On the morning of Dec. 20, 2022, we finally got a look at the language being negotiated in the 4,155 page Omnibus spending bill. Buried in the bill is new language relating to donations of conservation easements by pass-through entities.
Here are five important takeaways:
- The new paragraphs of Section 170 will only be prospective, taking effect when the bill is signed into law.
The bill not only states that “[t]he amendments made by this section shall apply to contributions made after the date of the enactment of this Act,” but that “[n]o inference is intended as to the appropriate treatment of contributions made in taxable years ending on or before the date” of enactment. Accordingly, these new rules cannot apply to any of the thousands of donations that have already occurred and will occur in the next few days.
- The safe harbor provisions permitting conforming the deed language based on the to-be-issued IRS-sanctioned deed language cannot apply to any case in Court, any case where a notice has been issued, and has no opt-in provision to help alleviate the enormous backlog of cases relating to deed issues that would be resolved by this safe harbor.
The Bill provides the IRS with 120 days to come up with safe-harbor deed language for “extinguishment clauses and boundary line adjustments” but does not apply if the easement deed “is part of a reportable transaction” or is “described in Internal Revenue Service Notice 2017-10, (ii) which by reason of section 170(h)(7) of such Code, as added by this section, is not treated as a qualified conservation contribution,” has been disallowed by the IRS, is in Federal court, or if IRS has asserted an underpayment penalty under Secs. 6662 or 6663 and either finally determined a penalty or if the penalty is challenged in Court. It appears this safe harbor only applies if your case is still in audit or potentially as early as any notification of penalties during the audit.
- The language incorporates parts of the now-stricken Notice 2017-10 by limiting the deduction to 2.5 times the partner’s “relevant basis.”
The bill incorporates a new term “relevant basis,” which it defines as “the portion of such partner’s modified basis in the partnership which is allocable…to the portion of the real property with respect to which the contribution…is made.” This means that regardless of the highest and best use of the property and any built-in gain based on a bargain sale, the Tax Court will now have to determine the value only as to whether the rights given up exceed 2.5 times the partners’ total relevant basis. Note that if the deduction claimed is in excess of 2.5 times the partner’s relevant basis, the deduction is denied in its entirety. The Omnibus spending bill provides for one exception to this general rule. The 3-year holding period exception requires that the partnership itself has held the real property for at least three years and each partner’s ownership interest in the partnership remain unchanged for at least three years. The 3-year holding period rule applies to all partnerships, including tiered partnerships.
- The penalties provision essentially removes reasonable cause if the taxpayer or the partnership relies on an accountant or legal advice for what is and remains a legitimate income tax deduction. In addition, the provisions extend the statute of limitations on assessment for any transaction that exceeds 2.5 times the partner’s relevant basis for purposes of sections 6501(c)(10) and 6235(c)(6).
The provisions state that it applies only to easements, but the IRS continues to apply the substance of Notice 2017-10 to all charitable donations of property regardless of whether the donation meets the listed requirements of Notice 2017-10. When the Tax Court overwhelmingly invalidated Notice 2017-10 last month, the IRS simply incorporated it into proposed regulations issued on December 6, 2022 to finally comply with the Administrative Procedures Act, but in contravention of the statutory language of Section 170.
- The change does not apply to historic buildings.
The bill specifically exempts “contributions the conservation purpose of which is the preservation of any building which is a certified historic structure.”