Rule2024-22963
Syndicated Conservation Easement Transactions as Listed Transactions
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
October 8, 2024
Effective
October 8, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations that identify certain syndicated conservation easement transactions and substantially similar transactions as listed transactions, a type of reportable transaction. Material advisors and certain participants in these listed transactions are required to file disclosures with the IRS and are subject to penalties for failure to disclose. The regulations affect participants in these transactions as well as material advisors.
Full Text
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<title>Federal Register, Volume 89 Issue 195 (Tuesday, October 8, 2024)</title>
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[Federal Register Volume 89, Number 195 (Tuesday, October 8, 2024)]
[Rules and Regulations]
[Pages 81341-81358]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-22963]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10007]
RIN 1545-BQ39
Syndicated Conservation Easement Transactions as Listed
Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that identify certain
syndicated conservation easement transactions and substantially similar
transactions as listed transactions, a type of reportable transaction.
Material advisors and certain participants in these listed transactions
are required to file disclosures with the IRS and are subject to
penalties for failure to disclose. The regulations affect participants
in these transactions as well as material advisors.
DATES:
Effective date: These regulations are effective on October 8, 2024.
Applicability date: For applicability dates, see Sec. 1.6011-9(h).
FOR FURTHER INFORMATION CONTACT: Concerning any provisions in the final
regulations within the jurisdiction of the Associate Chief Counsel
(Income Tax & Accounting), Joshua S. Klaber, (202) 317-4624, and Eugene
Kirman, (202) 317-5149, and concerning any provisions in the final
regulations within the jurisdiction of the Associate Chief Counsel
(Passthroughs & Special Industries), Charles Wien, (202) 317-5279 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Authority
This document amends the Income Tax Regulations (26 CFR part 1) by
adding final regulations under section 6011 of the Internal Revenue
Code (Code) to identify certain syndicated conservation easement
transactions and substantially similar transactions as listed
transactions, a type of reportable transaction (final regulations).
Section 6001 of the Code provides an express delegation of
authority to the Secretary of the Treasury or her delegate (Secretary),
requiring every taxpayer to keep the records, render the statements,
make the returns, and comply with the rules and regulations that the
Secretary deems necessary to demonstrate tax liability and prescribes,
either by notice served or by regulations.
Section 6011 of the Code provides an express delegation of
authority to the Secretary, requiring every taxpayer to ``make a return
or statement according to the forms and regulations prescribed by the
Secretary'' and ``include therein the information required by such
forms or regulations.''
In addition, section 6707A(c)(1) of the Code, in defining the term
``reportable transaction'' relating to the imposition of penalties
under section 6707A(a) on ``[a]ny person who fails to include on any
return or statement any information with respect to a reportable
transaction which is required under section 6011 to be included with
such return or statement,'' provides an express delegation of authority
to the Secretary, stating that, ``[t]he term `reportable transaction'
means any transaction with respect to which information is required to
be included with a return or statement because, as determined under
regulations prescribed under section 6011, such transaction is of a
type which the Secretary determines as having a potential for tax
avoidance or evasion.'' Section 6707A(c)(2), in defining the term
``listed transaction'' provides an express delegation of authority to
the Secretary, stating that, ``[t]he term `listed transaction' means a
reportable transaction which is the same as, or substantially similar
to, a transaction specifically identified by the Secretary as a tax
avoidance transaction for purposes of section 6011.''
The final regulations are also issued under the express delegation
of authority under section 7805(a) of the Code.
Background
I. The Proposed Regulations
On December 8, 2022, the Department of the Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking (REG-
106134-22) in the Federal Register (87 FR 75185) proposing regulations
that would identify certain syndicated conservation easement
transactions and substantially similar transactions as ``listed
transactions'' for purposes of Sec. 1.6011-4(b)(2) and sections 6111
and 6112 of the Code (proposed regulations). The provisions of the
proposed regulations
[[Page 81342]]
are explained in greater detail in the preamble to the proposed
regulations. The Treasury Department and the IRS received 26 comments
in response to the proposed regulations and notice of public hearing
that are the subject of this final rulemaking. The comments are
available for public inspection at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon
request. A public hearing on the proposed regulations was held by
teleconference on March 1, 2023, at 10 a.m. Eastern Time, at which five
speakers provided testimony.
After full consideration of the comments received and the testimony
provided, these final regulations adopt the proposed regulations with
certain revisions described in the Summary of Comments and Explanation
of Revisions.
II. Section 605 of the SECURE 2.0 Act
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 (December 29, 2022), was enacted just 15 days after
publication of the proposed regulations. Section 605(a) of the SECURE
2.0 Act added section 170(h)(7)(A) to the Code, which provides that a
contribution by a partnership (whether directly or as a distributive
share of a contribution of another partnership) is not treated as a
qualified conservation contribution for purposes of section 170 if the
amount of such contribution exceeds 2.5 times the sum of each partner's
relevant basis in such partnership, as defined in section 170(h)(7)(B).
Section 170(h)(7)(F) states that the rules of section 170(h)(7) apply
equally to S corporations and other pass-through entities.
Section 605(a) of the SECURE 2.0 Act also added section
170(h)(7)(C) through (E) to the Code, which provide three exceptions to
the general disallowance rule in section 170(h)(7)(A). Section
170(h)(7)(C) creates an exception for contributions by a pass-through
entity that satisfy a three-year holding period; section 170(h)(7)(D)
creates an exception for contributions made by family pass-through
entities; and section 170(h)(7)(E) creates an exception for
contributions made to preserve a building that is a certified historic
structure (as defined in section 170(h)(4)(C)).
Section 605(b) of the SECURE 2.0 Act added section 170(f)(19) to
the Code, creating additional reporting requirements for any qualified
conservation contribution (1) the conservation purpose of which is the
preservation of any building which is a certified historic structure
(as defined in section 170(h)(4)(C)), (2) which is made by a
partnership (whether directly or as a distributive share of a
contribution of another partnership), and (3) the amount of which
exceeds 2.5 times the sum of each partner's relevant basis (as defined
in section 170(h)(7)) in the partnership making the contribution.
Section 170(f)(19)(C) states that, except as may be otherwise provided
by the Secretary, the rules of section 170(f)(19) apply to S
corporations and other pass-through entities in the same manner as such
rules apply to partnerships.
Section 170(f)(19)(A) provides that no deduction is allowed for
such a contribution unless the entity making the contribution (1)
includes on its return for the taxable year in which the contribution
is made a statement that the entity made such a contribution and (2)
provides such information about the contribution as the Secretary may
require.
Section 605(c) of the SECURE 2.0 Act provides that no inference is
intended as to the appropriate treatment of contributions made in
taxable years ending on or before the date of the SECURE 2.0 Act's
enactment (December 29, 2022), or as to any contribution for which a
deduction is not disallowed by reason of section 170(h)(7).
On November 20, 2023, the Treasury Department and the IRS published
a notice of proposed rulemaking (REG-112916-23) in the Federal Register
(88 FR 80910) proposing regulations concerning the statutory
disallowance rule enacted by the SECURE 2.0 Act, including the
calculation of relevant basis. On June 28, 2024, the Treasury
Department and the IRS finalized these regulations in TD 9999 (89 FR
54284).
Summary of Comments and Explanation of Revisions
This Summary of Comments and Explanation of Revisions summarizes
all significant comments addressing the proposed regulations, and
describes and responds to comments concerning: (1) the listed
transaction system generally; (2) conservation easements generally; (3)
the continued necessity of finalizing these regulations following
passage of section 605 of the SECURE 2.0 Act; (4) the elements of the
listed transaction identified in these final regulations; and (5) the
role of donee organizations under these final regulations.
Comments outside the scope of this rulemaking are not adopted.
I. Comments Addressing the General Rules of the Listed Transaction
System
Many comments addressed rules that apply generally to any listed
transaction. While these comments are outside the scope of this
rulemaking, the Treasury Department and the IRS have nonetheless
considered these comments in finalizing these regulations.
A. Requirement To Report for Currently ``Open'' Periods Upon
Identification of a Listed Transaction
Several commenters argued that the proposed regulations' listed
transaction designation is impermissibly retroactive because taxpayers
who previously filed tax returns (or amended tax returns) reflecting
their participation in syndicated conservation easement transactions
but that did not disclose their participation pursuant to Notice 2017-
10 will be required to disclose those transactions once these final
regulations are published in the Federal Register. The commenters
opined that this so-called retroactive reach of the proposed listed
transaction designation is unfair and likely a violation of law under
various theories, including that it may be a taking under the Fifth
Amendment or constitute involuntary servitude under the Thirteenth
Amendment, and that it undermines the purpose of the Administrative
Procedure Act's (APA) notice and comment process. Several commenters
noted that the Tax Court has not determined whether a listed
transaction designation can be applied retroactively; thus, their
theory has not been resolved judicially.
The reporting rules for listed transactions are outside the scope
of these final regulations, which merely identify a listed transaction.
The reporting rules for listed transactions are found in Sec. 1.6011-
4, which was issued pursuant to notice and comment and finalized most
recently in TD 9350 (72 FR 43146), published in 2007 and which is not
amended by these final regulations. Section 1.6011-4(e)(2)(i) requires
reporting of transactions entered into prior to the publication of
guidance identifying a transaction as a listed transaction if the
statute of limitations for assessment of tax is still open when the
transaction becomes a listed transaction. While the reporting mandated
by Sec. 1.6011-4 may be with respect to prior periods, the disclosure
obligation is itself not retroactive--it is a current reporting
obligation. Thus, the comments regarding an impermissible retroactive
burden required by Sec. 1.6011-4 are without merit.
B. Determining an ``Open Year''
Several commenters requested additional guidance on what
constitutes an ``open year'' for purposes of reporting the listed
transaction. These commenters opined that the final
[[Page 81343]]
regulations should not be able to hold open (or re-open) a statute of
limitations for a return that was filed before the relevant transaction
became a listed transaction. One commenter stated that such a rule
would result in taxpayers currently under audit and disputing penalties
based on an expired statute of limitations finding one legal basis of
their case evaporated, undoing months or years of analysis and
evaluation.
Guidance on open years for purposes of applying Sec. 1.6011-4 is
outside the scope of these final regulations, which merely identify a
listed transaction. However, if a taxpayer who is required to disclose
a listed transaction for a taxable year for which the statute of
limitations has not expired prior to the identification of the listed
transaction fails to do so, then the taxpayer's statute of limitations
will continue to stay open for that taxable year as provided in section
6501(c)(10) of the Code. Section 6501(c)(10) provides that, if a
taxpayer fails to include on any return or statement for any taxable
year any information with respect to a listed transaction (as defined
in section 6707A(c)(2) of the Code) which is required under section
6011 to be included with such return or statement, the time for
assessment of any tax imposed by the Code with respect to such
transaction does not expire before the date that is one year after the
earlier of (1) the date the taxpayer provides the required information
or (2) the date that a material advisor meets the requirements of
section 6112 with respect to a request by the Secretary under section
6112(b) relating to such transaction with respect to such taxpayer.
Section 301.6501(c)-1(g)(3)(iii) of the Procedure and Administration
Regulations (26 CFR part 301), which was issued pursuant to notice and
comment and finalized most recently in TD 9718 (80 FR 16973), published
in 2015, and which is not amended by these final regulations, provides
(1) that the taxable years to which the failure to disclose relates
include each taxable year that the taxpayer participated (as defined
under section 6011 and the regulations thereunder) in a transaction
that was identified as a listed transaction and for which the taxpayer
failed to disclose the listed transaction as required under section
6011, and (2) if the taxable year in which the taxpayer participated in
the listed transaction is different from the taxable year in which the
taxpayer is required to disclose the listed transaction under section
6011, the taxable years to which the failure to disclose relates
include each taxable year for which the taxpayer participated in the
transaction.
Several commenters asked for guidance as to what constitutes an
``open'' tax year for taxpayers that took the position they were not
required to file a Form 8886, Reportable Transaction Disclosure
Statement, because Notice 2017-10 was invalidated. This requested
guidance is also outside the scope of these final regulations for the
reasons discussed in the prior paragraph.
C. Abating Section 6707A Penalties
One commenter expressed concern that there are no adequate
procedures or policies for abating section 6707A penalties with respect
to listed transactions. This comment is outside the scope of these
final regulations as the regulations merely identify a listed
transaction. The rules concerning section 6707A penalties are found in
Sec. 301.6707A-1, which was issued pursuant to notice and comment and
finalized most recently in TD 9853 (84 FR 11217), published in 2019 and
which is not amended by these final regulations.
D. Material Advisors
The proposed regulations provided no special rules for material
advisors. However, the effect of identifying a listed transaction is,
in part, to require certain disclosures from material advisors.
One commenter asked that the final regulations provide guidance to
appraisers on the application of any material advisor requirements, and
suggested that, if an appraiser is engaged after an easement is put in
place, the appraiser should not be considered a material advisor.
The requested guidance is outside the scope of these final
regulations; however, the Treasury Department and the IRS note that the
definition of material advisor is found in Sec. 301.6111-3(b), which
was issued pursuant to notice and comment and finalized in TD 9351 (72
FR 43157), published in 2007 and which is not amended by these final
regulations. A material advisor is a person who makes a ``tax
statement,'' as defined in Sec. 301.6111-3(b)(2)(ii), and derives
gross income in excess of the ``threshold amount,'' as defined in Sec.
301.6111-3(b)(3) (generally, $10,000 for listed transactions). Section
301.6111-3 contains no exception for providing advice ``after'' the
transaction is entered into. Section 301.6111-3(b)(4)(i) provides that
a person will be treated as becoming a material advisor when all of the
following events have occurred (in no particular order): (1) the person
provides material aid, assistance, or advice as described in Sec.
301.6111-3(b)(2); (2) the person directly or indirectly derives gross
income in excess of the threshold amount as described in Sec.
301.6111-3(b)(3); and (3) the transaction is entered into by the
taxpayer to whom or for whose benefit the person provided the tax
statement, or in the case of a tax statement provided to another
material advisor, when the transaction is entered into by a taxpayer to
whom or for whose benefit that material advisor provided a tax
statement. Thus, an appraiser that is engaged after an easement is put
in place can be a material adviser based on statements or actions after
an easement is put in place.
A few commenters argued that the ``retroactivity component'' to
material advisors (due to required disclosures) is impermissible or
burdensome. This comment is without merit and outside the scope of
these final regulations; however, the Treasury Department and the IRS
note that Sec. 301.6111-3(b)(4)(iii) provides that, if a transaction
that was not a reportable transaction is identified as a listed
transaction in published guidance after the occurrence of the events
described in Sec. 301.6111-3(b)(4)(i), the person will be treated as
becoming a material advisor on the date the transaction is identified
as a listed transaction. As the resulting obligations imposed are
limited to actions the person must take thereafter, the requirement is
not retroactive.
II. Comments Concerning Conservation Easements Generally
Several commenters addressed aspects of conservation easements that
are outside the scope of these final regulations but have nonetheless
been considered in adopting these final regulations. This part II of
this Summary of Comments and Explanation of Revisions describes and
responds to comments relating to: (1) the consistency of these final
regulations with the congressional intent to conserve land; (2)
overvaluation abuse in abusive syndicated conservation easement
transactions; (3) whether disclosure of the listed transactions is
needed since taxpayers must file Form 8283, Noncash Charitable
Contributions; and (4) requests for enforcement data on syndicated
conservation easement transactions.
A. Supporting Conservation While Combatting Abuse
One commenter noted that abusive syndicated conservation easement
transactions are antithetical to the concept of charity that section
170(h)
[[Page 81344]]
was designed to enable. The Treasury Department and the IRS agree.
However, several commenters opined that identification of
syndicated conservation easement transactions as listed transactions is
inconsistent with congressional intent to promote conservation. These
commenters argued that the proposed regulations disincentivize
conservation by increasing the audit risk of taxpayers involved in
syndicated conservation easement transactions and that the uncertainty
relating to what is considered a ``substantially similar'' transaction
has a chilling effect. These commenters further argued that the
proposed regulations go beyond the scope of section 170(h)(7), violate
the separation of powers, and are contrary to the priorities of the
Administration.
The Treasury Department and the IRS do not agree with the comments
criticizing the identification of syndicated conservation easement
transactions as listed transactions. Contrary to the commenters'
assertions, Congress has made it clear that it is concerned with
abusive syndicated conservation easement transactions. See, e.g.,
Syndicated Conservation-Easement Transactions, S. Prt. 116-44 (August
2020). The minimal impact on taxpayers who claim legitimate charitable
contribution deductions for qualified conservation contributions and
who may decide to file a protective disclosure is far outweighed by the
benefit of requiring disclosure for the identified transactions. In
addition, combatting abusive tax shelters is a priority for the Federal
government.
B. Valuation Abuse
Several commenters noted that the central problem with abusive
syndicated conservation easements is inaccurate, inflated, and flawed
appraisals and the associated overvaluation of conservation easements.
A few commenters asked that these final regulations be replaced with
``meaningful guidance'' on valuation or appraisal methodology,
including modifications to the rules for qualified appraisals under
Sec. 1.170A-17 and guidance on how to determine the highest and best
use of properties for purposes of easement valuation. One commenter
suggested that the IRS litigate fraudulent appraisal practices as an
alternative to ``questioning the long-standing conservation practices
of donee organizations.'' One commenter suggested establishing an
enhanced appraisal process similar to the process the IRS has
established for the art community.
Any guidance on valuation is outside the scope of these final
regulations, which are limited to identifying a listed transaction. The
purpose of these final regulations is to require taxpayers and material
advisors to report transactions for which the claimed value of a
syndicated conservation easement contribution strongly indicates
overvaluation and thus tax avoidance. The Treasury Department and the
IRS have challenged and will continue to challenge abusive appraisal
practices and overvaluation.
C. Disclosures
Some commenters questioned why the IRS needs to identify certain
syndicated conservation easements as a listed transaction when
contributions of conservation easements are already disclosed on the
Form 8283, which contains, among other information, the easement's
appraised value, when and how the property was acquired, the donor's
cost or adjusted basis, the amount deducted, and the date of the
contribution. The commenters noted that the Form 8283 must be prepared
completely and accurately because a deduction will be disallowed if any
information is missing.
The Form 8283, which is filed as a part of a taxpayer's tax return,
does not include all the information contained on Form 8886. It also
does not alert the Office of Tax Shelter Analysis to the taxpayer's
participation in an abusive transaction, nor does it trigger disclosure
and other obligations of material advisors to the transaction.
Accordingly, these comments are not adopted.
D. Requests for Enforcement Data
Some commenters, citing to an issue in the remand of CIC Services,
LLC v. IRS, 592 F. Supp. 3d 677 (E.D. Tenn. 2022), asserted that the
proposed regulations are arbitrary and capricious because, in their
opinion, the APA requires numerical data on syndicated conservation
easement transactions as part of the rationale for identifying a listed
transaction. The commenters requested the number of past syndicated
conservation easement transactions, the number of syndicated
conservation easement transactions challenged, the status and/or
outcome of every current syndicated conservation easement challenge,
the number of syndicated conservation easement transactions deemed
abusive by courts, the dollar amounts involved in syndicated
conservation easement transactions, the number of taxpayers affected by
syndicated conservation easement transactions, the nature and amount of
the contributions involved, the value and acreage of the property
conserved by syndicated conservation easement transactions, and the
effect of syndicated conservation easement transactions on nature and
wildlife.
CIC Services and other authorities do not require the public
release of enforcement data, or the other analysis commenters
requested, as a part of rulemaking. Section 6011 and the regulations
thereunder require that the IRS (1) determine that a transaction is a
tax avoidance transaction and (2) identify the transaction as a listed
transaction by notice, regulation, or other form of published guidance.
The Treasury Department and the IRS have consistently maintained, since
the issuance of Notice 2017-10, that certain syndicated conservation
easement transactions are tax avoidance transactions and have
identified them as such by notice or regulation. An offer to
potentially be allocated a charitable contribution deduction that is at
least 2.5 times one's investment, likely resulting in a positive after-
tax financial benefit from what is supposed to be a charitable
contribution, is strongly indicative of a tax avoidance transaction and
has been identified by Congress as such. See, e.g., section 170(h)(7).
Further, the data requested by commenters is unrelated to whether the
identified transactions are tax avoidance transactions.
III. Comments Regarding the Necessity of These Final Regulations in
Light of Section 605 of the SECURE 2.0 Act
Several commenters questioned the need for the proposed regulations
to be adopted as final regulations, given the enactment in December of
2022 of section 605 of the SECURE 2.0 Act, which added section
170(h)(7) to the Code to disallow a deduction for ``the vast majority''
of the abusive syndicated conservation easement transactions identified
in the proposed regulations. Commenters asked that, in light of the
legislation, the proposed regulations either be withdrawn or be revised
to take a ``more surgical approach'' that is in accordance with the new
statute (and addresses other concerns).
Some of these commenters opined that the proposed regulations were
overbroad and inconsistent with congressional intent, in part because
the proposed regulations did not include the three exceptions to
section 170(h)(7)(A) that Congress included in section 170(h)(7)(C)
through (E). These commenters argued that syndicated conservation
easement transactions that meet an exception to section 170(h)(7)(A)
should also be excepted
[[Page 81345]]
from the definition of the listed transaction identified in the
proposed regulations.
Other commenters supported adopting final regulations to help the
IRS identify promoters, material advisors, and donee organizations
involved in abusive syndicated conservation easement transactions. The
commenters noted that section 605 of the SECURE 2.0 Act is prospective
only. These commenters, however, suggested a few modifications to the
proposed rules, which are discussed later in this part III and in part
IV of this Summary of Comments and Explanation of Revisions.
The Treasury Department and the IRS have concluded that it is in
the interest of sound tax administration to continue to identify
abusive syndicated conservation easement transactions as listed
transactions, notwithstanding passage of section 605 of the SECURE 2.0
Act. However, in adopting the proposed regulations as final
regulations, the Treasury Department and the IRS have made several
modifications to the proposed rules, as described in this Summary of
Comments and Explanation of Revisions. Thus, these final regulations
are consistent with the commenters' recommendation that the final
regulations take ``a more surgical approach'' to the definition of the
syndicated conservation easement listed transaction following the
enactment of section 170(h)(7).
Specifically, these final regulations cover three major classes of
abusive syndicated conservation easement transactions (and
substantially similar transactions): (1) those that involve
contributions occurring before December 30, 2022; (2) those for which a
charitable contribution deduction is not automatically disallowed by
section 170(h)(7); and (3) those that substitute the contribution of a
fee simple interest in real property for the contribution of a
conservation easement.
A. Transactions Occurring Before December 30, 2022
Section 170(h)(7)(A) does not apply to contributions made on or
before December 29, 2022. As a result, these final regulations are
necessary to obtain reporting of transactions that are the same as, or
substantially similar to, syndicated conservation easement transactions
in cases in which the conservation easements were contributed before
December 30, 2022, and the taxpayers did not disclose the transaction
pursuant to Notice 2017-10. Thus, these final regulations impose
reporting requirements on taxpayers who had not previously disclosed
their participation in transactions that are the same as, or
substantially similar to, syndicated conservation easement transactions
to the extent that a taxpayer's participation in the transaction
occurred in one or more taxable years as to which the statute of
limitations had not run as of the date these final regulations identify
the transaction as a listed transaction.
Some commenters contended that, since many taxpayers have already
reported their transactions under Notice 2017-10, the IRS already has
the information reporting targeted by the proposed regulations. The
Treasury Department and the IRS agree that, in such cases, duplicative
reporting under these final regulations is unnecessary. Accordingly,
these final regulations explicitly provide that taxpayers who fully
disclosed their participation in syndicated conservation easement
transactions pursuant to Notice 2017-10 do not need to disclose again
under these final regulations for any taxable years covered by the
prior disclosure.
B. Transactions Not Automatically Disallowed by Section 170(h)(7)
The final regulations do not include an exception for transactions
that are excluded from the automatic disallowance rule in section
170(h)(7). Of note, the SECURE 2.0 Act, which was enacted after the
proposed regulations were issued, does not provide that the exceptions
to section 170(h)(7)(A) contained in section 170(h)(7)(C) through (E)
are also exceptions for purposes of the listed transaction rules. To
the contrary, section 605(c)(2) of the SECURE 2.0 Act explicitly
states: ``No inference is intended as to the appropriate treatment of .
. . any contribution for which a deduction is not disallowed by reason
of section 170(h)(7) of the Internal Revenue Code of 1986, as added by
this section.'' Thus, Congress has indicated that the fact that such
transactions are not automatically disallowed does not mean that such
transactions could not be abusive.
There are at least two types of conservation easement transactions
for which a charitable contribution deduction is not automatically
disallowed by section 170(h)(7) that are appropriately considered
listed transactions. First, transactions satisfying any of the three
exceptions found in section 170(h)(7)(C) through (E) that also contain
all the elements of a transaction identified as a listed transaction
under these final regulations continue to be transactions that the
Treasury Department and the IRS view as likely to be abusive. Thus, the
final regulations do not include any exceptions for transactions
described in section 170(h)(7)(C) through (E).
Second, any syndicated conservation easement transaction for which
a charitable contribution deduction is not automatically disallowed by
section 170(h)(7) because the amount of the partnership's contribution
does not exceed 2.5 times the sum of each partner's relevant basis in
the partnership is nevertheless a listed transaction with respect to
any partner who received promotional materials offering the possibility
of being allocated a share of the contribution that equals or exceeds
2.5 times that partner's investment.
C. Transactions That Involve Other Contributions of Real Property
The preamble to the proposed regulations stated that transactions
in which the contributed property is described in section 170(h)(2)(A)
or (B), or is a fee interest in real property, are transactions
substantially similar to the listed transaction identified in proposed
Sec. 1.6011-9(b). Several commenters noted that this language appears
to imply that any transaction that meets the elements of the listed
transaction identified in the proposed regulations, but that consists
of the contribution of real property, is substantially similar to the
listed transaction identified in the proposed regulations.
One commenter supported the inclusion of fee simple contributions
in the preamble to the proposed regulations and asked that fee simple
transactions be expressly identified in the regulatory text of the
final regulations. Another commenter asked that the final regulations
``clarify'' whether fee simple contributions are considered
substantially similar to syndicated conservation easement transactions,
stating that ``the preamble language is not law.'' However, several
other commenters questioned why contributions of fee simple interests
in property would be considered transactions that are substantially
similar to the syndicated conservation easement transaction identified
in the proposed regulations. One commenter contended that the tax
consequences, specifically taxpayer contribution base limitations and
carryover periods, are different for fee simple contributions and
conservation easement contributions.
The Treasury Department and IRS continue to believe that a
transaction that meets the elements of the listed transaction
identified in these final regulations, but consists of the contribution
of a fee simple interest
[[Page 81346]]
rather than of a conservation easement, is substantially similar to the
listed transaction identified in these final regulations. The
commenters questioning the treatment of contributions of fee simple
interests as substantially similar transactions failed to address the
broad definition of substantially similar found in Sec. 1.6011-
4(c)(4), which was issued after notice and comment; that Congress
specifically adopted the term ``substantially similar'' in its
subsequent enactment of section 6707A(c)(2); and that Congress
specifically referenced the definition in Sec. 1.6011-4(c)(4) when
explaining that provision. See Footnote 232 of House Report 108-548(I),
108th Cong., 2nd Sess. 2004, at 261 (June 16, 2004) (House Report)
(emphasis added):
The provision states that, except as provided in regulations, a
listed transaction means a reportable transaction, which is the same
as, or substantially similar to, a transaction specifically
identified by the Secretary as a tax avoidance transaction for
purposes of section 6011. For this purpose, it is expected that the
definition of ``substantially similar'' will be the definition used
in Treas. Reg. sec. 1.6011-4(c)(4). However, the Secretary may
modify this definition (as well as the definitions of ``listed
transaction'' and ``reportable transactions'') as appropriate.
In particular, despite the differing taxpayer contribution base
limitations and carryover periods between a fee simple donation and a
conservation easement donation, the transactions can result in similar
types of tax consequences and be either factually similar or based on
the same or a similar tax strategy.
In sum, the Treasury Department and the IRS agree that any
contribution of real property (including contributions of fee simple
interests and contributions described in section 170(h)(2)(A) or (B))
that meets the elements of the listed transaction identified in the
proposed regulations is a transaction that is substantially similar to
the listed transaction identified in the proposed regulations.
Accordingly, Sec. 1.6011-9(c)(7) of these final regulations explicitly
states that a transaction that meets all the elements described in
Sec. 1.6011-9(b), except that the transaction involves the
contribution of a fee simple interest or the contribution of a real
property interest described in section 170(h)(2)(A) or (B) instead of a
conservation easement, is substantially similar (within the meaning of
Sec. 1.6011-4(c)(4)) to the transaction described in Sec. 1.6011-
9(b). The final regulations contain an example showing a transaction
involving the contribution of a fee simple interest that is
substantially similar to the transaction described in Sec. 1.6011-
9(b).
D. Other Substantially Similar Transactions
Multiple commenters raised general concerns about the potential
scope of transactions that are ``substantially similar'' to the listed
transaction identified in the proposed regulations. Several of those
commenters opined that the substantially similar rule is void for
vagueness or overbroad, and some commenters requested that the term be
made more specific. Several commenters asked whether the 2.5 times rule
in proposed Sec. 1.6011-9(b)(1) is a bright-line rule; in other words,
whether transactions for which the highest estimate of charitable
contribution deduction in the promotional materials is less than 2.5
times a taxpayer's investment could be substantially similar to the
listed transaction identified in these regulations.
As previously discussed, the term ``substantially similar'' is part
of the statutory definition of a listed transaction in section
6707A(c)(2); furthermore, the regulatory definition found in Sec.
1.6011-4(c)(4) was adopted after notice and comment and has been viewed
favorably by Congress. Under Sec. 1.6011-4(c)(4), whether a
transaction is ``substantially similar'' to a syndicated conservation
easement transaction depends on the tax consequences, the tax strategy,
and other facts and circumstances related to the transaction. Section
1.6011-4(c)(4) further provides that the term substantially similar
must be broadly construed in favor of disclosure.
The ``substantially similar'' rule provides an important backstop
against advisors' and promoters' attempts to avoid the reporting
requirements. Consistent with that objective, these final regulations
generally do not circumscribe the types of transactions that may be
substantially similar to the listed transaction identified in these
final regulations. Nonetheless, as discussed in part IV.A.3. of this
Summary of Comments and Explanation of Revisions, these final
regulations do provide that the 2.5 times rule is a bright-line rule.
Thus, transactions in which the promotional materials offer investors
the possibility of being allocated a charitable contribution deduction
of anything less than 2.5 times a taxpayer's investment generally are
not substantially similar to the listed transaction identified in these
final regulations. However, if the taxpayer is nonetheless allocated a
charitable contribution deduction that equals or exceeds 2.5 times the
taxpayer's investment, the rebuttable presumption in Sec. 1.6011-
9(d)(3) would apply.
Several commenters asked whether transactions that involve
contributions other than real property, such as those that involve
contributions of artwork or other non-cash items, are listed
transactions. The Treasury Department and the IRS have determined that
such transactions are not ``substantially similar'' for purposes of
these final regulations because this listed transaction relates to
contributions of real property, not of personal property. The Treasury
Department and the IRS will continue to evaluate whether the
transactions raised by commenters are tax avoidance transactions and
may propose to identify such transactions as listed transactions in
future guidance.
A few commenters asked whether transactions that do not involve a
contribution by a pass-through entity (such as a transaction involving
a contribution by an individual or a corporation) are ``substantially
similar'' transactions. The Treasury Department and the IRS have
determined that transactions that do not involve a contribution by a
pass-through entity are not considered substantially similar
transactions; however, these transactions likewise could be proposed to
be identified as tax avoidance transactions in future guidance.
One commenter asked whether transactions that involve deductions
other than under section 170 (that is, transactions involving the ``use
of different Code provisions''), are considered ``substantially
similar'' to the syndicated conservation easement transaction
identified in the proposed regulations. It is possible that a pass-
through entity could use a deduction other than allowed under section
170 to obtain the same or a similar type of tax consequences, and that
such transaction would either be factually similar or based on the same
or similar tax strategy to the listed transaction identified in these
final regulations. Therefore, the Treasury Department and IRS conclude
it is possible that a transaction that abuses the application of a
section of the Code other than section 170, for example, section
642(c), could be a substantially similar transaction. Under Sec.
1.6011-4(f)(1), taxpayers who are uncertain whether a particular
transaction is substantially similar to a syndicated conservation
easement transaction may request a private letter ruling from the IRS.
Several commenters expressed concern that, given the uncertainty
about whether a particular transaction would be substantially similar
to a
[[Page 81347]]
listed transaction, the regulations could have a chilling effect on the
willingness of qualified organizations to accept contributions of
conservation easements if the section 4965 carveout were eliminated in
the final regulations. As described in part V of this Summary of
Comments and Explanation of Revisions, these final regulations maintain
the section 4965 carveout for qualified organizations, which addresses
those concerns.
IV. Comments Regarding Elements of the Listed Transaction Identified in
the Proposed Regulations
Several comments focused on the elements of the listed transaction
identified in the proposed regulations. This part IV describes and
responds to these comments, specifically comments regarding (1) the 2.5
times rule; (2) application of the 2.5 times rule; (3) timing rules;
and (4) definitions.
A. The 2.5 Times Rule
Commenters addressed the rationale for the 2.5 times multiple,
interaction with the 2.5 times rule in section 170(h)(7), and whether
2.5 times is a bright line.
1. Rationale for the 2.5 Times Multiple
Several commenters questioned the rationale for the 2.5 times
multiple in the proposed regulations. Some commenters argued that,
depending on the top marginal tax rate, a 2.5 times multiple would
result in minimal, if any, tax benefit to the investor. One commenter
opined that, because there is no explanation for how the multiple was
determined, there is no way to determine whether this criterion is
reasonable.
The Treasury Department and the IRS have concluded, consistent with
Notice 2017-10, that once a transaction offers the possibility of a
charitable contribution deduction that equals or exceeds an amount that
is 2.5 times the amount of the taxpayer's investment, the transaction
is a tax avoidance transaction that justifies a reporting obligation.
At this 2.5 times threshold, a taxpayer in the highest current marginal
tax bracket claiming a charitable contribution deduction for a
qualified conservation contribution will approximately break even
before considering State tax benefits, and, for any amounts above 2.5
times, will have an economic gain directly from making the charitable
contribution deduction. This multiple is also aligned with the 2.5
times threshold established by Congress in section 605 of the SECURE
2.0 Act, which disallows certain deductions at the partnership level
for contributions exceeding 2.5 times the sum of each partner's
relevant basis. Thus, the Treasury Department and the IRS conclude that
it is reasonable and in the sound interest of tax administration to
adopt the 2.5 times threshold as proposed.
2. Interaction With the 2.5 Times Rule in Section 170(h)(7)
Several commenters addressed the interaction of the 2.5 times rule
with section 170(h)(7) and asked whether only transactions in which the
charitable contribution deduction promised in the promotional materials
is exactly 2.5 times the investment need to be disclosed (because
transactions in which the deduction amount exceeds 2.5 times the
investment are generally disallowed by section 170(h)(7)). Under these
final regulations, both transactions in which the charitable
contribution deduction promised in the promotional materials is exactly
2.5 times the investment and transactions in which the charitable
contribution deduction promised in the promotional materials exceeds
2.5 times the investment must be disclosed.
As discussed in part III of this Summary of Comments and
Explanation of Revisions, certain transactions for which a deduction is
not disallowed by section 170(h)(7) are nevertheless considered listed
transactions.
3. Whether 2.5 Times Is a Bright Line
As noted in part III.D. of this Summary of Comments and Explanation
of Revisions, several commenters asked whether 2.5 times is a bright
line; in other words, whether transactions for which the highest
estimate of charitable contribution deduction in the promotional
materials is less than 2.5 times a taxpayer's investment could be
considered substantially similar transactions. One of these commenters
encouraged the IRS to clarify that the 2.5 times rule is not intended
to create or imply a safe harbor for excessive valuations below the 2.5
times threshold and that the 2.5 times rule does not implicitly approve
charitable contribution deduction amounts less than 2.5 times a
taxpayer's investment. This commenter noted that, regardless of whether
a contribution is a listed transaction pursuant to Sec. 1.6011-
4(b)(2), it remains subject to all the relevant requirements of law,
including those regarding valuation and substantiation of that
valuation by means of a qualified appraisal by a qualified appraiser
pursuant to Sec. 1.170A-17 that is subject to review by the IRS for
its accuracy. A few commenters asked the IRS to pick an actual number
(for example, 2.0, 2.25, 2.45, or 2.49 times) at which a transaction
will incur greater IRS scrutiny.
The Treasury Department and the IRS agree that taxpayers need some
certainty on which transactions need to be disclosed to the IRS. The
Treasury Department and the IRS have determined that a transaction in
which the promotional materials offer the taxpayer the possibility of
being allocated a charitable contribution deduction of only an amount
less than 2.5 times the taxpayer's investment and for which the
taxpayer is actually allocated a charitable contribution deduction of
an amount less than 2.5 times the taxpayer's investment (so that the
rebuttable presumption in Sec. 1.6011-9(d)(3) does not apply)
generally is not ``substantially similar'' to the listed transaction
identified in these final regulations. This determination takes into
account both the need for taxpayer certainty on reporting obligations
and the possibility of being allocated a charitable contribution
deduction the amount of which is less than 2.5 times the amount of the
taxpayer's investment presents less risk of the type of net-positive
financial benefit to investors that exists at and above the 2.5 times
threshold. This bright-line rule does not imply that valuations giving
rise to an amount less than 2.5 times a taxpayer's investment are
properly valued. The Treasury Department and the IRS agree with the
commenter that, regardless of whether a contribution is a reportable
transaction pursuant to Sec. 1.6011-4, it remains subject to all the
relevant requirements of law. For example, a claimed charitable
contribution deduction amount that is 2.0 times the partner's
investment may still be overvalued or unsubstantiated, and the
valuation remains subject to review by the IRS for accuracy.
In view of the foregoing, these final regulations add new Sec.
1.6011-9(d)(1) to state that the 2.5 times threshold is a bright line.
However, this new rule also provides that, if a pass-through entity
engages in a series of transactions (for example, contribution of an
easement followed by contribution of a fee simple interest) with a
principal purpose of avoiding the application of this bright-line rule,
the series of transactions may be disregarded, or the arrangement may
be recharacterized in accordance with its substance. Whether a series
of transactions has a principal purpose of avoiding the application of
this bright-line rule is determined based on all the facts and
circumstances.
[[Page 81348]]
B. Application of the 2.5 Times Rule
The proposed regulations contained three rules to address potential
avoidance of the 2.5 times rule. Taxpayers commented on each of these
rules.
1. Multiple Suggested Deduction Amounts
The proposed regulations contained a rule that, if the promotional
materials suggest or imply a range of possible charitable contribution
deduction amounts that may be allocated to the taxpayer, the highest
suggested or implied deduction amount will determine whether the 2.5
times rule is met. In addition, if one piece of promotional materials
(for example, an appraisal or oral statement) suggests or implies a
higher charitable contribution deduction amount than suggested or
implied by other promotional materials, then the highest suggested
charitable contribution deduction amount determines whether the 2.5
times rule is met. As the preamble to the proposed regulations
explained, this rule is intended to prevent promoters from
circumventing the 2.5 times rule by having promotional materials
contain language that is inconsistent as to the amount of the potential
charitable contribution deduction.
One commenter stated that the proposed rule ``does not apply to
ambiguities in the taxpayer's materials, it allows the Treasury to
create ambiguities in the taxpayer's materials.'' However, another
commenter asked whether a transaction that meets the elements of the
listed transaction identified in the proposed regulations, except that
the partnership merely promises that the investment will ``grow by''
2.5 times without mentioning a charitable contribution deduction, is
considered a ``substantially similar'' transaction. The intent of the
rule is to prevent promoters from circumventing the 2.5 times rule by
creating ambiguous promotional materials, and the transaction described
in the preceding sentence would be a substantially similar transaction.
Thus, these final regulations adopt the rule as proposed.
2. Rebuttable Presumption
The proposed regulations included a rebuttable presumption deeming
the 2.5 times rule to be met if (1) the pass-through entity donates a
conservation easement within three years following a taxpayer's
investment in the pass-through entity, (2) the pass-through entity
allocates a charitable contribution deduction to the taxpayer the
amount of which equals or exceeds two and one-half times the amount of
the taxpayer's investment, and (3) the taxpayer claims a deduction the
amount of which equals or exceeds two and one-half times the amount of
the taxpayer's investment. The proposed regulations provided that this
presumption may be rebutted if the taxpayer establishes to the
satisfaction of the Commissioner that none of the promotional materials
contained a suggestion or implication that investors might be allocated
a charitable contribution deduction the amount of which equals or
exceeds an amount that is two and one-half times the amount of their
investment in the pass-through entity.
Several commenters objected to the rebuttable presumption rule,
stating that it is ``arbitrary and capricious;'' that taxpayers cannot
prove a negative (particularly with respect to oral representations);
that any attempt to prove in court that oral representations were not
made is hearsay; that the regulations do not speak to how a taxpayer is
able to rebut the presumption; that it seems to be attempting to switch
the penalty burden from the IRS to taxpayers; and that the IRS has
demonstrated to taxpayers that it will neither be fair nor listen to
reasonable evidence in syndicated conservation easement tax disputes.
Commenters asked for guidance on how taxpayers may be able to rebut the
rebuttable presumption.
The Treasury Department and the IRS conclude that the rebuttable
presumption is reasonable because it is unlikely that a taxpayer would
claim a deduction for 250 percent of their investment in a pass-through
entity within three years of making that investment and not have
received promotional materials offering the possibility to do so. This
presumption is needed to address transactions with respect to which
taxpayers and promoters are not forthcoming about the content or
receipt of the promotional materials. While the Treasury Department and
the IRS decline to provide a specific method to rebut the presumption
in these final regulations because such rebuttal would necessarily be
dependent on the taxpayer's specific facts and circumstances, the
Treasury Department and the IRS expect that, in appropriate cases,
taxpayers will be able to establish to the satisfaction of the
Commissioner that none of the promotional materials contained a
suggestion or implication that investors might be allocated a
charitable contribution deduction the amount of which equals or exceeds
an amount that is two and one-half times the amount of their investment
in the pass-through entity. For example, a taxpayer may be able to
rebut the presumption by establishing that the partnership was not open
to other investors (and thus the only promotional materials were
documents needed to execute the transaction) or that similar properties
in the same area had increased significantly in value in the period
between the time the taxpayer invested in the partnership and the date
the conservation easement was contributed.
Contrary to commenters' assertions, nothing in the proposed
regulations suggested that the Commissioner will disregard evidence
rebutting the presumption. Section 7803(a)(3)(D) and (J) of the Code
require the Commissioner to ensure that employees of the IRS are
familiar, and act in accordance, with taxpayer rights, including the
right to challenge the position of the IRS, the right to be heard, and
the right to a fair and just tax system. Furthermore, the phrase ``to
the satisfaction of the Commissioner'' does not preclude future
judicial review, and the Commissioner bears the burden of demonstrating
that each of the other elements of the listed transaction has been
fulfilled and may have the burden of production under section 7491(c)
of the Code in a court proceeding regarding the imposition of a
penalty, depending on the party against whom it is asserted. In the
view of the Treasury Department and the IRS, evidence regarding oral
promotional materials generally would not constitute inadmissible
hearsay because the oral promotional materials would not be offered for
the truth of the matters asserted therein, but rather as evidence of
what was stated. See Fed. R. Evid. 801(c)(2).
Some commenters asked whether the rebuttable presumption implies
that taxpayers do not need to report if (1) at least three years have
passed between the taxpayer's investment in the pass-through entity and
the pass-through's contribution of a conservation easement or (2) if
the deduction amount is less than 2.5 times the amount of an investor's
investment. The rebuttable presumption does not carry either of these
implications.
The Treasury Department and the IRS have decided to retain the
rebuttable presumption in the final regulations because the
administrative need for a rebuttable presumption outweighs the concerns
raised by the commenters. Taxpayers and promoters are the persons with
access to and knowledge of the promotional materials involved in their
transactions. Taxpayers should not be able to escape the requirements
of these final regulations because their
[[Page 81349]]
syndicators were effective in masking their promises. Accordingly, the
final regulations retain the rebuttable presumption rule.
3. Determining the Amount of a Taxpayer's Investment in the Pass-
Through Entity
The proposed regulations contained an anti-stuffing rule providing
that, for purposes of determining whether a transaction is a listed
transaction, the amount of a taxpayer's investment in the pass-through
entity is limited to the portion of the taxpayer's investment that is
attributable to the portion of the real property on which a
conservation easement is placed and that produces the charitable
contribution deduction.
A few commenters noted that the term ``investment'' in proposed
Sec. 1.6011-9(b)(1) is not defined, while one commenter stated that
the anti-stuffing rule found in proposed Sec. 1.6011-9(d)(3) provides
the taxpayer's investment for purposes of the 2.5 times rule. Several
commenters stated that the anti-stuffing rule in the proposed
regulations is inconsistent with the relevant basis rule in section
170(h)(7)(B), and others suggested that the anti-stuffing rule in the
proposed regulations should be replaced with the relevant basis rule in
section 170(h)(7)(B).
The Treasury Department and the IRS note that the term
``investment'' is not generally defined within the Code. However, the
Treasury Department and the IRS agree with the commenter stating that
the anti-stuffing rule found in proposed Sec. 1.6011-9(d)(3) provides
the taxpayer's investment for purposes of the 2.5 times rule. Further,
in response to comments that relevant basis should also be permitted to
be used to determine investment, these final regulations provide that a
taxpayer may determine the amount of their investment in the pass-
through entity using one of the methods provided in Sec. 1.6011-
9(d)(4), which identifies the anti-stuffing method and, for
contributions occurring on or after December 30, 2022, adds the
relevant basis method in section 170(h)(7)(B) as another method to
determine the amount of the taxpayer's investment in the pass-through
entity. No other methods may be used.
In response to commenters asserting that relevant basis should
replace the anti-stuffing rule, the relevant basis computations under
section 170(h)(7) do not apply to all transactions for which disclosure
is required under these final regulations (such as to contributions
before the effective date of section 170(h)(7) in taxable years for
which the statute of limitations is still open); thus, these final
regulations retain the anti-stuffing method as one method to determine
investment for purposes of the 2.5 times rule.
i. Anti-Stuffing Method
As mentioned before in part IV.B.3 of this Summary of Comments and
Explanation of Revisions, several commenters addressed the anti-
stuffing rule found in the proposed regulations, which these final
regulations rename the ``anti-stuffing method'' to determine investment
for purposes of the 2.5 times rule. For example, one commenter
requested clarification on how to determine the portion of the
investment that is ``attributable'' to the real property on which the
conservation easement is placed. Another commenter stated that the
proposed anti-stuffing rule may give rise to constitutional challenges
because it requires the separation of investment assets, creating more
cost for investment managers and for investors, which they contended is
a limitation on interstate commerce, a power reserved only for the
legislative branch. One commenter opined that the anti-stuffing rule
will be impossible to apply in practice; the commenter noted that the
example of the anti-stuffing rule in the proposed regulations involved
marketable securities with an identifiable fair market value and
questioned how to apply the anti-stuffing rule if the pass-through
entity holds multiple pieces of property. Another commenter stated that
the example in the proposed regulations illustrating the anti-stuffing
rule was merely an example of the basis allocation rules under section
755 of the Code and that allocation rules under section 755 do not
require additional explanation.
The Treasury Department and the IRS conclude that the anti-stuffing
rule provides a reasonable method to determine the taxpayer's
investment in the pass-through entity by looking only to amounts
attributable to the property generating the charitable contribution
deduction. In response to comments requesting additional guidance on
the determination of the amount of a taxpayer's investment, these final
regulations provide that, under the anti-stuffing method, if an
investor uses non-cash assets to acquire its interest in the pass-
through entity, then the fair market value of such assets, rather than
their basis, is the relevant measure. In particular, under Sec.
1.6011-9(d)(4)(ii) of these final regulations, the amount of a
taxpayer's investment in the pass-through entity is the portion of the
cash and fair market value of the assets the taxpayer uses to acquire
its interest in the pass-through entity that is attributable to the
real property on which a conservation easement is placed (or the
portion thereof, if an easement is placed on a portion of the real
property) and that produces the charitable contribution deduction
described in Sec. 1.6011-9(b)(3).
The Treasury Department and the IRS disagree that the anti-stuffing
rule is impossible to apply in practice. Syndicated conservation
easement transactions often involve scenarios similar to the example
provided in the proposed regulations, in which the pass-through entity
owns only cash and marketable securities in addition to its real
property. Moreover, these regulations apply to transactions in which
the promotional materials offer the possibility of charitable
contribution deductions, and thus the parties involved will have
necessarily considered the possible allocation of charitable
contribution deductions based on the taxpayer's cost of acquiring the
interest in the pass-through entity. Accordingly, in the view of the
Treasury Department and the IRS, it is not unduly burdensome to require
the parties to determine the amount of the taxpayer's acquisition cost
that is allocable to the property giving rise to the charitable
contribution deduction that is being offered.
ii. Relevant Basis Method
The Treasury Department and the IRS recognize that partnerships and
S corporations that engage in syndicated conservation easement
transactions occurring on or after December 30, 2022, will need to
calculate relevant basis for purposes of section 170(f)(19), and, in
addition, each investor will need to calculate the amount of the
investor's investment for purposes of these listed transaction
regulations. To mitigate the burden of potentially duplicative
calculations, these final regulations add an alternative method to
determine the amount of a taxpayer's investment. These final
regulations provide that, for contributions occurring on or after
December 30, 2022, taxpayers may use their relevant basis, as
determined under section 170(h)(7)(B) and the regulations thereunder,
as the amount of their investment for purposes of Sec. 1.6011-9(b)(1).
4. Modification of the Determination of Investment for Qualified
Conservation Contributions Protecting Historic Structures
One commenter stated that the proposed anti-stuffing rule did not
adequately consider the difference between qualified conservation
contributions protecting historic
[[Page 81350]]
structures and those protecting natural open space or settings. This
commenter stated that, because historic preservation projects protect
the historic character of a building, they often require additional
investment for rehabilitation; however, the proposed rule did not
consider cash raised for, and invested into, the preservation,
rehabilitation and maintenance of certified historic structures in the
calculation of the investment. The commenter further stated that the
proposed regulations did not account for additional monies that need to
be invested in a project after an easement is placed to ensure that the
conservation purpose is protected in perpetuity. The commenter stated
that cash, if invested in the real property, should be considered part
of the taxpayer's investment in the real property when applying the 2.5
times rule.
The Treasury Department and the IRS conclude that the commenter's
proposed changes to the anti-stuffing method are not warranted. In
general, one key element in determining whether a transaction
constitutes a syndicated conservation easement listed transaction is
the ratio of the amount of the charitable contribution deduction
allocation that an investor is offered to the amount the investor pays
to obtain that charitable contribution deduction allocation. To that
end, the anti-stuffing method measures the amount of the taxpayer's
cost of acquiring the interest in the pass-through entity that is
attributable to the real property on which a conservation easement is
placed (or the portion thereof, if an easement is placed on a portion
of the real property) and that gives rise to the charitable
contribution deduction. Charitable contribution deductions are based on
either the fair market value or adjusted basis of the property that is
contributed as of the time of the contribution. See, e.g., section
170(e). Therefore, in the view of the Treasury Department and the IRS,
it is inappropriate, in determining the amount of a taxpayer's
investment, to look to the amounts expended on the property after the
time of the charitable contribution.
In general, every taxpayer that contributes a conservation easement
will be required to expend some amounts on the property after the
contribution, such as for property taxes. However, amounts of cash that
are held for expenditures after the date the conservation easement is
contributed, whether for property taxes, repairs, or anything else
related to the property, are not as directly related to the resultant
charitable contribution deduction that a taxpayer claims as the
expenditures related to the property that precede the conservation
easement contribution. The Treasury Department and the IRS have
concluded that it is appropriate for the anti-stuffing method to
maintain its focus on the amounts invested in the property giving rise
to the deduction as of the time of the charitable contribution. In
addition, the Treasury Department and the IRS have concluded that a
rule that treats certain cash holdings as attributable to the real
property if they are ``earmarked'' for future expenditures related to
the property would be difficult to administer. Such a rule would
require factually intensive estimations and projections about the
amount of future expenditures that would be necessary to fulfill the
purposes of the conservation easement (as opposed to merely enhancing
the value of the building). For these reasons, the Treasury Department
and the IRS have concluded that the final regulations should not adopt
this comment. Therefore, the final regulations add a clarification to
Sec. 1.6011-9(d)(4)(ii), which states that assets retained to pay for
costs related to the operation and maintenance of the real property on
which the conservation easement is placed, including costs that may be
incurred in future years, are not attributable to the contributed real
property.
The Treasury Department and the IRS will continue to consider
whether any additional clarifications or modifications to the anti-
stuffing method or the alternative relevant basis method of determining
the amount of the taxpayer's investment in the pass-through entity
would be beneficial in the context of qualified conservation
contributions protecting historic structures.
C. Timing Rules
Comments addressed both the timing of the pass-through entity's
acquisition of the real property and whether holding the real property
for a period of time before the contribution of the conservation
easement is made should result in the transaction being excluded from
the listed transaction identified in these regulations.
1. Timing of the Pass-Through Entity's Acquisition of the Real Property
Proposed Sec. 1.6011-9(b)(2) provided that one of the steps of a
syndicated conservation easement is that the taxpayer acquires an
interest directly, or indirectly through one or more tiers of pass-
through entities, in the pass-through entity that owns real property
(that is, becomes an investor in the entity). A few commenters asked
whether this step is met with respect to investors who acquire an
interest in an entity that does not hold real estate at the time the
interest in the pass-through entity is acquired. One of these
commenters requested that the IRS clearly state if it intends proposed
Sec. 1.6011-9(b)(2) to be met in the case of an investor who acquires
an interest in a pass-through entity that subsequently acquires real
estate or an interest in a pass-through entity holding real estate. The
commenter also stated that, if the real property is purchased after the
investor invests in the pass-through entity, the transaction would fall
outside of the anti-stuffing rule and therefore would be less likely to
trigger the 2.5 times rule (because the amount of the taxpayer's
investment would never be reduced by the anti-stuffing rule).
The Treasury Department and the IRS note that the proposed
regulations clearly stated that the transaction falls within the
definition of a syndicated conservation easement transaction
``regardless of the order'' in which the steps occur; therefore, the
proposed regulations already encompassed the scenario in which a
taxpayer acquires an interest in the pass-through entity before the
pass-through entity acquires the real property. However, for additional
clarity, these final regulations make that point explicit in Sec.
1.6011-9(b)(2).
The Treasury Department and the IRS do not agree with the commenter
that, if the real property is purchased after the investor invests in
the pass-through entity, the transaction falls outside of the reach of
the anti-stuffing method. The proposed and final regulations
specifically provide that the order in which the four steps of a
syndicated conservation easement transaction occur is not relevant. In
response to this comment, an example in these final regulations
illustrates the application of the anti-stuffing method if the pass-
through entity acquires the real property after a taxpayer invests in
the pass-through entity.
2. Holding Periods
The proposed regulations did not contain any exceptions from the
disclosure requirements for property held on a long-term basis. Several
commenters asked that the final regulations include an exception for
such transactions. One commenter questioned why investors who have held
interests in a pass-through entity for over one year would be required
to report the syndicated conservation easement transaction because such
[[Page 81351]]
investors would not need to rely on a tacked holding period to avoid
the limitations of section 170(e). One commenter contended that
contributions of land held for less than three years will generally not
be made. Several commenters observed that contributions with a long-
term holding period are excepted from the disallowance rule of section
170(h)(7)(A) pursuant to section 170(h)(7)(C). One commenter opined
that a hypothetical transaction in which the promotional materials
state that the property will be worth more than 2.5 times the
taxpayer's investment in ten years should not give rise to a listed
transaction. This commenter asked that the final regulations specify
the amount of time that must elapse between the purchase of the
property interest and the contribution of the easement for a
transaction to be listed. Another commenter asked about a taxpayer that
inherited land that is then in his possession for over twenty years and
decides to donate the land for the benefit and protection of the
environment.
The Treasury Department and the IRS conclude that it is not
necessary to modify the proposed rules to provide an exception for
property that has been held for a period of time. First, tax abuse in
syndicated conservation easement transactions is not limited to
mismatches between an investor's holding period in its interest in the
pass-through entity and the pass-through entity's holding period in the
real property on which the conservation easement is placed. For
example, even for transactions in which investors may otherwise be
eligible to claim a deduction of the fair market value of the
conservation easement, the deduction is nonetheless abusive if the
easement is improperly overvalued.
Second, as discussed in part III.B. of this Summary of Comments and
Explanation of Revisions, the exception to the disallowance rule in
section 170(h)(7) for contributions outside of a three-year holding
period does not necessitate a similar exception in these final
regulations, and these final regulations do not provide an exception
for syndicated conservation easements that are described in section
170(h)(7)(C).
Third, notwithstanding the commonly anticipated appreciation of
real property values over time, it is not the case that property values
always increase. The period a property is held is one element of a
fact-intensive inquiry into whether the property has been overvalued.
Attempting to craft an exception based on a holding period would result
in a rule that is over-inclusive and/or under-inclusive, depending on
the specific facts. The proposed hypotheticals for property held for
ten or twenty years seems unlikely to meet all elements of the listed
transaction identified in these regulations (for example, it might not
be held in a pass-through entity or involve promotional materials).
Therefore, the final regulations do not include an exception for long-
term holding periods.
D. Definitions
Commenters addressed the definitions of (1) charitable contribution
deduction, (2) conservation easement, (3) participant, (4) promotional
materials, and (5) syndicated conservation easement transaction.
1. Charitable Contribution Deduction
The proposed regulations defined ``charitable contribution
deduction'' as ``a deduction under section 170 of the Internal Revenue
Code (Code), which includes a deduction arising from a qualified
conservation contribution as defined in section 170(h)(1).''
One commenter stated that this definition is inconsistent with the
listed transaction identified in the proposed regulations, which is
limited to contributions of conservation easements. This commenter
suggested that the definition should be limited to ``the deduction
arising from a qualified conservation contribution as defined in
section 170(h)(1).''
The Treasury Department and the IRS decline to adopt this
suggestion, because some substantially similar transactions will
involve real property contributions other than qualified conservation
contributions.
2. Conservation Easement
The proposed regulations defined a ``conservation easement'' as ``a
restriction, within the meaning of section 170(h)(2)(C), exclusively
for conservation purposes, within the meaning of section 170(h)(1)(C)
and section 170(h)(4), granted in perpetuity, on the use that may be
made of the specified property.'' One commenter stated that, in all
cases that the commenter defended, the IRS had taken the position that
the conservation easement did not meet one or more of the requirements
in this definition. The commenter opined that, if an investor fails to
disclose a syndicated conservation easement transaction, the pass-
through's return is selected for audit, and the IRS determines that the
donated conservation easement fails to meet one or more elements of the
definition in the proposed regulations, then the investor would not
have had any reporting obligation because the investor had not claimed
a deduction for a ``conservation easement'' as that term was defined in
the proposed regulations. The commenter added that if this was not the
intent of the proposed regulation, then the final regulation should
clearly so state.
The Treasury Department and the IRS note that the third element of
the listed transaction identified in these regulations is that ``the
pass-through entity that owns the real property contributes an easement
on such real property, which it treats as a conservation easement, to a
qualified organization and allocates, directly or through one or more
tiers of pass-through entities, a charitable contribution deduction to
the taxpayer'' (emphasis added), and that the fourth element of the
listed transaction is that ``the taxpayer claims a charitable
contribution deduction with respect to the contribution of the real
property interest on the taxpayer's Federal income tax return.'' In the
commenter's hypothetical, the taxpayer's treatment of the contribution
as a conservation easement and claim of a charitable contribution
deduction with respect to the conservation easement makes the
transaction a listed transaction. Whether the IRS asserts that the
conservation easement is invalid and whether the charitable
contribution deduction claimed on the taxpayer's Federal income tax
return is ultimately allowed do not affect this outcome.
To more clearly track the language in section 170(h), the final
regulations modify the definition of conservation easement to provide
that it is a restriction (granted in perpetuity) on the use that may be
made of the real property, within the meaning of section 170(h)(2)(C),
exclusively for conservation purposes, within the meaning of section
170(h)(1)(C) and (h)(4).
3. Participant
The proposed regulations stated that a taxpayer participating,
within the meaning of Sec. 1.6011-4(c)(3)(i)(A), in a syndicated
conservation easement transaction described in proposed Sec. 1.6011-
9(b) includes (1) an owner of a pass-through entity, (2) a pass-through
entity (any tier, if multiple tiers are involved in the transaction),
and (3) any other taxpayer whose tax return reflects tax consequences
or a tax strategy arising from the syndicated conservation easement
transaction described in the proposed regulations. The proposed
regulations provided, consistent with Notice 2017-10, that a qualified
organization to which a
[[Page 81352]]
syndicated conservation easement described in proposed Sec. 1.6011-
9(b) is donated is not treated as a participant under Sec. 1.6011-
4(c)(3)(i)(A) with respect to the listed transaction.
One commenter stated that it is unclear whether a participant who
reports the tax consequences of a transaction that is substantially
similar to a syndicated conservation easement transaction is a member
of the class of participants described under proposed Sec. 1.6011-
9(e)(2). The commenter opined that the plain language of the proposed
regulation referred only to taxpayers who have the tax consequences of
a syndicated conservation easement transaction. To address this
comment, the final regulations clarify that the class of participants
includes participants in transactions that are the same as, or
substantially similar to, syndicated conservation easement
transactions.
One commenter requested additional guidance on the meaning of the
term ``arising from'' in proposed Sec. 1.6011-9(e)(2)(iii), stating
that it is ambiguous whether an IRS attorney that was hired to enforce
syndicated conservation easement transactions would be required to
report the transaction because his or her income ``arose from'' the
conservation easement transaction. The Treasury Department and the IRS
conclude that further clarification is not needed.
4. Promotional Materials
The proposed regulations stated that ``promotional materials''
include materials described in Sec. 301.6112-1(b)(3)(iii)(B) and any
other written or oral communication regarding the transaction provided
to investors, such as marketing materials, appraisals (including
preliminary appraisals, draft appraisals, and the appraisal that is
attached to the taxpayer's return), websites, transactional documents
such as the deed of conveyance, private placement memoranda, tax
opinions, operating agreements, subscription agreements, statements of
the anticipated value of the conservation easement, and statements of
the anticipated amount of the charitable contribution deduction.
One commenter supported this definition, but several commenters
thought it was overbroad, stating that it would be effectively
impossible for a taxpayer to prove that he or she did not receive
promotional materials. Some commenters objected to particular types of
communication being included within the scope of promotional materials.
Specifically, commenters expressed concern regarding oral
communications, websites, and documents required by law. For example,
one commenter stated that, since promotional materials are described to
include ``websites'' and ``oral communication,'' every taxpayer would
theoretically have received ``promotional materials'' relating to
conservation easement donations because every taxpayer has access to
the internet. In addition, one commenter stated that, under the
proposed regulations, promotional materials would include an oral
communication made to any other investor. The commenter also stated
that any one oral communication, regardless of accuracy, would ``render
the deduction unavailable'' to all investors. The commenter recommended
that the final regulations remove all references to oral
communications.
In response, the Treasury Department and the IRS note that receipt
of promotional materials by one investor does not automatically trigger
receipt of such materials by other investors (although it is
circumstantial evidence that may be relevant to showing receipt of
promotional materials by other investors). In addition, the broad
definition of promotional materials does not mean that the 2.5 times
rule will always be met; the quantity of promotional materials is not
directly relevant to whether the promotional materials offer the
investor the possibility of being allocated a charitable contribution
deduction that equals or exceeds an amount that is two and one-half
times the amount of the taxpayer's investment in the pass-through
entity. Moreover, even if the 2.5 times rule is met, the effect is not
to render the deduction unavailable to all investors but to meet one
element of this listed transaction. The Treasury Department and the IRS
conclude that a broad definition of promotional materials is warranted;
otherwise, taxpayers may contend that they do not meet the elements of
the listed transaction identified in these final regulations because
promoters made offers via oral communications, websites, or other
documents.
Some commenters noted that Congress did not mention promotional
materials in section 170(h)(7) and asked that the final regulations
explain the requirement's significance in the listed transaction. The
Treasury Department and the IRS conclude that the lack of reference to
promotional materials in section 170(h)(7) is of no significance to
this listed transaction, given that the purpose and scope of section
170(h)(7), which is to disallow a deduction, are different from those
of these regulations, which is for the IRS to identify tax avoidance
transactions.
One commenter noted that a taxpayer can claim a greatly inflated
deduction regardless of whether the taxpayer receives promotional
materials and stated that the promotional material requirement appears
to be unnecessary and could be removed altogether. The Treasury
Department and the IRS have determined that promotional materials are
an important attribute of the listed transaction identified in these
final regulations because the existence of promotional materials
offering investors the possibility of a charitable contribution
deduction that equals or exceeds an amount that is 2.5 times the amount
of the taxpayer's investment, on its own, is an element that
illustrates tax avoidance. Thus, the final regulations adopt the
proposed definition of promotional materials without changes.
One commenter stated that the broad definition of promotional
materials does not promote compliance with the law if an attorney that
created promotional materials, such as the deed of conveyance, is
considered a material advisor to the transaction. This commenter asked
for clarity on how the definition of promotional materials in the
proposed regulations relates to the definition of a material advisor.
As discussed in part I.D. of this Summary of Comments and
Explanation of Revisions, these final regulations do not change the
description of a material advisor provided in Sec. 301.6111-3(b). A
material advisor is a person who makes a tax statement, as defined in
Sec. 1.6111-3(b)(2)(ii), and derives gross income in excess of the
threshold amount, as defined in Sec. 301.6111-3(b)(3) (generally,
$10,000 for listed transactions). In general, a deed of conveyance
would not be a ``tax statement'' under Sec. 301.6111-3(b)(2)(ii)
because it is not a statement ``that relates to a tax aspect of a
transaction that causes the transaction to be a reportable
transaction.'' In addition, in general, the deed does not contain any
statements related to a tax aspect of the transaction that causes the
transaction to be reportable, such as stating that an investor may be
eligible to claim a deduction amount of 2.5 times the investor's
investment.\1\ As a result, the final regulations make no
[[Page 81353]]
modifications to the definition of promotional materials in response to
the comment.
---------------------------------------------------------------------------
\1\ As noted above, a transactional document such as a deed of
conveyance is considered to be a promotional material. Although the
deed by itself, typically, would not offer the investor the
possibility of being allocated a charitable contribution deduction
that equals or exceeds an amount that is two and one-half times the
amount of the taxpayer's investment in the pass-through entity,
whether all of the promotional materials, taken as a whole, make
such an offer is a factual determination.
---------------------------------------------------------------------------
5. Syndicated Conservation Easement Transaction
One commenter stated that ``syndication itself is not bad and is
often encouraged by the government'' (such as in the context of
historic tax credits, low-income housing tax credits, and new market
tax credits). The commenter opined that the proposed regulations sow
confusion because the focus should be on abuse, not on syndication.
The Treasury Department and the IRS agree with the commenter that
syndication in itself is not necessarily abusive. However, the Treasury
Department and the IRS do not agree with the commenter that the
definition of syndicated conservation easement transaction in Sec.
1.6011-9(b) needs to explicitly use the word ``abusive.'' The
identification of a listed transaction occurs only after the Treasury
Department and the IRS have determined that the transaction is a tax
avoidance transaction. If a syndicated conservation easement
transaction does not meet the elements of the transaction defined in
Sec. 1.6011-9(b), such as that the partnership's promotional materials
do not offer investors the possibility of being allocated a charitable
contribution deduction the amount of which equals or exceeds an amount
that is 2.5 times the amount of the taxpayer's investment in the
partnership (and the partnership does not in fact allocate a charitable
contribution deduction the amount of which equals or exceeds an amount
that is 2.5 times the amount of the taxpayer's investment in the
partnership), then the transaction is not a listed transaction.
V. Comments Addressing the Role of Qualified Organizations in the
Listed Transaction
Commenters addressed both the section 4965 carveout found in the
proposed regulations and the lack of a carveout to the definition of
material advisor in the proposed regulations for qualified
organizations.
A. Section 4965 Carveout
The proposed regulations included, consistent with Notice 2017-10,
the section 4965 carveout to exclude a qualified organization \2\ from
treatment as a party to a syndicated conservation easement transaction
under section 4965 but requested comments on whether the final
regulations should eliminate or limit the section 4965 carveout.
---------------------------------------------------------------------------
\2\ A donation of a qualified conservation contribution must be
made to a ``qualified organization,'' generally defined in section
170(h)(3), which includes donations to governmental units, certain
public charities, and Type I supporting organizations thereto. Under
section 4965(c), the term ``tax-exempt entity'' includes, among
others, entities and governmental units described in sections 501(c)
and 170(c) (other than the United States). Thus, absent the section
4965 carveout, tax-exempt entities that would be affected are donees
that are qualified organizations described in section 170(h)(3),
other than the United States, that accept a conservation easement as
part of the syndicated conservation easement transaction described
in these regulations.
---------------------------------------------------------------------------
Several commenters advocated for maintaining the section 4965
carveout for various reasons, including that section 170(h)(7)(A) will
disallow deductions for most transactions that these regulations seek
to deter, that receipt of a donated conservation easement generally
would not constitute ``net income'' or ``proceeds'' within the meaning
of section 4965, and that limiting or eliminating the section 4965
carveout could discourage qualified organizations from accepting
contributions of conservation easements (particularly due to
uncertainty as to what constitutes a ``substantially similar''
transaction). With respect to the Treasury Department and the IRS's
request for comments on limiting the carveout to qualified
organizations that conduct an adequate amount of due diligence (and on
what would constitute adequate due diligence for this purpose), several
commenters argued that qualified organizations are not equipped to
exercise the due diligence that could be required to qualify for a more
limited carveout. Several commenters also claimed that because only a
``small number'' of qualified organizations continue to facilitate
syndicated conservation easement transactions, it would be unfairly
burdensome to all other qualified organizations if the section 4965
carveout were limited or eliminated.
Given the addition of section 170(h)(7) to the Code, which
disallows charitable contribution deductions for some of the most
overvalued syndicated conservation easements, as well as other
considerations raised by the commenters, the Treasury Department and
the IRS have concluded that it is appropriate to maintain the section
4965 carveout in these final regulations. However, the Treasury
Department and the IRS will consider proposing to eliminate or limit
the section 4965 carveout in future regulations if qualified
organizations continue to facilitate the syndicated conservation
easement transactions (or substantially similar transactions) described
in these regulations.
B. Donee Material Advisors
As discussed in part I.D. of this Summary of Comments and
Explanation of Revisions, the proposed regulations provided no special
rules for material advisors and noted that this differed from the
approach taken in Notice 2017-29 (modifying Notice 2017-10), which
provided that a donee described in section 170(c) is not treated as a
material advisor under section 6111. The proposed regulations requested
comments on whether qualified organizations are receiving fees for
providing material aid, assistance, or advice with respect to the
syndicated conservation easement transactions described in the proposed
regulations, the nature of the services being provided, and why a
carveout from the definition of material advisor for qualified
organizations is needed.
Several commenters requested that the carveout for qualified
organizations found in Notice 2017-29 be reinstated, claiming that the
six-year look back period would be burdensome, that the IRS is already
privy to information necessary to identify potentially abusive
syndicated conservation easement transactions via reporting by other
material advisors, and that eliminating the carveout for qualified
organizations will discourage qualified organizations from accepting
legitimate syndicated conservation easements due to confusion and fear
of audits, potential penalties, and litigation. On the other hand, no
commenter explained how a qualified organization, acting solely in its
capacity as a qualified organization, could be considered a material
advisor. To the contrary, several commenters asserted that donee
organizations do not fit the definition of ``material advisor.''
A person is a material advisor with respect to a transaction if the
person: (1) provides material aid, assistance, or advice with respect
to organizing, managing, promoting, selling, implementing, insuring, or
carrying out any reportable transaction; and (2) directly or indirectly
derives gross income in excess of the threshold amount defined in Sec.
301.6011-3(b)(3) for the material aid, assistance, or advice. See Sec.
301.6111-3(b)(1). ``Gross income'' includes all fees for a tax
strategy, for services for advice (whether or not tax advice), and for
the implementation of a reportable transaction, but a ``fee'' does not
include amounts paid to a person, including an advisor, in that
person's capacity as a party to the transaction. See Sec. 301.6111-
3(b)(3)(ii). A person provides material
[[Page 81354]]
aid, assistance, or advice if the person makes or provides a tax
statement to or for the benefit of certain taxpayers who are required
to make a disclosure under section 6011 (including for participation in
a listed transaction) or other material advisors. See Sec. 301.6111-
3(b)(2)(i). ``Tax statement,'' for these purposes, is any statement
(including another person's statement), oral or written, that relates
to a tax aspect of a transaction that causes the transaction to be a
reportable transaction. See Sec. 301.6111-3(b)(2)(ii)(A).
In a typical conservation easement transaction, the qualified
organization signs the Form 8283 (Section B) and provides a
contemporaneous written acknowledgement of the contribution. See
section 170(f)(8). The qualified organization may also receive separate
cash contributions from the donor to monitor and enforce the easement
in perpetuity. The qualified organization might also make
representations to the donor that it is a qualified organization.
Signing the Form 8283 and the contemporaneous written acknowledgement
and making representations regarding the donee's status as a qualified
organization are not considered to be making a tax statement under
Sec. 301.6111-3(b)(2)(ii)(A). Therefore, a donee does not provide
material, aid, assistance, or advice under Sec. 301.6111-3 merely by
signing the Form 8283 (Section B) and the contemporaneous written
acknowledgement.
The Treasury Department and the IRS conclude that a qualified
organization acting solely in its capacity as a qualified organization
by, for example, accepting a conservation easement and separate
payments or contributions to monitor and enforce that easement,
provided such payments or contributions are in fact used for such
purpose, would not be considered a material advisor. The Treasury
Department and the IRS further conclude that if a qualified
organization engages in activities that would result in the
organization meeting the requirements to be considered a material
advisor, then such organization should be subject to the material
advisor rules, including the penalties for failure to disclose. Thus,
the final regulations include no special carveout to material advisor
status for qualified organizations.
Effect on Other Documents
Notice 2017-10 is obsoleted for transactions occurring after
October 8, 2024.
Special Analyses
I. Paperwork Reduction Act
The collection of information contained in these final regulations
is reflected in the collection of information for Forms 8886 and 8918
that have been reviewed and approved by the Office of Management and
Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C.
3507(c)) under control numbers 1545-1800 and 1545-0865.
To the extent there is a change in burden as a result of these
final regulations, the change in burden will be reflected in the
updated burden estimates for the Forms 8886 and 8918. The requirement
to maintain records to substantiate information on Forms 8886 and 8918
is already contained in the burden associated with the control number
for the forms and remains unchanged.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number.
II. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires
agencies to ``prepare and make available for public comment an initial
regulatory flexibility analysis,'' which will ``describe the impact of
the rule on small entities.'' 5 U.S.C. 603(a). Section 605(b) of the
RFA allows an agency to certify a rule if the rulemaking is not
expected to have a significant economic impact on a substantial number
of small entities.
The Secretary of the Treasury hereby certifies that these final
regulations will not have a significant economic impact on a
substantial number of small entities pursuant to the RFA. As previously
explained, the basis for these final regulations is Notice 2017-10,
2017-4 I.R.B. 544 (modified by Notice 2017-29, 2017-20 I.R.B. 1243, and
Notice 2017-58, 2017-42 I.R.B. 326). The following chart sets forth the
gross receipts of respondents to Notice 2017-10 that report Federal tax
information using Form 1065, U.S. Return of Partnership Income, and
Form 1120-S, U.S. Income Tax Return for an S corporation:
Notice 2017-10 All Filings 2017 to 2021 Respondents by Size
------------------------------------------------------------------------
Respondents Filings
Receipts (%) (%)
------------------------------------------------------------------------
Under 5M....................................... 93.3 88.3
5M to 10M...................................... 3.1 5.2
10M to 15M..................................... 1.2 2.9
15M to 20M..................................... 0.6 0.4
20M to 25M..................................... 0.6 0.7
Over 25M....................................... 1.2 2.5
------------------------------------------------------------------------
This chart shows that the majority of respondents to Notice 2017-10
reported gross receipts under $5 million. Even assuming that these
respondents constitute a substantial number of small entities, the
final regulations will not have a significant economic impact on these
entities because the final regulations implement sections 6111 and 6112
and Sec. 1.6011-4 by specifying the manner in which and time at which
an identified transaction must be reported. Accordingly, because the
final regulations are limited in scope to time and manner of
information reporting and definitional information, the economic impact
of the final regulations is expected to be minimal. Further, the
Treasury Department and the IRS expect the reporting burden to be low;
the information sought is necessary for regular annual return
preparation and ordinary recordkeeping. The estimated burden for any
taxpayer required to file Form 8886 is approximately 10 hours, 16
minutes for recordkeeping, 4 hours, 50 minutes for learning about the
law or the form, and 6 hours, 25 minutes for preparing, copying,
assembling, and sending the form to the IRS. The IRS's Research,
Applied Analytics, and Statistics division estimates that the
appropriate wage rate for this set of taxpayers is $102.08 (2022
dollars) per hour. Thus, it is estimated that a respondent will incur
costs of approximately $2,127.00 per filing. Disclosures received to
date by the Treasury Department and the IRS in response to the
reporting requirements of Notice 2017-10 indicate that this small
amount will not pose any significant economic impact for those
taxpayers now required to disclose under the final regulations.
Some commenters asserted that the hourly rate estimate of $98.87
(2021) in the proposed regulations is much lower than what
professionals charge to prepare Form 8886. Given the availability of
more recent data, the hourly rate estimate is revised in the final
regulations to $102.08 (2022). The new number still does not address
the substantial differences from the commenters' estimates. The
differences are likely attributable to the different methodologies
used. The commenters likely used the hourly rate that an independent
professional would charge
[[Page 81355]]
a retail customer to prepare a Form 8886. The Treasury Department and
the IRS used the hourly cost that a business owner would pay to employ
such a professional. This method was determined based on the comments
received from stakeholders objecting to reporting of the retail hourly
rate at earlier points.
One commenter asked for the data source for the hourly rate
estimate. The source data used by our data unit comes from the Bureau
of Labor Statistics.
Some commenters asserted that the estimate of the time to prepare
Form 8886 is too low as provided because (1) the estimate ignores the
time necessary to comply with the reporting requirement for the years
to which the requirement applies retroactively and (2) the estimate
does not properly account for some of the time spent, such as learning
new topics. At this time, the Treasury Department and the IRS did not
find a practical way to adjust the time estimate in response to these
comments due to (1) the uncertainties involved and (2) with respect to
the prior years, the effect of revealing our underreporting estimates
on enforcement.
For the reasons stated, a regulatory flexibility analysis under the
RFA is not required. Pursuant to section 7805(f) of the Code, the
proposed rule preceding this rulemaking was submitted to the Chief
Counsel for the Office of Advocacy of the Small Business Administration
for comment on its impact on small business, and no comments were
received.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). One commenter
argued that it is at least possible that the UMRA trigger of $100
million could be triggered because of the potential burdens of updating
State or local regulations concerning the acceptance of land donations,
harmonizing information reporting with the requirements of the
regulations, and cooperation with examination proceedings. The Treasury
Department and the IRS have considered this comment and conclude that
it is not persuasive, particularly in light of the continuing carve-out
for donees in these final regulations. This final rule does not include
any Federal mandate that may result in expenditures by State, local, or
Tribal governments, or by the private sector in excess of that
threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. One commenter suggested that, if the
Treasury Department and the IRS decide to eliminate the carveout for
donees described in section 170(c) from being treated as a party to the
transaction under section 4965, then the final regulations will have
federalism implications under Executive Order 13132. The final
regulations maintain the section 4965 carveout. This final rule does
not have federalism implications and does not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
V. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6(b) of Executive Order 12866, as amended. Therefore, a
regulatory impact assessment is not required.
VI. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
Guidance cited in this preamble is published in the Internal
Revenue Bulletin and is available from the Superintendent of Documents,
U.S. Government Publishing Office, Washington, DC 20402, or by visiting
the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal authors of these final regulations are Joshua S.
Klaber and Eugene Kirman, Office of Associate Chief Counsel (Income Tax
& Accounting). Other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry for Sec. 1.6011-9 in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.6011-9 also issued under 26 U.S.C. 6001 and 6011.
* * * * *
0
Par. 2. Section 1.6011-9 is added to read as follows:
Sec. 1.6011-9 Syndicated conservation easement listed transactions.
(a) Identification as listed transaction. Transactions that are the
same as, or substantially similar to, a transaction described in
paragraph (b) of this section are identified as listed transactions for
purposes of Sec. 1.6011-4(b)(2).
(b) Syndicated conservation easement transaction. The term
syndicated conservation easement transaction means a transaction in
which the following steps occur (regardless of the order in which they
occur)--
(1) A taxpayer receives promotional materials that offer investors
in a pass-through entity the possibility of being allocated a
charitable contribution deduction the amount of which equals or exceeds
an amount that is two and one-half times the amount of the taxpayer's
investment, as determined in paragraph (d)(4) of this section, in the
pass-through entity, as determined under paragraph (d) of this section
(2.5 times rule);
(2) The taxpayer acquires an interest, directly or indirectly
through one or more tiers of pass-through entities, in the pass-through
entity that owns or acquires real property (that is, becomes an
investor in the entity);
(3) The pass-through entity that owns the real property contributes
an easement on such real property, which it treats as a conservation
easement, to a qualified organization and allocates, directly or
through one or more tiers of pass-through entities, a charitable
contribution deduction to the taxpayer; and
(4) The taxpayer claims a charitable contribution deduction with
respect to
[[Page 81356]]
the contribution of the real property interest on the taxpayer's
Federal income tax return.
(c) Definitions. The following definitions apply for purposes of
this section:
(1) Charitable contribution deduction. The term charitable
contribution deduction means a deduction under section 170 of the
Internal Revenue Code (Code), which includes a deduction arising from a
qualified conservation contribution as defined in section 170(h)(1) of
the Code.
(2) Conservation easement. The term conservation easement means a
restriction (granted in perpetuity) on the use which may be made of the
real property, within the meaning of section 170(h)(2)(C) of the Code,
exclusively for conservation purposes, within the meaning of section
170(h)(1)(C) and (h)(4) of the Code.
(3) Pass-through entity. The term pass-through entity means a
partnership, S corporation, or trust (other than a grantor trust within
the meaning of subchapter J of chapter 1 of the Code).
(4) Promotional materials. The term promotional materials includes
materials described in Sec. 301.6112-1(b)(3)(iii)(B) of this chapter
and any other written or oral communication regarding the transaction
provided to investors, such as marketing materials, appraisals
(including preliminary appraisals, draft appraisals, and the appraisal
that is attached to the taxpayer's return), websites, transactional
documents such as deeds of conveyance, private placement memoranda, tax
opinions, operating agreements, subscription agreements, statements of
the anticipated value of the conservation easement, and statements of
the anticipated amount of the charitable contribution deduction.
(5) Qualified organization. The term qualified organization means
an organization described in section 170(h)(3) of the Code.
(6) Real property. The term real property includes all land,
structures, and buildings, including a certified historic structure
defined in section 170(h)(4)(C) of the Code.
(7) Substantially similar. The term substantially similar is
defined in Sec. 1.6011-4(c)(4). For example, transactions that meet
the elements of paragraph (b) of this section, except that the pass-
through entity contributes a fee simple interest in real property or a
real property interest described in section 170(h)(2)(A) or (B) of the
Code rather than a conservation easement, are substantially similar to
the listed transaction identified in this section.
(d) Application of the 2.5 times rule--(1) Bright-line rule.
Transactions for which the promotional materials offer the taxpayer the
possibility of being allocated a charitable contribution deduction of
only an amount less than 2.5 times the taxpayer's investment and for
which the taxpayer is actually allocated a charitable contribution
deduction of an amount less than 2.5 times the taxpayer's investment
(so that the rebuttable presumption in paragraph (d)(3) of this section
does not apply) are generally not considered substantially similar to
the listed transaction identified in this section. However, if a pass-
through entity engages in a series of transactions with a principal
purpose of avoiding the application of the bright-line rule in this
paragraph (d)(1), the series of transactions may be disregarded or the
arrangement may be recharacterized in accordance with its substance.
Whether a series of transactions has a principal purpose of avoiding
the application of this bright-line rule is determined based on all the
facts and circumstances.
(2) Multiple suggested contribution amounts. If the promotional
materials suggest or imply a range of possible charitable contribution
deduction amounts that may be allocated to the taxpayer, the highest
suggested or implied contribution amount determines whether the 2.5
times rule in this paragraph (d) is met. In addition, if one piece of
promotional materials (for example, an appraisal or oral statement)
states a higher charitable contribution deduction amount than stated by
other promotional materials, then the highest stated charitable
contribution deduction amount determines whether the 2.5 times rule is
met.
(3) Rebuttable presumption. The 2.5 times rule in this paragraph
(d) is deemed to be met if the pass-through entity donates a real
property interest within three years following the taxpayer's
investment in the pass-through entity, the pass-through entity
allocates a charitable contribution deduction to the taxpayer the
amount of which equals or exceeds two and one-half times the amount of
the taxpayer's investment, and the taxpayer claims a charitable
contribution deduction the amount of which equals or exceeds two and
one-half times the amount of the taxpayer's investment. This
presumption may be rebutted if the taxpayer establishes to the
satisfaction of the Commissioner that none of the promotional materials
contained a suggestion or implication that investors might be allocated
a charitable contribution deduction that equals or exceeds an amount
that is two and one-half times the amount of their investment in the
pass-through entity.
(4) Determining the amount of the taxpayer's investment in the
pass-through entity--(i) In general. A taxpayer may determine the
amount of the taxpayer's investment in the pass-through entity for
purposes of paragraph (b) of this section using either the anti-
stuffing method in paragraph (d)(4)(ii) of this section or, for
contributions made after December 29, 2022, the relevant basis method
in paragraph (d)(4)(iii) of this section. No other methods may be used.
(ii) Anti-stuffing method. Under the anti-stuffing method, the
amount of a taxpayer's investment in the pass-through entity is the
portion of the cash or fair market value of the assets the taxpayer
uses to acquire its interest in the pass-through entity that is
attributable to the real property on which a conservation easement is
placed (or the portion thereof, if an easement is placed on a portion
of the real property) that gives rise to the charitable contribution
described in paragraph (b)(3) of this section. For example, if a
portion of the taxpayer's cost of acquiring the taxpayer's interest in
the pass-through entity is attributable to property held directly or
indirectly by the pass-through entity other than the real property on
which a conservation easement is placed as described in paragraph
(b)(3) of this section (such other property may include other real
property, cash, cash equivalents, digital assets, marketable
securities, or other tangible or intangible assets), that portion of
the taxpayer's acquisition cost is not considered part of the
taxpayer's investment for purposes of this section because it is not
attributable to the portion of the real property on which a
conservation easement is placed as described in paragraph (b)(3) of
this section. For purposes of this paragraph (d)(4)(ii), assets
retained to pay for costs related to the operation and maintenance of
the real property on which the conservation easement is placed,
including costs that may be incurred in future years, are not
attributable to the real property on which a conservation easement is
placed as described in paragraph (b)(3) of this section. In the case of
a substantially similar transaction described in paragraph (c)(7) of
this section, the rules in this paragraph (d)(4)(ii) apply except that
the relevant real property that gives rise to the charitable
contribution deduction described in paragraph (b)(3) of this section is
the real property donated.
(iii) Relevant basis method. For contributions made after December
29,
[[Page 81357]]
2022, taxpayers may use their relevant basis, as determined in
accordance with section 170(h)(7)(B) of the Code and Sec. 1.170A-
14(k), as the amount of their investment for purposes of paragraph (b)
of this section.
(5) Examples. For the examples in this paragraph (d)(5), assume
that the partnerships are respected for Federal tax purposes, and that
the partnership allocations comply with the rules of subchapter K of
chapter 1 of the Code.
(i) Example 1--(A) Facts. Individual A purchased an interest in P,
a partnership that owns real property with a fair market value of
$500,000 and marketable securities with a fair market value of
$500,000. A is one of four equal investors in P, each of whom purchased
its interest in P for $250,000 of cash. With respect to an investor's
$250,000 payment for its interest in P, the promotional materials
stated that P expected to allocate a $500,000 charitable contribution
deduction to the investor (that is, a charitable contribution deduction
that is two times the amount an investor paid for its interest in P).
After all four investors have purchased their interests in P, P donates
a conservation easement on all of its real property to a qualified
organization as defined in section 170(h)(3) of the Code and reports a
$2,000,000 charitable contribution on its Form 1065, U.S. Return of
Partnership Income, based on P obtaining an appraisal indicating that
the value of the conservation easement is $2,000,000. The Schedule K-1
(Form 1065) that P furnishes to A indicates that P allocated a
charitable contribution deduction to A for the taxable year. A claims a
charitable contribution deduction with respect to the charitable
contribution on A's Federal income tax return.
(B) Analysis. A's cost of acquiring its interest in P is $250,000.
The real property on which a conservation easement was placed and that
gave rise to the charitable contribution deduction described in
paragraph (b)(3) of this section was P's property valued at $500,000.
P's only other asset was marketable securities worth $500,000.
Accordingly, half of A's share of the value of the assets held by P was
attributable to the real property on which P placed a conservation
easement and that gave rise to the charitable contribution deduction
described in paragraph (b)(3) of this section. Therefore, under
paragraph (d)(4)(i) of this section, for purposes of paragraph (b) of
this section, the amount of A's investment in P is $125,000 (that is,
half of A's $250,000 acquisition cost, which is the portion of A's
acquisition cost that is attributable to the real property on which P
placed a conservation easement and that gave rise to the charitable
contribution deduction described in paragraph (b)(3) of this section).
Because A's investment for purposes of the 2.5 times rule is $125,000
and A's expected charitable contribution deduction, based on the
promotional materials, is $500,000 (that is, an expected deduction that
is four times A's investment), the 2.5 times rule of paragraph (b)(1)
of this section is met. The transaction also meets the other elements
of a syndicated conservation easement within the meaning of paragraph
(b) of this section and therefore is a listed transaction for purposes
of Sec. 1.6011-4(b)(2).
(ii) Example 2--(A) Facts. Individual B acquires a ten percent
interest in InvestCo, a partnership, by making a $250,000 cash
contribution. Immediately after B's acquisition, InvestCo's only asset
is $2,500,000 of cash. The promotional materials state that InvestCo
expects to allocate a $500,000 charitable contribution deduction to B
with respect to B's partnership interest. InvestCo pays $600,000 to
purchase marketable securities. InvestCo also purchases an interest in
another partnership, PropCo, for $1,900,000 from one of PropCo's
partners. At the same time as the purchase, InvestCo also contributes
$100,000 of its marketable securities to PropCo. Immediately after
InvestCo's purchase and contribution, PropCo's only assets are real
property worth $2,400,000 and the marketable securities worth $100,000.
PropCo donates its entire interest in the real property (a fee simple
interest) to a qualified organization as defined in section 170(h)(3)
of the Code and reports a $6,250,000 charitable contribution on its
Form 1065, U.S. Return of Partnership Income, based on PropCo obtaining
an appraisal indicating that the value of the real property is
$6,250,000. PropCo allocates a portion of the charitable contribution
deduction to InvestCo. The Schedule K-1 (Form 1065) that InvestCo
furnishes to B indicates that InvestCo allocated a charitable
contribution deduction to B for the taxable year. B claims a charitable
contribution deduction with respect to the contribution on B's Federal
income tax return.
(B) Analysis. Immediately after InvestCo's acquisition of its
interest in PropCo, InvestCo's only assets were its interest in PropCo
and $500,000 in marketable securities. Accordingly, eighty percent of
InvestCo's funds ($2,000,000/$2,500,000) were used to acquire its
interest in PropCo. B's investment in InvestCo is $250,000; therefore,
eighty percent of that amount, $200,000, is attributable to InvestCo's
interest in PropCo. Immediately after InvestCo's acquisition of its
interest in PropCo, PropCo had real property worth $2,400,000 and
marketable securities worth $100,000. As such, ninety-six percent
($2,400,000/$2,500,000) of PropCo's assets were the real property that
was subsequently donated. Therefore, under paragraph (d)(4)(i) of this
section, for purposes of paragraph (b) of this section, the amount of
B's investment in InvestCo that is attributable to the donated real
property that gave rise to the charitable contribution deduction
described in paragraph (b)(3) of this section is $200,000 multiplied by
ninety-six percent, or $192,000. Because B's investment for purposes of
the 2.5 times rule is $192,000 and B's expected charitable contribution
deduction, based on the promotional materials, is $500,000 (that is, an
expected deduction that is at least 2.5 times B's investment), the 2.5
times rule of paragraph (b)(1) of this section is met. The transaction
also meets the other elements of a syndicated conservation easement
within the meaning of paragraph (b) of this section, except that PropCo
contributed a fee simple interest in real property rather than a
conservation easement. Under paragraph (c)(7) of this section, the
transaction is substantially similar to the listed transaction
described in paragraph (b) of this section and, therefore, under
paragraph (a) of this section, the transaction in this example is a
listed transaction for purposes of Sec. 1.6011-4(b)(2).
(e) Participation in a syndicated conservation easement
transaction--(1) In general. Whether a taxpayer has participated in a
syndicated conservation easement transaction described in paragraph (b)
of this section is determined under Sec. 1.6011-4(c)(3)(i)(A).
(2) Class of participants. For purposes of Sec. 1.6011-
4(c)(3)(i)(A), participants in a transaction that is the same as, or
substantially similar to, a syndicated conservation easement
transaction described in paragraph (b) of this section include--
(i) An owner of a pass-through entity;
(ii) A pass-through entity; and
(iii) Any other taxpayer whose Federal income tax return reflects
tax consequences or a tax strategy arising from a transaction that is
the same as, or substantially similar to, the transaction described in
paragraph (b) of this section.
(3) Exclusion. A qualified organization to which the conservation
easement is donated is not treated as a participant under Sec. 1.6011-
4(c)(3)(i)(A)
[[Page 81358]]
in a syndicated conservation easement transaction described in
paragraph (b) of this section.
(f) Application of section 4965. A qualified organization to which
the real property interest is donated is not treated under section 4965
of the Code as a party to the transaction described in paragraph (b) of
this section.
(g) Disclosures under Notice 2017-10. A taxpayer who disclosed
their participation in a transaction pursuant to Notice 2017-10 and in
accordance with Sec. 1.6011-4 before October 8, 2024, is treated as
having made the disclosure required under this section and Sec.
1.6011-4, for the years covered by that disclosure, as of the date of
the disclosure under Notice 2017-10.
(h) Applicability date--(1) In general. This section's
identification of transactions that are the same as, or substantially
similar to, the transactions described in paragraph (b) of this section
as listed transactions for purposes of Sec. 1.6011-4(b)(2) and
sections 6111 and 6112 of the Code is effective October 8, 2024.
(2) Applicability date for material advisors. Notwithstanding Sec.
301.6111-3(b)(4)(i) and (iii) of this chapter, material advisors are
required to disclose only if they have made a tax statement on or after
October 8, 2018.
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: September 16, 2024
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-22963 Filed 10-7-24; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on October 8, 2024.
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