March 11, 2025
On October 8, 2024, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations designating certain Syndicated Conservation Easement (SCE) transactions as listed transactions. The IRS first identified certain SCEs as listed transactions in Notice 2017-10 (Dec. 23, 2016). In response to successful challenges to Notice 2017-10 under the Administrative Procedure Act (APA), Treasury promulgated proposed SCE regulations on December 6, 2022, to replace the Notice.
The final SCE listed transaction regulations define a syndicated conservation easement transaction as a transaction in which: 1) a taxpayer receives promotional materials that offer investors in a passthrough 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 (the 2.5 times rule); 2) the taxpayer becomes a direct or indirect investor in the passthrough entity that owns the real property; 3) the passthrough entity that owns the real property contributes an easement on such real property to a qualified organization and allocates a charitable contribution deduction to the taxpayer; and 4) the taxpayer claims a charitable contribution deduction with respect to the passthrough entity’s contribution of the conservation easement.
The final regulations clarify and revise the proposed regulations in response to comments received during the rulemaking process, including the following:
- The IRS clarified that any transactions where the promotional materials advertise an amount less than the 2.5 times threshold are generally not reportable, however, if a taxpayer’s actual allocation is above the threshold, the rebuttable presumption in Treas. Reg. § 1.6011-9(d)(3) applies. In addition, if a passthrough entity engages in a series of transactions to avoid the 2.5 times threshold, the IRS may disregard or recharacterize the transaction in accordance with its substance.
- The final regulations rephrase the definition of a “conservation easement,” to track the language of section 170(h): “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).”
- The final regulations clarify that a transaction that meets the requirements for a listed SCE transaction under the regulations but involves the contribution of a fee simple real estate interest, rather than an easement, is a “substantially similar transaction.”
- The final regulations expand the definition of participant to include “participants in transactions that are the same as, or substantially similar to, syndicated conservation easement transactions,” in addition to owners of a passthrough entity, passthrough entities, and any other taxpayers whose tax returns reflect the tax consequences of an SCE.
The preamble to the final regulations also noted that some commenters questioned whether the SCE regulations should be finalized following Congress’s 2022 enactment of section 170(h) as part of the Consolidated Appropriations Act. Section 170(h) is intended to address most of the abusive conservation easement transactions by generally disallowing deductions for contributions of conservation easements by a partnership if the reported value is more than 2.5 times the partners’ “relevant basis” in the partnership and by imposing a strict liability 40 percent penalty.
Notably, the final regulations do not address valuation, which is the focal point of many SCE disputes. We should expect to see continued valuation disputes and controversies for any SCE-type transactions that are either pre-date or are not otherwise disallowed by section 170(h)(7).
The article in its original form can be found here.
Sam Lapin (LAW ’17) is Counsel at Miller & Chevalier in the Tax Department and specializes largely in tax controversy and litigation matters.