After years of fighting to prevent taxpayers from using syndicated conservation easements (SCEs) to claim outsized tax deductions, the IRS has finally gotten help from Congress. That help came in the form of a provision in the $1.7 trillion omnibus spending bill President Biden signed into law in December that limited partnership deductions for conservation easements to 2.5 times their investment. While the new law is expected to curb the use of SCEs as tax scams, it should have little impact on taxpayers who donate legitimate conservation easements.

Taxpayers are allowed to claim a charitable deduction when they give up development rights to property through a conservation easement that is equal to the property’s development value. However, aggressive promoters have taken advantage of the deduction by pitching “syndication” deals that allow investors to claim deductions of many times the value of the property donated.

SCE promoters form partnerships to purchase idle land and find an appraiser willing to give it a development value that is far larger than the purchase price. The promoters then sell interests in the partnership to investors who use it to claim an inflated charitable contribution deduction based on the inflated value when the partnership donates a conservation easement on the land.

As part of its efforts to tamp down on the abusive use of the easements, the IRS added certain SCEs to its listed transactions through Notice 2017-10. But recent rulings by the U.S. Court of Appeals for the 6th Circuit and the U.S. Tax Court found that the IRS lacked the authority to identify its listed transactions through notices unless it followed the notice and public comment procedures that apply to regulations. While the IRS has continued defending Notice 2017-10 in courts not located in the 6th Circuit, and has proposed new SCE regulations, the new legislation should drastically reduce the need for these actions.

New cap based on partners’ relevant basis
The Consolidated Appropriations Act, 2023, amends §170(h) to limit the deduction available for qualified conservation easements made by pass-through entities, including partnerships and S-corporations (collectively referred to as “partnerships”). It says that contributions by partnerships must not be treated as qualified conservation contributions if the amount of the contribution exceeds 2.5 times the sum of each partner’s basis in the partnership. The act defines “relevant basis” as the portion of a partner’s modified basis in the partnership that can be allocated to the portion of the donated property.

The act provides an exception for contributions that are made outside of a three-year holding period. The three-year period begins on the latest of:

• The last date on which the partnership making the contribution acquired any portion of the real property that was donated
• The last date on which any partner in the partnership making the contribution acquired any interest in the partnership
• When one or more partnerships hold an interest in the partnership making the contribution, the date is the last date on which any of the partnerships acquired an interest in the partnership making the contribution, or the last date in which any partner in the partnership with an interest in the donating partnership acquired an interest in it

The legislation also provides an exception for partnerships where “substantially all” of the partnership interests are held directly or indirectly by an individual and their family members. Additionally, there is an exception for contributions to preserve certified historic structures.

Finally, the act adds more reporting requirements for partnerships claiming a deduction for the donation of conservation easements by partnerships.