulations that identify certain syndicated conservation easement transactions and substantially similar transactions as listed transactions, a type of reportable transaction. Material advisors and certain participants in these listed transactions are required to file disclosures with the IRS on Form 8918, Material Advisor Disclosure Statement, and Form 8886, Reportable Transaction Disclosure Statement, respectively, and are subject to penalties for failure to disclose. T.D. 10007.

Background

On December 8, 2022, the IRS issued proposed regulations (REG-106134-22) that identify certain syndicated conservation easement transactions and substantially similar transactions as "listed transactions" for purposes of Reg. Sec. 1.6011-4(b)(2) and Code Secs. 6111 and 6112.

The SECURE 2.0 Act of 2022 (Pub. L. 117-328) was enacted just 15 days after the publication of the proposed regulations. Section 605 of the SECURE 2.0 Act added Code Sec. 170(h)(7)(A), which provides that a contribution by a partnership (whether directly or as a distributive share of a contribution of another partnership) is not treated as a qualified conservation contribution for purposes of Code Sec. 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 Code Sec. 170(h)(7)(B). Code Sec. 170(h)(7)(F) states that the rules of Code Sec. 170(h)(7) apply equally to S corporations and other passthrough entities.

Section 605 of the SECURE 2.0 Act also added Code Sec. 170(f)(19), creating additional reporting requirements for any qualified conservation contribution (1) the conservation purpose of which is the preservation of any building which is a certified historic structure (as defined in Code Sec. 170(h)(4)(C)), (2) which is made by a partnership (whether directly or as a distributive share of a contribution of another partnership), and (3) the amount of which exceeds 2.5 times the sum of each partner's relevant basis (as defined in Code Sec. 170(h)(7)) in the partnership making the contribution. Code Sec. 170(f)(19)(C) states that the rules of Code Sec. 170(f)(19) generally apply to S corporations and other passthrough entities in the same manner as such rules apply to partnerships.

Under 170(f)(19)(A), no deduction is allowed for such a contribution unless the entity making the contribution (1) includes on its return for the taxable year in which the contribution is made a statement that the entity made such a contribution and (2) provides such information about the contribution as the Treasury Secretary may require.

In June 2024, the IRS issued final regulations (T.D. 9999) concerning the statutory disallowance rule enacted by the SECURE 2.0 Act.

Final Regulations

On October 7, the IRS issued final regulations in T.D. 10007 that adopt the proposed regulations with certain revisions in response to practitioners' comments.

Among other comments, practitioners questioned the need for the proposed regulations to be adopted as final regulations, given the enactment in December of 2022 of Section 605 the SECURE 2.0 Act, which added Code Sec. 170(h)(7) to disallow a deduction for "the vast majority" of the abusive syndicated conservation easement transactions identified in the proposed regulations. Practitioners asked that, in light of the legislation, the proposed regulations either be withdrawn or be revised to take a "more surgical approach."

The IRS responded that it is in the interest of sound tax administration to continue to identify abusive syndicated conservation easement transactions as listed transactions, notwithstanding the passage of the SECURE 2.0 Act. However, in adopting the proposed regulations as final regulations, the IRS made several modifications to the proposed rules. The final regulations thus are consistent, according to the IRS, with the practitioners' recommendation for a more surgical approach to the definition of the syndicated conservation easement listed transaction following the enactment of Code Sec. 170(h)(7).

Specifically, the final regulations cover three major classes of abusive syndicated conservation easement transactions (and substantially similar transactions): (1) those that involve contributions occurring before December 30, 2022; (2) those for which a charitable contribution deduction is not automatically disallowed by Code Sec. 170(h)(7); and (3) those that substitute the contribution of a fee simple interest in real property for the contribution of a conservation easement.

Transactions Occurring Before December 30, 2022

Code Sec. 170(h)(7)(A) does not apply to contributions made on or before December 29, 2022. As a result, the IRS states that the final regulations are necessary to obtain reporting of transactions that are the same as, or substantially similar to, syndicated conservation easement transactions in cases in which the conservation easements were contributed before December 30, 2022, and the taxpayers did not disclose the transaction pursuant to Notice 2017-10. Thus, the final regulations impose reporting requirements on taxpayers who had not previously disclosed their participation in transactions that are the same as, or substantially similar to, syndicated conservation easement transactions to the extent that a taxpayer's participation in the transaction occurred in one or more tax years as to which the statute of limitations had not run as of the date the final regulations identify the transaction as a listed transaction.

Transactions Not Automatically Disallowed by Sec. 170(h)(7)

The final regulations do not include an exception for transactions that are excluded from the automatic disallowance rule in Code Sec. 170(h)(7). The IRS notes that Section 605 the SECURE 2.0 Act, which was enacted after the proposed regulations were issued, does not provide that the exceptions to Code Sec. 170(h)(7)(A) contained in Code Sec. 170(h)(7)(C) through (E) are also exceptions for purposes of the listed transaction rules. To the contrary, Section 605(c)(2) of the SECURE 2.0 Act explicitly states: "No inference is intended as to the appropriate treatment of ... any contribution for which a deduction is not disallowed by reason of" Code Sec. 170(h)(7). Thus, in the IRS's view, Congress believed that the fact that such transactions are not automatically disallowed does not mean that such transactions could not be abusive.

The IRS notes that there are at least two types of conservation easement transactions for which a charitable contribution deduction is not automatically disallowed by Code Sec. 170(h)(7) that are appropriately considered listed transactions. First, transactions satisfying any of the three exceptions found in Code Sec. 170(h)(7)(C) through (E) that also contain all the elements of a transaction identified as a listed transaction under the final regulations continue to be transactions that the IRS views as likely to be abusive. Thus, the final regulations do not include any exceptions for transactions described in Code Sec. 170(h)(7)(C) through (E). Second, any syndicated conservation easement transaction for which a charitable contribution deduction is not automatically disallowed by Code Sec. 170(h)(7) because the amount of the partnership's contribution does not exceed 2.5 times the sum of each partner's relevant basis in the partnership is nevertheless a listed transaction with respect to any partner who received promotional materials offering the possibility of being allocated a share of the contribution that equals or exceeds 2.5 times that partner's investment.

Transactions That Involve Other Contributions of Real Property

The preamble to the proposed regulations stated that transactions in which the contributed property is described in Code Sec. 170(h)(2)(A) or (B), or is a fee interest in real property, are transactions substantially similar to the listed transaction identified in Prop. Reg. Sec. 1.6011-9(b) (i.e., a syndicated conservation easement transaction). According to the IRS, despite the different taxpayer contribution base limitations and carryover periods between a fee simple donation and a conservation easement donation, these transactions can result in similar types of tax consequences and be either factually similar or based on the same or similar tax strategy. Therefore, the final regulations explicitly state that a transaction that meets all the elements of a syndicated conservation easement transaction, except that the transaction involves the contribution of a fee simple interest or the contribution of a real property interest described in Code Sec. 170(h)(2)(A) or (B) instead of a conservation easement, is substantially similar to a syndicated conservation easement transaction.

For a discussion of listed transactions, see Parker Tax ¶250,140.

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.

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