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Wednesday June 12, 2024

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JCT Explains Limits on Charitable Conservation Easements

Joint Committee on Taxation- Bluebook for the 117th Congress. JCS-1-23

GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 117TH CONGRESS

TITLE VI—REVENUE PROVISIONS

5. Charitable conservation easements (sec. 605 of the Act and secs. 170, 6662, and 6664 of the Code)

Explanation of Provision

Certain contributions not treated as qualified conservation contributions

General rule


Under the provision, certain charitable contributions made by a partnership (whether directly or as a distributive share of a contribution of another partnership) in a conservation easement transaction are not treated as qualified conservation contributions. The contribution is not so treated if the amount of the contribution exceeds two and one-half times the sum of each partner’s relevant basis in such partnership (the ‘‘disallowance rule’’). A partner’s relevant basis is the portion of the partner’s modified basis in the partnership 2401 that is allocable 2402 to the portion of the real property interest with respect to which the qualified conservation contribution is made.

Exceptions to the disallowance rule

The provision includes three exceptions to the disallowance rule. First, the disallowance rule does not apply to contributions made after a three-year holding period. The holding period is satisfied if such contribution is made at least three years after the latest of: (1) the last date on which the partnership that made the contribution acquired any portion of the real property with respect to which the contribution was made; (2) the last date on which any partner in the partnership that made the contribution acquired any interest in the partnership; and (3) if the interest in the partnership making the contribution is held through one or more partnerships, the last date on which any such partnership acquired any interest in any other such partnership and the last date on which any partner in any such partnership acquired any interest in such partnership. Second, the provision includes an exception for certain family partnerships. The disallowance rule does not apply with respect to a contribution made by a partnership if substantially all of the interests in the partnership are held, directly or indirectly, by an individual and members of the individual’s family.2403 Third, the disallowance rule does not apply to any qualified conservation contribution the conservation purpose of which is the preservation of any building which is a certified historic structure (as defined in section 170(h)(4)(C)).

Regulatory authority

Except as provided by the Secretary, rules similar to the rules in the provision relating to qualified conservation contributions of partnerships apply to S corporations and other pass-through entities. The Secretary is directed to prescribe such regulations or other guidance as may be necessary or appropriate to carry out or prevent avoidance of the purposes of the provision, including requiring reporting related to tiered partnerships and modified basis of partners.

Accuracy-related penalty (section 6662); supervisory approval not required

The provision makes several changes to the application of section 6662 accuracy related penalties in conservation easement cases. First, the provision applies the section 6662 accuracy-related penalty to any underpayment of tax attributable to the disallowance of a deduction by reason of the new limitation on qualified conservation contributions in this provision. In addition, any such disallowance is treated as a gross valuation misstatement, which increases the amount of the accuracy-related penalty from 20 percent to 40 percent of the underpayment of tax. No defense based on reasonable cause otherwise available to an accuracy-related penalty under section 6664(c) is available for any such underpayment. Finally, the requirement for supervisory approval of the penalty assessment under section 6751(b) does not apply.

Statute of limitation for syndicated conservation easement transactions

The provision also addresses the applicable statute of limitations for assessment of tax or penalties related to syndicated conservation easements transactions. In the case of any contribution with respect to which a deduction was disallowed by reason of the provision, the contribution shall be treated as having been identified by the Secretary as a tax avoidance transaction within the meaning of section 6011 for purposes of the statute of limitations rule described in sections 6501(c)(10) and 6235(c)(6).

Reporting requirement for certain transactions involving certified historic structures

The provision amends the present-law charitable contribution substantiation requirements to add a new substantiation requirement for certain easement contributions involving certified historic structures. The requirement applies to a contribution: (1) the conservation purpose of which is the preservation of any building which is a certified historic structure (as defined in section 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 two and one-half times the sum of each partner’s relevant basis (as defined above) in the partnership making the contribution. No charitable deduction is allowed for such a contribution unless the partnership making such contribution: (1) includes on its return for the taxable year in which the contribution is made a statement that the partnership made such a contribution; and (2) provides such other information about the contribution as the Secretary may require. Except as otherwise provided by the Secretary, the reporting rules apply to S corporations and other pass-through entities in the same manner as such rules apply to partnerships.

Notice of certain failures; correction procedure

The provision allows certain taxpayers an opportunity to correct certain defects in a deed that grants an easement. Within 120 days of the date of enactment, the Secretary (or the Secretary’s delegate) is required to publish safe harbor deed language for extinguishment clauses and boundary line adjustments. During the 90-day period beginning on the date of publication of such language, a donor may amend an easement deed to substitute the safe harbor language for the corresponding language in the original deed if (1) the amended deed is signed by the donor and donee and recorded within the 90-day period and (2) the amendment is treated as effective as of the date of recording of the original easement deed.

This correction procedure is not available for a contribution: (1) that is part of a reportable transaction; 2404 (2) is described in IRS Notice 2017-10;2405 (3) which, by reason of the disallowance rule described above is not treated as a qualified conservation contribution; (4) if a charitable deduction for the contribution has been disallowed by the Secretary, and the donee is contesting such allowance in a case which is docketed in a Federal court on a date before the date the amended deed is recorded by the donor; or (5) if a claimed charitable deduction resulted in an underpayment to which a penalty under section 6662 or 6663 applies, and either the penalty has been finally determined administratively or, if challenged in court, the judicial proceeding with respect to such penalty has been concluded by a decision or judgment which has become final.

Effective Date

The provision is generally effective for contributions made after the date of enactment (December 29, 2022).

No inference is intended as to (1) the appropriate treatment of contributions made in taxable years ending on or before such date or (2) as to any contribution for which a deduction is not disallowed by reason of the disallowance rule of the provision. Thus, for example, the provision is not intended to change the treatment of, or create a safe harbor for, a contribution where the amount of the contribution that is claimed does not exceed two and one-half times the sum of each partner’s relevant basis in such partnership; such transactions continue to be governed by present-law principles. As a further example, the provision does not change the tax treatment of, or create a safe harbor for, a contribution that falls within one of the exceptions to the disallowance rule.

The portion of the provision that allows certain taxpayers to correct defects in a deed granting an easement is effective on the date of enactment (December 29, 2022).

Footnotes

2401. For this purpose, the partner’s modified basis in the partnership means the partner’s adjusted basis in the partnership as determined: (1) immediately before the contribution, (2) without regard to section 752 (relating to the treatment of certain liabilities), and (3) by the partnership after taking into account the adjustments described in (1) and (2) and such other adjustments as the Secretary may provide.

2402. The allocable portion is determined under rules similar to the rules of section 755 (rules for allocation of basis).

2403. For this purpose, with respect to an individual, ‘‘members of the family’’ means the individual’s spouse and any individual who bears a relationship to such individual which is described in section 152(d)(2)(A) through (G) (relating to a qualifying relative under the definition of a dependent).

2404. As defined in section 6707A(c)(1).

2405. In the preamble to recently released proposed regulations relating to syndicated conservation easement transactions, the IRS noted that taxpayers in certain cases have challenged in court the validity of listed transaction notices issued without following the notice-and-comment procedures of the Administrative Procedure Act. See 87 Fed. Reg. No. 235 (December 8, 2022), pp. 75190-75191. It is intended that a transaction described in IRS Notice 2017-10 does not qualify for the correction procedure regardless of the outcome of any litigation relating to the validity of such Notice.


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