Rule2024-13844
Statutory Disallowance of Deductions for Certain Qualified Conservation Contributions Made by Partnerships and S Corporations
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 28, 2024
Effective
June 28, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations concerning the statutory disallowance rule enacted by the SECURE 2.0 Act of 2022 to disallow a Federal income tax deduction for a qualified conservation contribution made by a partnership or an S corporation after December 29, 2022, if the amount of the contribution exceeds 2.5 times the sum of each partner's or S corporation shareholder's relevant basis. These final regulations provide guidance regarding this statutory disallowance rule, including definitions, appropriate methods to calculate the relevant basis of a partner or an S corporation shareholder, the three statutory exceptions to the statutory disallowance rule, and related reporting requirements. In addition, these final regulations provide reporting requirements for partners and S corporation shareholders that receive a distributive share or pro rata share of any noncash charitable contribution made by a partnership or S corporation, regardless of whether the contribution is a qualified conservation contribution (and regardless of whether the contribution is of real property or other noncash property). These final regulations affect partnerships and S corporations that claim qualified conservation contributions, and partners and S corporation shareholders that receive a distributive share or pro rata share, as applicable, of a noncash charitable contribution.
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 125 (Friday, June 28, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 125 (Friday, June 28, 2024)]
[Rules and Regulations]
[Pages 54284-54327]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-13844]
[[Page 54283]]
Vol. 89
Friday,
No. 125
June 28, 2024
Part III
Department of the Treasury
-----------------------------------------------------------------------
Internal Revenue Service
-----------------------------------------------------------------------
26 CFR Part 1
Statutory Disallowance of Deductions for Certain Qualified Conservation
Contributions Made by Partnerships and S Corporations; Final Rule
Federal Register / Vol. 89, No. 125 / Friday, June 28, 2024 / Rules
and Regulations
[[Page 54284]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9999]
RIN 1545-BQ90
Statutory Disallowance of Deductions for Certain Qualified
Conservation Contributions Made by Partnerships and S Corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations concerning the
statutory disallowance rule enacted by the SECURE 2.0 Act of 2022 to
disallow a Federal income tax deduction for a qualified conservation
contribution made by a partnership or an S corporation after December
29, 2022, if the amount of the contribution exceeds 2.5 times the sum
of each partner's or S corporation shareholder's relevant basis. These
final regulations provide guidance regarding this statutory
disallowance rule, including definitions, appropriate methods to
calculate the relevant basis of a partner or an S corporation
shareholder, the three statutory exceptions to the statutory
disallowance rule, and related reporting requirements. In addition,
these final regulations provide reporting requirements for partners and
S corporation shareholders that receive a distributive share or pro
rata share of any noncash charitable contribution made by a partnership
or S corporation, regardless of whether the contribution is a qualified
conservation contribution (and regardless of whether the contribution
is of real property or other noncash property). These final regulations
affect partnerships and S corporations that claim qualified
conservation contributions, and partners and S corporation shareholders
that receive a distributive share or pro rata share, as applicable, of
a noncash charitable contribution.
DATES:
Effective date: These regulations are effective on June 28, 2024.
Applicability date: For dates of applicability, see Sec. Sec.
1.170A-14(o)(1), 1.170A-16(g)(2), 1.706-3(e), and 1.706-4(e)(2)(xiii)
and (e)(3)(ii).
FOR FURTHER INFORMATION CONTACT: Concerning the final regulations under
Sec. Sec. 1.170A-14, 1.706-3, and 1.706-4, contact John Hanebuth or
Benjamin Weaver at (202) 317-6850 (not a toll-free number); concerning
the final regulations under Sec. 1.170A-16 and issues regarding
section 170 other than section 170(h)(7), contact Elizabeth Boone at
(202) 317-5100 or Hannah Kim at (202) 317-7003 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations amending the Income Tax
Regulations (26 CFR part 1) under sections 170 and 706 of the Internal
Revenue Code (Code) to implement the provisions of section 605(a) and
(b) of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act), enacted as Division
T of the Consolidated Appropriations Act, 2023, Public Law 117-328, 136
Stat. 4459, 5393 (December 29, 2022), which apply to contributions of
property made after December 29, 2022.
I. Overview of Qualified Conservation Contributions
Section 170(a) provides, subject to certain limitations and
requirements, a deduction for any charitable contribution, as defined
in section 170(c), of cash or other property the payment of which is
made within the taxable year. Section 170(f) disallows charitable
contribution deductions in certain cases and provides special rules.
Section 170(f)(3)(A) provides that, in the case of a contribution (not
made by a transfer in trust) of an interest in property that consists
of less than the taxpayer's entire interest in such property, a
deduction will be allowed only to the extent that the value of the
interest contributed would be allowable as a deduction under section
170 if such interest had been transferred in trust. Section
170(f)(3)(B)(iii) provides that section 170(f)(3)(A) does not apply to
a qualified conservation contribution.
II. Enactment of Section 170(f)(19) and (h)(7)
Section 170(h)(7) was added to the Code by section 605(a)(1) of the
SECURE 2.0 Act. Section 170(h)(7)(A) states 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 section 170 if the amount of
such contribution exceeds 2.5 times the sum of each partner's relevant
basis in such partnership (Disallowance Rule). Thus, a contribution of
a qualified real property interest to a qualified organization
exclusively for conservation purposes is not a qualified conservation
contribution if the Disallowance Rule applies.
Section 170(h)(7)(B)(i) provides that, for purposes of section
170(h)(7), the term ``relevant basis'' means, with respect to any
partner, the portion of such partner's modified basis in the
partnership that is allocable (under rules similar to the rules of
section 755 of the Code) to the portion of the real property with
respect to which the contribution described in section 170(h)(7)(A) is
made. Section 170(h)(7)(B)(ii) provides that, for purposes of section
170(h)(7), the term ``modified basis'' means, with respect to any
partner, such partner's adjusted basis in the partnership as
determined: (1) immediately before the contribution described in
section 170(h)(7)(A), (2) without regard to section 752 of the Code,
and (3) by the partnership after taking into account these first two
adjustments and such other adjustments as the Secretary of the Treasury
or her delegate (Secretary) may provide.
Section 170(h)(7)(F) provides that the rules of section 170(h)(7)
``apply to S corporations and other pass-through entities in the same
manner as such rules apply to partnerships,'' except as the Secretary
otherwise provides.
Section 170(h)(7)(C) provides an exception to the Disallowance Rule
for contributions that satisfy a three-year holding period. Section
170(h)(7)(D) provides an exception to the Disallowance Rule for
contributions from family pass-through entities. Section 170(h)(7)(E)
provides an exception to the Disallowance Rule for qualified
conservation contributions the conservation purpose of which is the
preservation of a certified historic structure.
Section 170(h)(7)(G) provides a specific grant of regulatory
authority to the Secretary to issue regulations or other guidance as
the Secretary determines are necessary or appropriate to carry out the
purposes of the Disallowance Rule, including reporting requirements and
rules to prevent the avoidance of the Disallowance Rule.
Section 605(b) of the SECURE 2.0 Act added section 170(f)(19) to
the Code, which provides that, in the case of a partnership or S
corporation claiming a qualified conservation contribution for the
preservation of a building that is a certified historic structure (as
defined in section 170(h)(4)(C)) in an amount that exceeds 2.5 times
the sum of each partner's or S corporation shareholder's relevant basis
(as defined in section 170(h)(7)), no deduction under section 170 is
allowed unless, as provided in section 170(f)(19)(A)(i) and (ii), the
partnership or S corporation includes on its return for the taxable
year a statement that such contribution was
[[Page 54285]]
made and any other information as the Secretary may require. A
contribution to preserve a certified historic structure is one of the
three exceptions to the Disallowance Rule.
Section 605(c) of the SECURE 2.0 Act provides that the amendments
made by section 605 of the SECURE 2.0 Act apply to contributions made
after December 29, 2022, and that no inference is intended as to the
appropriate treatment of contributions made in taxable years ending on
or before that date, or as to any contribution for which a deduction is
not disallowed by reason of section 170(h)(7).
III. The Proposed Regulations
On November 20, 2023, the Department of the Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking (REG-
112916-23) (the proposed regulations) in the Federal Register (88 FR
80910) to provide guidance under section 170(f)(19) and (h)(7). The
proposed regulations would make changes to existing Sec. 1.170A-14,
including modifying paragraph (a) to reference the Disallowance Rule
and adding new paragraphs (j) through (n) to Sec. 1.170A-14 to provide
guidance on the application of the Disallowance Rule (and its
exceptions) to partnerships and S corporations. In addition, the
proposed regulations would make changes to the reporting requirements
in Sec. 1.170A-16. Finally, the proposed regulations would make
changes to Sec. Sec. 1.706-3 and 1.706-4 to facilitate the operation
of the Disallowance Rule in the case of a qualified conservation
contribution made by a partnership. The provisions of the proposed
regulations are explained in greater detail in the preamble to the
proposed regulations.
Pursuant to section 7805(b)(2) of the Code, regulations issued
under section 170(f)(19) and (h)(7) within 18 months of the December
29, 2022, date of enactment of section 605 of the SECURE 2.0 Act are
permitted to apply to periods ending before the dates provided under
section 7805(b)(1) (generally, the dates of the issuance of proposed or
final regulations or a notice describing the regulations). Accordingly,
the proposed regulations under Sec. Sec. 1.170A-14(j) through (n),
1.706-3, and 1.706-4 were proposed to apply to contributions made after
December 29, 2022. To align the reporting requirements under Sec.
1.170A-16 with the publication of the revised Form 8283, Noncash
Charitable Contributions, and its instructions, the proposed
regulations under Sec. 1.170A-16 were proposed to apply to
contributions made in taxable years ending on or after November 20,
2023 (the date the proposed regulations were published in the Federal
Register).
Summary of Comments and Explanation of Revisions
This Summary of Comments and Explanation of Revisions summarizes
the proposed regulations and all the substantive comments submitted in
response to the proposed regulations. The Treasury Department and the
IRS received eight written comments in response to the proposed
regulations. The comments are available for public inspection at
<a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request. There were no requests to
speak at the scheduled public hearing. Consequently, the public hearing
was cancelled (89 FR 39). After full consideration of the comments
received, these final regulations adopt the proposed regulations with
modifications as described in this Summary of Comments and Explanation
of Revisions.
The comments can be grouped into the following categories: (1)
definitions, (2) the computation of relevant basis, (3) requests for
guidance under the partnership allocation rules, (4) the exceptions to
the Disallowance Rule, (5) reporting requirements, and (6) other
comments. Each category is discussed in turn in the remainder of this
Summary of Comments and Explanation of Revisions.
I. Definitions
Proposed Sec. 1.170A-14(j)(3) contained definitions of terms,
including ``allocated portion,'' ``amount of qualified conservation
contribution,'' ``contributing partnership,'' ``contributing S
corporation,'' ``direct interest,'' ``directly,'' ``disallowed
qualified conservation contribution,'' ``indirect interest,''
``indirectly,'' ``ultimate member,'' ``upper-tier partnership,'' and
``upper-tier S corporation.'' Commenters generally provided no comments
on these definitions, except with respect to the definition of the
amount of qualified conservation contribution. Thus, the final
regulations adopt the definitions as proposed, except with respect to
the definition of the amount of qualified conservation contribution.
Proposed Sec. 1.170A-14(j)(3)(ii) defined ``amount of qualified
conservation contribution'' as the amount claimed as a qualified
conservation contribution on the return of the contributing partnership
or contributing S corporation for the taxable year in which the
contribution is made. No comments addressed the first sentence of
proposed Sec. 1.170A-14(j)(3)(ii), so the final regulations adopt that
sentence as proposed.
Proposed Sec. 1.170A-14(j)(3)(ii) further provided, ``[i]f the
contributing partnership or contributing S corporation files an amended
return or administrative adjustment request under section 6227 of the
Code claiming a different amount with respect to the qualified
conservation contribution, the rules of [Sec. 1.170A-14] must be re-
applied with respect to such different amount to determine the
application of section 170(h)(7) and [Sec. 1.170A-14.]'' One commenter
stated that this sentence would seem to inappropriately allow
partnerships or S corporations to file administrative adjustment
requests or amended returns after they had been notified of an IRS
examination. The commenter recommended that the regulations be changed
to refer only to an amended return or administrative adjustment request
that is a ``qualified amended return'' for purposes of the substantial
underpayment rules.
The Treasury Department and the IRS understand the commenter's
reference to ``qualified amended return'' to be a reference to Sec.
1.6664-2(c)(3). Under Sec. 1.6664-2(c)(3), a qualified amended return
is an amended return or a timely request for an administrative
adjustment under section 6227, filed after the due date of the return
for the taxable year and before the earliest of several dates,
including the date the taxpayer is first contacted by the IRS
concerning any examination with respect to the return. Under section
6227(a), a partnership may file an administrative adjustment request
for the amount of a partnership-related item for any partnership
taxable year. However, under section 6227(c), a partnership may not
file an administrative adjustment request after a notice of an
administrative proceeding with respect to the taxable year is mailed
under section 6231 of the Code.
The Treasury Department and the IRS did not intend the proposed
regulations to allow for the filing of an amended return or
administrative adjustment request in situations in which the
partnership or S corporation would not otherwise be allowed to file an
amended return or administrative adjustment request. Moreover, the
Treasury Department and the IRS agree that the re-application provision
in Sec. 1.170A-14(j)(3)(ii) should not be understood to allow a
partnership or S corporation to avoid the Disallowance Rule by filing
an amended return or administrative adjustment request claiming a lower
amount with respect to a qualified conservation contribution after
being contacted by the IRS concerning an
[[Page 54286]]
examination regarding the return. For example, under an inappropriate
interpretation of the language in the proposed regulations, a
contributing S corporation could violate the Disallowance Rule by
claiming an amount of a qualified conservation contribution on its
original return that exceeds 2.5 times the sum of the relevant bases.
Then, after its return has been selected for examination by the IRS,
the contributing S corporation could attempt to file an amended return
on which it reduces the amount of its claimed qualified conservation
contribution to an amount not exceeding 2.5 times the sum of the
relevant bases. The contributing S corporation could then argue that
the re-application provision in Sec. 1.170A-14(j)(3)(ii) allows the
Disallowance Rule to be re-tested, and that, therefore, its qualified
conservation contribution is not disallowed, but instead is allowed to
the extent of the amount claimed on the amended return. In order to
balance the need for a mechanism to timely fix errors made in good-
faith with the risk of circumvention of the Disallowance Rule, these
final regulations limit the re-application provision by providing that,
if the contributing partnership or contributing S corporation files an
amended return or timely administrative adjustment request under
section 6227 of the Code claiming a lower amount with respect to the
qualified conservation contribution, the rules of Sec. 1.170A-14 will
be re-applied with respect to such lower amount to determine the
application of section 170(h)(7) and Sec. 1.170A-14 if and only if the
amended return or timely administrative adjustment request is filed
before the contributing partnership or contributing S corporation is
put on notice of an IRS examination relating to the qualified
conservation contribution. The final regulations provide that a
contributing partnership or contributing S corporation is considered to
be on notice after the earlier of: (1) the date the contributing
partnership or contributing S corporation is first contacted by the IRS
in connection with any examination of a return that relates to the
qualified conservation contribution, or (2) the date any person is
first contacted by the IRS concerning an examination of that person
under section 6700 (relating to the penalty for promoting abusive tax
shelters) for an activity that relates to the qualified conservation
contribution. These regulations do not incorporate the full definition
of qualified amended returns within the meaning of Sec. 1.6664-2(c)(3)
as requested by the commenter, because a definition tailored to the
context of this regulation is sufficient to prevent abusive
circumventions of the Disallowance Rule without being overbroad and
preventing a contributing partnership or contributing S corporation
from being able to use the re-application provision in non-abusive
situations.
In addition, the Treasury Department and the IRS remain concerned
about situations in which a contributing partnership or contributing S
corporation files an amended return or administrative adjustment
request that claims a higher amount with respect to a qualified
conservation contribution. In that situation, the Treasury Department
and the IRS have concluded that the rules of Sec. 1.170A-14 should be
re-applied with respect to such higher amount to determine the
application of section 170(h)(7) and Sec. 1.170A-14 regardless of
whether the amended return or administrative adjustment request
constitutes a qualified amended return. This rule is necessary to
ensure that the Disallowance Rule is not avoided simply by filing an
original return claiming an amount with respect to a qualified
conservation contribution that does not exceed 2.5 times the sum of the
relevant bases, followed by an amended return or administrative
adjustment request claiming an amount with respect to the qualified
conservation contribution that does exceed 2.5 times the sum of the
relevant bases. Accordingly, these final regulations modify the second
sentence of Sec. 1.170A-14(j)(3)(ii) to clarify that, if the
contributing partnership or contributing S corporation files an amended
return or administrative adjustment request under section 6227 of the
Code claiming a higher amount with respect to the qualified
conservation contribution, the rules of Sec. 1.170A-14 must be re-
applied with respect to such higher amount to determine the application
of section 170(h)(7) and Sec. 1.170A-14; for example, if a
contributing S corporation's original return claims a qualified
conservation contribution that does not exceed 2.5 times the sum of the
relevant bases, and the S corporation subsequently files an amended
return claiming a higher amount with respect to the qualified
conservation contribution that does exceed 2.5 times the sum of the
relevant bases, then the entire amount of the qualified conservation
contribution is a disallowed qualified conservation contribution
(unless one of the exceptions in Sec. 1.170A-14(n) applies).
II. Computation of Relevant Basis
As noted earlier, section 170(h)(7)(B)(i) provides that, for
purposes of section 170(h)(7), the term ``relevant basis'' means, with
respect to any partner, the portion of such partner's modified basis in
the partnership that is allocable (under rules similar to the rules of
section 755 of the Code) to the portion of the real property with
respect to which the contribution described in section 170(h)(7)(A) is
made. Proposed Sec. 1.170A-14(l) provided guidance on the
determination of modified basis. Proposed Sec. 1.170A-14(m) provided
guidance on the allocation of modified basis, which results in the
determination of relevant basis.
The Treasury Department and the IRS received several comments on
the computation of modified basis and relevant basis, which can be
divided into the following two topics: (1) the determination of
modified basis, and (2) the allocation of modified basis to determine
relevant basis.
A. Determination of Modified Basis
As noted earlier, section 170(h)(7)(B)(ii) provides that, for
purposes of section 170(h)(7), the term ``modified basis'' means, with
respect to any partner, such partner's adjusted basis in the
partnership as determined: (1) immediately before the contribution
described in section 170(h)(7)(A), (2) without regard to section 752,
and (3) by the partnership after taking into account those adjustments
and such other adjustments as the Secretary may provide. Section
170(h)(7)(F) provides that the rules of section 170(h)(7) ``apply to S
corporations and other pass-through entities in the same manner as such
rules apply to partnerships'' except as the Secretary may otherwise
provide. This section of the preamble discusses: (1) the proposed
regulations, comments, and final regulations for the determination of a
partner's modified basis, and (2) the proposed regulations, comments,
and final regulations for the determination of an S corporation
shareholder's modified basis.
1. Determination of a Partner's Modified Basis
a. Proposed Rules for the Determination of a Partner's Modified Basis
Proposed Sec. 1.170A-14(l)(2)(i) defined the term ``modified
basis'' to mean, with respect to any ultimate member that is a direct
partner in either a contributing partnership or an upper-tier
partnership, such ultimate member's adjusted basis in its interest in
the partnership in which the ultimate
[[Page 54287]]
member holds a direct interest as of the beginning of the first day of
the partnership's taxable year in which the qualified conservation
contribution is made, with adjustments as determined under proposed
Sec. 1.170A-14(l)(2)(ii) through (v). However, if the ultimate member
was not a partner as of the beginning of the first day of the
partnership's taxable year in which the qualified conservation
contribution is made, then the term ``modified basis'' means such
ultimate member's adjusted basis in its interest in the partnership
immediately after the transaction that resulted in the ultimate member
becoming a partner, with adjustments as determined under proposed Sec.
1.170A-14(l)(2)(ii) through (v).
The proposed regulations provided that the following four
adjustments must be made in the order in which they are listed. First,
proposed Sec. 1.170A-14(l)(2)(ii) required an increase for any
contributions made by the ultimate member to the partnership during the
portion of the year commencing with the beginning of the taxable year
of the partnership and ending immediately prior to the time of day at
which the qualified conservation contribution is made as provided in
section 722 of the Code.
Second, proposed Sec. 1.170A-14(l)(2)(iii) required an adjustment,
as provided in section 705 of the Code, by the ultimate member's
hypothetical distributive share of partnership items attributable to
the portion of the year commencing with the beginning of the taxable
year of the partnership and ending immediately prior to the time of day
at which the qualified conservation contribution is made. In making
this determination, the partnership would be required to apply the
rules of Sec. 1.706-4 and apply a hypothetical interim closing method
to allocate the partnership's items attributable to the portion of the
year commencing with the beginning of the taxable year of the
partnership and ending immediately prior to the time of day at which
the qualified conservation contribution is made. The proposed
regulations provided that the partnership cannot apply any convention
in Sec. 1.706-4(c) to the hypothetical determination of the partners'
distributive shares, but rather must perform the calculation as though
the determination occurred immediately prior to the time of day at
which the qualified conservation contribution is made. The proposed
regulations clarified that this hypothetical determination of the
partners' distributive shares is only for purposes of calculating
modified basis. Proposed Sec. 1.170A-14(l)(2)(iii) did not require the
partnership to use the interim closing method with respect to the
determination of its partners' actual distributive shares of
partnership items of income, gain, loss, deduction, and credit for the
taxable year in which the qualified conservation contribution is made
or otherwise.
Third, proposed Sec. 1.170A-14(l)(2)(iv) required a reduction (but
not below zero) for any distributions made by the partnership to the
ultimate member during the portion of the year commencing with the
beginning of the taxable year of the partnership and ending immediately
prior to the time of day at which the qualified conservation
contribution is made as provided in section 733 of the Code.
Fourth, proposed Sec. 1.170A-14(l)(2)(v) required a reduction for
the full amount of the ultimate member's share of Sec. 1.752-1
liabilities of any partnership (including a lower-tier partnership).
The remaining amount would be such ultimate member's modified basis.
The proposed regulations contained two examples illustrating these
rules.
b. Comments Concerning a Partner's Modified Basis
The comments on the determination of modified basis can be grouped
into the following three categories: (1) inclusion of section 752
liabilities in modified basis, (2) determining modified basis
immediately prior to the qualified conservation contribution, and (3)
the complexity of the computations.
i. Inclusion of Section 752 Liabilities in Modified Basis
Section 170(h)(7)(B)(ii)(II) provides that modified basis is
determined without regard to section 752. Section 752(a) provides that
any increase in a partner's share of the liabilities of a partnership,
or any increase in a partner's individual liabilities by reason of the
assumption by such partner of partnership liabilities, is considered as
a contribution of money by such partner to the partnership. Section
752(b) provides that any decrease in a partner's share of the
liabilities of a partnership, or any decrease in a partner's individual
liabilities by reason of the assumption by the partnership of such
individual liabilities, is considered as a distribution of money to the
partner by the partnership. Existing Sec. 1.752-1 provides guidance
under section 752, including a definition of liabilities. Generally,
under the rules of subchapter K of chapter 1 of the Code (subchapter
K), if a partnership borrows money, the aggregate bases of its
partners' interests in the partnership will increase by the amount of
the borrowing. Consistent with section 170(h)(7)(B)(ii)(II), proposed
Sec. 1.170A-14(l)(2)(v) required subtracting the full amount of the
partner's share of Sec. 1.752-1 liabilities of any partnership
(including a lower-tier partnership) for purposes of calculating
modified basis.
One commenter expressed concern that the relevant basis calculation
ignores section 752 liabilities generally. The commenter offered an
example of a partnership with $200,000 in cash that borrows an
additional $800,000 and purchases a building for $1,000,000. The
commenter stated that the proposed regulations would ignore the
$800,000 as a section 752 liability and that any conservation
contribution for historic preservation of the building would be capped
at $500,000.
Section 170(h)(7)(B)(ii)(II) provides that a partner's modified
basis (and thus, relevant basis) is determined without regard to
section 752. The approach in the proposed regulations appropriately
effectuates this statutory directive. Thus, in the commenter's example,
although the partnership's $800,000 liability will increase the
partners' aggregate bases in their partnership interests by $800,000,
none of that $800,000 will be reflected in any partner's modified basis
or relevant basis.
The commenter's assumption that the Disallowance Rule would cap the
amount of the partnership's qualified conservation contribution at
$500,000 misunderstands the rule. Several other considerations must be
taken into account to determine the extent of any allowable qualified
conservation contribution. First, the Disallowance Rule is not a cap--
as explained in the preamble to the proposed regulations and as
provided in proposed Sec. 1.170A-14(j)(1), if the amount of a
qualified conservation contribution claimed by a partnership or an S
corporation exceeds 2.5 times the sum of the relevant bases, no
deduction is allowed at all for the contribution unless one of the
three statutory exceptions applies. Second, application of the
Disallowance Rule is not based on the difference between the amount of
the contribution and the partnership's basis in the donated property;
it is based on whether the contribution exceeds 2.5 times the sum of
the ultimate members' relevant bases. The facts presented in the
commenter's example are insufficient to determine whether 2.5 times the
sum of the relevant bases is $500,000.\1\
---------------------------------------------------------------------------
\1\ Moreover, the commenter's example seems to involve a
qualified conservation contribution the conservation purpose of
which is the preservation of a historic structure. If so, the
Disallowance Rule would not apply under section 170(h)(7)(E) and
proposed Sec. 1.170A-14(n)(4), provided that, if the amount of the
contribution exceeds 2.5 times the sum of the relevant bases, the
partnership or S corporation complies with the reporting
requirements of section 170(f)(19) and proposed Sec. 1.170A-
16(f)(6).
---------------------------------------------------------------------------
[[Page 54288]]
The same commenter also expressed concerns that the proposed
regulations appear to treat the ultimate member's share of liabilities
under Sec. 1.752-1(b) as ``flowing only in one direction'' because the
proposed regulations provided that modified basis must be reduced by
the full amount of the ultimate member's share of Sec. 1.752-1
liabilities of any partnership. The commenter stated that this language
ignores that a partner's share of liabilities may increase the
partner's basis.
It is true that a partner's share of the partnership's liabilities
increases the partner's basis in its interest in the partnership.
However, this basis is not included for purposes of the Disallowance
Rule pursuant to section 170(h)(7)(B)(ii)(II), which requires modified
basis to be determined without regard to a partner's share of the
partnership's liabilities. Thus, these regulations finalize Sec.
1.170A-14(l)(2)(v) without change.
ii. Determining Modified Basis Immediately Prior to the Qualified
Conservation Contribution
One commenter stated that the proposed regulations appear to time
the calculation of modified basis as of the time of the qualified
conservation contribution. The commenter stated that this ``artificial
cutoff'' ignores any basis allocable to the ultimate members following
the contribution, such as from capital contributions or increases in
the ultimate members' share of section 752 liabilities.
The Treasury Department and the IRS confirm that the rules in the
proposed regulations require the calculation of modified basis (and
thus, relevant basis) as of the time of the qualified conservation
contribution. As explained earlier, the proposed regulations were
intended to effectuate section 170(h)(7)(B)(ii)(I), which provides that
modified basis is the partner's adjusted basis in the partnership as
determined ``immediately before'' the qualified conservation
contribution. The Treasury Department and the IRS do not agree with the
commenter's suggestion that modified basis include amounts that were
reflected in the ultimate member's adjusted basis in its interest in
the partnership only after the contribution because inclusion of such
amounts would contradict the statute. Thus, the proposed regulations
are adopted without change as to this issue.
As a clarification to the statutory rule that modified basis is
determined immediately before a qualified conservation contribution is
made, the final regulations add a new step to the list of steps in
proposed Sec. 1.170A-14(l)(2). As described in the preamble to the
proposed regulations, the proposed regulations were designed to
facilitate the computation of a partner's ``adjusted basis'' in its
partnership interest immediately prior to the qualified conservation
contribution. As also described in the preamble to the proposed
regulations, adjusted basis is typically computed as of the beginning
or end of a taxable year, and generally, not as of the time of a
particular event, such as the making of a qualified conservation
contribution. Accordingly, the approach in the proposed regulations
started with a calculation of adjusted basis that partners are familiar
with computing, and then made adjustments designed to arrive at an
amount that reflects the partner's adjusted basis immediately before
the qualified conservation contribution. The proposed regulations did
not, however, take into account acquisitions of additional partnership
interests or partial dispositions of partnership interests that
occurred after the beginning of the taxable year and prior to the
qualified conservation contribution. In those situations, an additional
step is necessary to effectuate the rule in section 170(h)(7)(B)(ii)
that modified basis is adjusted basis immediately before the qualified
conservation contribution without regard to section 752. The new step,
in Sec. 1.170A-14(l)(2)(iii), provides that if, between the beginning
of the partnership's taxable year and the time of day at which the
qualified conservation contribution is made, the ultimate member
acquired additional interests in the partnership, modified basis must
be increased by the ultimate member's initial basis in those additional
interests. Similarly, Sec. 1.170A-14(l)(2)(iii) provides that if,
between the beginning of the partnership's taxable year and the time of
day at which the qualified conservation contribution is made, the
ultimate member partially disposed of its interest in the partnership,
modified basis must be decreased by the ultimate member's basis in the
interests disposed of. The final regulations add Sec. 1.170A-
14(l)(4)(iv) (Example 4) to illustrate this step.
iii. Complexity of the Determination of Modified Basis
Multiple commenters stated that the proposed regulations'
calculations, including the calculation of modified basis, were too
complex.\2\ One commenter stated that the proposed regulations are well
drafted and that the mechanical rules work, but that the computations
are too complex. Another commenter stated that the calculations were
complex and would be difficult for taxpayers, land trusts, and even the
IRS to administer. Another commenter stated that the proposed rules are
unnecessarily complex and will likely discourage many partnerships from
making conservation contributions even if, after performing the
calculations, the contribution would not be disallowed by the
Disallowance Rule. Finally, another commenter found the regulations to
be a ``complex labyrinth'' in which one misstep leads to the
disallowance of the charitable deduction and imposition of the gross
overvaluation penalty under section 6662(h) and also places a
significant burden on the IRS and the Independent Office of Appeals.
This commenter suggested that, under Executive Order 12866, 58 FR 190
(October 4, 1993), and Internal Revenue Manual provision
32.1.4.1.1(1)(a), the Treasury Department and the IRS are required to
draft regulations to minimize litigation, but that the proposed
regulations likely will increase litigation as the regulations are
overly complex and burdensome for the average taxpayer.
---------------------------------------------------------------------------
\2\ It is unclear from the comments whether some commenters were
objecting to the complexity of the determination of modified basis,
the determination of relevant basis (once modified basis is
determined), or both. Comments addressing the complexity of
determining relative basis once modified basis is determined are
discussed in Parts II.B.1.a, II.B.2, II.B.3.a, and II.B.4.a of this
Summary of Comments and Explanation of Revisions.
---------------------------------------------------------------------------
As an alternative to the complexity in the proposed regulations,
one commenter suggested that the IRS develop simplified safe harbor
calculations. Another commenter suggested applying pure aggregate rules
to the contributing partnership and any upper-tier partnerships to
determine modified basis and relevant basis and adding an anti-abuse
rule that the transaction does not work if a principal purpose is to
avoid the limitations of section 170(h)(7). This commenter noted,
however, that this suggestion was less precise and subject to potential
abuse, but stated that it is a rule that even small practitioners could
apply.
These suggested approaches are not specific or accurate enough to
comply with the statutory directive of section
[[Page 54289]]
170(h)(7). Section 170(h)(7)(B)(ii)(I) through (III) provides that
modified basis is the partner's adjusted basis in the partnership
immediately before the qualified conservation contribution, without
regard to section 752. Partners generally do not track their bases in
their partnership interests on a daily basis. Instead, such
determinations are typically made at year end. Thus, a partnership
generally will not know each partner's basis in its partnership
interest as of a particular point during the year, such as the moment
at which the partnership makes a qualified conservation contribution. A
partnership required by section 170(h)(7)(B)(ii)(III) to compute
modified basis would generally have to start with each partner's
adjusted basis in its partnership interest as of the beginning of the
year \3\ and make certain adjustments for items or events occurring in
the portion of the year ending with the qualified conservation
contribution that affect basis. These are the very steps that were
prescribed by the proposed regulations. Each of the steps from the
proposed regulations is necessary to carry out the statutory directive
that a partner's modified basis is the partner's adjusted basis in its
partnership interest immediately before the time of the qualified
conservation contribution, as computed by the partnership, and without
regard to section 752 liabilities. Instead of simply repeating the
statutory mandate, the proposed regulations provided a clear,
administrable, step-by-step approach for taxpayers to reach the result
required by the statute. To assist with performing the computations
required by this step-by-step approach, the proposed regulations
included several illustrative examples. Accordingly, proposed Sec.
1.170A-14(l)(2) is finalized with the changes described in this Part
II.A.1 of this Summary of Comments and Explanation of Revisions.
---------------------------------------------------------------------------
\3\ In the case of a partner who was not a partner at the
beginning of the year, but acquired an interest sometime later, the
partnership would generally have to start with the partner's
adjusted basis in its partnership interest as of the time of the
acquisition of that interest. This is the process that these
regulations provide.
---------------------------------------------------------------------------
2. Determination of an S Corporation Shareholder's Modified Basis
a. Proposed Rules for the Determination of an S Corporation
Shareholder's Modified Basis
Proposed Sec. 1.170A-14(l)(3)(i) provided that the term ``modified
basis'' means, with respect to any ultimate member that is a
shareholder in an S corporation, such ultimate member's adjusted basis
in its shares in the S corporation as of the end of the S corporation's
taxable year in which the qualified conservation contribution is made
with adjustments as determined under proposed Sec. 1.170A-14(l)(3)(ii)
and (iii). However, if the ultimate member was not a shareholder at the
end of the S corporation's taxable year in which the qualified
conservation contribution is made, then the term ``modified basis'' was
defined to mean such ultimate member's adjusted basis in its shares in
the S corporation immediately prior to the transaction that terminated
its interest in the S corporation, with adjustments as determined under
proposed Sec. 1.170A-14(l)(3)(ii) and (iii). Consistent with the
exclusion of section 752 liabilities under section
170(h)(7)(B)(ii)(II), proposed Sec. 1.170A-14(l)(3)(i) clarified that
modified basis does not include the ultimate member's adjusted basis in
any indebtedness of the S corporation to the ultimate member.
Because the calculation of modified basis for an S corporation
begins at the end of the year, proposed Sec. 1.170A-14(l)(3)(ii)
required the computation of modified basis to be increased by the
amount of any decrease to the adjusted basis as a result of the
qualified conservation contribution. Thus, the ultimate member's
modified basis with respect to a qualified conservation contribution
would not reflect any reduction for the ultimate member's pro rata
share of the S corporation's basis in the conservation easement or
other property contributed in the qualified conservation contribution.
Proposed Sec. 1.170A-14(l)(3)(iii) provided that the amount
determined under Sec. 1.170A-14(l)(3)(ii) must be multiplied by the
number of days during the S corporation's taxable year in which the
ultimate member was a shareholder and divided by the total number of
days during the S corporation's taxable year. The resulting amount
would be such ultimate member's modified basis.
The proposed regulations contained an example illustrating these
rules.
b. Comments Concerning Modified Basis for S Corporation Shareholders
Commenters did not provide specific comments concerning the rules
for S corporation shareholders; however, as described in Part II.A.1.b
of this Summary of Comments and Explanation of Revisions, certain
commenters discussed complexity concerns with respect to modified basis
without specifically identifying partnerships, so those comments may
also apply to S corporations. The Treasury Department and the IRS have
determined that the rules for determining modified basis for S
corporation shareholders are not unduly complex. In particular, any of
the information required to determine modified basis should be readily
known by a contributing S corporation and its ultimate members. The
regulations provide clear, administrable rules that are illustrated
with computational examples. This clarity will help decrease disputes
about the computation of modified basis. Accordingly, these final
regulations do not make changes to the rules for the determination of
modified basis in response to the commenters' concerns about complexity
and proposed Sec. 1.170A-14(l)(3) is finalized without change.
B. Allocation of Modified Basis To Determine Relevant Basis
Proposed Sec. 1.170A-14(m) provided rules for determining relevant
basis, which is the portion of modified basis that is allocable to the
portion of the real property with respect to which the qualified
conservation contribution is made. In general, the proposed regulations
provided that relevant basis is modified basis multiplied by a
fraction, the numerator of which is the ultimate member's portion of
the basis in the real property with respect to which the qualified
conservation contribution is made, and the denominator of which is the
ultimate member's portion of the basis in all properties held by the
partnership or S corporation. For example, if an ultimate member's
share of the basis in the real property is half of the ultimate
member's share of the basis in the other properties of the partnership
or S corporation, the ultimate member's relevant basis would be half of
the ultimate member's modified basis. The proposed regulations
contained rules for these computations, including rules for the
computation of relevant basis in tiered entities. The proposed
regulations also contained additional details and several examples of
the computation of relevant basis.
The proposed regulations provided separate rules for the
determination of relevant basis for ultimate members who are: (1)
partners in contributing partnerships, (2) shareholders in contributing
S corporations, (3) partners in upper-tier partnerships, and (4)
shareholders in upper-tier S corporations. The following portion of
this Summary of Comments and Explanation of Revisions will discuss each
set of rules in turn.
[[Page 54290]]
1. Determination of Relevant Basis for Partners in Contributing
Partnerships
Proposed Sec. 1.170A-14(m)(2)(i) through (iii) provided that the
relevant basis of an ultimate member holding a direct interest in a
contributing partnership is equal to the ultimate member's modified
basis as determined under proposed Sec. 1.170A-14(l)(2) multiplied by
a fraction: (1) the numerator of which is the ultimate member's share
of the contributing partnership's adjusted basis in the portion of the
real property with respect to which the qualified conservation
contribution is made as determined under proposed Sec. 1.170A-
14(m)(2)(ii); and (2) the denominator of which is the ultimate member's
portion of the adjusted basis in all the contributing partnership's
properties as determined under proposed Sec. 1.170A-14(m)(2)(iii).
For purposes of this computation, proposed Sec. 1.170A-
14(m)(2)(ii) provided that an ultimate member's share of the
contributing partnership's adjusted basis in the portion of the real
property with respect to which the qualified conservation contribution
is made equals the contributing partnership's adjusted basis in the
portion of the real property with respect to which the qualified
conservation contribution is made (determined as of the time of day of
the contribution) multiplied by a fraction: (1) the numerator of which
is the ultimate member's distributive share of the qualified
conservation contribution; and (2) the denominator of which is the
total amount of the contributing partnership's qualified conservation
contribution.
Proposed Sec. 1.170A-14(m)(2)(iii) provided that an ultimate
member's portion of the adjusted basis in all the contributing
partnership's properties is equal to the sum of: (1) the ultimate
member's share of the contributing partnership's adjusted basis in the
portion of the real property with respect to which the qualified
conservation contribution is made as determined under proposed Sec.
1.170A-14(m)(2)(ii), and (2) the ultimate member's portion of the
adjusted basis in all the contributing partnership's properties other
than the portion of the real property with respect to which the
qualified conservation contribution is made. To determine an ultimate
member's share of the adjusted basis in all the contributing
partnership's properties, the proposed regulations provided that a
contributing partnership must apportion among each of its partners in
accordance with their interests in the partnership under section 704(b)
of the Code the partnership's adjusted basis in each of its properties
(except the portion of the real property with respect to which the
qualified conservation contribution is made), using the adjusted bases
immediately before the qualified conservation contribution, without
duplication or omission of any property, and by treating the adjusted
basis in each property as not less than zero.
Proposed Sec. 1.170A-14(m)(2)(iv) provided the following formula
incorporating these rules:
R = M x (T / (D + T))
Where:
R = Relevant basis.
M = Modified basis as determined under proposed Sec. 1.170A-14(l).
D = Ultimate member's portion of the adjusted basis in all the
contributing partnership's properties (other than the portion of the
real property with respect to which the qualified conservation
contribution is made), determined by apportioning among the partners
of the contributing partnership in accordance with their interests
in the partnership under section 704(b) its adjusted basis in each
of its properties (other than the portion of the real property with
respect to which the qualified conservation contribution is made),
using the adjusted bases immediately before the qualified
conservation contribution, without duplication or omission of any
property, and by treating the adjusted basis in each property as not
less than zero.
T = Ultimate member's share of the contributing partnership's
adjusted basis in the portion of the real property with respect to
which the qualified conservation contribution is made, determined
according to the following formula: A x (B / C).
A = Contributing partnership's adjusted basis in the portion of the
real property with respect to which the qualified conservation
contribution is made.
B = Ultimate member's distributive share of the qualified
conservation contribution.
C = Total amount of the contributing partnership's qualified
conservation contribution.
The comments received on the allocation of modified basis can be
grouped into the following two categories: (a) complexity, and (b) the
effect of section 704(c) property. Each category is discussed in turn.
a. Complexity of the Proposed Rules for the Allocation of Modified
Basis
As noted in Part II.A.1.b.iii. of this Summary of Comments and
Explanation of Revisions, multiple commenters stated that the
calculations in the proposed regulations were too complex. One
commenter stated that the Treasury Department and the IRS should
reconsider the computational proposals and develop ``simplified safe
harbor calculations'' to give taxpayers the assurance that they have
done the math correctly and will not unintentionally incur additional
tax and significant penalties. As mentioned previously, one commenter
who objected to the complexity of the calculations proposed an
alternative method of applying pure aggregate rules to the contributing
partnership and any upper-tier partnerships to determine modified basis
and relevant basis. The commenter described this alternative as
``simple'' and suggested adding an anti-abuse rule if a principal
purpose is to avoid the limitations of section 170(h)(7), but also
acknowledged that this approach was ``[l]ess precise and subject to
potential abuse.'' Other commenters, while stating that the proposed
regulations were complex, did not express any alternative suggestions.
The rules in the proposed regulations for the allocation of
modified basis to determine relevant basis are not inappropriately
complex in light of the statute which they administer. Section
170(h)(7)(B)(i) directs that modified basis be allocated to the portion
of the real property with respect to which the qualified conservation
contribution is made under rules similar to the rules of section 755.
As mentioned in the preamble to the proposed regulations, the section
755 regulations involve several different methods for allocating basis
adjustments among the partnership's properties, including allocating in
proportion to the partner's share of the adjusted bases in the
partnership's properties. See Sec. 1.755-1(b)(5)(iii)(B). The section
755 regulations contain mathematical examples illustrating these rules,
formulas, and computations and also additional rules and exceptions.
As explained in the preamble to the proposed regulations, the
Treasury Department and the IRS considered simply cross-referencing the
rules under section 755. However, allocations under section 755 are
sometimes made in a way to reduce or eliminate built-in gain or built-
in loss in partnership property. The relevant basis rule of section
170(h)(7)(B)(i) is designed to determine the portion of a partner's
modified basis that is allocable to the portion of the real property
with respect to which the contribution is made, which is a broader and,
generally, different concept than determining the partner's share of
built-in gain or built-in loss in that property. Thus, applying an
approach based solely on the existing section 755 regulations would not
be consistent with the purpose of the Disallowance Rule. Moreover,
these regulations for the allocation of modified basis are similar
[[Page 54291]]
to, and not more complex than, the rules of section 755.
Section 170(h)(7) is computational in nature. Although the statute
is relatively short and does not list any formulas, complying with
section 170(h)(7)(B)(i) necessarily involves computations involving
every asset owned by the partnership or S corporation and any lower-
tier partnerships. The proposed regulations acknowledged this
complexity and, if possible, sought to simplify the requirements and
provide clear guidance. Thus, the proposed regulations are not more
complex than the statutory language already requires.
Furthermore, partnerships and S corporations making qualified
conservation contributions are required by existing rules to track each
partner's and shareholder's share of the entity's basis in the
contributed property. See sections 704(d)(3), 705(a)(2), 1366(d)(4),
and 1367(a)(2) of the Code; Rev. Rul. 96-11, 1996-1 C.B. 140; Rev. Rul.
2008-16, 2008-1 C.B. 585. Additionally, in certain circumstances the
rules under section 755 require a partnership to calculate a partner's
share of the partnership's basis in its properties. Thus, the approach
taken by the proposed regulations is consistent with existing rules and
principles.
The Treasury Department and the IRS have considered the commenter's
recommendation of determining relevant basis based on a ``pure
aggregate'' approach, subject to an anti-abuse rule or some type of
safe harbor. The Treasury Department and the IRS agree with the
commenter's assessment that such an approach would be less clear and
more subject to abuse. As explained in the preamble to the proposed
regulations, Congress enacted the Disallowance Rule because of abusive
syndicated conservation easement transactions. It would not be
appropriate to deviate from the computational requirements of the
statute. Congress intended that partnerships and S corporations that
make qualified conservation contributions perform several calculations
to substantiate that the contribution is not disallowed by the
Disallowance Rule. Allowing for shortcuts to such calculations that
lead to less accurate results would be inconsistent with Congress's
purpose in enacting the Disallowance Rule. Moreover, the computational
step-by-step approach in the proposed regulations will minimize
litigation by providing clear, administrable guidance. A shorter, more
conceptually-based rule such as ``safe harbor'' calculations or ``pure
aggregate treatment'' would be less clear and would lead to additional
disputes over the proper computation of relevant basis.
In sum, the Treasury Department and the IRS have determined that
the approach in the proposed regulations is similar to the rules of
section 755, consistent with the rule of section 170(h)(7)(B)(i), and
consistent with the purposes of the Disallowance Rule. Accordingly, the
Treasury Department and the IRS do not adopt the approaches suggested
by commenters.
b. Effect of Section 704(c) on the Allocation of Modified Basis
As noted earlier, the proposed regulations allocate modified basis
by reference, in part, to the partners' interests in the partnership,
which is a concept under section 704(b). Specifically, under proposed
Sec. 1.170A-14(m)(2)(iii)(B), to determine a partner's portion of the
adjusted basis in all the contributing partnership's properties, the
contributing partnership would apportion among its partners in
accordance with their interests in the partnership under section 704(b)
its adjusted basis in each of its properties (except the portion of the
real property with respect to which the qualified conservation
contribution is made), using the adjusted bases immediately before the
qualified conservation contribution, without duplication or omission of
any property, and by treating the adjusted basis in each property as
not less than zero.
The proposed regulations did not explicitly address the impact of
section 704(c) amounts. One commenter stated that, to promote
transparency, the final regulations should discuss what impact, if any,
section 704(c) may have with respect to conservation easement
transactions in the context of section 170(h)(7).
In part, section 704(c) provides rules for partnership allocations
with respect to property that has built-in gain (that is, fair market
value in excess of adjusted basis) or built-in loss (that is, adjusted
basis in excess of fair market value) at the time the property is
contributed by a partner to the partnership (section 704(c) property).
Section 704(c)(1)(A) provides that, under regulations prescribed by the
Secretary, income, gain, loss, and deduction with respect to property
contributed to the partnership by a partner is shared among the
partners so as to take account of the variation between the basis of
the property to the partnership and its fair market value at the time
of contribution. If a partner contributes property with built-in gain
or built-in loss to a partnership, and the partnership subsequently
sells the property and recognizes that gain or loss, the regulations
under section 704(c)(1)(A) generally require the partnership to
allocate that gain or loss to the contributing partner.
The Treasury Department and the IRS agree that it may be unclear
how the presence of section 704(c) property affects the partnership's
apportionment of its basis in its properties among its partners for
purposes of the computation of relevant basis, and that the final
regulations should provide additional guidance on how section 704(c)
property affects the computation of relevant basis. Thus, Sec. 1.170A-
14(m)(2)(iii)(B) as finalized in this Treasury Decision provides that
to determine a partner's portion of the adjusted basis in all of a
contributing partnership's properties, the contributing partnership
must apportion among its partners its adjusted basis in each of its
properties (except the portion of the real property with respect to
which the qualified conservation contribution is made), using the
adjusted basis immediately before the qualified conservation
contribution, without duplication or omission of any property, and by
treating the adjusted basis in each property as not less than zero.
Consistent with the proposed regulations, these final regulations
provide that this apportionment must be done under principles similar
to the determination of the partners' interests in the partnership
under section 704(b), but add a cross reference to Sec. 1.704-
1(b)(3)(ii), which provides factors to consider in determining a
partner's interest in a partnership. These factors include: the
partners' relative contributions to the partnership, the interests of
the partners in economic profits and losses (if different than that in
taxable income or loss), the interests of the partners in cash flow and
other non-liquidating distributions, and the rights of the partners to
distributions of capital upon liquidation. In addition, Sec. 1.170A-
14(m)(2)(iii)(B) as finalized provides that the apportionment must
reflect section 704(c) principles. For example, if a partnership
property has built-in loss (the adjusted basis of the property exceeds
its fair market value), and section 704(c) would require that built-in
loss to be allocated to a certain partner if that property were sold,
all of the basis in the property that exceeds the property's fair
market value must be apportioned to the partner to whom the loss would
be allocated if the property was sold.
The final regulations contain two examples illustrating the effect
of section 704(c) property upon the computation of relevant basis. In
the
[[Page 54292]]
first example (Sec. 1.170A-14(m)(7)(iv) (Example 4)), one partner
contributes property with built-in gain to the partnership. The
partnership later makes a qualified conservation contribution with
respect to other property. The example shows how the partnership's
basis in the built-in gain property is apportioned among the partners
for the purposes of determining relevant basis.
The second example (Sec. 1.170A-14(m)(7)(v) (Example 5)) involves
the same facts, except that the property contributed to the partnership
has built-in loss instead of built-in gain. The example shows how the
basis in the built-in-loss property is apportioned among the partners
for the purposes of determining relevant basis.
The change to Sec. 1.170A-14(m)(2)(iii)(B) is also reflected in
the formulaic version of the rule in Sec. 1.170A-14(m)(2)(iv) in these
final regulations. Specifically, item D is modified to read:
D = Ultimate member's portion of the adjusted basis in all the
contributing partnership's properties (other than the portion of the
real property with respect to which the qualified conservation
contribution is made) as determined under Sec. 1.170A-
14(m)(2)(iii)(B).
2. Determination of Relevant Basis for Ultimate Members That Are
Shareholders in a Contributing S Corporation
Proposed Sec. 1.170A-14(m)(3)(i) provided that relevant basis for
an ultimate member holding a direct interest in a contributing S
corporation would equal the ultimate member's modified basis multiplied
by a fraction: (1) the numerator of which is the ultimate member's pro
rata portion of the contributing S corporation's adjusted basis in the
portion of the real property with respect to which the qualified
conservation contribution is made; and (2) the denominator of which is
the ultimate member's pro rata portion of the adjusted basis in all the
contributing S corporation's properties (including the portion of the
real property with respect to which the qualified conservation
contribution is made). Proposed Sec. 1.170A-14(m)(3)(ii) provided the
following formulaic version of this rule:
R = M x (E / F)
Where:
R = Relevant basis.
M = Modified basis as determined under Sec. 1.170A-14(l).
E = Ultimate member's pro rata portion of the contributing S
corporation's adjusted basis in the portion of the real property
with respect to which the qualified conservation contribution is
made.
F = Ultimate member's pro rata portion of the adjusted basis in all
the contributing S corporation's properties (including the portion
of the real property with respect to which the qualified
conservation contribution is made).
Commenters did not raise issues specifically concerning the formula
for S corporations but did express concerns regarding the complexity of
proposed Sec. 1.170A-14(m) in general. In the view of the Treasury
Department and the IRS, this formula accurately accounts for modified
basis as a portion of the real property by simply taking the pro rata
allocation of adjusted basis in the contributed property over the pro
rata allocation of adjusted basis in all the S corporation's properties
and is not more complex than necessary to carry out the purposes of the
Disallowance Rule.
The Treasury Department and the IRS considered several alternatives
to this rule. One method would be to require a determination of a
portion of relevant basis for every day during the S corporation's
taxable year, because S corporations generally allocate the
contribution on a pro rata basis among the shareholders on each day of
the taxable year. These final regulations do not take that approach
because such an approach, although technically accurate and consistent
with the purposes of the Disallowance Rule, would be too burdensome for
taxpayers and difficult for the IRS to administer.
Accordingly, these final regulations finalize proposed Sec.
1.170A-14(m)(3) without change.
3. Determination of Relevant Basis for Partners in Upper-Tier
Partnerships
Proposed Sec. 1.170A-14(m)(4) provided rules for determining the
relevant basis of an ultimate member holding a direct interest in an
upper-tier partnership. Proposed Sec. 1.170A-14(m)(4)(i) provided that
each such ultimate member's modified basis must be traced through all
upper-tier partnerships to the contributing partnership, and the
contributing partnership must determine the relevant basis. This would
involve a multi-step process under which, beginning with the upper-tier
partnership in which the ultimate member holds a direct interest, each
upper-tier partnership would be required to perform calculations, and
then finally the contributing partnership would be required to use
those calculations to compute the ultimate member's relevant basis.
Proposed Sec. 1.170A-14(m)(4)(ii)(A) provided that the upper-tier
partnership must determine the portion of each ultimate member's
modified basis that is allocable to the upper-tier partnership's
interest in the partnership in which it holds a direct interest (in a
situation involving only two tiers of partnerships, that will be the
contributing partnership). This determination must be done in
accordance with the principles of proposed Sec. 1.170A-14(m)(2) and
the formula provided in proposed Sec. 1.170A-14(m)(4)(ii)(B). In other
words, the formula provided in proposed Sec. 1.170A-14(m)(4)(ii)(B) is
similar to the formula provided in proposed Sec. 1.170A-14(m)(2)(iv),
except that, instead of determining the portion of modified basis that
is allocable to the portion of the real property with respect to which
the qualified conservation contribution is made, the formula in
proposed Sec. 1.170A-14(m)(4)(ii)(B) determines the portion of
modified basis that is allocable to the upper-tier partnership's
interest in the next lower-tier partnership. As explained in proposed
Sec. 1.170A-14(m)(4)(iii), the contributing partnership will then use
the amount determined under the formula in proposed Sec. 1.170A-
14(m)(4)(ii)(B) to compute the portion of modified basis that is
allocable to the portion of the real property with respect to which the
qualified conservation contribution is made.
Proposed Sec. 1.170A-14(m)(4)(ii)(B) provided the following
formula:
G = M x (U / (J + U))
Where:
G = The portion of the ultimate member's modified basis that is
allocable to the upper-tier partnership's interest in the
contributing partnership.
M = Modified basis as determined under Sec. 1.170A-14(l).
J = Ultimate member's portion of the adjusted basis in all the
upper-tier partnership's properties (other than the upper-tier
partnership's interest in the contributing partnership), determined
by apportioning among the partners of the upper-tier partnership in
accordance with their interests in the partnership under section
704(b) its adjusted basis in each of its properties (other than the
upper-tier partnership's interest in the contributing partnership),
using the adjusted bases immediately before the qualified
conservation contribution, without duplication or omission of any
property, and by treating the adjusted basis in each property as not
less than zero.
U = Ultimate member's share of the upper-tier partnership's adjusted
basis in its interest in the contributing partnership, determined
according to the following formula: H x (B / K).
H = Upper-tier partnership's adjusted basis in its interest in the
contributing partnership.
B = Ultimate member's distributive share of the qualified
conservation contribution.
[[Page 54293]]
K = Upper-tier partnership's allocated portion of the qualified
conservation contribution.
Proposed Sec. 1.170A-14(m)(4)(iii) provided that, after completion
of these computations, the contributing partnership must determine the
portion of the amount determined under item G with respect to each
ultimate member that is allocable to the portion of the real property
with respect to which the qualified conservation contribution is made.
This determination must be done in accordance with the principles of
Sec. 1.170A-14(m)(2), and the following formula:
R = G x (V / (L + V))
Where:
R = Relevant basis.
G = Amount determined with respect to item G as described under
Sec. 1.170A-14(m)(4)(ii)(B).
L = Upper-tier partnership's portion of adjusted basis in all the
contributing partnership's properties (other than the portion of the
real property with respect to which the qualified conservation
contribution is made), determined by apportioning among the partners
of the contributing partnership in accordance with their interests
in the partnership under section 704(b) its adjusted basis in each
of its properties (except the interest in the contributing
partnership), using the adjusted bases immediately before the
qualified conservation contribution, without duplication or omission
of any property, and by treating the adjusted basis in each property
as not less than zero.
V = Upper-tier partnership's share of the contributing partnership's
adjusted basis in the portion of the real property with respect to
which the qualified conservation contribution is made, determined
according to the following formula: A x (K / C).
A = Contributing partnership's adjusted basis in the portion of the
real property with respect to which the qualified conservation
contribution is made.
K = Upper-tier partnership's allocated portion of the qualified
conservation contribution.
C = Total amount of the contributing partnership's qualified
conservation contribution.
a. Complexity of the Determination of Relevant Basis for Ultimate
Members That are Partners in an Upper-Tier Partnership
Several commenters criticized the complexity of the proposed
regulations' method for determining relevant basis in tiered entity
arrangements. For example, one commenter stated that the proposed
regulations use ``difficult multivariable mathematical formulae'' like
G = M x (U / (J + U)) and R = G x (V / (L + V)). The commenter stated
that these calculations ``are appropriate for launching rockets or
building bridges, but not for claiming Congressionally-encouraged tax
incentives for land conservation.'' Another commenter stated that the
complexity of the proposed regulations places a significant burden on
the IRS and the Independent Office of Appeals to determine compliance
at the level of an ``indeterminable number'' of upper-tier
partnerships. The commenter stated that the proposed regulations
provide an ``unclear legal standard with respect to the application of
the Disallowance Rule to tiered partnership structures and thus do not
promote simplification and taxpayer burden reduction.''
Another commenter stated that, of the conservation easement
contributions made by partnerships, very few are made by tiered
partnerships. The commenter stated that, after enactment of the
Disallowance Rule, there will be even fewer, noting that many of those
structures were created to facilitate transactions that are now banned.
The Treasury Department and the IRS have determined that the
proposed computations are not more complex than necessary to effectuate
the Disallowance Rule. In the context of tiered entities, section
170(h)(7)(A) requires the Disallowance Rule to be tested at each tier
and requires relevant basis to be determined by looking through all
tiers of pass-through entities to determine the portion of modified
basis that is attributable to the portion of the real property with
respect to which the qualified conservation contribution is made. For
example, if an individual is a partner in an upper-tier partnership,
and a lower-tier partnership makes a qualified conservation
contribution, section 170(h)(7)(A) requires each partnership to
determine if the amount of the contribution exceeds 2.5 times the sum
of the relevant bases. Section 170(h)(7)(B)(i) provides that the
individual's relevant basis is the portion of the individual's modified
basis in the upper-tier partnership that is allocable (under rules
similar to the rules of section 755) to the portion of the real
property held by the lower-tier partnership with respect to which the
qualified conservation contribution is made.
Applying the rules of section 755 to tiered entities involves
computations at each tier, which can be complex. Revenue Ruling 87-115,
1987-2 C.B. 163, Situation 1, describes the sale of an interest in an
upper-tier partnership that holds an interest in a lower-tier
partnership. The upper-tier partnership and the lower-tier partnership
both have elections in effect under section 754 of the Code. Rev. Rul.
87-115 concludes that, in addition to the upper-tier partnership
computing section 743(b) adjustments and allocating them among its
properties under section 755, an interest in the lower-tier partnership
will be deemed to have been transferred for purposes of the lower-tier
partnership computing section 743(b) adjustments and allocating them
among the lower-tier partnership's properties under section 755. Thus,
the rules of section 755 will have to be applied at each tier.
Similarly, Revenue Ruling 92-15, 1992-1 C.B. 215, Situation 1, provides
that if an upper-tier partnership makes an adjustment under section
734(b) that is allocated under the rules of section 755 to the basis of
an interest it holds in a lower-tier partnership that has an election
under section 754 in effect, the lower-tier partnership must make
section 734(b) adjustments to the upper-tier partnership's share of the
lower-tier partnership's assets and allocate those adjustments among
the lower-tier partnership's property under the rules of section 755.
Thus, the rules of section 755 will have to be applied at each tier to
determine the allocation of the section 734(b) adjustments.
As explained earlier, the proposed regulations are similar to, and
not more complex than, the rules of section 755. In addition, the
proposed regulations are more consistent with the purposes of the
Disallowance Rule than a rule that simply cross-references section 755.
Both of these statements are also true with respect to tiered
partnership arrangements. The computational step-by-step approach in
the proposed regulations provides a clear, administrable standard, and
protects the purposes of the Disallowance Rule in situations involving
tiered partnerships.
The Treasury Department and the IRS disagree with the commenter who
stated that the proposed regulations apply to an ``indeterminate''
number of tiers. The number of tiers is determinable, and within the
control of the taxpayers creating those tiers. The proposed regulations
provide a flexible approach to accommodate any number of tiers created
by taxpayers. This flexibility is necessary to prevent the avoidance of
the purposes of the Disallowance Rule. If the regulations stopped at
two tiers, taxpayers could create structures with additional tiers and
assert that they are not required to properly trace relevant basis
through all the tiers. In addition, one commenter reported that many
tiered partnership arrangements were created to engage in the very
types of abusive transactions which led Congress to enact the
Disallowance Rule.
[[Page 54294]]
Accordingly, these final regulations do not make changes in response to
the comments regarding the complexity of the relevant basis
computations in tiered partnership situations.
b. Effect of Section 704(c) on the Allocation of Modified Basis
As discussed in Part II.B.1.b of this Summary of Comments and
Explanation of Revisions, these final regulations amend Sec. 1.170A-
14(m)(2)(iii)(B) and item D in the formula in Sec. 1.170A-
14(m)(2)(iv), which address the apportionment of a contributing
partnership's adjusted bases in its properties. To provide a parallel
rule for an upper-tier partnership's apportionment of its adjusted
bases in its properties, Sec. 1.170A-14(m)(4)(ii)(A)(2) in these final
regulations provides that to determine a partner's portion of the
adjusted basis in all of an upper-tier partnership's properties, the
upper-tier partnership must apportion among its partners its adjusted
basis in each of its properties (except its interest in the lower-tier
partnership), using the adjusted basis immediately before the qualified
conservation contribution, without duplication or omission of any
property, and by treating the adjusted basis in each property as not
less than zero. This apportionment must be done under principles
similar to the determination of the partners' interests in the
partnership under section 704(b), including the factors in Sec. 1.704-
1(b)(3)(ii). In addition, the apportionment must reflect section 704(c)
principles. For example, if a partnership property has built-in loss
(the adjusted basis of the property exceeds its fair market value), and
section 704(c) would require all of that built-in loss to be allocated
to a certain partner if that property was sold, all of the basis in the
property that exceeds the property's fair market value must be
apportioned to the partner to whom the loss would be allocated if the
property was sold.
To effectuate this change, these final regulations modify the
definition of item J in Sec. 1.170A-14(m)(4)(ii)(B) to be:
J = Ultimate member's portion of the adjusted basis in all the
upper-tier partnership's properties (other than the upper-tier
partnership's interest in the contributing partnership) as
determined under Sec. 1.170A-14(m)(4)(ii)(A)(2).
To be consistent with the changes to Sec. 1.170A-
14(m)(2)(iii)(B), these final regulations modify the definition of
item L in Sec. 1.170A-14(m)(4)(ii)(B) to be:
L = Upper-tier partnership's portion of adjusted basis in all
the contributing partnership's properties (other than the portion of
the real property with respect to which the qualified conservation
contribution is made) as determined under Sec. 1.170A-
14(m)(2)(iii)(B).
4. Determination of Relevant Basis for Shareholders in Upper-Tier S
Corporations
Proposed Sec. 1.170A-14(m)(5) provided rules for determining
relevant basis for an ultimate member holding a direct interest in an
upper-tier S corporation. Proposed Sec. 1.170A-14(m)(5)(i) provided
that the ultimate member's modified basis must be traced through the
upper-tier S corporation and any upper-tier partnerships to the
contributing partnership, and the contributing partnership must
determine the relevant basis. This involves a multi-step process under
which, beginning with the upper-tier S corporation, the upper-tier S
corporation and any upper-tier partnerships would be required to
perform calculations, and then finally the contributing partnership
would be required to use those calculations to compute the ultimate
member's relevant basis.
Proposed Sec. 1.170A-14(m)(5)(ii)(A) provided a narrative rule for
the upper-tier S corporation. Under proposed Sec. 1.170A-
14(m)(5)(ii)(A), the upper-tier S corporation must determine the
portion of each ultimate member's modified basis that is allocable to
the upper-tier S corporation's interest in the partnership in which it
holds a direct interest (in a situation involving only two tiers, that
will be the contributing partnership). This determination must be done
in accordance with the principles of Sec. 1.170A-14(m)(3) and the
formula provided in Sec. 1.170A-14(m)(5)(ii)(B). In other words, the
formula provided in Sec. 1.170A-14(m)(5)(ii)(B) is similar to the
formula provided in Sec. 1.170A-14(m)(3), except that, instead of
determining the portion of modified basis that is allocable to the
portion of the real property with respect to which the qualified
conservation contribution is made, the formula in Sec. 1.170A-
14(m)(5)(ii)(B) determines the portion of modified basis that is
allocable to the upper-tier S corporation's interest in the next lower-
tier partnership. As explained in Sec. 1.170A-14(m)(5)(iii), the
contributing partnership will then use the amount determined under the
formula in Sec. 1.170A-14(m)(5)(ii)(B) to compute the portion of
modified basis that is allocable to the portion of the real property
with respect to which the qualified conservation contribution is made.
Proposed Sec. 1.170A-14(m)(5)(ii)(B) provided the following
formula:
N = M x (P / Q)
Where:
N = Portion of the ultimate member's modified basis that is
allocable to the upper-tier S corporation's interest in the
contributing partnership.
M = Modified basis as determined under Sec. 1.170A-14(l).
P = Ultimate member's pro rata portion of the upper-tier S
corporation's adjusted basis in its interest in the contributing
partnership.
Q = Ultimate member's pro rata portion of the adjusted basis in all
the upper-tier S corporation's properties (including the upper-tier
S corporation's adjusted basis in its interest in the contributing
partnership).
Proposed Sec. 1.170A-14(m)(5)(iii) provided that, after completion
of these computations, the contributing partnership must determine the
portion of the amount determined under item N with respect to each
ultimate member that is allocable to the portion of the real property
with respect to which the qualified conservation contribution is made.
This determination must be done in accordance with the principles of
Sec. 1.170A-14(m)(2), and the following formula:
R = N x (W / (S + W))
Where:
R = Relevant basis.
N = Amount determined with respect to item N as described under
Sec. 1.170A-14(m)(5)(ii)(B).
S = Upper-tier S corporation's portion of the adjusted basis in all
the contributing partnership's properties (other than the portion of
the real property with respect to which the qualified conservation
contribution is made), determined by apportioning among the partners
of the contributing partnership in accordance with their interests
in the partnership under section 704(b) its adjusted basis in each
of its properties (other than the portion of the real property with
respect to which the qualified conservation contribution is made),
using the adjusted bases immediately before the qualified
conservation contribution, without duplication or omission of any
property, and by treating the adjusted basis in each property as not
less than zero.
W = Upper-tier S corporation's share of the contributing
partnership's adjusted basis in the portion of the real property
with respect to which the qualified conservation contribution is
made, determined according to the following formula: A x (Y / C).
A = Contributing partnership's adjusted basis in the portion of the
real property with respect to which the qualified conservation
contribution is made.
Y = Upper-tier S corporation's allocated portion of the qualified
conservation contribution.
C = Total amount of the contributing partnership's qualified
conservation contribution.
[[Page 54295]]
a. Complexity of the Determination of Relevant Basis for Ultimate
Members That are Shareholders in an Upper-Tier S Corporation
Commenters did not provide comments specific to S corporations, but
an upper-tier S corporation would necessarily hold an interest in a
partnership, so the rules applicable to partnerships would apply to any
partnership owned by the S corporation. For the reasons described in
Part II.B.3.a of this Summary of Comments and Explanation of Revisions
(relating to the complexity of the determination of relevant basis for
ultimate members that are partners in an upper-tier partnership), the
Treasury Department and the IRS have determined that these computations
should be retained. Accordingly, these final regulations do not make
changes in response to the comments regarding the complexity of the
relevant basis computations in situations involving an S corporation
owning an interest in a lower-tier partnership.
b. Effect of Section 704(c) on the Allocation of Modified Basis
As discussed in Part II.B.1.b of this Summary of Comments and
Explanation of Revisions, these final regulations amend Sec. 1.170A-
14(m)(2)(iii)(B) and item D in the formula in Sec. 1.170A-
14(m)(2)(iv). To be consistent with those revisions, these final
regulations modify the definition of item S in Sec. 1.170A-
14(m)(5)(iii)(B) to be:
S = Upper-tier S corporation's portion of the adjusted basis in all
the contributing partnership's properties (other than the portion of
the real property with respect to which the qualified conservation
contribution is made) as determined under Sec. 1.170A-
14(m)(2)(iii)(B).
III. Requests for Guidance on Partnership Allocations
Subchapter K and the regulations thereunder provide rules on how a
partnership may allocate its items among its partners. Several
commenters requested that the final regulations provide guidance on
partnership allocations of qualified conservation contributions. These
comments are grouped into the following categories: (A) requests for
guidance under section 704(b), (B) requests for guidance under section
704(c), and (C) requests for additional guidance on the application of
the proposed regulations under Sec. 1.706-3.
A. Requests for Guidance Under Section 704(b)
Section 704(b) provides that a partner's distributive share of
income, gain, loss, deduction, or credit is determined in accordance
with the partner's interest in the partnership if the partnership
agreement does not provide as to the partner's distributive share of
these items or the allocation to a partner of these items under the
agreement does not have substantial economic effect. The existing
regulations under section 704(b) provide guidance, including
definitions of substantial economic effect, capital account provisions,
and guidance on the determination of a partner's interest in the
partnership.
The proposed regulations did not address section 704(b) allocation
issues. The examples in the proposed regulations tell the reader to
assume that the partnership allocations comply with the rules of
subchapter K. Commenters requested guidance on the following issues
involving section 704(b): (1) allocations of qualified conservation
contributions under section 704(b), and (2) section 704(b) capital
accounting for qualified conservation contributions.
1. Allocations of Qualified Conservation Contributions Under Section
704(b)
One commenter stated that the proposed regulations suggest that a
partnership can allocate qualified conservation contributions in any
manner it chooses irrespective of the rules under subchapter K. The
commenter stated that a partnership's allocation of a qualified
conservation contribution must reflect either the partners' interests
in the partnership or qualify as a special allocation that satisfies
the substantial economic effect rules. The commenter recommended that
the final regulations qualify any suggestion that special allocations
may be used in allocating qualified conservation contributions. Without
that, the commenter stated that the examples in the proposed
regulations may be taken as permission from the IRS to create a new
situation in which an investor receives more than 2.5 times its basis
in tax deductions.
The proposed regulations do not suggest that a partnership's
allocation of a qualified conservation contribution is not subject to
the rules of subchapter K. As noted, the examples in the proposed
regulations tell the reader to assume that the partnership allocations
comply with the rules of subchapter K. The focus of these regulations
is the implementation of section 170(f)(19) and (h)(7), which generally
do not change the rules for how a partnership may allocate a qualified
conservation contribution among its partners under section 704(b).
Accordingly, guidance on the application of section 704(b) to a
partnership's allocations of qualified conservation contributions is
outside the scope of these regulations.
The Treasury Department and the IRS note that the Disallowance Rule
does not prevent all situations in which an investor receives more than
2.5 times its basis in tax-deductible qualified conservation
contributions. See Sec. 1.170A-14(j)(6)(ii) (Example 2) for a
situation in which the amount of a partnership's qualified conservation
contribution does not exceed 2.5 times the sum of the partners'
relevant bases, even though one partner's share of the contribution
exceeds 2.5 times that partner's relevant basis. Such transactions may,
however, constitute a listed transaction.
2. Section 704(b) Capital Accounting for Qualified Conservation
Contributions
Regulations under section 704(b) provide rules for maintenance of a
partner's capital account. In general terms, a partner's capital
account is increased by the amount of money the partner contributes to
the partnership, the fair market value of property the partner
contributes to the partnership, and allocations to the partner of
partnership income and gain. In general terms, a partner's capital
account is decreased by the amount of money distributed to the partner
by the partnership, the fair market value of any property distributed
to the partner, allocations of section 705(a)(2)(B) expenditures of the
partnership, and allocations of partnership loss and deduction. See
Sec. 1.704-1(b)(2)(iv). Section 705(a)(2)(B) expenditures are
expenditures of a partnership that are not deductible in computing its
taxable income and not properly chargeable to its capital accounts.
Revenue Ruling 96-11, 1996-1 C.B. 140, provides that a noncash
charitable contribution by a partnership is a section 705(a)(2)(B)
expenditure.
Two commenters requested guidance on how a disallowed qualified
conservation contribution would affect capital accounts. They stated
that the proposed regulations provide rules for determining whether a
qualified conservation contribution runs afoul of section 170(h)(7) but
fail to provide capital accounting guidance under section 704(b) to the
extent that a contribution is disallowed. One commenter stated that,
under the current section 704(b) regulations, it is unclear what impact
a disallowed
[[Page 54296]]
qualified conservation contribution would have on book capital
accounts. Another commenter stated that, in the event that a
contributing partnership continues to conduct business following a
disallowed qualified conservation contribution, the lack of section
704(b) guidance will create confusion among tax practitioners, increase
the reporting burden on taxpayers, and require further guidance from
the Treasury Department and the IRS. These two commenters recommend
that the final regulations include book capital account guidance under
section 704(b) with respect to the Disallowance Rule.
The Treasury Department and the IRS have concluded that guidance on
capital account maintenance under section 704(b) is outside the scope
of these regulations. There are several situations in which the Code
limits or disallows a deduction for a partnership's charitable
contribution, including other provisions of section 170. As a result of
these long-standing rules, a partnership's allowed charitable
contribution may be less than the fair market value of the donated
property. The Disallowance Rule simply adds another situation in which
a deduction for a partnership's charitable contribution will be
disallowed. Thus, this issue is broader than contributions subject to
the Disallowance Rule. Accordingly, these final regulations do not
address partnership capital accounting.
B. Requests for Guidance Under Section 704(c)
In part, section 704(c) provides rules for partnership allocations
with respect to property that had built-in gain or built-in loss at the
time the property was contributed by a partner to the partnership. Two
commenters sought guidance on whether: (1) section 704(c)(1)(A) applies
to qualified conservation contributions, and (2) section 704(c)(1)(B)
applies to qualified conservation contributions.
1. Application of Section 704(c)(1)(A) to Charitable Contributions
Two commenters requested guidance on whether section 704(c)(1)(A)
applies to the definition of distributive share in the context of
proposed Sec. 1.170A-14. The commenters stated that the proposed
regulations do not define the term ``distributive share.'' The
commenters stated that, as a result, it is unclear whether section
704(c) may apply to determine each partner's distributive share of a
qualified conservation contribution. One commenter stated that, to
promote transparency, the final regulations should define the term
``distributive share'' and further discuss what impact, if any, section
704(c) may have with respect to conservation easement transactions in
the context of section 170(h).
Another commenter stated that none of the examples in the proposed
regulations involve a qualified conservation contribution with respect
to property that had been contributed to the partnership by a partner,
and that the application of section 704(c) to allocations of charitable
contributions should be addressed. The commenter hypothesized that the
proposed regulations will create an inference that the rules of section
704(c) do not apply in the context of a contributed property that is
later the subject of a charitable contribution because it is unclear
under the existing section 704(c) regulations whether charitable
contributions of contributed property are subject to section 704(c).
The commenter also attached or referenced several articles addressing
whether Congress intended for section 704(c) to apply to charitable
contributions.
The focus of these regulations is implementation of section
170(f)(19) and (h)(7). Thus, the application of section 704(c)(1)(A) to
charitable contributions by a partnership is outside the scope of these
regulations. However, the Treasury Department and the IRS will continue
to study the issue.
2. Application of Section 704(c)(1)(B) to Charitable Contributions
Section 704(c)(1)(B) provides in part that, if a partner
contributes property with built-in gain or built-in loss to a
partnership, and the partnership distributes the property (directly or
indirectly) to someone other than the contributing partner within seven
years of the partner's contribution, the contributing partner is
treated as recognizing gain or loss (as the case may be) from the sale
of such property in an amount equal to the gain or loss which would
have been allocated to such partner under section 704(c)(1)(A) if the
property had been sold at its fair market value at the time of the
distribution.
One commenter requested guidance on whether section 704(c)(1)(B)
would apply if a partner contributes real property to a partnership and
within seven years the partnership makes a qualified conservation
contribution with respect to that property. The commenter stated that a
partnership's charitable contribution is substantively equivalent to a
partnership distribution followed by a charitable contribution by the
partners.
The focus of these regulations is implementation of section
170(f)(19) and (h)(7). Thus, the application of section 704(c)(1)(B) to
charitable contributions by a partnership is outside the scope of these
regulations. However, the Treasury Department and the IRS will continue
to study the issue.
C. Proposed Regulations Under Sec. 1.706-3
Section 706(d)(3) of the Code provides rules for an upper-tier
partnership's allocation of items to its partners attributable to an
interest in a lower-tier partnership. It provides that if, during any
taxable year of the upper-tier partnership, there is a change in any
partner's interest in the upper-tier partnership, then (except to the
extent provided in regulations) each partner's distributive share of
any item of the upper-tier partnership attributable to the lower-tier
partnership must be determined by assigning the appropriate portion
(determined by applying principles similar to the principles of section
706(d)(2)(C) and (D)) of each such item to the appropriate days during
which the upper-tier partnership is a partner in the lower-tier
partnership and by allocating the portion assigned to any such day
among the partners in proportion to their interests in the upper-tier
partnership at the close of such day.
To facilitate the computation of a partner's relevant basis
immediately before the contribution, proposed Sec. 1.706-3(a) provided
that, for purposes of section 706(d)(3), in the case of a qualified
conservation contribution (without regard to whether such contribution
is a disallowed qualified conservation contribution within the meaning
of proposed Sec. 1.170A-14(j)(3)(vii)) by a partnership that is
allocated to an upper-tier partnership, the upper-tier partnership must
allocate the contribution among its partners in proportion to their
interests in the upper-tier partnership at the time of day at which the
contribution was made, regardless of the method (interim closing or
proration) and convention (daily, semi-monthly, or monthly) otherwise
used by the upper-tier partnership under Sec. 1.706-4.
The following sections of this Summary of Comments and Explanation
of Revisions address two issues under proposed Sec. 1.706-3(a): (1)
whether proposed Sec. 1.706-3(a) requires pro rata allocations, and
(2) whether proposed Sec. 1.706-3(a) withdraws the 2015 proposed
regulations under Sec. 1.706-3.
1. Whether Proposed Sec. 1.706-3(a) Requires Pro Rata Allocations
The Treasury Department and the IRS understand that there are
questions
[[Page 54297]]
whether the language in proposed Sec. 1.706-3(a) stating that the
upper-tier partnership must allocate the qualified conservation
contribution among its partners ``in proportion to their interests in
the upper-tier partnership'' requires the upper-tier partnership to
allocate the contribution among its partners pro rata, with no special
allocations.
The Treasury Department and the IRS did not intend for proposed
Sec. 1.706-3(a) to require an upper-tier partnership to allocate a
qualified conservation contribution pro rata among its partners.
Accordingly, the final regulations modify Sec. 1.706-3(a) to provide
that the upper-tier partnership must allocate the contribution among
its partners in accordance with their interests in the qualified
conservation contribution at the time of day at which the qualified
conservation contribution was made, rather than providing that the
upper-tier partnership must allocate the contribution among its
partners ``in proportion to their interests in the upper-tier
partnership'' at the time of day at which the contribution was made.
2. Whether Proposed Sec. 1.706-3(a) and (b) Withdraw the 2015 Proposed
Regulations Under Sec. 1.706-3
One commenter asked about the effect of the proposed regulations on
proposed regulations under Sec. 1.706-3 published August 3, 2015, REG-
109370-10 (80 FR 45905) (the 2015 proposed regulations). The 2015
proposed regulations proposed guidance under the general rule of
section 706(d)(3).
The proposed regulations did not withdraw, nor did they intend to
withdraw, the 2015 proposed regulations. Instead, the proposed
regulations under Sec. 1.706-3 are a regulatory exception to the
general rule in section 706(d)(3), to which the 2015 proposed
regulations relate. To avoid confusion, these regulations renumber the
guidance under Sec. 1.706-3 to follow the numbering in the 2015
proposed regulations. Thus, proposed Sec. 1.706-3(a) and (b) are
finalized as Sec. 1.706-3(d) and (e), incorporating the changes
described in this section of the preamble. Section 1.706-3(a) through
(c) are reserved for the 2015 proposed regulations.
In addition, the Treasury Department and the IRS have determined
that the language in proposed Sec. 1.706-3 might cause confusion
because it states that the upper-tier partnership must allocate the
qualified conservation contribution as described in Sec. 1.706-3
regardless of the method (interim closing or proration) and convention
(daily, semi-monthly, or monthly) otherwise used by the upper-tier
partnership under Sec. 1.706-4. This reference to Sec. 1.706-4 might
cause confusion because Sec. 1.706-4(a)(2) provides in part that items
subject to allocation under section 706(d)(3) are not subject to the
rules of Sec. 1.706-4. Thus, although proposed Sec. 1.706-3 is
correct to state that the upper-tier partnership's allocation of the
qualified conservation contribution must be done without regard to the
rules of Sec. 1.706-4, the reference to Sec. 1.706-4 may be read to
imply that the rules of Sec. 1.706-4 would otherwise apply to an
upper-tier partnership's allocation of items attributable to a lower-
tier partnership.
To avoid confusion, these final regulations modify proposed Sec.
1.706-3(a) to provide that, for purposes of section 706(d)(3), in the
case of a qualified conservation contribution (as defined in section
170(h)(1) and Sec. 1.170A-14(a) without regard to whether such
contribution is a disallowed qualified conservation contribution within
the meaning of Sec. 1.170A-14(j)(3)(vii)) by a partnership that is
allocated to an upper-tier partnership, the upper-tier partnership must
allocate the contribution among its partners in accordance with their
interests in the qualified conservation contribution at the time of day
at which the qualified conservation contribution was made, regardless
of the general rule of section 706(d)(3). The final regulations provide
that, pursuant to Sec. 1.706-4(a)(2), the rules of Sec. 1.706-4 do
not apply to allocations subject to Sec. 1.706-3.
IV. Exceptions to the Disallowance Rule
Section 170(h)(7) contains three exceptions to the Disallowance
Rule: the three-year holding period exception, the family pass-through
entity exception, and the certified historic structure exception. The
proposed regulations included each exception and provided additional
guidance. Commenters addressed each of these exceptions, requested an
exception for de minimis overages, and requested a more explicit
statement of the taxpayers to whom the Disallowance Rule does not
apply. Each category of comments is discussed in turn in the following
sections of this preamble.
A. Exception for Contributions Outside Three-Year Holding Period
Section 170(h)(7)(C) provides that the Disallowance Rule does not
apply to any contribution made at least three years after the latest
of: (1) the last date on which the pass-through entity that made such
contribution acquired any portion of the real property with respect to
which such contribution is made, (2) the last date on which any owner
of the pass-through entity that made such contribution acquired any
interest in such pass-through entity, and (3) if the interest in the
pass-through entity that made such contribution is held through one or
more pass-through entities, the last date on which any such pass-
through entity acquired any interest in any other such pass-through
entity, and the last date on which any owner in any such pass-through
entity acquired any interest in such pass-through entity.\4\ Neither
section 605 of the SECURE 2.0 Act nor section 170 defines the phrase
``acquired any interest.''
---------------------------------------------------------------------------
\4\ The Treasury Department and the IRS note that section
170(h)(7)(C) and Sec. 1.170A-14(n)(2) are based upon dates of
acquisition, not ``holding periods,'' and therefore, although this
exception is colloquially referred to as the ``three-year holding
period exception,'' the tacked holding period rules of section 1223
of the Code do not apply in determining the application of section
170(h)(7)(C) and Sec. 1.170A-14(n)(2).
---------------------------------------------------------------------------
Proposed Sec. 1.170A-14(n)(2)(ii) and (iii) defined the phrase
``acquired any interest'' for partnerships and S corporations,
respectively. Proposed Sec. 1.170A-14(n)(2)(iv) also clarified that,
if the contributing partnership or contributing S corporation does not
satisfy the requirements of proposed Sec. 1.170A-14(n)(2), then
proposed Sec. 1.170A-14(n)(2) would not apply to any person who
receives a distributive share or pro rata share of the qualified
conservation contribution (including an upper-tier partnership or
upper-tier S corporation), regardless of whether the person receiving
such distributive share or pro rata share would have satisfied the
requirements of proposed Sec. 1.170A-14(n)(2) if the person had been
the one to make the qualified conservation contribution. The proposed
regulations contained two examples illustrating these rules. The
preamble to the proposed regulations requested comments on whether any
additional rules or examples should be provided for the three-year
holding period exception.
The only comment received on proposed Sec. 1.170A-14(n)(2)
supported the three-year holding period exception and stated that no
further guidance is needed on the topic. Accordingly, these regulations
finalize the proposed regulations under Sec. 1.170A-14(n)(2) without
change.
B. Exception for Family Pass-Through Entities
Section 170(h)(7)(D)(i) provides that the Disallowance Rule does
not apply to any contribution made by any pass-through entity if
substantially all of the interests in such pass-through entity are
[[Page 54298]]
held, directly or indirectly, by an individual and members of the
family of such individual. Section 170(h)(7)(D)(ii) provides that, for
purposes of section 170(h)(7)(D), the term ``members of the family''
means, with respect to any individual: (1) the spouse of such
individual, and (2) any individual who bears a relationship to such
individual that is described in section 152(d)(2)(A) through (G) of the
Code for purposes of determining whether an individual is a qualifying
relative.
Proposed Sec. 1.170A-14(n)(3) provided guidance under the family
pass-through entity exception for partnerships and S corporations,
including: (1) defining ``substantially all of the interests,'' (2)
providing that ``members of the family'' are limited to individuals,
and (3) imposing two anti-abuse rules for the family pass-through
entity exception.
In addition, proposed Sec. 1.170A-14(n)(3)(v) provided that, if
the contributing partnership or contributing S corporation does not
satisfy the requirements of proposed Sec. 1.170A-14(n)(3), then the
exception in proposed Sec. 1.170A-14(n)(3) would not apply to any
person who receives a distributive share or pro rata share of the
qualified conservation contribution (including an upper-tier
partnership or upper-tier S corporation), regardless of whether the
person receiving such distributive share or pro rata share would have
satisfied the requirements of proposed Sec. 1.170A-14(n)(3) if the
person had been the one to make the contribution. No comments were
received on the rule in proposed Sec. 1.170A-14(n)(3)(v). Accordingly,
the rule in proposed Sec. 1.170A-14(n)(3)(v) is finalized without
change.
One commenter expressed support for the family pass-through entity
exception and stated that further guidance was not needed. Other
commenters requested modifications on: (1) the definition of
``substantially all of the interests,'' (2) the limitation of ``members
of the family'' to individuals, and (3) the two anti-abuse rules for
the family pass-through entity exception.
1. Defining ``Substantially All of the Interests''
Section 170(h)(7) does not contain a definition of ``substantially
all.'' The preamble to the proposed regulations mentioned that, for
purposes of applying different provisions of the Code that also use
that term, various Income Tax Regulations define the term
``substantially all'' as comprising different percentages, including:
70 percent (Sec. 1.1400Z2(d)-2(d)(4)); 80 percent (Sec. Sec. 1.41-
2(d)(2), 1.41-4(a)(6)); 85 percent (Sec. Sec. 1.45D-1(c)(5), 1.72(e)-
1T, Q&A 3, 1.528-4(b) and (c)); 90 percent (Sec. Sec. 1.103-
8(a)(1)(i), 1.103-16(c), 1.731-2(c)(3)(i), 1.1400Z2(d)-2(d)(3)); and 95
percent (Sec. Sec. 1.448-1T(e)(4)(i) and (e)(5)(i), 1.460-
6(d)(4)(i)(D)(1)).
The preamble to the proposed regulations stated that it is
appropriate to select a percentage at the higher end of this range to
carry out the purpose of the Disallowance Rule, which is to prevent
abusive syndications of qualified conservation contributions. Thus,
proposed Sec. 1.170A-14(n)(3)(i) provided that the family pass-through
entity exception applied if at least ninety percent of the interests in
the contributing partnership or contributing S corporation are held by
an individual and members of the family of such individual and the
contributing partnership or contributing S corporation meets the
requirements of proposed Sec. 1.170A-14(n)(3).
Proposed Sec. 1.170A-14(n)(3)(ii)(A) provided that, in the case of
a contributing partnership, at least ninety percent of the interests in
the contributing partnership are held by an individual and members of
the family of such individual if, at the time of the qualified
conservation contribution, at least ninety percent of the interests in
capital and profits in such partnership are held, directly or
indirectly, by an individual and members of the family of such
individual. Proposed Sec. 1.170A-14(n)(3)(ii)(B) provided that, in the
case of a contributing S corporation, at least ninety percent of the
interests in the contributing S corporation are held by an individual
and members of the family of such individual if, at the time of the
qualified conservation contribution, at least ninety percent of the
total value and at least ninety percent of the total voting power of
the outstanding stock in such S corporation are held by an individual
and members of the family of such individual.
One commenter agreed that ninety percent was a reasonable number to
define substantially all, noting that interests held by persons who are
not members of the family should be ``extremely limited.'' Another
commenter stated that ninety percent was too high and would
unnecessarily restrict the application of the family pass-through
entity exception; however, that commenter did not provide any examples
of unnecessary restrictions or recommend a different percentage. A
third commenter recommended lowering the percentage to eighty-five
percent, citing the eighty-five percent standard in Rev. Rul. 73-248,
1973-1 C.B. 295, and the fact that this Revenue Ruling relates to the
percentage of ownership in a legal entity, as opposed to the percentage
of cash, percentage of assets, or percentage of time. This commenter
also noted that eighty-five percent was closest to the average of the
various percentages used to define ``substantially all'' discussed in
the preamble to the proposed regulations.
The Treasury Department and the IRS agree with the commenter
stating that interests held by persons who are not members of the
family should be extremely limited and that that ninety percent is a
reasonable number to define ``substantially all.'' In the view of the
Treasury Department and the IRS, the intent of not requiring one-
hundred percent of a contributing entity to be owned by family members
was to allow non-family members to make small, non-material investments
in contributing entities, such as when a family partnership issues
profits interests to service providers. The two commenters who stated
that ninety percent is too high did not elaborate or give examples in
which a family partnership or family S corporation needed to provide
more than ten percent of its interests to persons who are not members
of the family but still should meet the family pass-through entity
exception to the Disallowance Rule. Further, the average of percentages
used to define ``substantially all'' in guidance is not relevant to the
definition that makes sense in the context of section 170(h)(7). Thus,
these final regulations adopt the definition of ``substantially all''
as proposed.
2. Defining ``Members of the Family''
Consistent with section 170(h)(7)(D)(ii), proposed Sec. 1.170A-
14(n)(3)(iii) provided that, for purposes of Sec. 1.170A-14(n)(3), the
term ``members of the family'' means, with respect to any individual:
(1) the spouse of such individual, and (2) any individual who bears a
relationship to such individual that is described in section
152(d)(2)(A) through (G). The preamble to the proposed regulations
stated that, under this rule, members of the family would be limited to
individuals and requested comments on whether certain estates or trusts
should be treated as members of the family for purposes of the family
pass-through entity exception. The preamble also noted that, under
existing Sec. 1.1361-1(e)(3)(ii), certain estates and trusts of
deceased members of the family are treated as members of the family for
purposes of the limitation on the number of shareholders in an S
corporation.
One commenter requested that estates and trusts of deceased
individuals be included in the definition of ``members of the family''
to address the fact that
[[Page 54299]]
the interests of deceased individuals may be included in conservation
contributions.
In the view of the Treasury Department and the IRS, if a family
member dies and the member's interest in the pass-through entity has
been transferred to the decedent's estate, the interest still should be
considered to be held by a member of the family. Otherwise, the pass-
through entity might have to wait until final disposition of the estate
(which may take years) to make a deductible qualified conservation
contribution, even if the beneficiaries of the estate are all
themselves individual members of the family. In addition, allowing a
decedent's estate to be treated as a member of the family if the
decedent was a member of the family at the time of death is
administrable because determining whether the estate qualified as a
member of the family involves the same determination as whether the
decedent qualified as a member of the family before death. Accordingly,
these final regulations modify Sec. 1.170A-14(n)(3)(iii) to provide
that a decedent's estate is treated as a member of the family for
purposes of Sec. 1.170A-14(n)(3) if the decedent was a member of the
family at the time of death.
In addition, as noted by the commenter, certain trusts may raise
similar issues. Trusts may be partners or S corporation shareholders,
or may become partners or shareholders as a result of the death of an
individual member of the family. For example, if a family member holds
a partnership interest through a grantor trust, that individual would
meet the requirements under these regulations of holding a direct
interest in the partnership under Sec. 1.170A-14(j)(3)(v). If that
family member dies and the trust is no longer a grantor trust, the
trust should not automatically cause the partnership to no longer be a
family partnership. If only family members are potential beneficiaries
of a trust, then the trust should be treated as being a member of the
family. Including such a trust would serve the purpose of the statute
to maintain an exception for partnerships and S corporations owned and
controlled by a family. A contributing partnership or contributing S
corporation that would otherwise satisfy the requirements of the family
pass-through entity exception should not be excluded from the exception
merely because interests are held through a family trust. Accordingly,
these final regulations modify Sec. 1.170A-14(n)(3)(iii) to provide
that a trust, all of the beneficiaries of which are individuals
described in Sec. 1.170A-14(n)(3)(iii)(A) or (B), is treated as a
member of the family. For this purpose, the term ``beneficiaries''
refers to those persons who currently must or may receive income or
principal from the trust and those persons who would succeed to the
property of the trust if the trust were to terminate immediately before
the qualified conservation contribution.
3. Anti-Abuse Rules for the Family Pass-Through Entity Exception
The Disallowance Rule and its exceptions in section 170(h)(7) are
generally mechanical. However, Congress recognized that additional
guidance may be needed to prevent situations in which those mechanical
rules are used to avoid the purposes of the Disallowance Rule. Section
170(h)(7)(G)(ii) provides the Secretary with authority to issue
regulations or other guidance to prevent the avoidance of the purposes
of section 170(h)(7). Accordingly, to ensure that the family pass-
through entity exception in proposed Sec. 1.170A-14(n)(3) would not be
used inappropriately to circumvent the Disallowance Rule, the proposed
regulations contained two anti-abuse rules: (1) a one-year holding
period, and (2) a ninety-percent allocation rule.
a. One-Year Holding Period
Proposed Sec. 1.170A-14(n)(3)(iv)(A) provided that the family
pass-through entity exception does not apply unless at least ninety
percent of the interests in the property with respect to which the
qualified conservation contribution was made were owned, directly or
indirectly, by one individual and members of the family of that
individual for at least one year prior to the date of the contribution.
The preamble to the proposed regulations explained that the need
for such a rule is the concern that, in the absence of a requirement
that the members of the family hold the contributed property for a
certain period before the contribution, promoters could structure
transactions to inappropriately take advantage of certain tacked-
holding-period transactions together with the family pass-through
entity exception. The proposed regulations provided an example of such
a situation, in which a lower-tier partnership that is not a family
pass-through entity distributes its real property to an S corporation
and an upper-tier partnership. The S corporation and the upper-tier
partnership each separately qualify as a family pass-through entity,
but the shareholders of the S corporation are not related to the
partners of the upper-tier partnership. Within one year of the
distribution, the S corporation makes a qualified conservation
contribution. The example concludes that, even though at the time of
the qualified conservation contribution the S corporation is completely
owned by an individual and members of the family, the family pass-
through entity exception does not apply because the one-year holding
period requirement was not met.
Two commenters disagreed with the one-year holding period. These
commenters claimed that the inclusion of a three-year holding period
under section 170(h)(7)(C) and the absence of a one-year holding period
under the family pass-through entity exception evidenced a
congressional intent not to include a one-year holding period for the
family pass-through entity exception under section 170(h)(7)(D). One of
these commenters opined that the proposed one-year holding period
requirement violated due process by retroactively binding taxpayers who
had already made contributions that did not satisfy the one-year
holding period. The other commenter stated that the Treasury Department
and the IRS had offered no evidence in support of the statement in the
preamble to the proposed regulations that reliance on a tacked holding
period raises serious concerns that the family pass-through entity
exception is being used inappropriately to circumvent the Disallowance
Rule.
The Treasury Department and the IRS disagree that the Treasury
Department and the IRS lack authority to promulgate an anti-abuse rule.
Section 170(h)(7)(G) is a specific grant of authority to the Secretary
to prescribe such regulations or other guidance as may be necessary or
appropriate to carry out the purposes of section 170(h)(7), including
regulations or other guidance to prevent the avoidance of the purposes
of section 170(h)(7). In addition, section 7805(a) authorizes the
Secretary to prescribe all needful rules and regulations for the
enforcement of title 26, including all rules and regulations as may be
necessary by reason of any alteration of law in relation to internal
revenue. As noted above, section 7805(b)(2) permits regulations issued
within 18 months of December 29, 2022 (the date SECURE 2.0 Act was
enacted), to apply to contributions after December 29, 2022. Section
7805(b)(3) provides that the Secretary may provide that any regulation
may take effect or apply retroactively to prevent abuse. Section
170(h)(7)(G) and section 7805(a), (b)(2), and (b)(3) provide ample
authority for an anti-abuse rule applicable to contributions after
December 29, 2022.
[[Page 54300]]
The holding period anti-abuse rule is necessary to address the
potential for taxpayers to inappropriately take advantage of certain
tacked-holding-period transactions to utilize the family pass-through
entity exception. In particular, the example in the proposed
regulations illustrates inappropriate avoidance of the purposes of the
Disallowance Rule. As described, the example shows a distribution from
a partnership that is not a family pass-through entity to two separate
upper-tier entities, each of which is a family pass-through entity,
followed by a qualified conservation contribution within one year of
the distribution. This situation should not qualify for the family
pass-through entity exception because the distributing partnership was
not a family pass-through entity. If such a situation qualified for the
family pass-through entity exception, then partnerships that fail to
qualify as family pass-through entities could simply distribute land to
upper-tier entities, each of which would be a family pass-through
entity (such as single-member S corporations or partnerships wholly-
owned by spouses) and thus each upper-tier entity could inappropriately
avail itself of the family pass-through entity exception. Without an
anti-abuse rule, similar inappropriate results could be obtained
through other tacked-holding-period transactions, including
contributions to family pass-through entities by persons who are not
members of the family.
However, after consideration of the comments, the Treasury
Department and the IRS have decided to finalize the one-year holding
period rule with two changes. First, the final regulations clarify
that, solely for purposes of Sec. 1.170A-14(n)(3)(iv)(A), section
1223(1) and (2) of the Code do not apply in determining whether at
least ninety percent of the interests in the property with respect to
which the qualified conservation contribution was made were owned,
directly or indirectly, by one individual and members of the family of
that individual for at least one year prior to the date of the
contribution. This clarification is only for purposes of the anti-abuse
rule in Sec. 1.170A-14(n)(3)(iv)(A) and does not affect the holding
period of the property for any other purpose, including section 170(e).
The Treasury Department and the IRS note that this rule was already
implicit in the proposed regulations; in fact, proposed Sec. 1.170A-
14(n)(3)(vi)(B) (Example 2) described a situation in which an S
corporation failed the one-year holding period requirement even though
it would have had a tacked holding period under section 1223 that
exceeded one year.
Second, the final regulations provide that the one-year holding
period rule does not apply if the entire amount of the qualified
conservation contribution is limited by section 170(e) to the
contributing partnership's or contributing S corporation's adjusted
basis in the qualified conservation contribution. For example, if
section 170(e) limits a qualified conservation contribution to the
contributing partnership's adjusted basis because the property with
respect to which the qualified conservation contribution is made was
purchased within one year of the qualified conservation contribution,
the anti-abuse rule in Sec. 1.170A-14(n)(3)(iv)(A) does not apply.
This change limits the one-year holding requirement to transactions
that inappropriately take advantage of tacked holding periods to
utilize the family pass-through entity exception.
b. Ninety Percent Allocation Rule
Proposed Sec. 1.170A-14(n)(3)(iv)(B) provided that the exception
in proposed Sec. 1.170A-14(n)(3) does not apply unless at least ninety
percent of the qualified conservation contribution is allocated to the
individual and all members of the individual's family who own at least
ninety percent of all the interests in the contributing partnership or
contributing S corporation. Commenters did not comment on this anti-
abuse rule. Therefore, these regulations maintain the ninety percent
allocation rule.
C. Certified Historic Structure Exception
Section 170(h)(7)(E) provides that the Disallowance Rule does not
apply to any qualified conservation contribution the conservation
purpose of which is the preservation of any building that is a
certified historic structure (as defined in section 170(h)(4)(C)).
Proposed Sec. 1.170A-14(n)(4) simply repeated this statutory language
and did not provide further guidance regarding the cases to which this
exception would apply. No comments were received on proposed Sec.
1.170A-14(n)(4), which these regulations finalize without change.
Proposed Sec. 1.170A-14(n)(4) also contained a cross-reference to
the special reporting requirements in proposed Sec. 1.170A-16(f)(6)
for a contribution that meets the certified historic structure
exception. Several commenters addressed these special reporting
requirements. Those comments are discussed in Part V.D of this Summary
of Comments and Explanation of Revisions,
D. The Request for a De Minimis Overage Exception
Section 170(h)(7)(A) states that a contribution by a partnership
(whether directly or as a distributive share of a contribution of
another partnership) ``shall not be treated as'' a qualified
conservation contribution for purposes of section 170 if the amount of
such contribution exceeds 2.5 times the sum of each partner's relevant
basis in such partnership. One commenter stated that there is a ``cliff
effect'' to the statute and the proposed regulations in that a
contribution of one dollar more than 2.5 times the sum of the relevant
bases results in disallowance of any deduction for any of the
contribution. The commenter stated that there should be some regulatory
leniency if the taxpayer was acting in good faith and there is de
minimis overage.
The Treasury Department and the IRS agree with the commenter that
the statutory language imposes a ``cliff effect,'' but do not agree
that a de minimis exception is necessary or desirable. As explained in
Part I of this Summary of Comments and Explanation of Revisions, the
first sentence of proposed Sec. 1.170A-14(j)(3)(ii), which these
regulations finalize without change, provides that the amount of a
contributing partnership's or contributing S corporation's qualified
conservation contribution is the amount claimed as a qualified
conservation contribution on the return of the contributing partnership
or contributing S corporation for the taxable year in which the
contribution is made. By focusing on the amount claimed by the
contributing partnership or contributing S corporation, rather than the
fair market value of the contribution, this rule provides greater
certainty to both taxpayers and the IRS. The regulations do not require
the contributing partnership or contributing S corporation to claim the
full amount of the contribution that it might otherwise claim in the
absence of the Disallowance Rule. Therefore, a contributing partnership
or contributing S corporation making a contribution that would
otherwise be disallowed by the Disallowance Rule could avoid the
Disallowance Rule by claiming an amount of qualified conservation
contribution that is less than or equal to 2.5 times the sum of the
relevant bases, assuming that the claimed amount is not more than the
fair market value of the contribution. Thus, taxpayers may be able to
mitigate the ``cliff effect'' noted by the commenter.
In accordance with section 170(h)(7)(G), which provides authority
[[Page 54301]]
for the Secretary to prescribe such regulations or other guidance as
may be necessary or appropriate to carry out the purposes of section
170(h)(7), including to prevent the avoidance of the purposes of
section 170(h)(7), these final regulations also provide that, if a
partner or S corporation shareholder claims an amount of qualified
conservation contribution that is inconsistent with and greater than
the amount of the partner's distributive share or S corporation
shareholder's pro rata share of qualified conservation contribution
reported to the partner or S corporation shareholder by the partnership
or S corporation, predicated on a position that the partnership's or S
corporation's qualified conservation contribution was a greater amount
than the amount claimed by the partnership or S corporation, and the
qualified conservation contribution would have been a disallowed
qualified conservation contribution if the partnership or S corporation
had actually claimed that greater amount, then the partner's or S
corporation shareholder's claimed qualified conservation contribution
is a disallowed qualified conservation contribution. This rule is
necessary to avoid situations in which a partner or an S corporation
shareholder seeks to avoid the application of section 170(h)(7) by
claiming an amount with respect to a qualified conservation
contribution that is more than the amount allocated to the partner or
shareholder and reported by the partnership or S corporation.
E. Statement Regarding Taxpayers to Whom the Disallowance Rule Does Not
Apply
One commenter stated that the proposed regulations lacked clarity
as to which provisions apply to every contributing partnership or
contributing S corporation and requested that the final regulations
include a preliminary explanation of scope. The commenter recommended
that, if different provisions have different scopes, then that should
be made clear. The commenter recommended that the final regulations
explicitly state that Sec. 1.170A-14(j) through (n) does not apply to
qualified conservation contributions made by individuals, joint
tenancies, tenancies in common, or C corporations. The commenter also
recommended that the final regulations explicitly state that Sec.
1.170A-14(j) through (n) does not apply to partnerships and entities
taxed as partnerships: (1) which have held the real property subject to
the qualified conservation contribution for more than one year
immediately before the date and hour of the qualified conservation
contribution, disregarding any tacked holding period; and (2) all of
whose members, on the date and time of the qualified conservation
contribution, have held the same percentage interest in the
partnership, directly or indirectly, disregarding any tacked holding
period, for more than one year immediately before the date and hour of
the qualified conservation contribution.
With respect to the request to clarify that Sec. 1.170A-14(j)
through (n) does not apply to qualified conservation contributions made
by individuals, joint tenancies, tenancies in common, or by C
corporations, the Treasury Department and the IRS agree in part.
Section 170(h)(7)(A) and (F) provide that the Disallowance Rule applies
only to certain qualified conservation contributions made by
partnerships, S corporations, and other pass-through entities; thus, it
does not apply to qualified conservation contributions made by
individuals or C corporations. However, in certain cases an arrangement
that is a joint tenancy or tenancy in common under State law may be
considered a partnership for Federal tax purposes. See Sec. 301.7701-
1(a)(2). If so, a qualified conservation contribution by such an
arrangement would be subject to the Disallowance Rule. Accordingly,
Sec. 1.170A-14(j)(1) of these final regulations includes a statement
that the Disallowance Rule does not apply to qualified conservation
contributions made directly by landowners that are not pass-through
entities, such as individuals or C corporations.
With respect to the request to clarify that Sec. 1.170A-14(j)
through (n) does not apply to partnerships and entities taxed as
partnerships: (1) which have held the real property subject to the
qualified conservation contribution for more than one year immediately
before the date and hour of the qualified conservation contribution,
disregarding any tacked-on holding period and (2) all of whose members,
on the date and time of the qualified conservation contribution, have
held the same percentage interest in the partnership, directly or
indirectly, disregarding any tacked holding period, for more than one
year immediately before the date and hour of the qualified conservation
contribution, the Treasury Department and the IRS have concluded that
such a rule would be inconsistent with section 170(h)(7). As explained
in Part IV.A of this Summary of Comments and Explanation of Revisions,
section 170(h)(7)(C) provides an exception to the Disallowance Rule for
pass-through entities that satisfy a three-year holding period.
Accordingly, the final regulations do not adopt this recommendation.
V. Reporting Requirements
Section 170(f)(11)(H) grants the Treasury Department and the IRS
authority to promulgate regulations to provide for substantiation of a
charitable contribution. Section 170(h)(7)(G) grants the Treasury
Department and the IRS authority to promulgate regulations to carry out
the purposes of section 170(h)(7), including to require reporting
(including reporting related to tiered partnerships and the modified
basis of partners and S corporation shareholders).
As noted in the preamble to the proposed regulations, existing
Sec. 1.170A-16 imposes substantiation and reporting requirements for
noncash charitable contributions, including but not limited to
qualified conservation contributions by pass-through entities. Subject
to certain exceptions, Sec. 1.170A-16 requires the donor to file Form
8283 in the case of a noncash charitable contribution exceeding $500.
Specifically, existing Sec. 1.170A-16(c) generally requires the donor
to complete Form 8283 (Section A) in the case of a noncash charitable
contribution of more than $500 but not more than $5,000. Existing Sec.
1.170A-16(d) generally requires the donor to complete Form 8283
(Section A or Section B, as applicable) in the case of a noncash
charitable contribution of more than $5,000. Existing Sec. 1.170A-
16(e) applies to noncash charitable contributions of more than $500,000
and generally requires the donor to complete Form 8283 (Section A or
Section B, as applicable). Section 170(f)(11)(D) and existing Sec.
1.170A-16(e) require a donor of a noncash contribution of more than
$500,000 to attach a qualified appraisal to the return on which the
deduction is claimed. Existing Sec. 1.170A-16(f) provides additional
substantiation rules, including rules for donors that are partnerships
or S corporations.
The proposed regulations provided guidance in the following four
categories: (1) requirements for all noncash charitable contributions
of more than $500, (2) requirements for noncash charitable
contributions by partnerships and S corporations, (3) requirements for
qualified conservation contributions made by partnerships and S
corporations, and (4) requirements for qualified conservation
contributions made by partnerships and S corporations the conservation
purpose of which is the preservation of a certified historic structure.
[[Page 54302]]
A. Requirements for All Noncash Charitable Contributions of More Than
$500
The proposed regulations made one clarifying change applicable to
all noncash charitable contributions of more than $500--a requirement
that taxpayers input numerical entries into Form 8283.
Section 1.170A-16(c)(3) provides the elements of a completed Form
8283 (Section A), and Sec. 1.170A-16(d)(3) provides the elements of a
completed Form 8283 (Section B). To further clarify reporting
requirements for donated property, proposed Sec. 1.170A-16(c)(3)(v)
and (d)(3)(ix) each added a requirement, respectively, that, if a
number can be inserted into any box on Form 8283, the number must be
inserted in the box on Form 8283; alternatively, taxpayers may attach a
statement to the Form 8283 explaining why a number cannot be inserted.
The proposed regulations also clarified that, while nothing precludes a
taxpayer from both inserting the number in the appropriate box on Form
8283 and including an attached statement explaining any additional
information regarding the number, taxpayers may not respond to a
request for information on Form 8283 with nonresponsive responses, for
example, by indicating that the requested information is available upon
request or will be provided upon request. The proposed regulations
provided that inclusion of such nonresponsive language in response to a
request for information on Form 8283 may be treated by the IRS as being
an incomplete filing of Form 8283.
The preamble to the proposed regulations explained the IRS had
observed a pronounced increase in taxpayers filing a Form 8283 that did
not contain any numbers and instead referred the IRS to an attachment.
Often, the attachment included nonresponsive information, such as
``available upon request,'' was entirely blank, or otherwise did not
provide the information required by Form 8283. Other times, the
attachment included multiple numbers for different boxes, leaving the
IRS to figure out which of the included numbers was appropriate for a
particular box. The proposed regulations stated that these actions are
to the detriment of fair and effective tax administration, and stated,
While many taxpayers understandably want to attach a statement
to the Form 8283 to verify their calculations and provide
appropriate supplemental information, having the numerical
information in the appropriate box on Sections A and B of Form 8283
is critical to the IRS's ability to ensure the integrity of each
filing, as IRS systems are programmed to match a partner's or
shareholder's information to the appropriate contributing
partnership's or contributing S corporation's information. Moreover,
information requested on Sections A and B of Form 8283 is
information that the partnership or S corporation should already
have and is already required to provide to the partner or
shareholder, as appropriate.
A commenter suggested that confusion could be avoided if the
regulation stated that an attached statement will only be acceptable if
it clearly explains why the taxpayer cannot provide the basis of their
donation or is simply explanatory of the basis the taxpayer provided.
The commenter also suggested that the box requiring the taxpayer to
report its basis in the donated property could be left blank if the
taxpayer provided an explanatory statement attached to the Form 8283.
The same commenter suggested that the regulations add a box for the
taxpayer to check if the entire explanation and number are contained in
an attached statement. These comments are largely already addressed by
the proposed regulations, which provided that taxpayers may attach a
statement to the Form 8283 explaining why a number cannot be inserted
and also clarified that nothing precludes a taxpayer from both
inserting the number in the appropriate box on Form 8283 and including
an attached statement explaining any additional information regarding
the number. The request to add a box to check if the entire explanation
and number are contained in the attached statement is outside the scope
of these final regulations but will be considered in connection with
updates to the Form 8283.
One commenter agreed with the Treasury Department and the IRS's
``general attitude toward Form 8283 and taxpayers who leave information
blank,'' but requested that the Form 8283 include a box to disclose
tacked holding periods. This commenter noted that the Form 8283
currently only contains a box for ``date acquired by donor'' and stated
that accountants had expressed confusion over whether acquisition date
or holding period date ought to be inserted into that box, because the
holding period date is the relevant date for all other accounting and
tax purposes. The commenter suggested that adding a box for the holding
period would account for potential disparities between the date entered
in the ``date acquired by donor'' box and the actual date when a
donor's holding period began to run.
The request to add a box for the holding period is outside the
scope of these final regulations but will be considered in connection
with updates to the Form 8283. The Treasury Department and IRS
emphasize that current instructions to Form 8283 direct taxpayers to
enter the date the property is acquired by the donor and that taxpayers
may submit an attachment disclosing the tacked holding period to
explain potential disparities between the date acquired by the donor
and the date the donor's holding period began to run.
This commenter also suggested that any increase in the number of
taxpayers filing Forms 8283 that do not contain numbers and instead
refer the IRS to an attachment is evidence of taxpayer confusion on how
to fill out the Form 8283, ``particularly when the IRS has taken a
litigating position that attempts to disqualify deductions in numerous
easement cases based on alleged failures in the taxpayers' Forms
8283.'' The commenter suggested that the final regulations should not
discourage taxpayers from providing additional information on an
attachment, particularly if the taxpayer is doing so to supplement
information on the Form 8283. This comment is consistent with the
proposed regulations, which provided that taxpayers may attach a
statement to the Form 8283 explaining why a number cannot be inserted
and also clarified that nothing precludes a taxpayer from both
inserting the number in the appropriate box on Form 8283 and including
an attached statement explaining any additional information regarding
the number.
This commenter also proposed that the regulations include a
``substantial compliance'' standard for Form 8283 for taxpayers who
make a good faith effort to complete the form. The commenter stated
that substantial compliance relief should not apply if a taxpayer omits
information from Form 8283 altogether or otherwise manipulates the
form, but that if a taxpayer makes a good-faith mistake, such as
miscalculating basis in a way that does not affect the calculation of
whether a qualified conservation contribution exceeds 2.5 times the sum
of the relevant bases, the taxpayer should not be punished by having
its deduction denied altogether.
While the IRS may work with a taxpayer to fix a good-faith mistake,
the Treasury Department and the IRS decline to adopt a ``substantial
compliance'' standard for Form 8283. First, there are certain reporting
requirements that are statutorily imposed and cannot be satisfied
through substantial compliance, including the requirement to obtain a
qualified appraisal and attach an appraisal summary to the return. See
Hewitt v.
[[Page 54303]]
Commissioner, 109 T.C. 258, aff'd without published opinion, 166 F.3d
332 (4th Cir. 1998); Deficit Reduction Act of 1984 (DEFRA), Public Law
98-369, section 155(a)(3), 98 Stat. 494 (1984). Second, even for those
reporting requirements that may implicate the substantial compliance
doctrine, the determination of whether substantial compliance should
apply is made under common law and should be applied only in cases in
which the taxpayer acted in good faith and exercised due diligence but
nevertheless failed to meet regulatory requirements. See Prussner v.
U.S., 896 F.2d 218, 224 (7th Cir. 1990). See also McAlpine v.
Commissioner, 968 F.2d 459, 462 (5th Cir. 1992). Substantial compliance
is not applicable if the requirement is essential but may be applied if
the requirements are procedural or directory. See Estate of Strickland
v. Commissioner, 92 T.C. 16, 27 (1989). The determination of whether
substantial compliance is satisfied is a facts-and-circumstances
analysis that is ordinarily resolved through the examination, Appeals,
or judicial process.
One commenter noted that the requirement to report cost basis has
been in existence since 1988 and stated that some practitioners have
failed to scrupulously report either the cost basis, fair market value,
or both, maintaining that an earlier iteration of the Form 8283
instructions were vague as to this requirement. The commenter asked
that the final regulations ``remove all doubt and reaffirm that the
reporting requirement was never vague or ambiguous.''
The Treasury Department and the IRS agree that the requirements for
an accurate Form 8283 have always required the reporting of cost or
other basis in the donated property. Section 155(a)(1) of DEFRA
specifically instructs the Secretary to promulgate regulations that
require a taxpayer claiming a deduction for a noncash charitable
contribution to: (1) obtain a qualified appraisal for the property, (2)
attach an appraisal summary to the return on which such deduction is
first claimed for such contribution, and (3) include on such return
such additional information (including the cost basis and acquisition
date of the contributed property) as the Secretary may prescribe in
such regulations. (Emphasis added). In fulfillment of this mandate, the
Secretary promulgated Sec. 1.170A-13, Recordkeeping and Return
Requirements for Deductions for Charitable Contributions. TD 8002, 49
FR 50663, December 31, 1984. Section 1.170A-13(b)(3)(i)(B) requires
reporting cost or other basis for charitable contribution deductions in
excess of $500 if required by the return form or its instructions.
Section 1.170A-13(b)(3)(ii) provides that, if a taxpayer has reasonable
cause for being unable to provide such information, the taxpayer must
attach an explanatory statement to the return. Existing Sec. 1.170A-
16(c)(3)(iv)(F) and (d)(3)(vi) require the reporting of cost or other
basis on Form 8283. Additionally, section 170(f)(11)(B) and (C) provide
the Secretary the authority to require information other than property
descriptions for contributions of more than $500 and requires qualified
appraisals for contributions of more than $5,000. These final
regulations clarify requirements for completing certain fields on Form
8283, but the requirement to include cost basis is clear under existing
regulations and does not require reiterating in other parts of the
regulations, including in these final regulations.
Accordingly, proposed Sec. 1.170A-16(c)(3)(v) and (d)(3)(ix) are
finalized with only minor, non-substantive changes (such as using the
term ``non-responsive language'' instead of the term ``non-responsive
responses'').
B. Requirements for Noncash Charitable Contributions Over $500 by
Partnerships and S Corporations
Existing Sec. 1.170A-16(f)(4)(i) provides that, if a partnership
or S corporation makes a noncash charitable contribution, the
partnership or S corporation is required to provide a copy of its
completed Form 8283 (Section A or Section B) to every partner or
shareholder who receives an allocation of a charitable contribution
deduction under section 170. Similarly, a recipient partner or
shareholder that is a partnership or S corporation must provide a copy
of the completed Form 8283 to each of its partners or shareholders who
receives an allocation of a charitable contribution deduction under
section 170 for the property described in Form 8283. Proposed Sec.
1.170A-16(f)(4)(i) retained these rules and clarified that any
additional tiers of pass-through entities must also provide a copy of
the donor's Form 8283 to its partners or shareholders who receive an
allocation of the charitable contribution.
Existing Sec. 1.170A-16(f)(4)(ii) requires a partner or S
corporation shareholder that receives an allocation of a charitable
contribution to which Sec. 1.170A-16(c), (d), or (e) applies to attach
a copy of the partnership's or S corporation's completed Form 8283
(Section A or Section B) to the return on which the deduction is
claimed. Proposed Sec. 1.170A-16(f)(4)(ii) retained these rules and
clarified that the partner or shareholder must also attach a copy of
any additional Forms 8283 that must be provided to them under proposed
Sec. 1.170A-16(f)(4)(iii)(A).
Proposed Sec. 1.170A-16(f)(4)(iii)(A) provided that a partner of a
partnership or shareholder of an S corporation that receives an
allocation of a charitable contribution to which Sec. 1.170A-16(c),
(d), or (e) applies must complete its own Form 8283 with any
information required by Form 8283 and the instructions to Form 8283. In
addition, proposed Sec. 1.170A-16(f)(4)(iii)(A) provided that a
partner that is itself a partnership or S corporation must complete its
own Form 8283 and provide a copy of that Form 8283 to every partner or
shareholder who receives an allocation of the charitable contribution,
and so on through any additional tiers. Proposed Sec. 1.170A-
16(f)(4)(iii)(A) required each partner or shareholder to attach its
separate Form 8283 to the return on which the contribution is claimed,
in addition to the copy of the donor's Form 8283 as well as other Forms
8283 that the partner or shareholder received. This proposed
requirement applied to all noncash charitable contributions over $500
made by a partnership or S corporation, not just those for conservation
easements.
The comments received on these provisions addressed: (1) the
requirement that partners and S corporation shareholders complete and
file separate Forms 8283, and (2) donee responsibilities pertaining to
the partners' and shareholders' Forms 8283.
1. The Form 8283 Filing Requirement for Partners and Shareholders
One commenter addressed proposed Sec. 1.170A-16(f)(4)(iii)(A).
This commenter suggested that, rather than requiring partners and S
corporation shareholders to complete and file separate Forms 8283, the
donating partnership or S corporation should be required to include on
its Form 8283 information about the partners' and shareholders' bases
and holding periods. The commenter suggested retaining the ``current
approach'' of having one Form 8283 for the contributing partnership
(that is distributed to the partners) and then requiring the specific
information the IRS is seeking on the attachment (which is required for
all qualified conservation contributions) submitted by the partners.
Section 170(f)(11) disallows a charitable contribution deduction
unless certain substantiation requirements are met. Providing a Form
[[Page 54304]]
8283 is a reasonable, basic step for substantiating charitable
contributions for taxpayers who ultimately claim the deduction.
Congress provided, as part of DEFRA, the authority to require taxpayers
to submit Forms 8283. The legislative history shows that Congress was
concerned that ``opportunities to offset income through inflated
valuations of donated property have been increasingly exploited by tax
shelter promoters.'' Staff of Senate Comm. on Finance, 98th Cong., 2d
Sess., Explanation of Provisions of the Deficit Reduction Act of 1984,
at 503 (Comm. Print 1984). This has long been an area of abuse for
which taxpayers have creatively sought to avoid transparent reporting
and instead have attempted to disguise overvalued charitable
contributions.
Proposed Sec. 1.170A-16(f)(4)(iii)(A) provides the IRS with
important information and the burden imposed on taxpayers is reasonable
in light of the potential for abuse. As the preamble to the proposed
regulations stated, in pass-through and tiered-entity structures, the
IRS regularly observes partners and shareholders providing incomplete
information to substantiate their charitable contribution deductions. A
partner's or S corporation shareholder's Form 8283 that contains the
necessary information from the Form K-1 received from the donating
partnership, donating S corporation, or an upper-tier partnership or
upper-tier S corporation streamlines processing and efficiency. Thus,
these final regulations finalize Sec. 1.170A-16(f)(4)(iii)(A) as
proposed.
2. Donee Responsibilities Pertaining to Partners' and Shareholders'
Forms 8283
A commenter stated that the requirement that partners and S
corporation shareholders provide their own Form 8283 represents
substantial additional work for donees that likely would make them less
willing (and able) to assess the accuracy and completeness of Form
8283. This commenter stated that, if there is an expectation that the
donee would sign an individual's Form 8283, then it would require more
due diligence for the donee, creating on-the-ground problems and
complexities. The commenter also stated that retaining so many copies
of Forms 8283 as part of their permanent record would significantly
increase their record-keeping burden (although this commenter also
stated that the great majority of conservation easement donations are
not made by partnerships and, of those, very few are made by tiered
partnerships).
The proposed regulations did not impose a requirement for the donee
to sign and/or retain a copy of each partner's and shareholder's Forms
8283. The requirement in Sec. 1.170A-16(d)(3)(ii) that a completed
Form 8283 (Section B) include the donee's signature only applies to the
Form 8283 filed by the donor, in these instances the contributing pass-
through entity. To clarify this issue, the Instructions to Form 8283
have been updated to provide: ``A member's Form 8283 is not required to
have signatures.'' See the Form 8283 Instructions released on January
17, 2024, which state ``(Rev. December 2023)'' after ``Instructions for
Form 8283'' at the top of the first page.
C. Requirements for Qualified Conservation Contributions Made by
Partnerships and S Corporations
As explained in the preamble to the proposed regulations, to ensure
that taxpayers claiming qualified conservation contributions properly
comply with section 170(f)(19) and (h)(7), the IRS must have relevant
basis reporting from both the contributing partnership or contributing
S corporation and each partner or shareholder receiving an allocation
of the contribution (which will be ultimate members, upper-tier
partnerships, or upper-tier S corporations). Accordingly, the proposed
regulations inserted a new paragraph, proposed Sec. 1.170A-
16(d)(3)(viii),\5\ which provided that, for qualified conservation
contributions made by a partnership or S corporation, the contributing
partnership or contributing S corporation must report the sum of each
ultimate member's relevant basis, computed in accordance with Sec.
1.170A-14(j) through (m), on the Form 8283 (Section B). Under proposed
Sec. 1.170A-16(d)(3)(viii), this new requirement did not apply to
contributions described in section 170(h)(7)(C) and Sec. 1.170A-
14(n)(2) (for contributions made outside of the three-year holding
period) or section 170(h)(7)(D) and Sec. 1.170A-14(n)(3) (for
contributions made by certain family partnerships or S corporations),
provided that they are not also described in section 170(h)(7)(E) and
Sec. 1.170A-14(n)(4) (for contributions to preserve certified historic
structures), in which case the reporting requirement did apply.
---------------------------------------------------------------------------
\5\ The proposed regulations would redesignate existing Sec.
1.170A-16(d)(3)(viii) as Sec. 1.170A-16(d)(3)(x).
---------------------------------------------------------------------------
Proposed Sec. 1.170A-16(f)(4)(iii)(B) provided an additional
substantiation rule for partners and S corporation shareholders
receiving an allocation of a qualified conservation contribution. That
paragraph required that an ultimate member's separate Form 8283 must
include the ultimate member's own relevant basis and that an upper-tier
partnership's or upper-tier S corporation's separate Form 8283 must
include the sum of each of its ultimate member's relevant bases.
Proposed Sec. 1.170A-16(f)(4)(iii)(B) did not apply to contributions
described in section 170(h)(7)(C) and Sec. 1.170A-14(n)(2) (for
contributions made outside of the three-year holding period) or section
170(h)(7)(D) and Sec. 1.170A-14(n)(3) (for contributions made by
certain family partnerships or S corporations), provided that they are
not also described in section 170(h)(7)(E) and Sec. 1.170A-14(n)(4)
(for contributions to preserve certified historic structures), in which
case proposed paragraph Sec. 1.170A-16(f)(4)(iii)(B) did apply.
The comments received on these provisions addressed: (1) the
requirement that ultimate shareholders report relevant basis, (2)
whether the contributing entity should report the basis in the property
underlying the qualified conservation contribution or the basis in the
qualified conservation contribution itself, and (3) requiring reporting
of relevant basis with respect to a qualified conservation contribution
that satisfies one of the exceptions to the Disallowance Rule.
1. The Requirement That Ultimate Members Report Relevant Basis
One commenter interpreted the requirement in the proposed
regulations that ultimate members report their relevant basis on their
separate Forms 8283 to mean that the proposed regulations ``require
individual members and shareholders to determine their relevant basis
and holding period.'' The commenter stated that a particular problem
with this new requirement is the complexity of the calculations needed
for an ultimate member to determine their relevant basis.
The Treasury Department and the IRS disagree that the proposed
regulations require each ultimate member to determine its relevant
basis. As explained in the proposed regulations, relevant basis must be
determined by the partnership or S corporation. The ultimate member may
need to share information, such as its basis in its interest in the
partnership or S corporation, with the partnership or S corporation to
facilitate this computation. The partnership or S corporation must also
determine its holding period in the property with respect to which the
qualified conservation contribution is made.
Another commenter stated that the requirement that partners and
[[Page 54305]]
shareholders file a separate Form 8283 with respect to certified
historic structure contributions was a trap for the unwary that was
confusing, duplicative, and contrary to the statute. In support of this
premise, the commenter stated that: (1) the requirement that each
partner and shareholder file a separate Form 8283 reporting its own
relevant basis does nothing to further the purposes of section
170(f)(19) and (h)(7); (2) section 170(f)(19) and (h)(7) apply at the
entity level based on the sum of all the relevant bases, and the
partners' and shareholders' separate Forms 8283 do not convey the sum
of all the relevant bases; (3) the Treasury Department and the IRS
could require the contributing partnership to add an attachment to the
Form 8283 explaining the partnership's allocations of the qualified
conservation contribution, such as any contractual limitations
affecting the partnership's allocations; (4) requiring partners and
shareholders to report their relevant bases may cause confusion by
leading the partners and shareholders to believe that application of
the Disallowance Rule depends on whether the amount of a partner's or
shareholder's deduction exceeds 2.5 times the partner's or
shareholder's personal relevant basis; (5) because section 170(f)(19)
and (h)(7) applies only to pass-through entities and ``almost all''
pass-through entities are subject to audit at the entity level pursuant
to the Bipartisan Budget Act of 2015 (BBA), the IRS does not need
separate Forms 8283 at any intermediary partner levels; and (6) the
separate Forms 8283 from partners and shareholders would not achieve
the intended result of reporting requirements enacted in DEFRA--
triggering an audit of overvalued property. The Treasury Department and
IRS have considered these comments but conclude that they are not
persuasive. First, in a structure involving tiered partnerships or S
corporations, the Disallowance Rule must be tested at each tier. See
Sec. 1.170A-14(j)(2)(ii). Therefore, each upper-tier partnership and
upper-tier S corporation must compute 2.5 times the sum of its ultimate
members' relevant bases. It may be the case that the amount of the
contributing partnership's contribution does not exceed 2.5 times the
sum of its ultimate members' relevant bases, but an upper-tier
partnership's allocated portion does exceed 2.5 times the sum of the
upper-tier partnership's ultimate members' relevant bases and would be
subject to the Disallowance Rule. Therefore, it is essential that each
upper-tier partnership and upper-tier S corporation provide a separate
Form 8283 so that the IRS can apply the Disallowance Rule to upper-tier
partnerships and upper-tier S corporations. Second, section
170(h)(7)(G)(i) provides an explicit grant of authority for the
promulgation of regulations and other guidance requiring reporting
related to tiered partnerships and S corporations. Requiring upper-tier
partnerships and upper-tier S corporations to report the sum of their
ultimate members' relevant bases is necessary to administer the
Disallowance Rule and is consistent with the authority granted in
section 170(h)(7)(G).
Similarly, the requirement that an ultimate member must report
their own relevant basis on their separate Form 8283 ensures that the
relevant basis reported at the ultimate member level is consistent with
the sum of relevant bases reported by the partnership or S corporation.
The commenter's suggestion that the partnership's or S corporation's
Form 8283 could separately list each ultimate member's relevant basis
would not be as administrable. It is impractical for Form 8283 itself
to contain sufficient space for each ultimate member's relevant basis
to be separately listed. Accordingly, the partnership or S corporation
would need to provide such information on an attachment or additional
statement. The way in which such an attachment is formatted, how easily
the information can be found, and whether or not the information is
actually provided may vary. The Treasury Department and the IRS have
determined that requiring ultimate members to report their personal
relevant bases in the appropriate box on the Form 8283 (rather than on
an attachment to the form) ensures that the information can be easily
found by the IRS and is in a uniform format for processing by the IRS.
Thus, even if a contributing partnership or upper-tier partnership is
subject to entity-level audit under the BBA, the partners' separate
Forms 8283 provide valuable information in ascertaining the
partnership's compliance with section 170(f)(19) and (h)(7).
In addition, the Treasury Department and the IRS note that no S
corporations and not all partnerships are subject to the BBA audit
procedures. Accordingly, the Treasury Department and the IRS decline to
remove the requirement that partners and S corporation shareholders
report their relevant bases on their separate Forms 8283.
2. Whether the Contributing Entity Should Report the Basis in the
Property Underlying the Qualified Conservation Contribution or the
Basis in the Qualified Conservation Contribution Itself
As noted earlier, the regulations and Form 8283 have long required
a donor to report its basis in the contributed property. At the time of
the publication of the proposed regulations in November 2023, the then-
current version of the Form 8283 instructions allowed a donor of a
qualified conservation contribution to either report its basis in the
underlying property or its basis in the qualified conservation
contribution itself. For example, assume a partnership owned 600 acres
of real property. The partnership donates a conservation easement on
400 of those acres. Assume the partnership's adjusted basis in those
400 acres was $2,000,000, and that the partnership's adjusted basis in
the conservation easement itself was $500,000. Under the then-current
version of the Form 8283 instructions, the partnership could list
either $2,000,000 or $500,000 as its basis on the Form 8283; the
partnership would also be required to indicate whether it was reporting
its basis in the property underlying the qualified conservation
contribution or its basis in the qualified conservation contribution
itself.
A commenter noted this option in the (then-current) Form 8283
instructions. The commenter stated that the proposed regulations
require a contributing partnership or contributing S corporation to
provide its basis in the property underlying the qualified conservation
contribution rather than its basis in the qualified conservation
contribution itself. This commenter believed it would simplify the
process for the donor, donee, and the IRS if Form 8283 required all
taxpayers making a qualified conservation contribution to report their
basis in the property underlying the qualified conservation
contribution, rather than giving taxpayers a choice.
The Treasury Department and the IRS note that the proposed
regulations do not amend the requirement in Sec. 1.170A-16(d)(3)(vi)
that taxpayers report their basis in contributed property on their
Forms 8283. Section 170(h)(7)(B)(i) provides that, for purposes of the
Disallowance Rule, relevant basis is determined with reference to ``the
portion of the real property with respect to which'' the qualified
conservation contribution is made. Accordingly, the computations in the
proposed regulations are generally based on the
[[Page 54306]]
contributing partnership's or contributing S corporation's basis in the
property underlying the qualified conservation contribution, rather
than its basis in the qualified conservation contribution itself.
Although the proposed regulations do not modify the requirement
that a donor must report its basis in contributed property, the
Treasury Department and the IRS note that the current version of the
Form 8283 instructions, released January 17, 2024, which states ``(Rev.
December 2023)'' after ``Instructions for Form 8283'' at the top of the
first page, requires a donor of a qualified conservation contribution
to both report its basis in the underlying real property on Form 8283
and include information about the cost or adjusted basis of the
qualified conservation contribution itself in a statement attached to
Form 8283.
3. Requiring Reporting of Relevant Basis With Respect to a Qualified
Conservation Contribution That Satisfies One of the Exceptions to the
Disallowance Rule
One commenter requested clarification on whether the rule requiring
Forms 8283 with relevant basis applied to every qualified conservation
contribution made by a partnership or S corporation, regardless of
whether the contribution satisfies one of the exceptions to the
Disallowance Rule. As noted above, proposed Sec. 1.170A-16(d)(3)(viii)
and (f)(4)(iii)(B) required contributing partnerships, contributing S
corporations, upper-tier partnerships, upper-tier S corporations, and
ultimate members to report relevant basis (or the sum of the relevant
bases) on Form 8283 with respect to a qualified conservation
contribution. However, these reporting requirements did not apply to
contributions made outside of the three-year holding period or to
contributions made by certain family partnerships or S corporations,
unless the contribution is to preserve a certified historic structure
(in which case the reporting requirements did apply).
Because the regulations are already clear on this point, the
commenter's suggestion is not adopted. Accordingly, these final
regulations adopt Sec. 1.170A-16(d)(3)(viii) and (f)(4)(iii)(B) with
only minor non-substantive changes.
D. Requirements for Certified Historic Structure Contributions Made by
Partnerships and S Corporations
Although contributions by partnerships or S corporations to
preserve certified historic structures that exceed 2.5 times the sum of
the relevant bases are excepted from the Disallowance Rule, they are
subject to section 170(f)(19). Section 170(f)(19) provides that no
deduction is allowed under section 170(a) for such a contribution
unless the pass-through entity making such contribution includes on its
return for the taxable year in which the contribution is made a
statement that the pass-through entity made such a contribution and
provides such information about the contribution as the Secretary may
require. Section 170(f)(19)(B) provides that section 170(f)(19) applies
to qualified conservation contributions by pass-through entities
(whether directly or as a distributive share of a contribution of
another pass-through entity) the conservation purpose of which is the
preservation of any building which is a certified historic structure,
and the amount of which exceeds 2.5 times the sum of each partner's
relevant basis (as defined in section 170(h)(7)).
Proposed Sec. 1.170A-16(f)(6)(i) provided that, for any qualified
conservation contribution described in proposed Sec. 1.170A-
16(f)(6)(ii), no deduction is allowed under section 170 or any other
provision of the Code under which deductions are allowable to pass-
through entities with respect to such contribution unless each
partnership or S corporation: (1) includes on its return for the
taxable year in which the contribution is made a statement that it made
such a contribution or received such allocated portion and (2) provides
such information about the contribution as the Secretary may require in
guidance, forms, or instructions.
Proposed Sec. 1.170A-16(f)(6)(ii) provided that proposed Sec.
1.170A-16(f)(6) applies to any qualified conservation contribution, the
conservation purpose of which is preservation of a building that is a
certified historic structure, that is either made by a contributing
partnership or contributing S corporation or that is an allocated
portion of an upper-tier partnership or upper-tier S corporation, and
the amount of such contribution or such allocated portion exceeds 2.5
times the sum of each ultimate member's relevant basis.
Proposed Sec. 1.170A-16(f)(6)(iii) provided that a partnership or
S corporation satisfies the requirements of section 170(f)(19)(A) and
Sec. 1.170A-16(f)(6)(i) by filing a completed Form 8283, including
information about relevant basis, in accordance with section 170, the
regulations under section 170, and the instructions to Form 8283.
As noted above, proposed Sec. 1.170A-16(d)(3)(viii) and
(f)(4)(iii)(B) required contributing partnerships, contributing S
corporations, upper-tier partnerships, upper-tier S corporations, and
ultimate members to report relevant basis (or the sum of the relevant
bases) on Form 8283 with respect to any qualified conservation
contribution for the preservation of a certified historic structure,
regardless of whether the contribution also satisfied the three-year
holding period exception or the certain family pass-through entity
exception.
Two commenters addressed these rules, discussing whether: (1)
relevant basis accounts for fundamental differences between certified
historic structure contributions and other types of qualified
conservation contributions, (2) relevant basis accurately reflects
abusive certified historic structure contributions, and (3) these
reporting requirements should apply to certified historic structure
contributions that also satisfy either the three-year holding period
exception or the family-pass through entity exception.
1. Differences Between Certified Historic Structure Contributions and
Other Types of Qualified Conservation Contributions
Two commenters expressed concern that qualified conservation
contributions that satisfy the certified historic structure exception
are fundamentally different than other types of qualified conservation
contributions (such as a conservation easement to protect greenspace)
and, as such, the data used for computation of relevant basis should be
different. One of these commenters stated that protection of certified
historic structures under section 170(h)(4)(A)(iv) differs
fundamentally from other conservation purposes in section
170(h)(4)(A)(i) through (iii) because ``[u]nlike natural lands, which
typically do not need upkeep, historic properties require a continuous
influx of capital for rehabilitation and ongoing maintenance
expenditures to preserve the historic character of the building
protected by the easement.'' This commenter added that ``open space''
qualified conservation contributions allow nature to thrive undisturbed
while certified historic structure contributions need additional human
intervention to further the conservation purpose and to preserve the
historic structure in perpetuity. The commenter stated that money
flowing into the property-owning partnership that is ``put toward the
preservation, rehabilitation, or upkeep of the certified historic
structure'' should be allocated to the
[[Page 54307]]
ultimate member's modified basis, but that the proposed regulations
``ignore these funds entirely.''
The commenter offered an example of a taxpayer that acquires a
building and then invests $2,000,000 into the building after
acquisition. The commenter stated that the proposed regulations ignore
both debt financing and capital contributions made after the date of
contribution, which the commenter stated ``produces odd and unworkable
results for investors in historic structures,'' and recommended that
the regulations be amended to ``include these other sources of
financing in historic properties.'' The commenter also stated that,
``at the time an easement is donated, cash from investors may be
earmarked for preservation and rehabilitation of a dilapidated
structure.'' The commenter remarked that cash raised and debt secured
is essential for furthering the historic preservation purpose. Thus,
the commenter asserted that, with respect to certified historic
structure contributions, the definition of relevant or modified basis
should include debt and cash necessary for maintaining the conservation
purpose.
The Treasury Department and the IRS have concluded that certified
historic structure contributions should have the same relevant basis
computation as any other qualified conservation contribution. Although
the Treasury Department and the IRS recognize that there are
differences between the conservation purposes for different types of
qualified conservation contributions, section 170(h)(7) does not
contemplate different calculations of relevant basis depending on the
particular conservation purpose. Moreover, section 170(f)(19)(B)(iii)
specifically refers to relevant basis ``as defined in [section
170(h)(7)].''
It is appropriate that the rules for the determination of modified
basis and relevant basis maintain their focus on the amounts invested
in the property generating the deduction as of the time of the
qualified conservation contribution. Including debt and cash earmarked
for the ongoing maintenance of the conservation purpose would
contradict the statutory definition of relevant basis and modified
basis. Section 170(h)(7)(B)(i) provides that relevant basis means the
portion of a partner's modified basis in the partnership which is
allocable to the portion of the real property with respect to which a
qualified charitable contribution is made. This narrow definition of
relevant basis does not include amounts allocable to other assets.
Also, section 170(h)(7)(B)(ii)(I) provides that modified basis is
calculated immediately before the qualified conservation contribution.
Including future events and costs incurred or paid after the donation
would defeat the purpose of including a timeline in the definition of
modified basis.
Therefore, the final regulations do not provide for different
calculations for relevant basis depending on different conservation
purposes. In addition, the computations for relevant basis would not
treat ``earmarked'' amounts as part of the property with respect to
which the qualified conservation contribution is made. Thus, for
example, such amounts would not be included in items A \6\ or E \7\ in
the relevant basis computations.
---------------------------------------------------------------------------
\6\ Item A is a contributing partnership's adjusted basis in the
portion of the real property with respect to which a qualified
conservation contribution is made.
\7\ Item E is an ultimate member's pro rata portion of a
contributing S corporation's adjusted basis in the portion of the
real property with respect to which a qualified conservation
contribution is made.
---------------------------------------------------------------------------
2. The Use of Relevant Basis in Identifying Abusive Certified Historic
Structure Contributions
One of the commenters stated that relevant basis is not an accurate
measure to determine whether a certified historic structure
contribution is abusive, giving the example of three buildings. The
first building is dilapidated, was purchased for $100,000, and requires
$900,000 of improvements to reach a $1,000,000 investment value. The
second building is fully operational with a $1,000,000 acquisition
cost. It is possible for the owner to enlarge either building under the
applicable zoning laws. The third building is acquired for $5,000,000,
but it is fully developed and cannot be enlarged under the applicable
zoning laws. The owner of each building makes a certified historic
structure contribution and claims a $1,000,000 contribution.
The commenter stated that the $100,000 dilapidated building would
be most in danger of demolition, yet the ratio of the amount of the
contribution to the building's basis would be 10:1, suggesting an
abusive transaction. The commenter stated that, with respect to the
second building, the ratio of the amount of the contribution to the
building's basis would be 1:1, and the ratio for the third building
would be 0.2:1. The commenter concluded that, because the third
building cannot be enlarged under applicable zoning laws, the claimed
contribution of $1,000,000 would be the most abusive of the three
donations, yet would appear, under the reporting requirements, as the
least abusive (because it would have the lowest ratio). The commenter
concluded that this example illustrates that computing whether a
certified historic structure contribution exceeds 2.5 times the sum of
the relevant bases does not appropriately provide relevant information
for the IRS to determine whether the claimed amount of the contribution
is abusive. The commenter stated that requiring reporting of the sum of
the relevant bases could actually lead the IRS away from identifying
abusive transactions.
The Treasury Department and the IRS conclude that this comment is
not persuasive and decline to make the changes that it advocates. The
purpose of these regulations is to implement section 170(f)(19) and
(h)(7). Section 170(f)(19) explicitly requires reporting for certified
historic structure contributions by partnerships and S corporations
that exceed 2.5 times the sum of the relevant bases (as defined in
section 170(h)(7)). The fact that the commenter believes that a
different reporting regime would have been more helpful to the IRS does
not change the statutory framework with which taxpayers must comply.
Moreover, the fact pattern described by the commenter raises concerns
about overvaluation and compliance with section 170. In addition, the
buildings most in need of preservation are those with the greatest
significance to American history, not those in the poorest condition
with an ability to be enlarged. See 36 CFR 60.4 (criteria for National
Register listing) and 36 CFR 67.4 (criteria for certification of
historic significance).
This commenter also stated that relevant basis for certified
historic structure contributions is particularly difficult to compute.
The commenter noted the ``sheer number and subjectivity of variables
that can affect the basis of a commercial building'' and cited as
examples the segregation of furniture and fixtures from real property
and the determination of whether particular acquisition expenses should
be capitalized or expensed. This commenter posited a scenario in which
the IRS disallowed a deduction because of a disagreement over whether
carpeting should be capitalized as part of furniture and fixtures or as
part of the basis in the building, because the determination about how
to capitalize that item impacts the relevant basis calculation.
The Treasury Department and the IRS note that the certified
historic structure exception in section 170(h)(7)(E) and
[[Page 54308]]
Sec. 1.170A-14(n)(4) provides that those qualified conservation
contributions are not subject to the Disallowance Rule. Under section
170(f)(19) and proposed Sec. 1.170A-16(f)(6), however, any deduction
will be disallowed if the amount of the contribution exceeds 2.5 times
the sum of the relevant bases and the reporting requirements are not
followed. The commenter's hypothetical is unrealistic because the only
way the capitalization dispute would result in disallowance under
section 170(h)(7) or section 170(f)(19) would be if the capitalization
disagreement resulted in the contribution exceeding 2.5 times the sum
of the relevant bases and the taxpayer failed to comply with the
section 170(f)(19) reporting requirements.
The commenter stated that, rather than using relevant basis, the
IRS should implement an alternative reporting regime that would include
``Valuation Assumptions'' and ``Qualified Appraisal Information.'' To
address valuation assumptions, the commenter suggested a ``Critical
Information Summary for Historic Preservation Easement Appraisals.''
The commenter hoped that this proposal would make it much more
efficient to determine compliance with the existing requirements and to
find the aspects of the appraisal that need additional review.
The second part of the commenter's reporting regime included a
Qualified Appraisal Checklist, which the commenter suggested would
serve as a central checklist for taxpayers to report adherence to
section 170(f)(11)(E)(ii)(II) \8\ and several requirements in the
section 170 regulations. The commenter stated that adopting such a
checklist would be permissible because the commenter interprets section
170(f)(19)(A)(ii) as ``giving the Secretary wide discretion in what
information to require.''
---------------------------------------------------------------------------
\8\ Section 170(f)(11)(E)(ii)(ll) requires the appraiser to
regularly perform appraisals for which the individual receives
compensation. The commenter seems to imply that the Qualified
Appraisal Checklist more broadly satisfies the requirements of
section 170(f)(11)(E) and corresponding regulations.
---------------------------------------------------------------------------
The Treasury Department and the IRS note that section 170(f)(19)(B)
requires that the taxpayer compute relevant basis, as defined in
section 170(h)(7), to determine if the taxpayer is required to report
under section 170(f)(19)(A). In other words, although the statute
grants authority for the Treasury Department and the IRS to require
reporting of additional information, the disallowance rule in section
170(f)(19) for failure to report required information depends on
whether the amount of the certified historic structure contribution
exceeds 2.5 times the sum of the relevant bases, as defined in section
170(h)(7). Accordingly, the Treasury Department and the IRS decline to
adopt the commenter's suggestion to replace the relevant basis
calculation required under section 170(f)(19)(B)(iii) with this
checklist. As noted in the preamble to the proposed regulations, the
Treasury Department and the IRS intend to issue future guidance
addressing section 170(f)(19)(A)(ii).
3. Reporting Requirements for Certified Historic Structure
Contributions That Also Satisfy Another Exception to the Disallowance
Rule
As described above, the proposed regulations required the computing
and reporting of relevant basis with respect to all contributions that
satisfy the certified historic structure exception. The proposed
regulations generally did not require the computation or reporting of
relevant basis with respect to contributions that satisfied either the
three-year holding period exception or the family pass-through entity
exception. However, in a situation in which a contribution satisfies
both the certified historic structure exception and one of the other
exceptions, the proposed regulations did require the computing and
reporting of relevant basis. In addition, under proposed Sec. 1.170A-
16(f), if the amount of the certified historic structure contribution
or allocated portion exceeded 2.5 times the sum of the relevant bases,
then section 170(f)(19) would disallow any deduction unless the
reporting requirements of proposed Sec. 1.170A-16(f) were satisfied.
One commenter stated that computation and reporting of relevant
basis should not be required with respect to a contribution that
satisfies both the certified historic structure exception and one of
the other exceptions. The commenter opined that the rationale for the
certified historic structure exception relates to the capital needs of
operating buildings and not its form of ownership. The commenter opined
that a qualified conservation contribution does not present
opportunities for abusive arrangements if the form of ownership
qualifies for the three-year holding period exception or the family
pass-through entity exception. The commenter further argued that, had
Congress been concerned about reporting for the three-year holding
period exception or the family pass-through entity exception, Congress
would have imposed a standalone reporting requirement for those
exceptions. The commenter suggested that requiring participants in the
other two exceptions to follow the reporting requirements for certified
historic structures may serve as a deterrent to investment in certified
historic structures or as a deterrent to protecting certified historic
structures through a qualified conservation contribution.
The Treasury Department and the IRS do not adopt this comment.
Congress drafted section 170(h)(7) so that a contribution meeting any
of the three statutory exceptions in section 170(h)(7)(C), (D), or (E)
is not subject to the Disallowance Rule. In contrast, Congress drafted
the reporting requirements in section 170(f)(19) to apply to all
certified historic structure contributions in excess of 2.5 times the
sum of the relevant bases, without regard to whether the contribution
satisfies the three-year holding period exception or the family pass-
through exception. Similarly, although section 170(h)(7)(C) and (D)
provide exceptions to the Disallowance Rule, they do not provide an
exception to the reporting requirements of section 170(f)(19).
Accordingly, it would not be consistent with the language or purposes
of section 170(f)(19) and (h)(7) to exempt any certified historic
structure contributions from section 170(f)(19). In addition, to ensure
compliance with section 170(f)(19), it is necessary that relevant basis
be reported for all certified historic structure contributions. Thus,
these final regulations adopt Sec. 1.170A-16(d)(3)(viii),
(f)(4)(iii)(B), and (f)(6) as proposed with minor non-substantive
changes.
For clarity, these final regulations modify the recordkeeping
requirements for allocation of modified basis found in proposed Sec.
1.170A-14(m)(6). As proposed, contributing partnerships, contributing S
corporations, upper-tier partnerships, and upper-tier S corporations
must maintain dated, written statements in their books and records by
the due date, including extensions, of their Federal income tax
returns, substantiating the computation of each ultimate member's
adjusted basis, modified basis, and relevant basis, but these
statements need not be maintained (nor does modified basis or relevant
basis need to be computed) with respect to contributions that meet an
exception in Sec. 1.170A-14(n)(2) or (3). These final regulations
clarify that these statements must be maintained (and modified basis
and relevant basis must be computed) with respect to all contributions
that meet the certified historic structure exception in Sec. 1.170A-
14(n)(4), regardless of whether such contributions also meet an
[[Page 54309]]
exception in Sec. 1.170A-14(n)(2) or (3). Accordingly, these
regulations finalize Sec. 1.170A-14(m)(6) with a clarification to the
second sentence, which now provides that these statements need not be
maintained (nor does modified basis or relevant basis need to be
computed) with respect to contributions that meet an exception in Sec.
1.170A-14(n)(2) or (3), unless the contribution also meets the
exception in Sec. 1.170A-14(n) (in which case these statements need to
be maintained and modified basis and relevant basis need to be
computed).
VI. Other Comments
Commenters also addressed: (1) the proposed regulations'
consistency with the Federal government's position on climate action,
(2) the ``no inference'' paragraph in the proposed regulations, (3)
valuation of qualified conservation contributions, and (4) interaction
of the Disallowance Rule with the rules of section 1011(b) of the Code.
A. Consistency With the Federal Government's Position on Climate Action
One commenter stated that the proposed regulations evidenced an
approach to land conservation that is inconsistent with the Federal
government's position regarding climate action as outlined at the 2023
United Nations Climate Change Conference (COP28).
The Treasury Department and the IRS acknowledge the important role
of climate action, land conservation, and qualified conservation
contributions. Nevertheless, Congress enacted section 170(f)(19) and
(h)(7) because of concerns regarding abusive transactions and inflated
claims. See, e.g., S. Committee on Finance, Comm. Print 116-44,
Syndicated Conservation-Easement Transactions, 116th Cong., 2nd Sess.
(2020). The regulations under Sec. 1.170A-14 implement the
Disallowance Rule.
B. No Inference
Section 605(c)(2) of the SECURE 2.0 Act states that no inference is
intended as to the appropriate treatment of any contribution for which
a deduction is not disallowed by reason of section 170(h)(7). As
explained in the preamble to the proposed regulations, some
practitioners have taken the position that section 170(h)(7) operates
as a ``safe harbor.'' According to these practitioners, a qualified
conservation contribution that is not disallowed by the Disallowance
Rule is somehow immune to a challenge on other grounds, including
failure to comply with other rules under section 170 and overvaluation
of the contribution. The preamble to the proposed regulations stated
that such a position is baseless and contradicted by the statutory
language. To clarify this issue, proposed Sec. 1.170A-14(j)(5)
provided that there is no presumption that a qualified conservation
contribution that is not a disallowed qualified conservation
contribution is compliant with section 170, any other section of the
Code, the regulations, or any other guidance thereunder. It also
provided that compliance with section 170(h)(7) and proposed Sec.
1.170A-14(j) through (n) is not a safe harbor for purposes of any other
provision of law, including the other requirements of section 170 and
the value of the contribution. Such transactions are subject to
adjustment or disallowance for any other reason, including failure to
satisfy the requirements of section 170 or the overvaluation of the
contribution; for example, failure to properly execute Form 8283,
violation of the partnership anti-abuse rule of Sec. 1.701-2, lack of
economic substance, or other rules or judicial doctrines. In addition,
compliance with proposed Sec. 1.170A-14(j) through (n) would not
preclude the application of any penalty, including penalties for
valuation misstatement, negligence, and fraud. Proposed Sec. 1.170A-
14(j)(5) also provided that taxpayers who engage in such transactions
may be required to disclose, under Sec. 1.6011-4, the transactions as
listed transactions.
One commenter requested that the IRS delete proposed Sec. 1.170A-
14(j)(5). The commenter stated that paragraph does not add any value to
the substance of the proposed regulations and is ``inappropriately
hostile toward donors of qualified conservation contributions.''
The Treasury Department and the IRS do not agree with this comment.
Proposed Sec. 1.170A-14(j)(5) implements section 605(c)(2) of the
SECURE 2.0 Act and provides further detail and clarification about the
interaction between section 605(c)(2) of the SECURE 2.0 Act and the
other rules governing qualified conservation contributions. Moreover,
as explained in the preamble to the proposed regulations, the rule in
proposed Sec. 1.170A-14(j)(5) addresses positions that some
practitioners have actually taken. Accordingly, these final regulations
retain Sec. 1.170A-14(j)(5) with minor non-substantive changes.
C. Valuation of Qualified Conservation Contributions
One commenter expressed concern that the proposed regulations do
not address the valuation of donated property, especially real
property, nor do they address fraudulent appraisal practices.
The Treasury Department and the IRS agree that overvaluation is an
important facet of abusive charitable contributions of interests in
real property. However, any guidance on valuation would be outside the
scope of these final regulations, which are focused on the Disallowance
Rule, section 170(f)(19), and reporting requirements for noncash
charitable contributions. The Treasury Department and the IRS have
challenged and will continue to challenge fraudulent appraisal
practices and overvaluation.
D. Interaction With the Rules of Section 1011(b)
Section 1011(b) provides that, if a deduction is allowable under
section 170 by reason of a sale, then the adjusted basis for
determining the gain from such sale is that portion of the adjusted
basis which bears the same ratio to the adjusted basis as the amount
realized bears to the fair market value of the property. The proposed
regulations do not address section 1011(b). One commenter asked about
the interaction of section 1011(b) with the Disallowance Rule.
Specifically, the commenter asked whether the actual fair market value
of the qualified conservation contribution or the ``capped amount''
under section 170(h)(7) should be used in applying section 1011(b).
First, the Treasury Department and the IRS disagree that section
170(h)(7) is a ``capped amount;'' it is a Disallowance Rule for certain
qualified conservation contributions by pass-through entities.
Second, by its terms, section 1011(b) applies only if a deduction
is allowable under section 170 by reason of a sale. Therefore, if a
contribution is disallowed, section 1011(b) would not apply.
Third, even in situations in which section 1011(b) could apply, the
application of section 1011(b) is outside the scope of these final
regulations, and these final regulations do not address section
1011(b). The Treasury Department and the IRS note, however, that the
computation of adjusted basis for d
[…truncated; see source link]Indexed from Federal Register on June 28, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.