The Department of the Treasury and the Internal Revenue Service (IRS) have announced proposed regulations aimed at providing guidance under a new section of the tax law. This new legislation focuses on disallowing deductions for certain charitable conservation contributions made by partnerships and other pass-through entities, such as S corporations. This move is part of a broader effort to address tax evasion issues linked to syndicated conservation easements, which have been consistently listed in the IRS’ “Dirty Dozen” tax schemes.
Context of the New Regulations
The SECURE 2.0 Act of 2022 introduced new subsections to the tax law under Internal Revenue Code section 170, specifically targeting rules for deductions on charitable contributions. These changes reflect an increased effort by the IRS to combat complex tax evasion tactics involving overvalued conservation easement contributions through partnership structures.
IRS Commissioner’s Stance
IRS Commissioner Danny Werfel highlighted the commitment to clamp down on what are essentially retail tax shelters disguised as syndicated conservation easements. The regulations are designed to protect legitimate conservation easements while ensuring that law-abiding taxpayers can more easily fulfill their obligations.
Implications for Partnerships and S Corporations
The proposed regulations primarily affect partnerships and S corporations involved in making conservation contributions. They also impact upper-tier partnerships and S corporations, along with their partners and shareholders, particularly in cases where these contributions are allocated among them. The regulations disallow deductions if the amount of the contribution exceeds two and a half times the sum of each partner’s or shareholder’s relevant basis in the partnership or S corporation.
Guidance on Statutory Exceptions
Additionally, the proposed regulations offer clarity on exceptions to the new disallowance rule. This includes exceptions for family partnerships and S corporations, as well as for contributions made outside a specified three-year holding period. There are also updates concerning the substantiation and reporting rules for certain charitable contributions.
Strategic Plan and Compliance
This initiative is part of the IRS’s strategic plan to ensure compliance with tax laws by partnerships, other pass-through entities, and their owners. The goal is to foster a more transparent and fair tax system, particularly in the area of conservation easement contributions.
The proposed regulations represent a significant step in the IRS’s ongoing efforts to combat tax evasion and reinforce the integrity of the tax system, particularly in relation to charitable contributions and conservation efforts.
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