The U.S. Department of the Treasury (Treasury) and IRS recently finalized a set of proposed regulations (REG-106134-22) classifying certain syndicated conservation easements as listed transactions, which are a type of reportable transaction to the IRS. These transactions have been included in the IRS’ “Dirty Dozen” tax schemes. The final regulations became effective on October 8, 2024.
The final regulations cover three major categories of abusive syndicated conservation easement transactions, as well as substantially similar transactions, that include:
- Transactions that involve contributions occurring before December 30, 2022.
- Transactions for which a charitable contribution deduction (Deduction) is not automatically disallowed by Section 170(h)(7) of the Internal Revenue Code (IRC).
- Transactions that substitute the contribution of a fee simple interest in real property for the contribution of a conservation easement.
Background
On December 23, 2016, the IRS issued Notice 2017-10 (Notice) drawing attention to its awareness of promoters syndicating conservation easements with unreasonable tax benefits. The IRS then issued proposed regulations on December 8, 2022, identifying syndicated conservation easements as a listed transaction.
Final Regulations Modifications
Signed into law 21 days after publication of the proposed regulations, §605(a) of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act) added §170(h)(7)(A) through 170(h)(7)(G). These added sections provide that a contribution by a pass-through entity is not treated as a qualified conservation contribution if the amount of the contribution exceeds two and a half times the sum of each partner’s relevant basis in such partnership as defined in §170(h)(7)(B).
Further, three exceptions to the general disallowance rule were added, including contributions made by a pass-through entity that satisfies a three-year holding period, contributions made by family pass-through entities, and contributions made to preserve a building that is a certified historic structure. Additional reporting requirements for certain qualified conservation contributions involving certified historic structures were added with the enactment of §170(f)(19). In light of the passage of §605 of the SECURE 2.0 Act, the IRS modified the proposed rules, taking “a more surgical approach.” Specifically, the final regulations address transactions occurring before December 30, 2022; transactions not automatically disallowed by §170(h)(7); and transactions involving other contributions of real property.
Below is a list of modifications made in finalizing the proposed regulations:
- The definition of conservation easement was updated to better align with the language in §170(h) and to clarify that whether the IRS subsequently denies a deduction for a conservation easement has no impact on whether the transaction was originally a listed transaction.
- A definition for substantially similar was added as defined in Treasury Regulation (Treas. Reg.) §1.6011-4(c)(4). The definition includes an example where the pass-through entity contributes a fee simple interest in the real property instead of a conservation easement.
- Modification was made to the 2.5 Times Rule, indicating 2.5 times as the bright-line, and any Deduction less than that amount is generally not considered substantially similar to the listed transaction if any promotional materials received by the taxpayer also only offered a deduction less than 2.5 times the taxpayer’s investment. However, a series of transactions with the principal purpose of avoiding the bright-line rule may be disregarded or recharacterized in accordance with its substance.
- The anti-stuffing rule was replaced with a section describing the determination of a taxpayer’s investment in the pass-through entity. Only two methods may be used: the anti-stuffing method or, for contributions made after December 29, 2022, the relevant basis method.
- The anti-stuffing method is similar to the anti-stuffing rule, whereas the amount of a taxpayer’s investment is equal to the portion of the cash or fair market value (FMV) of the assets the taxpayer uses to acquire its interest in only the real property which a conservation easement is placed leading to a charitable contribution deduction. Any other assets that are not attributable to the real property as described are not considered part of the taxpayer’s investment for purposes of this section.
- For contributions made after December 29, 2022, the relevant basis method is determined using the definitions found in §170(h)(7)(B) and Treas. Reg. §1.170A-14(k).
- Another example of the 2.5 Times Rule was added.
- A section regarding disclosures made in accordance with Notice 2017-10 before October 8, 2024 was added.
How Forvis Mazars Can Help
If you have questions regarding a syndicated conservation easement or reportable transactions in general, please contact a professional at Forvis Mazars.