The IRS issued proposed regulations (REG-112916-23) on a rule under the SECURE 2.0 Act of 2022 that disallows deductions for certain charitable conservation contributions by partnerships or S corporations as the Service continues to focus on abusive syndicated conservation easement schemes.
The proposed regulations, issued Friday, would amend the regulations under Secs. 170 and 706 to implement provisions of the SECURE 2.0 Act, which was enacted as Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328. The proposed regulations apply to contributions of property made after Dec. 29, 2022.
Under Sec. 170(h)(7), added by Section 605 of the SECURE 2.0 Act, a qualified conservation contribution is disallowed if the amount is more than 2.5 times the sum of each partner's or shareholder's relevant basis in the partnership or S corporation.
Those generally covered by the proposed regulations include partnerships and S corporations that make conservation contributions as well as upper-tier partnerships, upper-tier S corporations, partners, and S corporation shareholders that are allocated a portion of these contributions. The proposed regulations provide definitions, explanations, computational guidance, and examples, the IRS said.
The proposed regulations also provide guidance on the statutory exceptions to the new disallowance rule, particularly an exception for family partnerships and S corporations and an exception for contributions made outside a three-year holding period. They also update the substantiation and reporting rules for certain charitable contributions.
"The IRS is focusing its new compliance efforts on those who evade taxes through complex partnership structures and overvalued conservation easement contributions. The regulations issued today will stem the tide of certain syndicated conservation easements that are nothing more than retail tax shelters, while protecting the integrity of legitimate conservation easements and helping law-abiding taxpayers more easily meet their obligations," IRS Commissioner Danny Werfel said in a news release.
The IRS then published proposed regulations in December 2022 that identified syndicated conservation easement transactions and substantially similar transactions as listed transactions (REG-106134-22). The Service said it is now reviewing the comments it received before it finalizes those proposed regulations.
In addition, abusive conservation easement schemes were included on the IRS "Dirty Dozen" list for 2023. When conservation easements are abused, "participants attempt to game the tax system with grossly inflated tax deductions," the IRS said.
The IRS is seeking comments on the proposed regulations, and a public hearing is scheduled for Jan. 3, 2024.
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