Statutory Disallowance of Deductions for Certain Qualified Conservation Contributions Made by Partnerships and S Corporations

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 9999]</DEPDOC> <RIN>RIN 1545-BQ90</RIN> <SUBJECT>Statutory Disallowance of Deductions for Certain Qualified Conservation Contributions Made by Partnerships and S Corporations</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations concerning the statutory disallowance rule enacted by the SECURE 2.0 Act of 2022 to disallow a Federal income tax deduction for a qualified conservation contribution made by a partnership or an S corporation after December 29, 2022, if the amount of the contribution exceeds 2.5 times the sum of each partner's or S corporation shareholder's relevant basis. These final regulations provide guidance regarding this statutory disallowance rule, including definitions, appropriate methods to calculate the relevant basis of a partner or an S corporation shareholder, the three statutory exceptions to the statutory disallowance rule, and related reporting requirements. In addition, these final regulations provide reporting requirements for partners and S corporation shareholders that receive a distributive share or pro rata share of any noncash charitable contribution made by a partnership or S corporation, regardless of whether the contribution is a qualified conservation contribution (and regardless of whether the contribution is of real property or other noncash property). These final regulations affect partnerships and S corporations that claim qualified conservation contributions, and partners and S corporation shareholders that receive a distributive share or pro rata share, as applicable, of a noncash charitable contribution. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on June 28, 2024. <E T="03">Applicability date:</E> For dates of applicability, <E T="03">see</E> §§ 1.170A-14(o)(1), 1.170A-16(g)(2), 1.706-3(e), and 1.706-4(e)(2)(xiii) and (e)(3)(ii). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the final regulations under §§ 1.170A-14, 1.706-3, and 1.706-4, contact John Hanebuth or Benjamin Weaver at (202) 317-6850 (not a toll-free number); concerning the final regulations under § 1.170A-16 and issues regarding section 170 other than section 170(h)(7), contact Elizabeth Boone at (202) 317-5100 or Hannah Kim at (202) 317-7003 (not toll-free numbers). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> This document contains final regulations amending the Income Tax Regulations (26 CFR part 1) under sections 170 and 706 of the Internal Revenue Code (Code) to implement the provisions of section 605(a) and (b) of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act), enacted as Division T of the Consolidated Appropriations Act, 2023, Public Law 117-328, 136 Stat. 4459, 5393 (December 29, 2022), which apply to contributions of property made after December 29, 2022. <HD SOURCE="HD2">I. Overview of Qualified Conservation Contributions</HD> Section 170(a) provides, subject to certain limitations and requirements, a deduction for any charitable contribution, as defined in section 170(c), of cash or other property the payment of which is made within the taxable year. Section 170(f) disallows charitable contribution deductions in certain cases and provides special rules. Section 170(f)(3)(A) provides that, in the case of a contribution (not made by a transfer in trust) of an interest in property that consists of less than the taxpayer's entire interest in such property, a deduction will be allowed only to the extent that the value of the interest contributed would be allowable as a deduction under section 170 if such interest had been transferred in trust. Section 170(f)(3)(B)(iii) provides that section 170(f)(3)(A) does not apply to a qualified conservation contribution. <HD SOURCE="HD2">II. Enactment of Section 170(f)(19) and (h)(7)</HD> Section 170(h)(7) was added to the Code by section 605(a)(1) of the SECURE 2.0 Act. Section 170(h)(7)(A) states that a contribution by a partnership (whether directly or as a distributive share of a contribution of another partnership) is not treated as a qualified conservation contribution for purposes of section 170 if the amount of such contribution exceeds 2.5 times the sum of each partner's relevant basis in such partnership (Disallowance Rule). Thus, a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes is not a qualified conservation contribution if the Disallowance Rule applies. Section 170(h)(7)(B)(i) provides that, for purposes of section 170(h)(7), the term “relevant basis” means, with respect to any partner, the portion of such partner's modified basis in the partnership that is allocable (under rules similar to the rules of section 755 of the Code) to the portion of the real property with respect to which the contribution described in section 170(h)(7)(A) is made. Section 170(h)(7)(B)(ii) provides that, for purposes of section 170(h)(7), the term “modified basis” means, with respect to any partner, such partner's adjusted basis in the partnership as determined: (1) immediately before the contribution described in section 170(h)(7)(A), (2) without regard to section 752 of the Code, and (3) by the partnership after taking into account these first two adjustments and such other adjustments as the Secretary of the Treasury or her delegate (Secretary) may provide. Section 170(h)(7)(F) provides that the rules of section 170(h)(7) “apply to S corporations and other pass-through entities in the same manner as such rules apply to partnerships,” except as the Secretary otherwise provides. Section 170(h)(7)(C) provides an exception to the Disallowance Rule for contributions that satisfy a three-year holding period. Section 170(h)(7)(D) provides an exception to the Disallowance Rule for contributions from family pass-through entities. Section 170(h)(7)(E) provides an exception to the Disallowance Rule for qualified conservation contributions the conservation purpose of which is the preservation of a certified historic structure. Section 170(h)(7)(G) provides a specific grant of regulatory authority to the Secretary to issue regulations or other guidance as the Secretary determines are necessary or appropriate to carry out the purposes of the Disallowance Rule, including reporting requirements and rules to prevent the avoidance of the Disallowance Rule. Section 605(b) of the SECURE 2.0 Act added section 170(f)(19) to the Code, which provides that, in the case of a partnership or S corporation claiming a qualified conservation contribution for the preservation of a building that is a certified historic structure (as defined in section 170(h)(4)(C)) in an amount that exceeds 2.5 times the sum of each partner's or S corporation shareholder's relevant basis (as defined in section 170(h)(7)), no deduction under section 170 is allowed unless, as provided in section 170(f)(19)(A)(i) and (ii), the partnership or S corporation includes on its return for the taxable year a statement that such contribution was made and any other information as the Secretary may require. A contribution to preserve a certified historic structure is one of the three exceptions to the Disallowance Rule. Section 605(c) of the SECURE 2.0 Act provides that the amendments made by section 605 of the SECURE 2.0 Act apply to contributions made after December 29, 2022, and that no inference is intended as to the appropriate treatment of contributions made in taxable years ending on or before that date, or as to any contribution for which a deduction is not disallowed by reason of section 170(h)(7). <HD SOURCE="HD2">III. The Proposed Regulations</HD> On November 20, 2023, the Department of the Treasury (Treasury Department) and the IRS published a notice of proposed rulemaking (REG-112916-23) (the proposed regulations) in the <E T="04">Federal Register</E> (88 FR 80910) to provide guidance under section 170(f)(19) and (h)(7). The proposed regulations would make changes to existing § 1.170A-14, including modifying paragraph (a) to reference the Disallowance Rule and adding new paragraphs (j) through (n) to § 1.170A-14 to provide guidance on the application of the Disallowance Rule (and its exceptions) to partnerships and S corporations. In addition, the proposed regulations would make changes to the reporting requirements in § 1.170A-16. Finally, the proposed regulations would make changes to §§ 1.706-3 and 1.706-4 to facilitate the operation of the Disallowance Rule in the case of a qualified conservation contribution made by a partnership. The provisions of the proposed regulations are explained in greater detail in the preamble to the proposed regulations. Pursuant to section 7805(b)(2) of the Code, regulations issued under section 170(f)(19) and (h)(7) within 18 months of the December 29, 2022, date of enactment of section 605 of the SECURE 2.0 Act are permitted to apply to periods ending before the dates provided under section 7805(b)(1) (generally, the dates of the issuance of proposed or final regulations or a notice describing the regulations). Accordingly, the proposed regulations under §§ 1.170A-14(j) through (n), 1.706-3, and 1.706-4 were proposed to apply to contributions made after December 29, 2022. To align the reporting requirements under § 1.170A-16 with the publication of the revised Form 8283, <E T="03">Noncash Charitable Contributions,</E> and its instructions, the proposed regulations under § 1.170A-16 were proposed to apply to contributions made in taxable years ending on or after November 20, 2023 (the date th ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 340k characters. 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