[Federal Register Volume 88, Number 222 (Monday, November 20, 2023)]
[Proposed Rules]
[Pages 80910-80945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25423]



[[Page 80909]]

Vol. 88

Monday,

No. 222

November 20, 2023

Part III





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





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

Federal Register / Vol. 88 , No. 222 / Monday, November 20, 2023 / 
Proposed Rules

[[Page 80910]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-112916-23]
RIN 1545-BQ90


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed 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. The 
proposed regulations would 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, the 
proposed regulations would 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 proposed 
regulations would 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. This document also 
provides a notice of public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by December 20, 
2023. The public hearing on these proposed regulations is scheduled to 
be held on January 3, 2024, at 10 a.m. ET. Requests to speak and 
outlines of topics to be discussed at the public hearing must be 
received by December 20, 2023. If no outlines are received by December 
20, 2023, the public hearing will be cancelled. Requests to attend the 
public hearing must be received by 5 p.m. on December 29, 2023. The 
public hearing will be made accessible to people with disabilities. 
Requests for special assistance during the hearing must be received by 
5 p.m. on December 28, 2023.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and 
REG-112916-23) by following the online instructions for submitting 
comments. Once submitted to the Federal eRulemaking Portal, comments 
cannot be edited or withdrawn. The Department of Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comments submitted, whether electronically or on paper, to the IRS's 
public docket. Requests for a public hearing must be submitted as 
prescribed in the ``Comments and Public Hearing'' section.
    Send paper submissions to: CC:PA:01:PR (REG-112916-23), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations 
under Sec. Sec.  1.170A-14, 1.706-3, and 1.706-4, contact Benjamin 
Weaver at (202) 317-6850 (not a toll-free number); concerning the 
proposed regulations under Sec.  1.170A-16 and issues regarding section 
170 other than section 170(h)(7), contact Elizabeth Boone at (202) 317-
5100 and Hannah Kim at (202) 317-7003 (not toll-free numbers); and 
concerning submissions of comments and requests for a public hearing, 
contact Vivian Hayes at (202) 317-6901 (not a toll-free number) or by 
email to <a href="/cdn-cgi/l/email-protection#5e2e2b3c32373d363b3f2c3730392d1e372c2d70393128"><span class="__cf_email__" data-cfemail="1a6a6f78767379727f7b6873747d695a736869347d756c">[email protected]</span></a> (preferred).

SUPPLEMENTARY INFORMATION:

Background

I. Overview

    This document contains proposed regulations that would amend 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.

II. Charitable Contribution Deductions

    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 (discussed in part III of this 
Background section).
    Section 170(f)(11) requires a qualified appraisal and other 
documentation for a charitable contribution deduction to be allowed 
with respect to certain contributions of property. Section 170(f)(11) 
also includes special rules for contributions of property other than 
cash (noncash charitable contributions) of more than $5,000 and for 
noncash charitable contributions of more than $500,000. In addition, 
section 170(f)(11)(H) provides that the Secretary of the Treasury or 
her delegate (Secretary) may prescribe such regulations as may be 
necessary or appropriate to carry out the purposes of section 
170(f)(11). Section 6001 provides that every person liable for any tax 
imposed by title 26, United States Code (title 26) must keep such 
records, render such statements, make such returns, and comply with 
such rules and regulations as the Secretary may from time to time 
prescribe. In addition, section 6011 provides, in part, that, whenever 
required by regulations prescribed by the Secretary, any person made 
liable for any tax imposed by title 26 must make a return or statement 
according to the forms and regulations prescribed by the Secretary and 
include therein the information required by such forms or regulations. 
Under the authority of sections 170(f)(11)(H), 6001, and 6011, existing 
regulations under Sec.  1.170A-16 provide substantiation and reporting 
requirements that must be satisfied for a deduction to be allowed under 
section 170 with respect to noncash charitable contributions.

[[Page 80911]]

III. Qualified Conservation Contributions

    Section 170(h)(1) provides that, in general, for purposes of 
section 170(f)(3)(B)(iii), the term ``qualified conservation 
contribution'' means a contribution (1) of a qualified real property 
interest, (2) to a qualified organization, (3) exclusively for 
conservation purposes. Section 170(h)(2) defines the term ``qualified 
real property interest,'' section 170(h)(3) defines the term 
``qualified organization,'' section 170(h)(4) defines the term 
``conservation purpose,'' and section 170(h)(5) defines the term 
``exclusively for conservation purposes.'' In general, a qualified 
conservation contribution may include a contribution of a conservation 
easement.
    The existing regulations under Sec.  1.170A-14 provide rules for 
qualified conservation contributions described in section 170(h). 
Consistent with section 170(f)(3), Sec.  1.170A-14(a) provides that a 
deduction under section 170 generally is not allowed for a charitable 
contribution of any interest in property that consists of less than the 
donor's entire interest in the property other than certain transfers in 
trust. However, by reason of section 170(f)(3)(B)(iii), a deduction may 
be allowed for the value of a qualified conservation contribution if 
the requirements of Sec.  1.170A-14 are met. To be eligible for a 
deduction under Sec.  1.170A-14, the conservation purpose of the 
contribution must be protected in perpetuity. See Sec.  1.170A-14(a) 
and (g).

IV. Syndicated Conservation Easement Transactions

    On December 23, 2016, the Treasury Department and the IRS released 
Notice 2017-10, 2017-4 I.R.B. 544, which identified transactions that 
are the same as or substantially similar to certain syndicated 
conservation easement transactions as ``listed transactions'' under 
Sec.  1.6011-4 subject to certain disclosure and list maintenance 
requirements. Notice 2017-10 explains that the Treasury Department and 
the IRS are aware that some promoters are syndicating conservation 
easement transactions that purport to give investors the opportunity to 
obtain charitable contribution deductions in amounts that significantly 
exceed the amounts invested. In addition, Notice 2017-10 provides that 
a transaction is a listed transaction if (1) an investor receives 
promotional materials that offer a prospective investor in a pass-
through entity the possibility of a charitable contribution deduction 
that equals or exceeds an amount that is 2.5 times the amount of the 
investor's investment, (2) the investor purchases an interest directly 
or indirectly (through one or more tiers of pass-through entities) in 
the pass-through entity that holds real property, (3) the pass-through 
entity contributes a conservation easement and allocates, directly or 
through one or more tiers of pass-through entities, a charitable 
contribution to the investor, and (4) the investor reports on the 
investor's Federal income tax return a charitable contribution 
deduction with respect to the conservation easement.
    Congress continued to be concerned about abusive syndicated 
conservation easement transactions even after Notice 2017-10 was 
issued, and the transactions were the subject of an investigation by 
the U.S. Senate Committee on Finance, which issued a report on August 
25, 2020. S. Committee on Finance, Comm. Print 116-44, Syndicated 
Conservation-Easement Transactions, 116th Cong., 2nd Sess. (2020) 
(Committee Report). The Committee Report found that the syndicated 
conservation easement transactions examined were nothing more than 
retail tax shelters allowing taxpayers to buy tax deductions at the end 
of any given tax year. Id. at 3. The Committee Report further stated 
that these tax deductions could be purchased with no economic risk. Id. 
As such, the Finance Committee concluded that further action was 
necessary to preserve the integrity of the conservation easement tax 
deduction despite ongoing efforts to combat this abuse such as the 
issuance of Notice 2017-10 and IRS enforcement action. Id. at 4.
    In a separate report accompanying an earlier proposal for amending 
section 170(h), in legislation proposed as the ``Enhancing American 
Retirement Now Act,'' the Committee on Finance recognized charitable 
deductions for the donation of conservation easements as an important 
tool and incentive to protect the environment and historic structures. 
S. Rep. No. 117-142 on S. 4808, at 218, 117th Cong., 2nd Sess. (2022). 
Citing its findings from the 2020 Committee Report, the Committee 
noted, however, that abusive tax shelter transactions put the 
conservation easement tax deduction at risk. The Committee ultimately 
found it appropriate to take legislative action to protect the 
integrity of the conservation easement tax deduction for easement 
donations with a legitimate conservation purpose. Id.
    On December 8, 2022, the Treasury Department and the IRS published 
in the Federal Register (87 FR 75185) a notice of proposed rulemaking 
(REG-106134-22) identifying syndicated conservation easement 
transactions and substantially similar transactions as listed 
transactions (listing NPRM). The definition of a syndicated 
conservation easement transaction in proposed Sec.  1.6011-9 of the 
listing NPRM is similar to the definition in Notice 2017-10. The 
purpose of the listing NPRM was to eliminate any confusion and ensure 
consistent enforcement of Federal tax laws throughout the nation in 
light of certain judicial decisions holding that, under the 
Administrative Procedure Act, 5 U.S.C. chapter 5, subchapter II, listed 
transactions may be identified only after following notice and comment 
procedures. See, e.g., Mann Construction, Inc. v. United States, 27 
F.4th 1138 (6th Cir. 2022), and Green Valley Investors, LLC, et al. v. 
Commissioner, 159 T.C. No. 5 (2022). The Treasury Department and the 
IRS are in the process of considering the comments received and 
finalizing the listing NPRM.

V. Section 605 of the SECURE 2.0 Act

    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)(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 may otherwise provide.
    Section 170(h)(7)(B) defines the terms ``relevant basis'' and 
``modified basis,'' section 170(h)(7)(C), (D), and (E) provide three 
exceptions to the Disallowance Rule, and 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(a)(2) of the SECURE 2.0 Act modifies certain penalty 
provisions in sections 6662, 6664, and 6751 of the Code to provide 
special rules for

[[Page 80912]]

charitable contribution deductions disallowed by section 170(h)(7). 
Section 605(a)(3) of the SECURE 2.0 Act provides that any charitable 
contribution for which a deduction was disallowed under section 
170(h)(7) is treated, for purposes of the period of limitations on 
assessment and collection of tax in section 6501 of the Code and the 
period of limitations on making adjustments in section 6235 of the 
Code, as a transaction specifically identified by the Secretary as a 
tax-avoidance transaction.
    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).

VI. Overview of the Disallowance Rule

    The Disallowance Rule provides 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. If such a contribution is not treated as a 
qualified conservation contribution, then the general rule under 
section 170(f)(3)(A) disallowing a charitable contribution deduction 
under section 170 for a contribution of a partial interest in property 
applies. Thus, if the Disallowance Rule applies, any amount of 
deduction under section 170 for a qualified conservation contribution 
is disallowed.
    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 for allocating certain special basis 
adjustments to partnership property) 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 the treatment 
of partnership liabilities in section 752, and (3) by the partnership 
after taking into account these first two adjustments and such other 
adjustments as the Secretary may provide.
    Section 170(h)(7) contains three exceptions to the Disallowance 
Rule. First, section 170(h)(7)(C) provides that the Disallowance Rule 
does not apply to any contribution made at least three years after the 
latest of (1) the last date on which the partnership that made such 
contribution acquired any portion of the real property with respect to 
which such contribution is made, (2) the last date on which any partner 
in the partnership that made such contribution acquired any interest in 
such partnership, and (3) if the interest in the partnership that made 
such contribution is held through one or more partnerships, the last 
date on which any such partnership acquired any interest in any other 
such partnership, and the last date on which any partner in any such 
partnership acquired any interest in such partnership.
    Second, section 170(h)(7)(D)(i) provides that the Disallowance Rule 
does not apply to any contribution made by any partnership if 
substantially all of the partnership interests in such partnership are 
held, directly or indirectly, by an individual and members of the 
family of such individual. Section 170(h)(7)(D)(ii) provides that, for 
purposes of section 170(h)(7)(D), the term ``members of the family'' 
means, with respect to any individual (I) the spouse of such 
individual, and (II) any individual who bears a relationship to such 
individual that is described in section 152(d)(2)(A) through (G) of the 
Code for purposes of determining whether an individual is a qualifying 
relative.
    Third, section 170(h)(7)(E) provides that the Disallowance Rule 
does not apply to any qualified conservation contribution the 
conservation purpose of which is the preservation of any building that 
is a certified historic structure (as defined in section 170(h)(4)(C)).
    Section 170(h)(7)(F) provides that, except as may be otherwise 
provided by the Secretary, 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.
    Section 170(h)(7)(G) authorizes the Secretary to prescribe such 
regulations or other guidance as may be necessary or appropriate to 
carry out the purposes of section 170(h)(7), including regulations or 
other guidance (1) to require reporting, including reporting related to 
tiered partnerships and the modified basis of partners, and (2) to 
prevent the avoidance of the purposes of section 170(h)(7).

Explanation of Provisions

I. Overview

    These proposed regulations would address several requirements added 
by section 605 of the SECURE 2.0 Act and make several related 
clarifying changes to the existing regulations applicable to qualified 
charitable contributions. First, these proposed regulations would make 
changes to existing Sec.  1.170A-14, including modifying paragraph (a) 
to reference the Disallowance Rule and adding new paragraphs (j) 
through (n) to Sec.  1.170A-14 to provide guidance on the application 
of the Disallowance Rule to partnerships and S corporations, the 
computation of relevant basis and modified basis, including in tiered 
structures, and the three statutory exceptions to the Disallowance 
Rule.
    These proposed regulations would provide specific rules for 
partnerships and S corporations, but do not specifically address other 
types of pass-through entities. The Treasury Department and the IRS 
continue to study whether specific rules are needed for other types of 
pass-through entities and request comments on the application of 
section 170(f)(19) and (h)(7) to pass-through entities other than 
partnerships and S corporations. The Treasury Department and the IRS 
intend to issue future guidance on other issues relating to section 605 
of SECURE 2.0 Act, including additional guidance relating to the three 
statutory exceptions to the Disallowance Rule.
    Second, these proposed regulations would make changes to the 
reporting requirements in Sec.  1.170A-16 to address

[[Page 80913]]

substantiation of charitable contribution deductions as well as to 
implement section 170(f)(19)(A)(i). The Treasury Department and the IRS 
intend to issue future guidance addressing section 170(f)(19)(A)(ii).
    Finally, these proposed regulations propose new language in 
Sec. Sec.  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.

II. Clarifying Change to Sec.  1.170A-14(a)

    The second sentence of existing Sec.  1.170A-14(a) provides that a 
deduction may be allowed under section 170(f)(3)(B)(iii) for the value 
of a qualified conservation contribution if the requirements of Sec.  
1.170A-14 are met. Because the Disallowance Rule provided in section 
170(h)(7) is proposed to be contained in Sec.  1.170A-14(j) through 
(n), proposed Sec.  1.170A-14(a) would amend this sentence to provide 
that a deduction may be allowed under section 170(f)(3)(B)(iii) for the 
value of a qualified conservation contribution if the requirements of 
Sec.  1.170A-14 are met and the contribution is not a disallowed 
qualified conservation contribution within the meaning of proposed 
Sec.  1.170A-14(j).

III. Disallowance Rule and Its Exceptions

    Proposed Sec.  1.170A-14(j) would provide guidance on the general 
applicability of the Disallowance Rule to partnerships and S 
corporations. Proposed Sec.  1.170A-14(j)(3) would provide definitions. 
Consistent with section 170(h)(7)(B), proposed Sec.  1.170A-14(k) would 
provide that the term ``relevant basis'' means, with respect to any 
ultimate member (as defined in proposed Sec.  1.170A-14(j)(3)(x)), the 
portion of such ultimate member's modified basis (as determined under 
proposed Sec.  1.170A-14(l)) that is allocable (under the rules of 
proposed Sec.  1.170A-14(m)) to the portion of the real property with 
respect to which the qualified conservation contribution is made. 
Proposed Sec.  1.170A-14(l) would provide guidance on the determination 
of modified basis. Proposed Sec.  1.170A-14(m) would provide guidance 
on the allocation of modified basis to the portion of the real property 
with respect to which the qualified conservation contribution was made. 
Proposed Sec.  1.170A-14(m)(6) would impose recordkeeping requirements 
for substantiating the computation of each ultimate member's adjusted 
basis, modified basis, and relevant basis by the due date, including 
extensions, of the partnership's or S corporation's Federal income tax 
return. Proposed Sec.  1.170A-14(n) would provide guidance on the three 
statutory exceptions to the Disallowance Rule.

A. General Disallowance Rule for Partnerships and S Corporations

    Consistent with section 170(h)(7)(A), proposed Sec.  1.170A-
14(j)(1) would provide that proposed Sec.  1.170A-14(j) applies the 
rules of section 170(h)(7), which disallow a deduction under the Code 
and Sec.  1.170A-14 for certain qualified conservation contributions, 
as defined in section 170(h)(1) and Sec.  1.170A-14, made by, or 
allocated to, partnerships or S corporations if the amount of the 
qualified conservation contribution exceeds 2.5 times the sum of the 
relevant bases, as determined by proposed Sec.  1.170A-14(j) through 
(m). Proposed Sec.  1.170A-14(j)(3)(vii) would define a contribution 
for which a deduction is disallowed by Sec.  1.170A-14(j) as a 
``disallowed qualified conservation contribution.'' Proposed Sec.  
1.170A-14(j)(2)(i) would provide that, except as provided in proposed 
Sec.  1.170A-14(n), a qualified conservation contribution by a 
contributing partnership or a contributing S corporation is a 
disallowed qualified conservation contribution if the amount of the 
qualified conservation contribution exceeds 2.5 times the sum of each 
of the contributing partnership's or contributing S corporation's 
ultimate member's relevant basis as determined under proposed Sec.  
1.170A-14(j) through (m).
    Proposed Sec.  1.170A-14(j)(2)(ii) would provide that, except as 
provided in proposed Sec.  1.170A-14(n), an allocated portion of a 
contribution received by an upper-tier partnership or upper-tier S 
corporation is a disallowed qualified conservation contribution if 
either the contribution is a disallowed qualified conservation 
contribution with respect to the partnership that allocated the 
allocated portion to the upper-tier partnership or upper-tier S 
corporation, or such allocated portion exceeds 2.5 times the sum of 
each of that upper-tier partnership's or upper-tier S corporation's 
ultimate member's relevant basis as determined under proposed Sec.  
1.170A-14(j) through (m). Thus, if a contribution is a disallowed 
qualified conservation contribution with respect to a partnership, then 
the contribution is a disallowed qualified conservation contribution 
with respect to any upper-tier partnership or upper-tier S corporation 
owning a direct or indirect interest in that partnership. On the other 
hand, if a contribution is not a disallowed qualified conservation 
contribution with respect to a partnership, then the rules of proposed 
Sec.  1.170A-14(j) through (m) must be applied to the next tier of 
upper-tier partnerships and upper-tier S corporations (which own a 
direct interest in the partnership) to determine if the Disallowance 
Rule applies to those upper-tier partnerships and upper-tier S 
corporations. In other words, the test of Sec.  1.170A-14(j) through 
(m) must be applied at each tier unless and until the test is failed at 
one tier, in which case that portion of the contribution will be a 
disallowed qualified conservation contribution to that tier and any 
subsequent tiers.
B. Definitions
    Proposed Sec.  1.170A-14(j)(3) would contain definitions, including 
definitions of terms, including ``contributing partnership,'' 
``contributing S corporation,'' ``ultimate member,'' ``allocated 
portion,'' ``upper-tier partnership,'' and ``upper-tier S 
corporation.''
1. Allocated Portion
    Proposed Sec.  1.170A-14(j)(3)(i) would provide that, in the case 
of an upper-tier partnership or upper-tier S corporation that receives, 
directly or indirectly, a distributive share of a qualified 
conservation contribution, the phrase ``allocated portion'' means the 
amount of such distributive share.
2. Amount of Qualified Conservation Contribution
    Proposed Sec.  1.170A-14(j)(3)(ii) would provide that the amount of 
a contributing partnership's or contributing S corporation's qualified 
conservation contribution is the amount claimed as a qualified 
conservation contribution on the return of the contributing partnership 
or contributing S corporation for the taxable year in which the 
contribution is made. It would also provide that, if the contributing 
partnership or contributing S corporation files an amended return or 
administrative adjustment request under section 6227 of the Code 
claiming a different amount with respect to the qualified conservation 
contribution, the rules of Sec.  1.170A-14 must be re-applied with 
respect to such different amount to determine the application of 
section 170(h)(7) and Sec.  1.170A-14.
3. Contributing Partnership
    The Disallowance Rule applies to a partnership or S corporation 
that makes a qualified conservation contribution, as well as a 
partnership or S corporation that is allocated a distributive share of 
a qualified conservation contribution of

[[Page 80914]]

another partnership. For clarity, proposed Sec.  1.170A-14(j)(3)(iii) 
would provide that the term ``contributing partnership'' means a 
partnership that makes a qualified conservation contribution.
4. Contributing S Corporation
    Proposed Sec.  1.170A-14(j)(3)(iv) would provide that the term 
``contributing S corporation'' means an S corporation that makes a 
qualified conservation contribution.
5. Direct Interest
    Proposed Sec.  1.170A-14(j)(3)(v) would provide that the term 
``direct interest'' refers to an ownership interest in a contributing 
partnership, upper-tier partnership, contributing S corporation, or 
upper-tier S corporation that is held directly, or through an entity 
disregarded as separate from its owner for Federal income tax purposes, 
a qualified subchapter S subsidiary as defined in section 1361(b)(3) of 
the Code, or through a grantor trust (under subpart E of part 1 of 
subchapter J of chapter 1 of the Code). In the case of a partner that 
is a C corporation, non-grantor trust, or an estate, or an S 
corporation shareholder that is a non-grantor trust or an estate, the 
direct interest in the partnership or S corporation, as applicable, 
would be considered to be held by the C corporation, non-grantor trust, 
or estate; the C corporation's shareholders, trust beneficiaries, and 
estate beneficiaries would not be considered to hold any interest in 
the partnership or S corporation, as applicable, for purposes of 
proposed Sec.  1.170A-14(j) through (n).
6. Directly
    Proposed Sec.  1.170A-14(j)(3)(vi) would provide that an ownership 
interest is held ``directly'' if it is not held through one or more 
upper-tier partnerships or upper-tier S corporations. Similarly, a 
distributive share or pro rata share of a qualified conservation 
contribution would be received ``directly'' if it does not pass through 
one or more upper-tier partnerships or upper-tier S corporations.
7. Disallowed Qualified Conservation Contribution
    Proposed Sec.  1.170A-14(j)(3)(vii) would provide that the term 
``disallowed qualified conservation contribution'' means a qualified 
conservation contribution or allocated portion for which no deduction 
is allowed pursuant to section 170(h)(7) and proposed Sec.  1.170A-
14(j).
8. Indirect Interest
    Proposed Sec.  1.170A-14(j)(3)(viii) would provide that the term 
``indirect interest'' refers to an ownership interest in a contributing 
partnership, contributing S corporation, upper-tier partnership, or 
upper-tier S corporation held through an upper-tier S corporation or 
one or more upper-tier partnerships.
9. Indirectly
    Proposed Sec.  1.170A-14(j)(3)(ix) would provide that an ownership 
interest is held ``indirectly'' if it is held through one or more 
upper-tier partnerships or upper-tier S corporations. Similarly, a 
distributive share or pro rata share of a qualified conservation 
contribution would be received ``indirectly'' if it passes through one 
or more upper-tier partnerships or upper-tier S corporations.
10. Ultimate Member
    Proposed Sec.  1.170A-14(j)(3)(x) would provide that the term 
``ultimate member'' means, with respect to any partnership or S 
corporation, any partner (that is not itself a partnership or S 
corporation) or S corporation shareholder that receives a distributive 
share or pro rata share, directly or indirectly, of a qualified 
conservation contribution. Thus, ultimate members would either be 
partners holding a direct interest in a partnership, which may be the 
contributing partnership or an upper-tier partnership, or shareholders 
holding a direct interest in an S corporation, which may be the 
contributing S corporation or an upper-tier S corporation. Proposed 
Sec.  1.170A-14(j)(3)(x) would provide that upper-tier S corporations 
and upper-tier partnerships themselves are not considered ultimate 
members.
    Several considerations played a role in the decision of the 
Treasury Department and the IRS to propose this rule that looks to the 
relevant basis of the ultimate members for determining whether a 
qualified conservation contribution will be disallowed. Although 
section 170(h)(7)(A) provides that the Disallowance Rule applies in 
tiered structures, the statutory language does not explicitly explain 
whether the determination of relevant basis is made with respect to 
partners (who may themselves be pass-through entities) and S 
corporation shareholders holding a direct interest in the contributing 
partnership or contributing S corporation, or whether the determination 
of relevant basis is made with respect to the ultimate members. The 
Disallowance Rule is meant to compare the amount of a claimed qualified 
conservation contribution with the equity investment made by those 
persons expected to claim a deduction with respect to such 
contribution. Because it is the ultimate members, such as individuals, 
estates, and C corporations (that is, non-pass-through entities), who 
ultimately claim a deduction for a qualified conservation contribution, 
the proposed regulations would require that the determination of 
relevant basis be made with respect to those ultimate partners and S 
corporation shareholders. For example, assume a contributing 
partnership has two partners: (1) an upper-tier S corporation, which 
has two individual shareholders, and (2) an upper-tier partnership, 
which has three partners--a C corporation, an estate, and an 
individual. Under these proposed regulations, relevant basis would be 
computed with respect to the three individuals, C corporation, and 
estate, and not with respect to the upper-tier S corporation or upper-
tier partnership. The proposed regulations would refer to these persons 
as the ``ultimate members.'' In the case of a tiered arrangement, the 
use of the term ``partner'' to refer to such ultimate members might be 
confusing or inaccurate because such persons may not be partners of the 
contributing partnership, and in fact, may not be partners at all, if 
they are shareholders of an upper-tier S corporation that is itself a 
partner in the contributing partnership. As such, the proposed 
regulations use the term ``member.''
    The Treasury Department and the IRS considered alternatives to the 
ultimate member rule. One possible approach would be to determine the 
application of the Disallowance Rule with respect to the contributing 
partnership by looking only to the relevant bases of the contributing 
partnership's direct partners. In the example in which a contributing 
partnership has two partners, an upper-tier S corporation and an upper-
tier partnership, the direct partners would be the upper-tier S 
corporation and the upper-tier partnership. The modified basis (and 
thus, relevant basis) of the upper-tier S corporation or upper-tier 
partnership could include basis attributable to shareholders or 
partners of the upper-tier entity that will not be expected to claim 
the deduction. For example, this might be the case because the 
contributing partnership allocates all of the qualified conservation 
contribution to the upper-tier S corporation. Because the Disallowance 
Rule is meant to compare the amount of a claimed

[[Page 80915]]

qualified conservation contribution with the equity investment made by 
those persons expected to claim a deduction with respect to such 
contribution, it is more consistent with the purposes of the 
Disallowance Rule to compute relevant basis only using the basis of 
those persons who are expected to claim a deduction with respect to the 
contribution.
    Additionally, in the example earlier, if the contributing 
partnership's qualified conservation contribution was not disallowed by 
the Disallowance Rule, the upper-tier S corporation and the upper-tier 
partnership would each be required to determine the application of the 
Disallowance Rule by looking to their direct owners. Because section 
170(h)(7)(B)(i) requires that relevant basis be traced to the portion 
of the real property with respect to which the contribution is made, 
the upper-tier S corporation's and upper-tier partnership's 
determinations would necessarily involve computations by both the 
upper-tier entity and the contributing partnership. Thus, in many 
cases, computing relevant basis only with respect to direct partners 
would not simplify the computations required to apply the Disallowance 
Rule, because it would still be necessary to carry the computations 
through each tier.
    These proposed regulations would provide numerous examples to 
determine who is an ultimate member. Comments are requested on the 
definition of ultimate member, and whether additional examples for 
specific situations would be helpful.
11. Upper-Tier Partnership
    Proposed Sec.  1.170A-14(j)(3)(xi) would provide that the term 
``upper-tier partnership'' means a partnership that receives an 
allocated portion.
    Where appropriate, the proposed regulations would provide separate 
rules for contributing partnerships, contributing S corporations, 
upper-tier partnerships, and upper-tier S corporations. The Treasury 
Department and the IRS are aware that sometimes different naming 
conventions are used to refer to tiered partnership arrangements. For 
example, some may refer to the contributing partnership as the 
``property partnership'' or ``top-tier partnership,'' and in fact the 
IRS has used that naming convention in some correspondence. That naming 
convention is not inherently wrong, as different practitioners refer to 
the ``bottom'' and ``top'' of a tiered structure differently. However, 
the regulations under subchapter K of chapter 1 of the Code generally 
would refer to the contributing partnership as the lower-tier 
partnership, and to a partnership that owns an interest in the 
contributing partnership (either directly or indirectly) as an upper-
tier partnership. Accordingly, in a tiered partnership ownership 
structure, these proposed regulations reflect a naming convention under 
which the contributing partnership would be the ``lower-tier 
partnership,'' and a partnership receiving a distributive share of a 
qualified conservation contribution from the contributing partnership 
would be an ``upper-tier partnership.''
12. Upper-Tier S Corporation
    Proposed Sec.  1.170A-14(j)(3)(xii) would provide that the term 
``upper-tier S corporation'' means an S corporation that receives an 
allocated portion.

C. Effect of the Disallowance Rule

    As noted previously, section 170(h)(7)(A) applies the Disallowance 
Rule to both contributing partnerships and upper-tier partnerships. 
Section 170(h)(7) does not explicitly address what effect the 
application of the Disallowance Rule to one partnership or S 
corporation in a tiered structure has on the other partnerships or S 
corporations in the tiered structure. These proposed regulations would 
provide that if the Disallowance Rule applies to a partnership or S 
corporation, then the qualified conservation contribution is a 
disallowed qualified conservation contribution to that entity as well 
as to any person receiving a distributive share or pro rata share, 
directly or indirectly, of that entity's disallowed qualified 
conservation contribution; however, the disallowance would not affect 
the qualified conservation contribution with respect to any lower-tier 
entities. In other words, if the application of the Disallowance Rule 
with respect to an upper-tier partnership or upper-tier S corporation 
results in a disallowed qualified conservation contribution, that would 
affect Federal income tax consequences up the chain of tiers, but not 
down the chain of tiers, so, for example, the contributing partnership 
would not be affected.
    The Treasury Department and the IRS considered other approaches, 
such as always re-testing the application of the Disallowance Rule to 
an upper-tier partnership's or upper-tier S corporation's allocated 
portion, even when the contribution is a disallowed qualified 
conservation contribution with respect to the lower-tier partnership. 
Under this approach, if the allocated portion does not exceed 2.5 times 
the sum of each of the upper-tier partnership's or upper-tier S 
corporation's ultimate member's relevant basis, the allocated portion 
would be a qualified conservation contribution and not disallowed to 
the upper-tier partnership's non-pass-through partners or the upper-
tier S corporation's shareholders, even though the contribution was a 
disallowed qualified conservation contribution to the non-pass-through 
partners of the lower-tier partnership. Allowing re-testing of 
contributions that have already failed the Disallowance Rule would be 
inconsistent with the purposes of the Disallowance Rule because it 
would inappropriately encourage the creation of tiered structures to 
allow some ultimate members to avoid the Disallowance Rule. These 
proposed regulations are intended to prevent avoidance of the purposes 
of section 170(h)(7) and ensure disallowance of deductions attributable 
to disallowed qualified conservation contributions. The Treasury 
Department and the IRS request comments on the application of the 
Disallowance Rule in tiered structures.
    Under the authority of section 170(h)(7)(G)(ii) to issue 
regulations or other guidance to prevent the avoidance of the purposes 
of section 170(h)(7), proposed Sec.  1.170A-14(j)(4)(i) would provide 
that, if a contributing partnership's or contributing S corporation's 
qualified conservation contribution is a disallowed qualified 
conservation contribution, then: (1) any upper-tier partnership's or 
upper-tier S corporation's allocated portion of such contribution is a 
disallowed qualified conservation contribution, regardless of whether 
such allocated portion exceeds 2.5 times the sum of each of the upper-
tier partnership's or upper-tier S corporation's ultimate member's 
relevant basis; and (2) no person (whether holding a direct or indirect 
interest in such contributing partnership or contributing S 
corporation) may claim a deduction under any provision of the Code with 
respect to any amount of such disallowed qualified conservation 
contribution, regardless of whether that person's distributive share or 
pro rata share of the disallowed qualified conservation contribution 
exceeds 2.5 times its relevant basis. The reference to ``any provision 
of the Code'' is necessary to prevent taxpayer attempts to avoid the 
Disallowance Rule by claiming a deduction with respect to any amount of 
a qualified conservation contribution under a provision of the Code 
other than section 170 in cases in which no deduction is allowable 
under section 170 by reason of section 170(h)(7). For example, this 
proposed

[[Page 80916]]

rule would disallow a deduction under section 642(c) of the Code for a 
trust that is a partner in a partnership with respect to a distributive 
share of a disallowed qualified conservation contribution from the 
partnership.
    Proposed Sec.  1.170A-14(j)(4)(ii) would provide that if a 
contributing partnership's or contributing S corporation's qualified 
conservation contribution is not a disallowed qualified conservation 
contribution, then: (1) the distributive share or pro rata share of any 
ultimate member holding a direct interest in the contributing 
partnership or contributing S corporation is not a disallowed qualified 
conservation contribution; and (2) any upper-tier partnership or upper-
tier S corporation that receives an allocated portion of such qualified 
conservation contribution must separately apply the rules of section 
170(h)(7) and proposed Sec.  1.170A-14(j) through (m) to determine 
whether that upper-tier partnership's or upper-tier S corporation's 
allocated portion is a disallowed qualified conservation contribution.
    Proposed Sec.  1.170A-14(j)(4)(iii) would provide that, if an 
upper-tier partnership's or upper-tier S corporation's allocated 
portion is a disallowed qualified conservation contribution, then: (1) 
any subsequent upper-tier partnership's or upper-tier S corporation's 
allocated portion of such allocated portion would be a disallowed 
qualified conservation contribution, regardless of whether the 
subsequent upper-tier partnership's or upper-tier S corporation's 
allocated portion exceeds 2.5 times the sum of each of the subsequent 
upper-tier partnership's or upper-tier S corporation's ultimate 
member's relevant basis; and (2) no person (whether holding a direct or 
indirect interest in that upper-tier partnership or upper-tier S 
corporation) would be able to claim a deduction under any provision of 
the Code with respect to any amount of that upper-tier partnership's or 
upper-tier S corporation's allocated portion, regardless of whether 
that person's distributive share or pro rata share of the allocated 
portion exceeds 2.5 times its relevant basis. Similar to proposed Sec.  
1.170A-14(j)(4)(i), proposed Sec.  1.170A-14(j)(4)(iii) would be issued 
under the authority of section 170(h)(7)(G)(ii) to issue regulations or 
other guidance to prevent the avoidance of the purposes of section 
170(h)(7). However, this proposed rule would not affect the application 
of proposed Sec.  1.170A-14(j) through (m) to another partner of the 
contributing partnership; for example, if the qualified conservation 
contribution is not a disallowed qualified conservation contribution 
with respect to the contributing partnership, then the distributive 
share of such contribution of an ultimate member holding a direct 
interest in the contributing partnership is not a disallowed qualified 
conservation contribution, notwithstanding that the qualified 
conservation contribution is a disallowed qualified conservation 
contribution with respect to one or more upper-tier partnerships or 
upper-tier S corporations.
    Proposed Sec.  1.170A-14(j)(4)(iv) would provide that, if an upper-
tier partnership's or upper-tier S corporation's allocated portion is 
not a disallowed qualified conservation contribution, then: (1) the 
distributive share or pro rata share of such allocated portion of any 
ultimate member holding a direct interest in the upper-tier partnership 
or upper-tier S corporation is not a disallowed qualified conservation 
contribution; and (2) any subsequent upper-tier partnership or upper-
tier S corporation that receives an allocated portion of such allocated 
portion must separately apply the rules of section 170(h)(7) and 
proposed Sec.  1.170A-14(j) through (m) to determine whether that 
subsequent upper-tier partnership's or upper-tier S corporation's 
allocated portion is treated as a disallowed qualified conservation 
contribution.
    The proposed regulations contain examples illustrating the rules 
with respect to tiers of entities. The Treasury Department and the IRS 
request comments on whether additional examples would be helpful.
D. No Inference
    The Treasury Department and the IRS are aware that, even though 
section 605(c)(2) of the SECURE 2.0 Act plainly states that no 
inference is intended as to any contribution for which a deduction is 
not disallowed by reason of section 170(h)(7), some practitioners have 
taken the position that section 170(h)(7) operates as a ``safe 
harbor.'' According to these practitioners, a qualified conservation 
contribution that is not disallowed by the Disallowance Rule is somehow 
immune to a challenge on other grounds, including failure to comply 
with other rules under section 170 and overvaluation of the 
contribution. Such a position is baseless and contradicted by the 
statutory language.
    To clarify this issue, proposed Sec.  1.170A-14(j)(5) would provide 
that there is no presumption that a qualified conservation contribution 
that is not a disallowed qualified conservation contribution is 
compliant with section 170, any other section of the Code, the 
regulations, or any other guidance thereunder. It would also provide 
that compliance with section 170(h)(7) and proposed Sec.  1.170A-14(j) 
through (n) is not a safe harbor for purposes of any other provision of 
law, including the other requirements of section 170 and the value of 
the contribution. Such transactions are subject to adjustment or 
disallowance for any other reason, including failure to satisfy the 
requirements of section 170 and the overvaluation of the contribution; 
for example, failure to properly execute Form 8283, Noncash Charitable 
Contributions, violation of the partnership anti-abuse rule of Sec.  
1.701-2, lack of economic substance, or other rules or judicial 
doctrines. In addition, compliance with proposed Sec.  1.170A-14(j) 
through (n) would not preclude the application of any penalty, 
including penalties for valuation misstatement, negligence, and fraud. 
Proposed Sec.  1.170A-14(j)(5) would also provide that taxpayers who 
engage in such transactions may be required to disclose under Sec.  
1.6011-4 the transactions as listed transactions.
E. Determination of Relevant Basis
    Consistent with section 170(h)(7)(B)(i), proposed Sec.  1.170A-
14(k) would provide that, for purposes of Sec.  1.170A-14, the term 
``relevant basis'' means, with respect to any ultimate member, the 
portion of such ultimate member's modified basis (as defined in 
proposed Sec.  1.170A-14(l)) that is allocable (under the rules of 
proposed Sec.  1.170A-14(m)) to the portion of the real property with 
respect to which the qualified conservation contribution is made.
1. Modified Basis
    Proposed Sec.  1.170A-14(l)(1) would provide that, in the case of 
an ultimate member holding a direct interest in a partnership, the 
ultimate member's modified basis is determined by such partnership 
immediately before the qualified conservation contribution is made in 
the manner described in Sec.  1.170A-14(l)(2). In the case of an 
ultimate member holding a direct interest in an S corporation, the 
ultimate member's modified basis would be determined by such S 
corporation in the manner described in Sec.  1.170A-14(l)(3).
a. Modified Basis of Ultimate Members That Are Partners
    Consistent with section 170(h)(7)(B)(ii), the proposed regulations 
would provide rules that are designed to determine a partner's

[[Page 80917]]

modified basis immediately prior to the qualified conservation 
contribution. Without additional guidance under section 706, there may 
be situations in which the contribution is allocated to partners that 
did not hold an interest at the time of the qualified conservation 
contribution. Such partners would not have any bases in their 
partnership interests immediately before the contribution, and thus, 
without additional rules, their modified bases and relevant bases would 
be zero. As discussed later in this preamble, these proposed 
regulations would contain rules under section 706 that would treat a 
qualified conservation contribution as an extraordinary item under 
Sec.  1.706-4(e) that must be allocated only to partners holding an 
interest in the partnership at the time of the contribution. Proposed 
rules under Sec.  1.706-3 would ensure that only partners holding an 
interest in an upper-tier partnership at the time of the contribution 
would receive a distributive share of an allocated portion. Thus, all 
ultimate members who are partners would be partners at the time of day 
the contribution is made. In other words, for a partner to be an 
ultimate member, the partner must have been a partner at the time of 
day the contribution is made and must have been allocated a 
distributive share of that contribution. These proposed rules are 
intended to facilitate the computation of modified basis immediately 
before the contribution, consistent with section 170(h)(7)(B)(ii)(I).
    The proposed regulations would provide a process for determining a 
partner's modified basis. Proposed Sec.  1.170A-14(l)(2)(i) would 
provide that, for purposes of Sec.  1.170A-14, the term ``modified 
basis'' means, with respect to any ultimate member that is a direct 
partner in either a contributing partnership or an upper-tier 
partnership, such ultimate member's adjusted basis in its interest in 
the partnership in which the ultimate member holds a direct interest as 
of the beginning of the first day of the partnership's taxable year in 
which the qualified conservation contribution is made with adjustments 
as determined under proposed Sec.  1.170A-14(l)(2)(ii) through (v). 
However, if the ultimate member was not a partner as of the beginning 
of the first day of the partnership's taxable year, then the term 
``modified basis'' would mean such ultimate member's adjusted basis in 
its interest in the partnership immediately after the transaction that 
resulted in the ultimate member becoming a partner with adjustments as 
determined under proposed Sec.  1.170A-14(l)(2)(ii) through (v). The 
Treasury Department and the IRS considered alternatives to this rule, 
including simply requiring that ``adjusted basis'' be computed 
immediately prior to the contribution. However, adjusted basis is 
typically computed as of the beginning of a taxable year, and it may be 
unclear to taxpayers how to compute adjusted basis as of another time 
during the year. Current regulations generally do not require partners 
to compute their adjusted bases in their partnership interests as of 
the time events, such as the making of a qualified conservation 
contribution, occur. Accordingly, these proposed regulations would 
start with a calculation of adjusted basis that partners are familiar 
with computing, and then make adjustments to arrive at an amount that 
reflects the partner's modified basis immediately before the 
contribution.
    Proposed Sec.  1.170A-14(l)(2)(ii) through (v) would provide four 
adjustments that must be made to a partner's adjusted basis to arrive 
at modified basis. These adjustments would be required to be made in 
the order in which they are listed. First, proposed Sec.  1.170A-
14(l)(2)(ii) would provide that the computation of modified basis must 
start with the ultimate member's adjusted basis under proposed Sec.  
1.170A-14(l)(2)(i) and then reflect an increase for any contributions 
made by the ultimate member to the partnership during the portion of 
the year commencing with the beginning of the taxable year of the 
partnership and ending immediately prior to the time of day at which 
the qualified conservation contribution is made as provided in section 
722 of the Code.
    Second, proposed Sec.  1.170A-14(l)(2)(iii) would provide that the 
amount determined under proposed Sec.  1.170A-14(l)(2)(ii) must be 
adjusted, as provided in section 705 of the Code, by the ultimate 
member's hypothetical distributive share of partnership items 
attributable to the portion of the year commencing with the beginning 
of the taxable year of the partnership and ending immediately prior to 
the time of day at which the qualified conservation contribution is 
made. For example, if a calendar-year partnership makes a qualified 
conservation contribution at 9:17 a.m. on November 19 of Year 1, then 
the hypothetical distributive share would be required to be made based 
on the partnership items attributable to the period between the 
beginning of the day on January 1 Year 1 and 9:16 a.m. on November 19 
Year 1. In making this determination, the partnership would be required 
to apply the rules of Sec.  1.706-4 and apply a hypothetical interim 
closing method to allocate the partnership's items attributable to the 
portion of the year commencing with the beginning of the taxable year 
of the partnership and ending immediately prior to the time of day at 
which the qualified conservation contribution is made. Proposed Sec.  
1.170A-14(l)(2)(iii) would provide that the partnership cannot apply 
any convention in Sec.  1.706-4(c) to the hypothetical determination of 
the partners' distributive shares, but rather must perform the 
calculation as though the determination occurred immediately prior to 
the time of day at which the qualified conservation contribution is 
made. Proposed Sec.  1.170A-14(l)(2)(iii) would clarify that this 
hypothetical determination of the partners' distributive shares is only 
for purposes of calculating modified basis. Proposed Sec.  1.170A-
14(l)(2)(iii) would also make clear that proposed Sec.  1.170A-14(l) 
does not require the partnership to use the interim closing method with 
respect to the determination of its partners' actual distributive 
shares for the taxable year in which the qualified conservation 
contribution is made or otherwise. See section 706(d) and the 
regulations thereunder for the permissible methods that may be used in 
the determination of the partners' distributive shares for a 
partnership taxable year in which there is a variation in a partner's 
interest in the partnership. As described later this preamble, proposed 
Sec. Sec.  1.706-3(a) and 1.706-4(e)(2)(ix) would provide special rules 
for the allocation of qualified conservation contributions.
    The Treasury Department and the IRS considered using the partners' 
actual distributive shares, determined as of the time of the 
contribution. In the case of a partnership using the proration method, 
however, such an approach would result in the partners' modified bases 
reflecting a portion of partnership items earned or incurred by the 
partnership after the time of the contribution, and thus would be 
inconsistent with the requirement in section 170(h)(7)(B)(ii)(I) that 
partners' modified bases be determined immediately before the 
contribution. The Treasury Department and the IRS request comments on 
the approach taken in the proposed regulations to determine the 
partners' distributive shares of partnership items attributable to the 
portion of the year commencing with the beginning of the taxable year 
of the partnership and ending immediately prior to the time of day at 
which the

[[Page 80918]]

qualified conservation contribution is made.
    Third, proposed Sec.  1.170A-14(l)(2)(iv) would provide that the 
amount determined under proposed Sec.  1.170A-14(l)(2)(iii) must be 
reduced (but not below zero) by any distributions made by the 
partnership to the ultimate member during the portion of the year 
commencing with the beginning of the taxable year of the partnership 
and ending immediately prior to the time of day at which the qualified 
conservation contribution is made as provided in section 733 of the 
Code.
    Fourth, consistent with section 170(h)(7)(B)(ii)(II), proposed 
Sec.  1.170A-14(l)(2)(v) would provide that the amount determined under 
proposed Sec.  1.170A-14(l)(2)(iv) must be reduced by the full amount 
of the ultimate member's share of Sec.  1.752-1 liabilities of any 
partnership (including a lower-tier partnership). The remaining amount 
would be such ultimate member's modified basis. Thus, under the 
proposed regulations, an ultimate member's modified basis may be less 
than zero. Under the formulas for the determination of relevant basis 
discussed later in this preamble, a negative modified basis will result 
in a negative relevant basis. Because the application of the 
Disallowance Rule is based on the sum of each ultimate member's 
relevant basis, if one ultimate member's relevant basis is negative, it 
will be added to all other ultimate members' relevant bases, and the 
sum may be a positive or negative number.
b. Modified Basis of Ultimate Members That Are Shareholders in an S 
Corporation
    Unlike the rules for partnerships discussed previously, S 
corporations do not have extraordinary items that must be allocated 
only to shareholders as of the time of day the item occurs. Instead, 
section 1377 of the Code and existing Sec.  1.1377-1 generally require 
pro rata allocations. Section 1.1377-1(a) provides that each 
shareholder's pro rata share of any S corporation item described in 
section 1366(a) of the Code for any taxable year is the sum of the 
amounts determined with respect to the shareholder by assigning an 
equal portion of the item to each day of the S corporation's taxable 
year, and then dividing that portion pro rata among the shares 
outstanding on that day. If a shareholder disposes of its entire 
interest in an S corporation, Sec.  1.1377-1(b) allows the S 
corporation to make a terminating election, under which the S 
corporation will determine the terminating shareholder's share as 
though the S corporation's taxable year closed on the day of the 
termination. However, there is no extraordinary item rule for S 
corporations similar to Sec.  1.706-4(e). As such, it may be the case 
that an S corporation allocates a portion of a qualified conservation 
contribution to someone that was not a shareholder at the time of the 
contribution, but that shareholder would still be treated as an 
ultimate member because the shareholder received a pro rata share of 
the qualified conservation contribution.
    As described previously, the rules for determining a partner's 
modified basis start with the partner's adjusted basis at the start of 
the partnership's taxable year and work forward to determine modified 
basis immediately before the contribution. However, the Treasury 
Department and the IRS are concerned that such an approach is not 
appropriate for S corporation shareholders, as it could be 
unnecessarily burdensome and, in some cases, impossible to determine 
each shareholder's modified basis immediately prior to the qualified 
conservation contribution (because some ultimate members may not be 
shareholders at the time of the contribution). To provide an 
administrable standard consistent with the purposes of section 
170(h)(7), these proposed regulations would require the computation of 
an S corporation shareholder's modified basis under an approach that is 
similar in purpose to the approach for partners but different in 
application.
    Proposed Sec.  1.170A-14(l)(3)(i) would provide that, for purposes 
of Sec.  1.170A-14, the term ``modified basis'' means, with respect to 
any ultimate member that is a shareholder of either a contributing S 
corporation or an upper-tier S corporation, such ultimate member's 
adjusted basis in its shares in the S corporation as of the end of the 
S corporation's taxable year in which the qualified conservation 
contribution is made with adjustments as determined under proposed 
Sec.  1.170A-14(l)(3)(ii) and (iii). However, if the ultimate member 
was not a shareholder at the end of the S corporation's taxable year in 
which the qualified conservation contribution is made, then the term 
``modified basis'' would mean such ultimate member's adjusted basis in 
its shares in the S corporation immediately prior to the transaction 
that terminated its interest in the S corporation with adjustments as 
determined under proposed Sec.  1.170A-14(l)(3)(ii) and (iii).
    The Treasury Department and the IRS considered several alternatives 
to this rule. One method would be to require a determination of a 
portion of modified basis for every day during the S corporation's 
taxable year, because S corporations generally allocate the 
contribution on a pro rata basis among the shareholders on each day of 
the taxable year. These proposed regulations do not take that approach 
because the Treasury Department and the IRS are concerned that such an 
approach, although technically accurate and consistent with the 
purposes of section 170(h)(7), would be too burdensome for taxpayers 
and difficult for the IRS to administer. The Treasury Department and 
the IRS also considered using the shareholders' adjusted bases as of 
the beginning of the S corporation's taxable year (rather than as of 
the end of the year). However, because qualified conservation 
contributions are typically made in the second half of the year, 
especially in syndicated transactions, the Treasury Department and the 
IRS determined that such an approach would be less accurate than using 
the shareholders' adjusted bases as of the end of the year (or a 
shareholder's adjusted basis immediately prior to the transaction that 
terminated their interest in the S corporation).
    Proposed Sec.  1.170A-14(l)(3)(i) would also clarify that modified 
basis does not include the ultimate member's adjusted basis of any 
indebtedness of the S corporation to the ultimate member.\1\
---------------------------------------------------------------------------

    \1\ As described previously, section 170(h)(7)(B)(ii)(II) 
provides that the determination of modified basis is to be made 
without regard to section 752. However, the Code does not contain a 
rule substantially similar to section 752 for S corporations. Unlike 
a partner's basis in the partner's interest in the partnership, an S 
corporation shareholder's basis in stock of the S corporation does 
not include any share of the S corporation's liabilities. Under 
section 1367(b)(2)(A) of the Code and Sec.  1.1367-2(b), if an S 
corporation shareholder's pro rata share of the S corporation's 
losses, deductions, noncapital, nondeductible expenses, and certain 
oil and gas depletion deductions exceed the shareholder's stock 
basis, then these items may reduce the shareholder's basis in 
indebtedness owed to them by the S corporation (but not below zero). 
Under section 1367(b)(2)(B) and Sec.  1.1367-2(c), if the basis in 
indebtedness has been so reduced, then any future net increase must 
be applied to restore such reduction in indebtedness basis before 
any of it may be used to increase the shareholder's basis in its 
stock of the S corporation.
---------------------------------------------------------------------------

    Proposed Sec.  1.170A-14(l)(3)(ii) and (iii) would provide two 
adjustments that must be made to arrive at modified basis. These 
adjustments would be required to be made in the order in which they are 
listed. First, proposed Sec.  1.170A-14(l)(3)(ii) would provide that 
the computation of modified basis must start with the ultimate member's 
adjusted basis under proposed Sec.  1.170A-14(l)(3)(i) and then must 
reflect an increase for the extent to which the adjusted basis reflects 
a reduction as a result of the qualified

[[Page 80919]]

conservation contribution. Thus, the ultimate member's modified basis 
with respect to a qualified conservation contribution would not reflect 
any reduction for the ultimate member's pro rata share of the S 
corporation's basis in the conservation easement or other property 
contributed in the qualified conservation contribution. This adjustment 
in proposed Sec.  1.170A-14(l)(3)(ii) would be made because it would 
not be appropriate or consistent with section 170(h)(7)(B)(ii)(I) for 
modified basis, and thus relevant basis, to reflect a reduction for the 
very contribution that is being analyzed under the Disallowance Rule as 
such an approach might result in deductions being inappropriately 
disallowed by the Disallowance Rule.
    Second, proposed Sec.  1.170A-14(l)(3)(iii) would provide that the 
amount determined under proposed Sec.  1.170A-14(l)(3)(ii) must be 
multiplied by the number of days during the S corporation's taxable 
year in which the ultimate member was a shareholder and divided by the 
total number of days during the S corporation's taxable year. The 
resulting amount would be such ultimate member's modified basis. 
Inappropriate double counting of relevant basis might occur unless the 
proposed regulations provide this rule. For example, assume individual 
A owns a portion of the outstanding shares of an S corporation. In 
early July, A sells all its shares to B. In December, the S corporation 
makes a qualified conservation contribution. Absent a terminating 
election under Sec.  1.1377-1(b), the S corporation would allocate some 
of the qualified conservation contribution to each of A and B. Unless 
A's and B's modified bases (and thus, their relevant bases) are 
adjusted to reflect that each was a shareholder for approximately half 
of the year, the S corporation's computation of the sum of each of its 
ultimate member's relevant basis would be inappropriately overstated. 
The Treasury Department and the IRS request comments on whether there 
are certain situations in which the divisor should be less than the 
full number of days in the S corporation's taxable year. In particular, 
the Treasury Department and the IRS request comments on whether, and 
how, elections under Sec. Sec.  1.1368-1(g)(2) and 1.1377-1(b) should 
result in the divisor being less than the full number of days in the S 
corporation's taxable year. It would be particularly helpful for 
commenters to address situations in which elections under Sec. Sec.  
1.1368-1(g)(2) and 1.1377-1(b) affect some, but not all, of the 
shareholders.
    Section 170(h)(7)(B)(ii)(III) provides authority for the Secretary 
to provide for other adjustments in the computation of modified basis. 
The Treasury Department and the IRS request comments on whether any 
additional adjustments to arrive at modified basis would be 
appropriate.
    The proposed regulations also contain examples illustrating the 
determination of modified basis. Comments are requested on whether it 
would be helpful to add examples with other factual scenarios.
2. Allocation of Modified Basis and Determination of Relevant Basis
    Proposed Sec.  1.170A-14(m) would provide rules for determining the 
portion of an ultimate member's modified basis that is allocable to the 
portion of the real property with respect to which the contribution is 
made, which is the final step in the determination of relevant basis. 
Section 170(h)(7)(B)(i) provides that the allocation is made under 
rules similar to the rules of section 755. Section 755 provides rules 
for allocating special basis adjustments to partnership property 
resulting from partnership distributions or transfers of partnership 
interests, such as adjustments under section 734(b) of the Code and 
adjustments under section 743(b) of the Code.
    Section 755(a) generally provides that any increase or decrease in 
the adjusted basis of partnership property under section 734(b) 
(relating to the optional adjustment to the basis of undistributed 
partnership property) or section 743(b) (relating to the optional 
adjustment to the basis of partnership property in the case of a 
transfer of an interest in a partnership) is allocated (1) in a manner 
that reduces the difference between the fair market value and the 
adjusted basis of partnership properties, or (2) in any other manner 
permitted by regulations. The regulations under section 755 provide 
rules for performing these allocations. Those rules can be complex and 
involve several different methods for allocating basis adjustments 
among the partnership's properties, including:
    (1) Allocating in a manner that reduces the difference between the 
fair market value and the adjusted basis of partnership properties. See 
Sec.  1.755-1(b)(2)(i) and (b)(3).
    (2) Allocating in proportion to the transferee's share of the 
amount that would be realized by the partnership upon the hypothetical 
sale of each property. See Sec.  1.755-1(b)(5)(iii)(A).
    (3) Allocating in proportion to the fair market values of the 
partnership's properties. See Sec.  1.755-1(c)(2)(i).
    (4) Allocating in proportion to the partnership's adjusted bases in 
its properties. See Sec.  1.755-1(c)(2)(ii).
    (5) Allocating in proportion to the partner's share of the adjusted 
bases in the partnership's properties. See Sec.  1.755-1(b)(5)(iii)(B).
    In considering which of these allocation rules would be most 
appropriate to determine relevant basis, the Treasury Department and 
the IRS considered the special basis adjustment and loss limitation 
rules for charitable contributions. Those rules look to a partner's or 
shareholder's share of the partnership's or S corporation's basis in 
the contributed property.
    Generally, section 705(a)(2) provides that the adjusted basis of a 
partner's interest in a partnership is decreased (but not below zero) 
by distributions by the partnership and by the sum of the partner's 
distributive share for the taxable year and prior taxable years of (1) 
losses of the partnership, and (2) expenditures of the partnership not 
deductible in computing its taxable income and not properly chargeable 
to capital account. Generally, when a partnership makes a charitable 
contribution, the partners are not required to reduce their adjusted 
bases in their partnership interests by the fair market value of the 
contribution. Instead, Revenue Ruling 96-11, 1996-1 C.B. 140, provides 
that after a partnership makes a charitable contribution of property, 
the basis of each partner's interest in the partnership is decreased 
(but not below zero) by the partner's share of the partnership's basis 
in the property contributed. Revenue Ruling 96-11 explains that 
reducing the partners' bases in their partnership interests by their 
respective shares of the permanent decrease in the partnership's basis 
in its properties preserves the intended benefit of providing a 
deduction (in circumstances not under section 170(e)) for the fair 
market value of appreciated property without recognition of the 
appreciation. In contrast, reducing the partners' bases in their 
partnership interests by the fair market value of the contributed 
property would subsequently cause the partners to recognize gain (or a 
reduced loss), for example, upon a disposition of their partnership 
interests, attributable to the unrecognized appreciation in the 
contributed property at the time of the contribution.
    The partnership loss limitation rules in section 704(d) of the Code 
have a similar rule for charitable contributions. Generally, section 
704(d)(1) provides that a partner's distributive share of partnership 
loss is allowed only to the

[[Page 80920]]

extent such partner's adjusted basis in its partnership interest at the 
end of the partnership year in which such loss occurred. Section 
704(d)(3)(A) provides, in part, that in determining the amount of any 
loss under section 704(d)(1), the partner's distributive share of 
charitable contributions as defined in section 170(c) must be taken 
into account. However, section 704(d)(3)(B) provides that, in the case 
of a charitable contribution of property whose fair market value 
exceeds its adjusted basis, section 704(d)(3)(A) does not apply to the 
extent of the partner's distributive share of such excess.
    The rules for S corporations also look to the shareholder's share 
of the S corporation's basis in the contributed property. Section 
1367(a)(2)(B) of the Code provides that the basis of each shareholder's 
stock is reduced by the items of loss and deduction described in 
section 1366(a)(1)(A). However, the second sentence of section 
1367(a)(2) provides that the decrease in basis under section 
1367(a)(2)(B) by reason of a charitable contribution (as defined in 
section 170(c)) of property is the amount equal to the shareholder's 
pro rata share of the adjusted basis of such property.\2\
---------------------------------------------------------------------------

    \2\ Whether a qualified conservation contribution is a 
disallowed qualified conservation contribution has no effect on the 
application of sections 705 and 1367 to the contribution. These 
basis reductions remain required regardless of whether a qualified 
conservation contribution is a disallowed qualified conservation 
contribution.
---------------------------------------------------------------------------

    Generally, section 1366(d)(1) provides that the aggregate amount of 
losses and deductions taken into account by a shareholder under section 
1366(a) for any taxable year cannot exceed the sum of (1) the adjusted 
basis of the shareholder's stock in the S corporation, and (2) the 
shareholder's adjusted basis of any indebtedness of the S corporation 
to the shareholder. However, section 1366(d)(4) provides that, in the 
case of any charitable contribution of property to which the second 
sentence of section 1367(a)(2) applies, section 1366(d)(1) does not 
apply to the extent of the excess (if any) of (1) the shareholder's pro 
rata share of such contribution, over (2) the shareholder's pro rata 
share of the adjusted basis of such property. See also Rev. Rul. 2008-
16, 2008-1 C.B. 585.
    Therefore, generally partnerships and S corporations making 
charitable contributions are already required to track each partner's 
and shareholder's share of the entity's basis in the contributed 
property. And as noted previously, in certain circumstances the rules 
under section 755 also look to the partner's share of the partnership's 
basis in its properties. Accordingly, as described in this section of 
the preamble, these proposed regulations would require the allocation 
of an ultimate member's modified basis to the portion of the real 
property with respect to which the qualified conservation contribution 
is made to be based on the ultimate member's share of the entity's 
bases in its properties. This provides an administrable standard 
consistent with the purposes of section 170(h)(7).
    The Treasury Department and the IRS considered alternatives to this 
rule. In particular, the Treasury Department and the IRS considered 
simply cross-referencing the rules under section 755. Under that 
alternative approach, the amount of each partner's modified basis would 
be treated for purposes of the computation of relevant basis as a 
special basis adjustment under section 734(b) or section 743(b); 
relevant basis would be the portion of modified basis that would be 
allocated under the rules of section 755 to the portion of the real 
property with respect to which the contribution was made. Such an 
approach would be less consistent with the purposes of the Disallowance 
Rule. As noted previously, basis allocations under section 755 are 
sometimes made in a way to reduce or eliminate built-in gain or loss in 
partnership property. The relevant basis rule of section 170(h)(7) is 
designed to determine the portion of a partner's modified basis that is 
allocable to the portion of the real property with respect to which the 
contribution is made, which is a broader and, generally, different 
concept than determining the partner's share of built-in gain or loss 
in that property. The approach in the proposed regulations is similar 
to the rules of section 755 and consistent with the rule of section 
170(h)(7)(B)(i). The Treasury Department and the IRS request comments 
on whether another acceptable allocation approach would be easier or 
more administrable.
    Proposed Sec.  1.170A-14(m)(1) would provide that the allocation of 
an ultimate member's modified basis to the portion of the real property 
with respect to which the qualified conservation contribution is made 
must be made in accordance with proposed Sec.  1.170A-14(m). Rules for 
allocating an ultimate member's modified basis in a contributing 
partnership would be provided in proposed Sec.  1.170A-14(m)(2). Rules 
for allocating an ultimate member's modified basis in a contributing S 
corporation would be provided in proposed Sec.  1.170A-14(m)(3). Rules 
for allocating an ultimate member's modified basis in an upper-tier 
partnership would be provided in proposed Sec.  1.170A-14(m)(4). Rules 
for allocating an ultimate member's modified basis in an upper-tier S 
corporation would be provided in proposed Sec.  1.170A-14(m)(5). 
Records would be required to be kept in accordance with proposed Sec.  
1.170A-14(m)(6).
a. Determination of Relevant Basis for an Ultimate Member Holding a 
Direct Interest in a Contributing Partnership
    Proposed Sec.  1.170A-14(m)(2)(i) through (iii) would provide a 
narrative rule applicable in the case of an ultimate member holding a 
direct interest in a contributing partnership and would provide that a 
contributing partnership must determine each such ultimate member's 
relevant basis as provided therein. Relevant basis would equal each 
ultimate member's modified basis as determined under proposed Sec.  
1.170A-14(l)(2) multiplied by a fraction (1) the numerator of which is 
the ultimate member's share of the contributing partnership's adjusted 
basis in the portion of the real property with respect to which the 
qualified conservation contribution is made as determined under 
proposed Sec.  1.170A-14(m)(2)(ii); and (2) the denominator of which is 
the ultimate member's portion of the adjusted basis in all the 
contributing partnership's properties as determined under proposed 
Sec.  1.170A-14(m)(2)(iii).
    The Treasury Department and the IRS note that this numerator 
determines the ultimate member's share of the contributing 
partnership's adjusted basis in the portion of the real property with 
respect to which the qualified conservation contribution is made, which 
is what is required by the statute, but may be different than the 
ultimate member's share of the contributing partnership's adjusted 
basis in the contributed property. As noted previously, section 704(d) 
and Revenue Ruling 96-11 require a partner's basis in its interest in 
the partnership to be decreased (but not below zero) by the partner's 
share of the partnership's basis in the contributed property. For 
example, assume a partnership owns 100 acres of real property, and 
grants a conservation easement that is a qualified conservation 
contribution on 60 of those acres. Assume the partnership's adjusted 
basis in the 100 acres is $100,000, its adjusted basis in the 60 acres 
is $60,000, and its adjusted basis in the conservation easement itself 
is $45,000. Section 705(a)(2)(B) and Revenue Ruling 96-11 would require 
each partner's basis in its interest in the partnership to be decreased 
(but not below zero) by the partner's share of the partnership's 
$45,000 basis in the easement. On the other hand, the

[[Page 80921]]

computation of each ultimate member's relevant basis would look to the 
ultimate member's share of the partnership's $60,000 basis in the 60 
acres (the portion of the real property with respect to which the 
qualified conservation contribution was made). As described in the 
following paragraphs, these proposed regulations would provide 
computational rules for determining an ultimate member's share of the 
contributing partnership's adjusted basis in the portion of the real 
property with respect to which the qualified conservation contribution 
is made. The Treasury Department and the IRS request comments on 
whether these computations generally align with the methods used by 
partnerships to determine each partner's share of the partnership's 
basis in the contributed property for purposes of sections 704(d) and 
705(a)(2)(B) and Revenue Ruling 96-11. In terms of the example in this 
paragraph, the Treasury Department and the IRS request comments on 
whether the rules in the proposed regulations for determining each 
ultimate member's share of the partnership's $60,000 basis in the 60 
acres align with the way in which the partnership would determine each 
partner's share of the partnership's $45,000 basis in the conservation 
easement for purposes of applying sections 704(d) and 705(a)(2)(B) and 
Revenue Ruling 96-11.
    Proposed Sec.  1.170A-14(m)(2)(ii) would provide that, for purposes 
of proposed Sec.  1.170A-14(m), an ultimate member's share of the 
contributing partnership's adjusted basis in the portion of the real 
property with respect to which the qualified conservation contribution 
is made equals the contributing partnership's adjusted basis in the 
portion of the real property with respect to which the qualified 
conservation contribution is made multiplied by a fraction (1) the 
numerator of which is the ultimate member's distributive share of the 
qualified conservation contribution; and (2) the denominator of which 
is the total amount of the contributing partnership's qualified 
conservation contribution.
    The Treasury Department and the IRS considered several alternatives 
to this rule, including determining the ultimate member's share of the 
contributing partnership's adjusted basis in the property based on the 
ultimate member's share of gain, loss, and cash distributions 
attributable to the property. However, there may be situations in which 
the allocation of a qualified conservation contribution does not match 
the partners' shares of gain, loss, or cash distributions with respect 
to the property. Accordingly, the Treasury Department and the IRS 
determined that such an approach would be less accurate. In addition, 
the proposed rule would be less burdensome for taxpayers and more 
easily administrable for the IRS because it would be based on the 
partnership's actual allocation of the contribution, rather than on a 
hypothetical sale of the property.
    Proposed Sec.  1.170A-14(m)(2)(iii) would provide that, for 
purposes of proposed Sec.  1.170A-14(m), an ultimate member's portion 
of the adjusted basis in all the contributing partnership's properties 
is equal to the sum of: (1) the ultimate member's share of the 
contributing partnership's adjusted basis in the portion of the real 
property with respect to which the qualified conservation contribution 
is made as determined under proposed Sec.  1.170A-14(m)(2)(ii), plus 
(2) the ultimate member's portion of the adjusted basis in all the 
contributing partnership's properties other than the portion of the 
real property with respect to which the qualified conservation 
contribution is made. Proposed Sec.  1.170A-14(m)(2)(iii) would provide 
that, to determine the ultimate member's share of the adjusted basis in 
all the contributing partnership's properties, the contributing 
partnership must apportion among its partners in accordance with their 
interests in the partnership under section 704(b) its adjusted basis in 
each of its properties (except the portion of the real property with 
respect to which the qualified conservation contribution is made), 
using the adjusted bases immediately before the qualified conservation 
contribution, without duplication or omission of any property, and by 
treating the adjusted basis in each property as not less than zero.
    The Treasury Department and the IRS considered alternatives to this 
rule, including determining the ultimate member's portion of the 
partnership's adjusted basis in all its properties in accordance with 
Sec.  1.743-1(d), which provides for the determination of a transferee 
partner's share of the partnership's adjusted basis of its property for 
purposes of computing special basis adjustments under section 743(b). 
The Treasury Department and the IRS also considered determining the 
ultimate member's portion of the partnership's adjusted basis in all 
its properties in proportion to the ultimate member's share of the 
built-in gain in each of the partnership's properties. The Treasury 
Department and the IRS determined that these approaches would be more 
complex and could reach results that are less accurate for purposes of 
the Disallowance Rule. In particular, as previously mentioned, the 
partnership's allocation of the qualified conservation contribution 
might differ from the way that the partnership would allocate gain and 
loss and make cash distributions with respect to the contributed 
property. Moreover, these approaches would require the partnership to 
obtain a valuation of each of its properties at the time of the 
qualified conservation contribution. The Treasury Department and the 
IRS also considered an approach under which each ultimate member's 
portion of the partnership's adjusted basis in all its properties would 
be determined in proportion to the ultimate member's share of the 
qualified conservation contribution. Although such an approach would be 
simpler than using the partners' interests in the partnership, it would 
be less accurate. The Treasury Department and the IRS also considered 
an approach based on section 704(b) capital accounts. However, not all 
partnerships use the section 704(b) capital account safe harbor, and 
such an approach would also require a revaluation of partnership 
properties as of the time of the contribution. The Treasury Department 
and the IRS also considered a rule based on how the partnership would 
allocate depreciation from the properties, similar to the rule in Sec.  
1.199A-2(a)(3)(ii). However, such a rule would not address property 
that is not depreciable. The Treasury Department and the IRS request 
comments on these proposed rules and alternatives.
    Proposed Sec.  1.170A-14(m)(2)(iv) would provide a formulaic 
version of the narrative rules in proposed Sec.  1.170A-14(m)(2)(i) 
through (iii).
b. Determination of Relevant Basis for an Ultimate Member Holding a 
Direct Interest in a Contributing S Corporation
    Proposed Sec.  1.170A-14(m)(3)(i) would provide a narrative rule 
for the determination of relevant basis for an ultimate member holding 
a direct interest in a contributing S corporation. It would provide 
that a contributing S corporation must determine each such ultimate 
member's relevant basis as provided therein. Relevant basis would equal 
each ultimate member's modified basis as determined under proposed 
Sec.  1.170A-14(l)(3) multiplied by a fraction (1) the numerator of 
which is the ultimate member's pro rata portion of the contributing S 
corporation's adjusted basis in the portion of the real property with 
respect to which the qualified conservation contribution is made; and 
(2) the denominator of which is the ultimate member's pro rata portion 
of the adjusted basis in all the

[[Page 80922]]

contributing S corporation's properties (including the portion of the 
real property with respect to which the qualified conservation 
contribution is made). The Treasury Department and the IRS request 
comments on whether this rule is sufficiently clear, and whether 
additional rules are needed regarding the time at which the pro rata 
portions of bases are determined. For example, the regulations could 
provide that these determinations are made as of the time of the 
qualified conservation contribution; however, in the event that an 
ultimate member is not a shareholder at that time, it would be unclear 
when the determination is to be made.
    Proposed Sec.  1.170A-14(m)(3)(ii) would provide a formulaic 
version of the narrative rules in proposed Sec.  1.170A-14(m)(3)(i).
c. Determination of Relevant Basis for an Ultimate Member Holding a 
Direct Interest in an Upper-Tier Partnership
    Proposed Sec.  1.170A-14(m)(4) would provide rules for determining 
the relevant basis of an ultimate member holding a direct interest in 
an upper-tier partnership. Proposed Sec.  1.170A-14(m)(4)(i) would 
provide that each such ultimate member's modified basis must be traced 
through all upper-tier partnerships to the contributing partnership, 
and the contributing partnership must determine the relevant basis. 
This would involve a multi-step process under which, beginning with the 
upper-tier partnership in which the ultimate member holds a direct 
interest, each upper-tier partnership would be required to perform 
calculations, and then finally the contributing partnership would be 
required to use those calculations to compute the ultimate member's 
relevant basis. For simplicity, proposed Sec.  1.170A-14(m)(4) would 
describe a situation in which there are two tiers of partnerships--a 
contributing partnership and an upper-tier partnership. Proposed Sec.  
1.170A-14(m)(4)(i) would provide that, in a situation involving more 
tiers, each partnership must apply the rules and principles of proposed 
Sec.  1.170A-14(m)(4) iteratively to determine relevant basis. In a 
tiered structure, the determination of relevant basis should reflect 
the basis of the ultimate members that intend to claim a portion of the 
deduction and thus, cannot be done without computations at the level of 
each entity. The Treasury Department and the IRS request comments on 
whether, and how, these rules can be simplified, and whether any 
additional rules are necessary to prevent the avoidance of the 
Disallowance Rule in tiered structures.
    Proposed Sec.  1.170A-14(m)(4)(ii)(A) would provide a narrative 
rule for the upper-tier partnership. It would provide that the upper-
tier partnership must determine the portion of each ultimate member's 
modified basis that is allocable to the upper-tier partnership's 
interest in the partnership in which it holds a direct interest (in a 
situation involving only two tiers of partnerships, that would be the 
contributing partnership). This proposed regulation would require this 
determination to be made in accordance with the principles of proposed 
Sec.  1.170A-14(m)(2), and the formula provided in proposed Sec.  
1.170A-14(m)(4)(ii)(B). In other words, the formula provided in 
proposed Sec.  1.170A-14(m)(4)(ii)(B) would be similar to the formula 
provided in proposed Sec.  1.170A-14(m)(2)(iv), except that, instead of 
determining the portion of modified basis that is allocable to the 
portion of the real property with respect to which the qualified 
conservation contribution is made, the formula in proposed Sec.  
1.170A-14(m)(4)(ii)(B) would determine the portion of modified basis 
that is allocable to the upper-tier partnership's interest in the next 
lower-tier partnership. As explained in proposed Sec.  1.170A-
14(m)(4)(iii), the contributing partnership then would be required to 
use the amount determined as the result of the formula in proposed 
Sec.  1.170A-14(m)(4)(ii)(B) in another set of computations that would 
determine the portion of modified basis that is allocable to the 
portion of the real property with respect to which the qualified 
conservation contribution is made.
    Proposed Sec.  1.170A-14(m)(4)(ii)(B) would provide that the rule 
of proposed Sec.  1.170A-14(m)(4)(ii) is also expressed in the 
following formula: \3\
---------------------------------------------------------------------------

    \3\ Under the order of operations for mathematical computations, 
operations contained in parenthesis (such as the addition of J and 
U) are performed before the rest of the equation.

---------------------------------------------------------------------------
G = M x (U / (J + U))

Where:

G = The portion of the ultimate member's modified basis that is 
allocable to the upper-tier partnership's interest in the 
contributing partnership.
M = Modified basis as determined under proposed Sec.  1.170A-14(l).
J = Ultimate member's portion of the adjusted basis in all the 
upper-tier partnership's properties (other than the upper-tier 
partnership's interest in the contributing partnership), determined 
by apportioning among the partners of the upper-tier partnership in 
accordance with their interests in the partnership under section 
704(b) its adjusted basis in each of its properties (other than the 
upper-tier partnership's interest in the contributing partnership), 
using the adjusted bases immediately before the qualified 
conservation contribution, without duplication or omission of any 
property, and by treating the adjusted basis in each property as not 
less than zero.
U = Ultimate member's share of the upper-tier partnership's adjusted 
basis in its interest in the contributing partnership, determined 
according to the following formula: H x (B / K).
H = Upper-tier partnership's adjusted basis in its interest in the 
contributing partnership.
B = Ultimate member's distributive share of the qualified 
conservation contribution.
K = Upper-tier partnership's allocated portion of the qualified 
conservation contribution.

    After this formula is computed, then the contributing partnership 
must perform computations using the amount determined for item ``G'' to 
determine relevant basis. Proposed Sec.  1.170A-14(m)(4)(iii)(A) would 
provide a narrative rule for the contributing partnership to complete 
this second step. It would provide that the contributing partnership 
must determine the portion of the amount determined under proposed 
Sec.  1.170A-14(m)(4)(ii) with respect to each ultimate member that is 
allocable to the portion of the real property with respect to which the 
qualified conservation contribution is made. The proposed regulations 
would require this determination to be made in accordance with the 
principles of proposed Sec.  1.170A-14(m)(2), and the formula provided 
in proposed Sec.  1.170A-14(m)(4)(iii)(B).
    Proposed Sec.  1.170A-14(m)(4)(iii)(B) would provide that the rule 
of proposed Sec.  1.170A-14(m)(4)(iii) is also expressed in the 
following formula:

R = G x (V / (L + V))

Where:

R = Relevant basis.
G = Amount determined with respect to item G as described previously 
under proposed Sec.  1.170A-14(m)(4)(ii)(B).
L = Upper-tier partnership's portion of adjusted basis in all the 
contributing partnership's properties (other than the portion of the 
real property with respect to which the qualified conservation 
contribution is made), determined by apportioning among the partners 
of the contributing partnership in accordance with their interests 
in the partnership under section 704(b) its adjusted basis in each 
of its properties (except the portion of the real property with 
respect to which the qualified conservation contribution is made), 
using the adjusted bases immediately before the qualified 
conservation contribution, without duplication or omission of any 
property, and by treating the adjusted basis in each property as not 
less than zero.

[[Page 80923]]

V = Upper-tier partnership's share of the contributing partnership's 
adjusted basis in the portion of the real property with respect to 
which the qualified conservation contribution is made, determined 
according to the following formula: A x (K / C).
A = Contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made.
K = Upper-tier partnership's allocated portion of the qualified 
conservation contribution.
C = Total amount of the contributing partnership's qualified 
conservation contribution.
d. Determination of Relevant Basis for an Ultimate Member Holding a 
Direct Interest in an Upper-Tier S Corporation
    Proposed Sec.  1.170A-14(m)(5) would provide rules for determining 
relevant basis for an ultimate member holding a direct interest in an 
upper-tier S corporation. Proposed Sec.  1.170A-14(m)(5)(i) would 
provide that each such ultimate member's modified basis must be traced 
through the upper-tier S corporation and any upper-tier partnerships to 
the contributing partnership, and the contributing partnership must 
determine the relevant basis. This would involve a multi-step process 
under which, beginning with the upper-tier S corporation, the upper-
tier S corporation and any upper-tier partnerships would be required to 
perform calculations, and then finally the contributing partnership 
would be required to use those calculations to compute the ultimate 
member's relevant basis. For simplicity, proposed Sec.  1.170A-14(m)(5) 
would describe a situation in which there are two tiers--a contributing 
partnership and an upper-tier S corporation. Proposed Sec.  1.170A-
14(m)(5)(i) would provide that, in a situation involving more tiers, 
each partnership and the upper-tier S corporation must apply the rules 
and principles of proposed Sec.  1.170A-14(m) iteratively to determine 
relevant basis.
    Proposed Sec.  1.170A-14(m)(5)(ii)(A) would provide a narrative 
rule for the upper-tier S corporation. It would provide that the upper-
tier S corporation must determine the portion of each ultimate member's 
modified basis that is allocable to the upper-tier S corporation's 
interest in the partnership in which it holds a direct interest (in a 
situation involving only two tiers, that would be the contributing 
partnership). The proposed regulations would require this determination 
to be made in accordance with the principles of proposed Sec.  1.170A-
14(m)(3), and the formula provided in proposed Sec.  1.170A-
14(m)(5)(ii)(B). In other words, the formula provided in proposed Sec.  
1.170A-14(m)(5)(ii)(B) would be similar to the formula provided in 
proposed Sec.  1.170A-14(m)(3)(ii), except that, instead of determining 
the portion of modified basis that is allocable to the portion of the 
real property with respect to which the qualified conservation 
contribution is made, the formula in proposed Sec.  1.170A-
14(m)(5)(ii)(B) would determine the portion of modified basis that is 
allocable to the upper-tier S corporation's interest in the next lower-
tier partnership. As explained in proposed Sec.  1.170A-14(m)(5)(iii), 
the contributing partnership then would be required to use the amount 
determined as the result of the formula in proposed Sec.  1.170A-
14(m)(5)(ii)(B) in another set of computations that would determine the 
portion of modified basis that is allocable to the portion of the real 
property with respect to which the qualified conservation contribution 
is made.
    Proposed Sec.  1.170A-14(m)(5)(ii)(B) would provide that the rule 
of proposed Sec.  1.170A-14(m)(5)(ii) is also expressed in the 
following formula:

N = M x (P / Q)

Where:

N = Portion of the ultimate member's modified basis that is 
allocable to the upper-tier S corporation's interest in the 
contributing partnership.
M = Modified basis as determined under proposed Sec.  1.170A-14(l).
P = Ultimate member's pro rata portion of the upper-tier S 
corporation's adjusted basis in its interest in the contributing 
partnership.
Q = Ultimate member's pro rata portion of the adjusted basis in all 
the upper-tier S corporation's properties (including the upper-tier 
S corporation's interest in the contributing partnership).

    After this formula is computed, then the contributing partnership 
must perform computations using the amount determined for item ``N'' to 
determine relevant basis. Proposed Sec.  1.170A-14(m)(5)(iii)(A) would 
provide a narrative rule for the contributing partnership to compute 
this second step. It would provide that the contributing partnership 
must determine the portion of the amount determined under proposed 
Sec.  1.170A-14(m)(5)(ii) with respect to each ultimate member that is 
allocable to the portion of the real property with respect to which the 
qualified conservation contribution is made. The proposed regulations 
would require this determination to be made in accordance with the 
principles of proposed Sec.  1.170A-14(m)(2), and the formula provided 
in proposed Sec.  1.170A-14(m)(5)(iii)(B).
    Proposed Sec.  1.170A-14(m)(5)(iii)(B) would provide that the rule 
of proposed Sec.  1.170A-14(m)(5)(iii) is also expressed in the 
following formula:

R = N x (W / (S + W))

Where:

R = Relevant basis.
N = Amount determined with respect to item N as described previously 
under proposed Sec.  1.170A-14(m)(5)(ii)(B).
S = Upper-tier S corporation's portion of the adjusted basis in all 
the contributing partnership's properties (other than the portion of 
the real property with respect to which the qualified conservation 
contribution is made), determined by apportioning among the partners 
of the contributing partnership in accordance with their interests 
in the partnership under section 704(b) its adjusted basis in each 
of its properties (other than the portion of the real property with 
respect to which the qualified conservation contribution is made), 
using the adjusted bases immediately before the qualified 
conservation contribution, without duplication or omission of any 
property, and by treating the adjusted basis in each property as not 
less than zero.
W = Upper-tier S corporation's share of the contributing 
partnership's adjusted basis in the portion of the real property 
with respect to which the qualified conservation contribution is 
made, determined according to the following formula: A x (Y / C).
A = Contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made.
Y = Upper-tier S corporation's distributive share of the qualified 
conservation contribution.
C = Total amount of the contributing partnership's qualified 
conservation contribution.

    The proposed regulations would provide examples illustrating these 
rules. The Treasury Department and the IRS request comments on the 
determination of relevant basis.
3. Recordkeeping Requirements
    Proposed Sec.  1.170A-14(m)(6) would provide that contributing 
partnerships, contributing S corporations, upper-tier partnerships, and 
upper-tier S corporations must each maintain dated, written statements 
in their books and records, by the due date, including extensions, of 
their Federal income tax returns, substantiating the computation of 
each ultimate member's adjusted basis, modified basis, and relevant 
basis. It would also provide that these statements need not be 
maintained (nor does modified basis or relevant basis need to be 
computed) with respect to contributions that meet an exception in 
proposed Sec.  1.170A-14(n)(2) (contributions outside a three-year 
holding period) or (n)(3) (family pass-

[[Page 80924]]

through entities). However, these statements must be maintained with 
respect to contributions that meet the exception in proposed Sec.  
1.170A-14(n)(4) for certified historic structures because section 
170(f)(19) imposes special reporting requirements for such 
contributions if they exceed 2.5 times the sum of relevant basis.
F. Exceptions to the Disallowance Rule
    Consistent with section 170(h)(7)(C), (D), and (E), the rules in 
proposed Sec.  1.170A-14(n) would provide definitions and additional 
guidance relating to the three exceptions to the Disallowance Rule. It 
would also provide that there is no presumption that such a 
contribution otherwise is compliant with section 170, any other section 
of the Code, or the regulations or any other guidance thereunder; being 
described in proposed Sec.  1.170A-14(n) is not a safe harbor for 
purposes of any other provision of law or with respect to the value of 
the contribution; such transactions are subject to adjustment or 
disallowance for any other reason, including failure to satisfy the 
other requirements of section 170 and overvaluation of the 
contribution; and taxpayers who engage in such transactions may be 
required to disclose under Sec.  1.6011-4 the transactions as listed 
transactions.
1. Exception for Contributions Outside Three-Year Holding Period
    Consistent with section 170(h)(7)(C), proposed Sec.  1.170A-
14(n)(2)(i) would provide that Sec.  1.170A-14(j) does not apply to any 
qualified conservation contribution by a contributing partnership or 
contributing S corporation that is made at least three years after the 
latest of (1) the last date on which the contributing partnership or 
contributing S corporation acquired any portion of the real property 
with respect to which such qualified conservation contribution is made, 
(2) the last date on which any partner in the contributing partnership 
or shareholder in the contributing S corporation acquired any interest 
in such partnership or S corporation, and (3) if the interest in the 
contributing partnership is held through one or more upper-tier 
partnerships or upper-tier S corporations (A) the last date on which 
any such upper-tier partnership or upper-tier S corporation acquired 
any interest in the contributing partnership or any other such upper-
tier partnership, and (B) the last date on which any partner or 
shareholder in any such upper-tier partnership or upper-tier S 
corporation acquired any interest in such upper-tier partnership or 
upper-tier S corporation.
    Neither section 605 of SECURE 2.0 Act nor section 170 defines the 
phrase ``acquired any interest.'' An acquisition of an interest in a 
partnership can occur in several ways, including by inheritance, 
purchase from an existing partner, in a section 721 exchange with the 
partnership, in exchange for the provision of services, or as a 
distribution from an upper-tier partnership. An existing partner can 
also acquire additional interests in the partnership. In addition, one 
partner's complete or partial disposition of an interest in the 
partnership can be economically similar to the acquisition of an 
interest in the partnership by the remaining partners. For example, if 
a partnership makes a distribution that reduces one partner's interest 
in the profits or losses of the partnership, the remaining partners' 
interests, in the aggregate, may increase in the same manner as if they 
had acquired additional interests in the partnership.
    The rules under section 706(c) and (d) address partnership 
allocations in situations involving variations in partners' interests 
attributable to acquisitions and dispositions. Section 1.706-4(a)(1) 
provides rules for determining the partners' distributive shares of 
partnership items when a partner's interest in a partnership varies 
during the taxable year as a result of the disposition of a partial or 
entire interest in a partnership as described in Sec.  1.706-1(c)(2) 
and (3),\4\ or with respect to a partner whose interest in a 
partnership is reduced as described in Sec.  1.706-1(c)(3), including 
by the entry of a new partner, collectively referred to as a 
``variation.'' Generally, a variation includes any acquisition, partial 
disposition, or complete disposition of an interest in the partnership. 
However, Sec.  1.706-4(b)(1) provides that the rules in Sec.  1.706-
4(a)(3) do not preclude changes in the allocations of the distributive 
share of items described in section 702(a) among contemporaneous 
partners, provided that any variation in a partner's interest is not 
attributable to a contribution of money or property by a partner to the 
partnership or a distribution of money or property by the partnership 
to a partner, and the allocations resulting from the modification 
satisfy the requirements in section 704(b) and the regulations 
thereunder. Generally, partnerships are familiar with the rules under 
Sec.  1.706-4 because they must apply such rules in computing 
allocations whenever there is an acquisition or disposition of a 
partner's interest during the taxable year.
---------------------------------------------------------------------------

    \4\ Section 1.706-1(c)(2) provides in part that a partnership 
taxable year closes with respect to a partner who sells or exchanges 
the partner's entire interest in the partnership, with respect to a 
partner whose entire interest in the partnership is liquidated, and 
with respect to a partner who dies. Section 1.706-1(c)(3) provides 
that if a partner sells or exchanges a part of the partner's 
interest in a partnership, or if the interest of a partner is 
reduced, the partnership taxable year continues to its normal end.
---------------------------------------------------------------------------

    The definition of ``variation'' in Sec.  1.706-4 would provide an 
administrable standard consistent with the purposes of section 
170(h)(7)(C). Accordingly, proposed Sec.  1.170A-14(n)(2)(ii) would 
provide that, for purposes of Sec.  1.170A-14(n)(2), an acquisition of 
any interest in a partnership is any ``variation'' within the meaning 
of that term in Sec.  1.706-4(a)(1); however, a variation would not 
include a change in allocations that satisfies the requirements of 
Sec.  1.706-4(b)(1). The Treasury Department and the IRS considered 
alternatives to this rule, including defining acquisition as any 
acquisition by purchase, contribution, or gift. However, because 
certain other transactions such as redemptions and abandonments may 
reach results that are substantively similar to an acquisition by 
purchase, contribution, or gift, the Treasury Department and the IRS 
determined that the variation rules of Sec.  1.706-4 would be more 
appropriate in this context.
    Proposed Sec.  1.170A-14(n)(2)(iii) would define an acquisition of 
any interest in an S corporation as any transfer, issuance, redemption, 
or other disposition of stock in the S corporation; however, an 
acquisition would not include any issuance or redemption involving all 
shareholders that does not affect the proportionate ownership of any 
shareholder (for example, a stock split). The Treasury Department and 
the IRS considered alternatives to this rule, including defining 
acquisition as any acquisition by purchase, contribution, or gift. 
However, because certain other transactions such as redemptions and 
abandonments may reach results that are substantively similar to an 
acquisition by purchase, contribution, or gift, the Treasury Department 
and the IRS determined that the proposed rule would be more appropriate 
in this context.
    Proposed Sec.  1.170A-14(n)(2)(iv) would provide that, if the 
contributing partnership or contributing S corporation does not satisfy 
the requirements of proposed Sec.  1.170A-14(n)(2), then proposed Sec.  
1.170A-14(n)(2) would not apply to any person who receives a 
distributive share or pro rata share of the qualified conservation

[[Page 80925]]

contribution (including an upper-tier partnership or upper-tier S 
corporation), regardless of whether the person receiving such 
distributive share or pro rata share would have satisfied the 
requirements of proposed Sec.  1.170A-14(n)(2) if the person had been 
the one to make the qualified conservation contribution. The Treasury 
Department and the IRS considered alternatives to this rule, such as 
allowing upper-tier partnerships and upper-tier S corporations to apply 
the three-year-holding-period exception even if the contributing 
partnership failed to satisfy the exception. Such an approach, however, 
would be inconsistent with section 170(h)(7)(C), which explicitly 
applies the holding period requirements to the contributing 
partnership.
    The proposed regulations contain two examples illustrating these 
rules. The Treasury Department and the IRS request comments on whether 
any additional rules or examples should be provided for the three-year 
holding period exception.
2. Exception for Family Pass-Through Entities
    As mentioned earlier, section 170(h)(7)(D)(i) provides the 
Disallowance Rule does not apply to any contribution made by any 
partnership if substantially all of the partnership interests in such 
partnership are held, directly or indirectly, by an individual and 
members of the family of such individual. The Treasury Department and 
the IRS are aware that the meaning of the term ``substantially all'' in 
section 170(h)(7)(D)(i) may not be clear and that such ambiguity could 
impair taxpayers' ability to determine whether they qualify for the 
family pass-through entity exception. For purposes of applying 
different provisions of the Code that also use that term, various 
Income Tax Regulations define the term ``substantially all'' as 
comprising different percentages, including: 70 percent (Sec.  
1.1400Z2(d)-2(d)(4)); 80 percent (Sec. Sec.  1.41-2(d)(2), 1.41-
4(a)(6)); 85 percent (Sec. Sec.  1.45D-1(c)(5), 1.72(e)-1T, Q&A 3; 
1.528-4(b) and (c)); 90 percent (Sec. Sec.  1.103-8(a)(1)(i), 1.103-
16(c), 1.731-2(c)(3)(i); 1.1400Z2(d)-2(d)(3)); and 95 percent 
(Sec. Sec.  1.448-1T(e)(4)(i) and (e)(5)(i), 1.460-6(d)(4)(i)(D)(1)). 
It is appropriate to select a percentage at the higher end of this 
range to carry out the purpose of section 170(h)(7) of preventing 
abusive syndications of qualified conservation contributions. 
Accordingly, the Treasury Department and the IRS propose to define 
``substantially all'' for purposes of section 170(h)(7)(D)(i) and Sec.  
1.170A-14(n)(3)(i) as 90 percent of the interests in the contributing 
partnership or contributing S corporation that meets the requirements 
of proposed Sec.  1.170A-14(n)(3).
    Thus, proposed Sec.  1.170A-14(n)(3)(i) would provide that Sec.  
1.170A-14(j) does not apply with respect to any qualified conservation 
contribution made by a contributing partnership or contributing S 
corporation if at least 90 percent of the interests in the contributing 
partnership or contributing S corporation are held by an individual and 
members of the family of such individual, and the contributing 
partnership or contributing S corporation meets the requirements of 
proposed Sec.  1.170A-14(n)(3).
    The Treasury Department and the IRS are also aware that it may be 
unclear what ``interests'' in the contributing partnership or 
contributing S corporation are to be taken into account for purposes of 
the family pass-through entity exception. Generally, the Code 
characterizes interests in a partnership as comprising the ``capital 
interests'' in the partnership and the ``profits interests'' in the 
partnership. See, for example, section 707(b) of the Code. The Treasury 
Department and the IRS propose limiting the family pass-through entity 
exception to situations in which an individual and the family members 
of such individual own at least 90 percent of both the capital and 
profits interests in the contributing partnership. Doing so would help 
to ensure that the family pass-through entity exception does not apply 
in situations in which persons outside an individual's family own a 
substantial economic interest in the partnership. Accordingly, proposed 
Sec.  1.170A-14(n)(3)(ii)(A) would provide that, in the case of a 
contributing partnership, at least 90 percent of the interests in the 
contributing partnership are held by an individual and members of the 
family of such individual if, at the time of the qualified conservation 
contribution, at least 90 percent of the interests in capital and 
profits in such partnership are held, directly or indirectly, by an 
individual and members of the family of such individual.
    A similar rule is proposed for S corporations. Section 
1361(b)(1)(D) requires that an S corporation have only one class of 
stock. However, section 1361(c)(4) provides that differences in voting 
rights alone do not create a second class of stock. The Treasury 
Department and the IRS propose limiting the family pass-through entity 
exception in the case of S corporations to situations in which the 
individual and the family of such individual own stock in the 
contributing S corporation possessing at least 90 percent of the total 
voting power and at least 90 percent of the total value of the 
outstanding stock of the contributing S corporation. Doing so would 
help to ensure that the family pass-through exception does not apply in 
situations in which persons outside an individual's family own a 
substantial economic interest in the S corporation. Accordingly, 
proposed Sec.  1.170A-14(n)(3)(ii)(B) would provide that, in the case 
of a contributing S corporation, at least 90 percent of the interests 
in the contributing S corporation are held by an individual and members 
of the family of such individual if, at the time of the qualified 
conservation contribution, at least 90 percent of the total value and 
at least 90 percent of the total voting power of the outstanding stock 
in such S corporation are held by an individual and members of the 
family of such individual.
    The Treasury Department and the IRS request comments on whether 
these definitions of ``substantially all of the interests'' in the 
contributing partnership or contributing S corporation are appropriate 
and sufficient to ensure the intended application of the family pass-
through entity exception.
    Consistent with section 170(h)(7)(D)(ii), proposed Sec.  1.170A-
14(n)(3)(iii) would provide that, for purposes of Sec.  1.170A-
14(n)(3), the term ``members of the family'' means, with respect to any 
individual (1) the spouse of such individual, and (2) any individual 
who bears a relationship to such individual that is described in 
section 152(d)(2)(A) through (G). Under these proposed regulations, 
members of the family would be limited to individuals. The Treasury 
Department and the IRS request comments on whether certain estates or 
trusts should be treated as members of the family for purposes of this 
rule. The Treasury Department and the IRS note that, under existing 
Sec.  1.1361-1(e)(3)(ii), certain estates and trusts of deceased 
members of the family are treated as members of the family for purposes 
of the limitation on the number of shareholders in an S corporation.
    As described earlier in this preamble, the Disallowance Rule and 
its exceptions in section 170(h)(7) are generally mechanical. However, 
Congress recognized that additional guidance may be needed to prevent 
situations in which those mechanical rules are used to avoid the 
purposes of the Disallowance Rule. As mentioned previously, section 
170(h)(7)(G)(ii) provides the Secretary with authority to issue 
regulations or other guidance to

[[Page 80926]]

prevent the avoidance of the purposes of section 170(h)(7). 
Accordingly, these proposed regulations would provide two anti-abuse 
rules designed to ensure that the family pass-through entity exception 
in proposed Sec.  1.170A-14(n)(3) is not used inappropriately to 
circumvent the Disallowance Rule.
    First, the Treasury Department and the IRS propose to limit the 
family pass-through entity exception to situations in which an 
individual and members of that individual's family have held the 
requisite ownership interest in the property for at least one year 
prior to the contribution. The need for such a rule is the concern 
that, in the absence of a requirement that the members of the family 
hold the contributed property for a certain period of time before the 
contribution, promoters could structure transactions to inappropriately 
take advantage of tacked holding periods under section 1223 of the Code 
together with the family pass-through entity exception. Due to the 
operation of section 170(e), most contributions that exceed 2.5 times 
the sum of relevant basis would be expected to be of long-term capital 
gain property because, in those situations, the amount of the 
contribution would not be limited to the donor's basis. Transactions in 
which a family is relying on a tacked-holding period under section 1223 
from another owner outside the family to claim a contribution in excess 
of 2.5 times the sum of relevant basis raise serious concerns that the 
family pass-through entity exception is being used inappropriately to 
circumvent the Disallowance Rule. Accordingly, proposed Sec.  1.170A-
14(n)(3)(iv)(A) would provide that the exception in proposed Sec.  
1.170A-14(n)(3) does not apply unless at least 90 percent of the 
interests in the property with respect to which the qualified 
conservation contribution was made were owned, directly or indirectly, 
by one individual and members of the family of that individual for at 
least one year prior to the date of the contribution. The proposed 
rules would clarify that the members of the family during that year 
need not be the same members of the family that own an interest at the 
time of the qualified conservation contribution; however, at least one 
individual must own an interest for the entire year, and at least 90 
percent of the interests in the property must be owned, directly or 
indirectly, during that year by that individual and members of the 
family with respect to that individual. The proposed regulations 
contain an example illustrating the application of this rule.
    Second, proposed Sec.  1.170A-14(n)(3)(iv)(B) would provide that 
the exception in proposed Sec.  1.170A-14(n)(3) does not apply unless 
at least 90 percent of the qualified conservation contribution is 
allocated to the individual and all members of the individual's family 
who own at least 90 percent of all the interests in the contributing 
partnership or contributing S corporation. The Treasury Department and 
the IRS are concerned that, without such a rule, contributing 
partnerships or contributing S corporations might be structured to meet 
the family pass-through exception, but the qualified conservation 
contribution would be allocated disproportionately to persons that are 
not members of the family.
    Proposed Sec.  1.170A-14(n)(3)(v) would provide that, in the case 
of tiered pass-through entities, the family pass-through exception is 
available only if the contributing partnership or contributing S 
corporation satisfies the requirements of Sec.  1.170A-14(n)(3). If the 
contributing partnership or contributing S corporation satisfies the 
requirements of proposed Sec.  1.170A-14(n)(3), then any upper-tier 
partnership or upper-tier S corporation need not apply Sec.  1.170A-
14(j) through (n) to its allocated portion of such contribution. If the 
contributing partnership or contributing S corporation does not satisfy 
the requirements of proposed Sec.  1.170A-14(n)(3), then the exception 
in Sec.  1.170A-14(n)(3) would not apply to any person who receives a 
distributive share or pro rata share of the qualified conservation 
contribution (including an upper-tier partnership or upper-tier S 
corporation), regardless of whether the person receiving such 
distributive share or pro rata share would have satisfied the 
requirements of proposed Sec.  1.170A-14(n)(3) if the person had been 
the one to make the contribution. The Treasury Department and the IRS 
considered alternatives to this rule, such as allowing upper-tier 
partnerships and upper-tier S corporations to apply the family pass-
through entity exception even if the contributing partnership failed to 
satisfy the exception. Such an approach, however, would be inconsistent 
with section 170(h)(7)(D), which explicitly applies the substantially-
all requirement to the contributing partnership or contributing S 
corporation.
3. Exception for Contributions To Preserve Certified Historic 
Structures
    Consistent with section 170(h)(7)(E), proposed Sec.  1.170A-
14(n)(4) would provide that proposed Sec.  1.170A-14(j) does not apply 
to any qualified conservation contribution the conservation purpose of 
which is the preservation of any building that is a certified historic 
structure (as defined in section 170(h)(4)(C)). Proposed Sec.  1.170A-
14(n)(4) would also contain a cross-reference to the special reporting 
requirements in proposed Sec.  1.170A-16(f)(6) for a contribution that 
meets the certified historic structure exception.

IV. Reporting Requirements

    Existing Sec.  1.170A-16 imposes substantiation and reporting 
requirements for noncash charitable contributions. Subject to certain 
exceptions, Sec.  1.170A-16 requires the donor to file Form 8283, 
Noncash Charitable Contributions, in the case of a noncash charitable 
contribution exceeding $500. Specifically, existing Sec.  1.170A-16(c) 
generally requires the donor to complete Form 8283 (Section A) in the 
case of a noncash charitable contribution of more than $500 but not 
more than $5,000. Existing Sec.  1.170A-16(d) generally requires the 
donor to complete Form 8283 (Section A or Section B, or both, as 
applicable) in the case of a noncash charitable contribution of more 
than $5,000. Existing Sec.  1.170A-16(e) applies to noncash charitable 
contributions of more than $500,000 and generally requires the donor to 
complete Form 8283 (Section A or Section B, or both, as applicable). 
Consistent with section 170(f)(11)(D), Sec.  1.170A-16(e) requires a 
donor of a noncash contribution of more than $500,000 to attach an 
appraisal to the return on which the deduction is claimed. Existing 
Sec.  1.170A-16(f) provides additional substantiation rules, including 
rules for donors that are partnerships or S corporations.
A. Requirement That Numbers Be Entered in Sections A and B of Form 8283
    Existing Sec.  1.170A-16(c)(3) and (d)(3) define a completed Form 
8283 (Section A) and Form 8283 (Section B), respectively. To further 
clarify reporting requirements for donated property, proposed Sec.  
1.170A-16(c)(3)(v) and (d)(3)(ix) would add a requirement that, if a 
box in Section A or Section B of the Form 8283 (respectively) requests 
insertion of a number, the taxpayer must include the number in the box 
or attach a statement explaining why the taxpayer cannot include the 
number in the box. Taxpayers that do not include numbers where required 
or engage in a practice to obfuscate or otherwise defeat the 
requirement to include a number in the box, could be subject to 
heightened scrutiny and a denial of the deduction for failure to 
provide the requested information on the Form 8283.

[[Page 80927]]

    The Treasury Department and the IRS believe that this rule 
regarding specific reporting of numerical amounts is reasonable and 
necessary because the IRS has observed a pronounced increase in 
taxpayers filing a Form 8283 that does not contain any numbers and 
instead refers the IRS to an attachment. Often, the attachment includes 
nonresponsive information, such as ``available upon request,'' is 
entirely blank, or otherwise does not provide the information required 
by Form 8283. Other times, the attachment includes multiple numbers for 
different boxes, leaving the IRS to surmise which of the included 
numbers is appropriate for a particular box. These actions are to the 
detriment of fair and effective tax administration. Accordingly, the 
proposed regulations state that Sections A and B of Form 8283, 
including any attachments thereto, may not include nonresponsive 
information, such as ``available upon request,'' ``provided upon 
request,'' or any other nonresponsive information other than the 
information requested. Including any nonresponsive language may result 
in a presumption that Form 8283 is incomplete.
    While many taxpayers understandably want to attach a statement to 
the Form 8283 to verify their calculations and provide appropriate 
supplemental information, having the numerical information in the 
appropriate box on Sections A and B of Form 8283 is critical to the 
IRS's ability to ensure the integrity of each filing, as IRS systems 
are programmed to match a partner's or shareholder's information to the 
appropriate contributing partnership's or contributing S corporation's 
information. Moreover, information requested on Sections A and B of 
Form 8283 is information that the partnership or S corporation should 
already have and is already required to provide to the partner or 
shareholder, as appropriate. See Sec.  1.170A-16(f)(4).

B. Clarification of Reporting of Certain Qualified Conservation 
Contributions Made by a Partnership or S Corporation

    Existing Sec.  1.170A-16(d)(3) defines a completed Form 8283 
(Section B) required to substantiate charitable contributions of more 
than $5,000. To ensure that taxpayers claiming qualified conservation 
contributions properly comply with section 170(f)(19) and (h)(7), which 
require a partnership or S corporation to calculate the sum of the 
relevant basis of the partnership's or S corporation's partners or 
shareholders, the IRS must have relevant basis reporting from both the 
contributing partnership or contributing S corporation and each partner 
or shareholder receiving an allocation of the contribution (which will 
be ultimate members, upper-tier partnerships, or upper-tier S 
corporations). Accordingly, these proposed regulations would insert a 
new paragraph, proposed Sec.  1.170A-16(d)(3)(viii).\5\
---------------------------------------------------------------------------

    \5\ The proposed regulations would redesignate existing Sec.  
1.170A-16(d)(3)(viii) to Sec.  1.170A-16(d)(3)(x).
---------------------------------------------------------------------------

    The new paragraph would provide that, for certain qualified 
conservation contributions made by a partnership or S corporation, the 
sum of each ultimate member's relevant bases, computed in accordance 
with Sec.  1.170A-14(j) through (m), must be reported on the Form 8283 
(Section B) in order for the Form 8283 (Section B) to be considered 
complete.
    This new requirement applies to contributions described in section 
170(h)(7)(E) and Sec.  1.170A-14(n)(4) (for contributions to preserve 
certified historic structures), regardless of whether they are also 
described in section 170(h)(7)(C) and Sec.  1.170A-14(n)(2) (for 
contributions made outside of the three-year holding period) and/or 
section 170(h)(7)(D) and Sec.  1.170A-14(n)(3) (for contributions made 
by certain family partnerships or S corporations). While contributions 
by partnerships or S corporations to preserve historic structures are 
excepted from the Disallowance Rule of section 170(h)(7), they are 
potentially subject to section 170(f)(19), which applies when the 
amount of the contribution exceeds 2.5 times of the relevant bases. The 
Treasury Department and the IRS request comments on whether any 
adjustments to relevant basis are warranted in the case of a 
contribution to preserve a historic structure.
    This new requirement also would apply for any other qualified 
conservation contribution by a partnership or S corporation, provided 
that the contribution is not described in section 170(h)(7)(C) and 
Sec.  1.170A-14(n)(2) (for contributions made outside of the three-year 
holding period) and/or section 170(h)(7)(D) and Sec.  1.170A-14(n)(3) 
(for contributions made by certain family partnerships or S 
corporations). If the contribution is disallowed by section 170(h)(7) 
and proposed Sec.  1.170A-14(j), then the Treasury Department and the 
IRS expect that the contribution will not be reported to the IRS on 
Form 8283 because no deduction can be taken.

C. Clarification of Reporting of Noncash Charitable Contributions Over 
$500 Made by a Partnership or S Corporation

    Existing Sec.  1.170A-16(d)(6) refers to existing Sec.  1.170A-
16(f) for additional substantiation rules. Existing Sec.  1.170A-
16(f)(4) provides special substantiation rules for partner and S 
corporation shareholders.
    Existing Sec.  1.170A-16(f)(4)(i) provides that, if the donor is a 
partnership or S corporation, the donor must provide a copy of the 
completed Form 8283 to every partner or shareholder who receives an 
allocation of a charitable contribution under section 170 for the 
property described in the Form 8283. Similarly, existing Sec.  1.170A-
16(f)(4)(i) provides that a recipient partner or shareholder that is a 
partnership or S corporation must provide a copy of the completed Form 
8283 to each of its partners or shareholders who receives an allocation 
of a charitable contribution under section 170 for the property 
described in Form 8283.
    Existing Sec.  1.170A-16(f)(4)(ii) provides that a partner of a 
partnership or shareholder of an S corporation who receives an 
allocation of a charitable contribution under section 170 for property 
to which Sec.  1.170A-16(c), (d), or (e) applies \6\ must attach a copy 
of the partnership's or S corporation's completed Form 8283 to the 
return on which the deduction is claimed.
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    \6\ In other words, a charitable contribution of more than $500 
but not more than $5,000, Sec.  1.170A-16(c), a charitable 
contribution of more than $5,000, Sec.  1.170A-16(d), or noncash 
charitable contributions of more than $500,000, Sec.  1.170A-16(e).
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    In pass-through and tiered entity structures, the IRS regularly 
observes partners and shareholders providing incomplete information to 
substantiate their charitable contribution deductions. For example, an 
ultimate member might complete a Form 8283 that contains the necessary 
information from the Form K-1 received from the contributing 
partnership, contributing S corporation, or an upper-tier partnership 
or upper-tier S corporation. However, often, the ultimate member fails 
to provide a copy of the appropriate partnership's or S corporation's 
Form 8283 and the Form K-1. In accordance with the authority granted by 
section 170(h)(7)(G) to ``prescribe such regulations or other guidance 
as may be necessary or appropriate to carry out the purposes of this 
paragraph, including regulations or other guidance . . . to require 
reporting, including reporting related to tiered partnerships and the 
modified basis of partners,'' these proposed regulations would revise 
paragraph Sec.  1.170A-16(f)(4).

[[Page 80928]]

    Proposed Sec.  1.170A-16(f)(4)(i) would retain the requirement that 
a donor that is a partnership or S corporation provide a copy of the 
completed Form 8283 to every partner or shareholder who receives an 
allocation. That paragraph also would retain the requirement that a 
partnership or corporation that receives an allocation of a charitable 
contribution under section 170 must provide a copy of the donor's Form 
8283 to its partners or shareholders who receive an allocation of the 
deduction, but would clarify that this reporting is required through 
any additional tiers.
    Proposed Sec.  1.170A-16(f)(4)(ii) would retain the rule that a 
partner of a partnership or shareholder of an S corporation who 
receives an allocation of a charitable contribution to which Sec.  
1.170A-16(c), (d), or (e) applies must attach the donor partnership's 
or S corporation's Form 8283 to the return on which the deduction is 
claimed. A clarifying requirement is added that the partner or 
shareholder must also attach a copy of any additional Forms 8283 that 
they must receive as provided in proposed Sec.  1.170A-
16(f)(4)(iii)(A).
    Proposed Sec.  1.170A-16(f)(4)(iii)(A) would provide that a partner 
of a partnership or shareholder of an S corporation that receives an 
allocation of a charitable contribution under section 170 for property 
to which Sec.  1.170A-16(c), (d), or (e) applies must complete their 
own Form 8283 with any information required by Form 8283 and the 
instructions to Form 8283. In addition, a partner that is itself a 
partnership or S corporation must complete its own Form 8283 and 
provide a copy of that Form 8283 to every partner or shareholder who 
receives an allocation of the charitable contribution, and so on 
through any additional tiers. The partner or shareholder must attach 
its separate Form 8283 to the return on which the contribution is 
claimed in addition to the copy of donor's Form 8283 as well as other 
Forms 8283 that the partner or shareholder received. This new 
requirement would apply to all noncash charitable contributions over 
$500 made by a partnership or S corporation, not just those for 
conservation easements.
    Proposed Sec.  1.170A-16(f)(4)(iii)(B) would provide that, if the 
contribution was a qualified conservation contribution, an ultimate 
member's separate Form 8283 must include the ultimate member's own 
relevant basis. An upper-tier partnership's or upper-tier S 
corporation's separate Form 8283 must include the sum of each of its 
ultimate member's relevant bases. However, the requirements that an 
ultimate member provide their own relevant basis and that an upper-tier 
partnership or upper-tier S corporation include the sum of its ultimate 
member's relevant bases do not apply to contributions described in 
section 170(h)(7)(C) and Sec.  1.170A-14(n)(2) (for contributions made 
outside of the three-year holding period) or section 170(h)(7)(D) and 
Sec.  1.170A-14(n)(3) (for contributions made by certain family 
partnerships or S corporations), provided that they are not also 
described in section 170(h)(7)(E) and Sec.  1.170A-14(n)(4) (for 
contributions to preserve certified historic structures), in which case 
proposed paragraph Sec.  1.170A-16(f)(4)(iii)(B) does apply. The Form 
8283 instructions will be revised accordingly.
D. Additional Reporting Required by Section 170(f)(19)
    To ensure proper reporting under section 170(f)(19), the proposed 
regulations would add new Sec.  1.170A-16(f)(6). Specifically, proposed 
Sec.  1.170A-16(f)(6)(i) would provide that, in the case of any 
contribution described in section 170(h)(4)(C) and proposed Sec.  
1.170A-16(f)(6)(ii) (relating to the preservation of certified historic 
structures), pursuant to section 170(f)(19), no deduction is allowed 
under section 170 or any other provision of the Code under which 
deductions are allowable to pass-through entities with respect to such 
contribution unless each partnership or S corporation (1) includes on 
its return for the taxable year in which the contribution is made a 
statement that it made such a contribution or received such allocated 
portion and (2) provides such information about the contribution as the 
Secretary may require in guidance, forms, or instructions. The 
reference to ``any other provision of the Code under which deductions 
are allowable to pass-through entities'' is included under the 
authority of section 170(f)(19)(C) to apply these rules to S 
corporations and other pass-through entities in the same manner as such 
rules apply to partnerships and their partners, and is necessary to 
prevent such pass-through entities and their owners from claiming a 
deduction under a different provision of the Code other than section 
170, such as section 642(c), unless the statutory and regulatory 
requirements of section 170(f)(19) are met.
    Proposed Sec.  1.170A-16(f)(6)(ii) describes (using terms defined 
in proposed Sec.  1.170A-14(j)(3)) the contributions to which proposed 
Sec.  1.170A-16(f)(6) would apply, namely any qualified conservation 
contribution (as defined in section 170(h)(1) and proposed Sec.  
1.170A-14) for which: (1) the conservation purpose of which is 
preservation of a building that is a certified historic structure (as 
defined in section 170(h)(4)(C)); (2) that is either made by a 
contributing partnership or contributing S corporation, or that is an 
allocated portion of an upper-tier partnership or upper-tier S 
corporation; and (3) the amount of such contribution or such allocated 
portion exceeds 2.5 times the sum of each ultimate member's relevant 
basis (as defined in proposed Sec.  1.170A-14(j) through (m)).
    Proposed Sec.  1.170A-16(f)(6)(iii) would provide that a 
partnership or S corporation satisfies the requirement to have made a 
statement that it made such a contribution or received such allocated 
portion and to provide such information about the contribution as the 
Secretary may require by filing Form 8283 (including information about 
relevant basis) in accordance with section 170, the regulations under 
section 170 (including those proposed in this notice of proposed 
rulemaking), and the instructions to Form 8283.

V. Section 706 Regulations

    The general mechanism of section 170(h)(7) with respect to 
partnerships is to compare the amount of the partnership's contribution 
(or its distributive share of a contribution made by another 
partnership) to 2.5 times the sum of each of its partner's relevant 
basis. Relevant basis is based on modified basis, which is based on the 
partner's adjusted basis in its partnership interest immediately before 
the contribution. Without additional rules, there may be situations in 
which the contribution is allocated to partners that did not hold an 
interest at the time of the qualified conservation contribution. Such 
partners would not have any adjusted basis in their partnership 
interests immediately before the contribution, and thus, without 
additional rules, their relevant basis would be zero. Therefore, rules 
are needed to align the computation of relevant basis (which is 
generally required to be computed immediately before the computation) 
with the allocation of the contribution among the partners.
    Generally, section 706 and Sec.  1.706-4 of the existing 
regulations provide rules for determining a partner's distributive 
share of partnership items when a partner's interest in the partnership 
varies during the taxable year. For example, assume a partner holding a 
25 percent interest in a calendar-year partnership sells its 25 percent 
interest on July 1. Under section 706 and

[[Page 80929]]

Sec.  1.706-4, the partnership would not allocate the selling partner 
25 percent of all items of income for the year because the selling 
partner had no interest in the partnership for the final half of the 
year. Instead, the partnership would follow the rules of Sec.  1.706-4 
to ensure that the allocations properly reflect the sale of the 
partner's interest. Generally, the rules of Sec.  1.706-4 allow 
partnerships to use either a proration method or an interim closing of 
the books method (interim closing method).\7\ In the example, a 
partnership using the proration method generally would allocate the 
selling partner 12.5 percent (reflecting the fact that the selling 
partner held a 25 percent interest in the partnership for half of the 
year) of every item of the partnership for the full year, regardless of 
whether the partnership incurred the item in the first or second half 
of the year. Alternatively, a partnership using the interim closing 
method generally would allocate the selling partner 25 percent of every 
item occurring in the first half of the year.
---------------------------------------------------------------------------

    \7\ The rules of Sec.  1.706-4 also require the use of 
conventions to determine the date on which variations are deemed to 
occur. Discussion of these conventions is beyond the scope of this 
preamble.
---------------------------------------------------------------------------

    Section 1.706-4 provides an exception to these rules for certain 
``extraordinary items,'' which must be allocated in accordance with the 
partners' interests in the item at the time of day the extraordinary 
item occurred. Section 1.706-4(e)(2) provides a list of these 
extraordinary items. In particular, Sec.  1.706-4(e)(2)(i) and (ii) 
provide that an extraordinary item includes any item from the 
disposition or abandonment (other than in the ordinary course of 
business) of a capital asset as defined in section 1221 of the Code 
(determined without the application of any other rules of law) and any 
item from the disposition or abandonment (other than in the ordinary 
course of business) of property used in a trade or business as defined 
in section 1231(b) of the Code (determined without the application of 
any holding period requirement). Section 1.706-4(e)(3) provides a 
``small item exception'' under which certain items in the list in Sec.  
1.706-4(e)(2) nevertheless are not extraordinary items if they fall 
below certain thresholds.
    Proposed Sec.  1.706-4(e)(2)(ix) would provide that an 
extraordinary item includes any qualified conservation contribution 
(without regard to whether such contribution is a disallowed qualified 
conservation contribution within the meaning of Sec.  1.170A-
14(j)(3)(vii)). The proposed amendments to existing Sec.  1.706-4(e)(3) 
contained in these proposed regulations would provide that the small 
item exception does not apply to any qualified conservation 
contribution. These rules are designed to ensure that modified basis 
can be computed immediately before the contribution, as directed in 
section 170(h)(7). The Treasury Department and the IRS considered 
alternatives to this rule. However, many, and perhaps most, qualified 
conservation contributions are already considered extraordinary items 
under existing Sec.  1.706-4(e)(2)(i) or (ii). The proposed rule, 
however, provides clarity and uniformity regarding the application of 
the extraordinary item rule to qualified conservation contributions and 
facilitates the computation of a partner's modified basis immediately 
before the contribution as directed by the statute.
    Section 706(d)(3) provides rules for an upper-tier partnership's 
allocation of items to its partners attributable to an interest in a 
lower-tier partnership. It provides that if, during any taxable year of 
the upper-tier partnership there is a change in any partner's interest 
in the upper-tier partnership, then (except to the extent provided in 
regulations) each partner's distributive share of any item of the 
upper-tier partnership attributable to the lower-tier partnership must 
be determined by assigning the appropriate portion (determined by 
applying principles similar to the principles of section 706(d)(2)(C) 
and (D)) of each such item to the appropriate days during which the 
upper-tier partnership is a partner in the lower-tier partnership and 
by allocating the portion assigned to any such day among the partners 
in proportion to their interests in the upper-tier partnership at the 
close of such day. The Treasury Department and the IRS are concerned 
that, even if a lower-tier partnership's qualified conservation 
contribution is treated as an extraordinary item with respect to the 
lower-tier partnership, an upper-tier partnership might nevertheless 
attempt to rely on section 706(d)(3) and allocate its share of the 
contribution to partners that were not partners on the date of 
contribution. To facilitate the computation of a partner's relevant 
basis immediately before the contribution, proposed Sec.  1.706-3(a) 
would provide that, for purposes of section 706(d)(3), in the case of a 
qualified conservation contribution (without regard to whether such 
contribution is a disallowed qualified conservation contribution within 
the meaning of Sec.  1.170A-14(j)(3)(vii)) by a partnership that is 
allocated to an upper-tier partnership, the upper-tier partnership must 
allocate the contribution among its partners in proportion to their 
interests in the upper-tier partnership at the time of day at which the 
contribution was made, regardless of the method (interim closing or 
proration) and convention (daily, semi-monthly, or monthly) otherwise 
used by the upper-tier partnership under Sec.  1.706-4. The Treasury 
Department and the IRS request comments on whether these rules are 
necessary and sufficient to ensure the appropriate operation of the 
Disallowance Rule.

Proposed Applicability Dates

    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. 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). Accordingly, the proposed 
regulations under Sec. Sec.  1.170A-14(j) through (n), 1.706-3, and 
1.706-4 are proposed to apply to contributions made after December 29, 
2022.
    To align the reporting requirements under Sec.  1.170A-16 with the 
publication of the revised Form 8283 and its instructions, the proposed 
regulations under Sec.  1.170A-16 are proposed to apply to 
contributions made in taxable years ending on or after November 20, 
2023.

Special Analyses

I. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally 
requires that a Federal agency obtain the approval of the Office of 
Management and Budget (OMB) before collecting information from the 
public, whether such collection of information is mandatory, voluntary, 
or required to obtain or retain a benefit. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless the collection of information displays a valid 
control number.
    The collection of information contained in these proposed 
regulations is reflected in the collection of information for Form 8283 
and Schedule K-1 for Forms 1065, U.S. Return of Partnership Income, and 
1120-S, U.S. Income Tax Return for an S corporation, that have been 
reviewed and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act (44

[[Page 80930]]

U.S.C. 3507(c)) under control numbers 1545-0074 and 1545-0123. The 
estimated burden for taxpayers filing Form 8283 under OMB control 
number 1545-0074 is nineteen minutes for recordkeeping, twenty-nine 
minutes for learning about the law or the form, one hour and four 
minutes for preparing the form, and thirty-four minutes for copying, 
assembling, and sending the form to the IRS.
    To the extent there is a change in burden as a result of these 
regulations, the change in burden will be reflected in the updated 
burden estimates for the Form 8283 and Schedule K-1 for Forms 1065 and 
1120-S. The requirement to maintain records to substantiate information 
on Form 8283 and Schedule K-1 for Forms 1065 and 1120-S is already 
contained in the burden associated with the control number for the 
forms and remains unchanged.

II. Regulatory Flexibility Act

    The Secretary of the Treasury hereby certifies that the proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6). This rule would 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 of a noncash charitable 
contribution. Although data is not readily available about the number 
of small entities that are potentially affected by this rule, it is 
possible that a substantial number of small entities may be affected.
    The impact of these proposed regulations can be described in the 
following four categories.
    First, proposed Sec.  1.170A-14(j) through (n) would provide 
guidance in applying section 170(h)(7), including providing 
definitions, formulas for the required calculations, and examples to 
help ensure the effective application of section 170(h)(7), and 
proposed Sec. Sec.  1.706-3 and 1.706-4(e)(2)(ix) would provide special 
rules for allocating qualified conservation contributions. Even 
assuming that these provisions affect a substantial number of small 
entities, they will not have a significant economic impact. Section 
170(h)(7) is self-executing and imposes the burden of calculating 
relevant basis and applying the Disallowance Rule. Because these 
proposed regulations are focused on providing definitional and 
computational guidance related to section 170(h)(7), their economic 
impact is expected to be minimal.
    Second, proposed Sec.  1.170A-16(d)(3)(viii) would require the Form 
8283 filed by contributing partnerships and contributing S corporations 
to include the sum of each ultimate member's relevant basis. The 
existing regulations under Sec.  1.170A-16 already requires these 
entities to file Form 8283. Even assuming that this provision affects a 
substantial number of small entities, it will not have a significant 
economic impact because it simply requires contributing partnerships 
and contributing S corporations to put a small amount of additional 
information, which section 170(h)(7) and (f)(19) requires them to 
determine, on a form they are already required to file.
    Third, proposed Sec.  1.170A-16(f)(6) would require a partnership 
or S corporation to file a completed Form 8283 to be considered to 
satisfy the requirements of section 170(f)(19)(A)(i). Even assuming 
that this provision affects a substantial number of small entities, it 
will not have a significant economic impact because it simply requires 
contributing partnerships and contributing S corporations to put a 
small amount of additional information on a form they are already 
required to file.
    Fourth, proposed Sec.  1.170A-16(f)(4)(iii) would require all 
partners and shareholders of S corporations who receive an allocation 
of a noncash charitable contribution to file a separate Form 8283. Many 
of these partners and shareholders will be individuals, not small 
entities. However, even assuming that this provision affects a 
substantial number of small entities, it will not have a significant 
economic impact. The partnership or S corporation will provide the 
partner or shareholder with all, or substantially all, of the 
information to be reported on the separate Form 8283; this information 
will be contained either on the partnership's or S corporation's Form 
8283 or the Schedule K-1 issued to the partner or shareholder. 
Accordingly, in most cases partners and shareholders will simply be 
transcribing information provided to them onto the separate Form 8283.
    For the reasons stated, a regulatory flexibility analysis under the 
Regulatory Flexibility Act is not required. The Treasury Department and 
the IRS invite comments on the impact of the proposed regulations on 
small entities.
    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel for the Office of Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

III. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandate Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). These 
proposed regulations do not include any Federal mandate that may result 
in expenditures by State, local, or Tribal governments or by the 
private sector in excess of that threshold.

IV. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications and do not impose substantial, direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

V. Executive Order 13175: Consultation and Coordination With Indian 
Tribal Governments

    Executive Order 13175 (Consultation and Coordination With Indian 
Tribal Governments) prohibits an agency from publishing any rule that 
has Tribal implications if the rule either imposes substantial, direct 
compliance costs on Indian Tribal governments, and is not required by 
statute, or preempts Tribal law, unless the agency meets the 
consultation and funding requirements of section 5 of the Executive 
order. This proposed rule does not have substantial direct effects on 
one or more federally recognized Indian tribes and does not impose 
substantial direct compliance costs on Indian Tribal governments within 
the meaning of the Executive order.

VI. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

[[Page 80931]]

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to comments that are submitted timely to 
the IRS as prescribed in the preamble under the ADDRESSES section. The 
Treasury Department and the IRS request comments on all aspects of the 
proposed regulations. Any electronic comments submitted, and any paper 
comments submitted, will be made available at https://www.regulations.gov or upon request. Once submitted to the Federal 
eRulemaking Portal, comments cannot be edited or withdrawn.
    Announcement 2023-16, 2023-20 I.R.B. 854 (May 15, 2023), provides 
that public hearings will be conducted in person, although the IRS will 
continue to provide a telephonic option for individuals who wish to 
attend or testify at a hearing by telephone. Any telephonic hearing 
will be made accessible to people with disabilities.
    A public hearing has been scheduled for January 3, 2024, beginning 
at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 
Constitution Avenue NW, Washington, DC, unless no outlines are received 
by December 20, 2023. Due to building security procedures, visitors 
must enter at the Constitution Avenue entrance. In addition, all 
visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. Participants may alternatively attend the public hearing by 
telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to comment by telephone at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed as 
well as the time to be devoted to each topic by December 20, 2023, as 
prescribed in the preamble under the ADDRESSES section.
    A period of ten minutes will be allocated to each person for making 
comments. After the deadline for receiving outlines has passed, the IRS 
will prepare an agenda containing the schedule of speakers. If no 
outline of the topics to be discussed at the hearing is received by 
December 20, 2023, the public hearing will be cancelled. If the public 
hearing is cancelled, a notice of cancellation of the public hearing 
will be published in the Federal Register. Copies of the agenda will be 
available free of charge at the hearing, and via the Federal 
eRulemaking Portal (https://www.regulations.gov) under the title of 
Supporting & Related Material. Copies of the agenda will also be 
available by emailing a request to <a href="/cdn-cgi/l/email-protection#f5858097999c969d9094879c9b9286b59c8786db929a83"><span class="__cf_email__" data-cfemail="b8c8cddad4d1dbd0ddd9cad1d6dfcbf8d1cacb96dfd7ce">[email protected]</span></a>. Please put 
``REG-112916-23 Agenda Request'' in the subject line of the email.
    Individuals who want to testify in person at the public hearing 
must send an email to <a href="/cdn-cgi/l/email-protection#24545146484d474c4145564d4a4357644d56570a434b52"><span class="__cf_email__" data-cfemail="a6d6d3c4cacfc5cec3c7d4cfc8c1d5e6cfd4d588c1c9d0">[email protected]</span></a> to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-112916-23 and the language ``TESTIFY In 
Person.'' For example, the subject line may say: Request to TESTIFY In 
Person at Hearing for REG-112916-23.
    Individuals who want to testify by telephone at the public hearing 
must send an email to <a href="/cdn-cgi/l/email-protection#e9999c8b85808a818c889b80878e9aa9809b9ac78e869f"><span class="__cf_email__" data-cfemail="85f5f0e7e9ece6ede0e4f7ecebe2f6c5ecf7f6abe2eaf3">[email protected]</span></a> to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-112916-23 and the language 
``TESTIFY Telephonically.'' For example, the subject line may say: 
Request to TESTIFY Telephonically at Hearing for REG-112916-23.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to <a href="/cdn-cgi/l/email-protection#f08085929c999398959182999e9783b0998283de979f86"><span class="__cf_email__" data-cfemail="45353027292c262d2024372c2b2236052c37366b222a33">[email protected]</span></a> to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number REG-112916-23 and the language 
``ATTEND In Person.'' For example, the subject line may say: Request to 
ATTEND Hearing In Person for REG-112916-23. Individuals who want to 
attend the public hearing by telephone without testifying must also 
send an email to <a href="/cdn-cgi/l/email-protection#601015020c090308050112090e0713200912134e070f16"><span class="__cf_email__" data-cfemail="334346515f5a505b5652415a5d5440735a41401d545c45">[email protected]</span></a> to receive the telephone number 
and access code for the hearing. The subject line of the email must 
contain the regulation number REG-112916-23 and the language ``ATTEND 
Hearing Telephonically.'' For example, the subject line may say: 
Request to ATTEND Hearing Telephonically for REG-112916-23. Requests to 
attend the public hearing must be received by 5 p.m. ET on December 29, 
2023.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during a hearing please contact the 
Publications and Regulations Branch of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
<a href="/cdn-cgi/l/email-protection#45353027292c262d2024372c2b2236052c37366b222a33"><span class="__cf_email__" data-cfemail="d5a5a0b7b9bcb6bdb0b4a7bcbbb2a695bca7a6fbb2baa3">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) by December 28, 2023.

Statement of Availability of IRS Documents

    IRS notices and other guidance cited in this preamble are published 
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are 
available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at https://www.irs.gov.

Drafting Information

    The principal authors of these proposed are Elizabeth Boone and 
Hannah Kim, Office of the Associate Chief Counsel (Income Tax & 
Accounting), IRS, and Benjamin Weaver, Office of the Associate Chief 
Counsel (Passthroughs & Special Industries), IRS. However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by:
0
1. Adding an entry for Sec.  1.170A-14 in numerical order;
0
2. Revising the entry for Sec.  1.170A-16;
0
3. Adding an entry for Sec.  1.706-3 in numerical order; and
0
4. Revising the entry for Sec.  1.706-4.
    The additions and revisions read as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.170A-14 also issued under 26 U.S.C. 170(f)(11) and 
170(h)(7).
* * * * *
    Section 1.170A-16 also issued under 26 U.S.C. 170(f)(11), 
170(f)(19), 170(h)(7)(G), 6001, and 6011.
* * * * *
    Section 1.706-3 also issued under 26 U.S.C. 170(h)(7)(G).
* * * * *
    Section 1.706-4 also issued under 26 U.S.C. 170(h)(7)(G).
* * * * *
0
Par. 2. Section 1.170A-14 is amended by:
0
1. Revising paragraph (a);
0
2. Redesignating paragraph (j) as paragraph (o) and adding new 
paragraph (j);
0
3. Adding paragraphs (k) through (n); and
0
4. Revising newly designated paragraph (o).
    The additions and revisions read as follows:

[[Page 80932]]

Sec.  1.170A-14  Qualified conservation contributions.

    (a) Qualified conservation contributions. A deduction under section 
170 of the Internal Revenue Code (Code) is generally not allowed for a 
charitable contribution of any interest in property that consists of 
less than the donor's entire interest in the property other than 
certain transfers in trust (see Sec.  1.170A-6 relating to charitable 
contributions in trust and Sec.  1.170A-7 relating to contributions not 
in trust of partial interests in property). However, a deduction may be 
allowed under section 170(f)(3)(B)(iii) for the value of a qualified 
conservation contribution if the requirements of this section are met 
and the contribution is not a disallowed qualified conservation 
contribution within the meaning of paragraph (j) of this section. A 
qualified conservation contribution is the contribution of a qualified 
real property interest to a qualified organization exclusively for 
conservation purposes. To be eligible for a deduction under section 
170(h) and this section, the conservation purpose must be protected in 
perpetuity.
* * * * *
    (j) Disallowance of certain deductions for contributions by 
partnerships and S corporations that exceed 2.5 times the sum of 
relevant bases--(1) In general. This paragraph (j) applies the rules of 
section 170(h)(7), which disallow a deduction for certain qualified 
conservation contributions, as defined in section 170(h)(1) and this 
section, made by, or allocated to, partnerships or S corporations (as 
defined in section 1361(a)(1) of the Code) if the amount of the 
qualified conservation contribution exceeds 2.5 times the sum of the 
relevant bases, as determined by this paragraph (j) and paragraphs (k) 
through (m) of this section (Disallowance Rule). See paragraph (n) of 
this section for certain exceptions. See paragraph (j)(3) of this 
section for definitions of terms used in this paragraph (j) and 
paragraphs (k) through (n) of this section.
    (2) Application--(i) Contributing partnerships and contributing S 
corporations. Except as provided in paragraph (n) of this section, a 
qualified conservation contribution by a contributing partnership or a 
contributing S corporation is a disallowed qualified conservation 
contribution if the amount of the qualified conservation contribution 
exceeds 2.5 times the sum of each of the contributing partnership's or 
contributing S corporation's ultimate member's relevant basis as 
determined under this paragraph (j) and paragraphs (k) through (m) of 
this section.
    (ii) Upper-tier partnerships and upper-tier S corporations. Except 
as provided in paragraph (n) of this section, an allocated portion 
received by an upper-tier partnership or upper-tier S corporation is a 
disallowed qualified conservation contribution if either the 
contribution is a disallowed qualified conservation contribution with 
respect to the partnership that allocated the allocated portion to the 
upper-tier partnership or upper-tier S corporation, or such allocated 
portion exceeds 2.5 times the sum of each of that upper-tier 
partnership's or upper-tier S corporation's ultimate member's relevant 
basis as determined under this paragraph (j) and paragraphs (k) through 
(m) of this section.
    (3) Definitions. The following definitions apply for purposes of 
this paragraph (j) and paragraphs (k) through (n) of this section:
    (i) Allocated portion. In the case of an upper-tier partnership or 
upper-tier S corporation that receives, directly or indirectly, a 
distributive share of a qualified conservation contribution, the phrase 
allocated portion means the amount of such distributive share.
    (ii) Amount of qualified conservation contribution. The amount of a 
contributing partnership's or contributing S corporation's qualified 
conservation contribution is the amount claimed as a qualified 
conservation contribution on the return of the contributing partnership 
or contributing S corporation for the taxable year in which the 
contribution is made. If the contributing partnership or contributing S 
corporation files an amended return or administrative adjustment 
request under section 6227 of the Code claiming a different amount with 
respect to the qualified conservation contribution, the rules of this 
section must be re-applied with respect to such different amount to 
determine the application of section 170(h)(7) and this section.
    (iii) Contributing partnership. The term contributing partnership 
means a partnership that makes a qualified conservation contribution.
    (iv) Contributing S corporation. The term contributing S 
corporation means an S corporation that makes a qualified conservation 
contribution.
    (v) Direct interest. The term direct interest refers to an 
ownership interest in a contributing partnership, upper-tier 
partnership, contributing S corporation, or upper-tier S corporation 
that is held directly, or through an entity disregarded as separate 
from its owner for Federal income tax purposes, a qualified subchapter 
S subsidiary as defined in section 1361(b)(3), or through a grantor 
trust (under subpart E of part 1 of subchapter J of chapter 1 of the 
Code). In the case of a partner that is a C corporation (as defined in 
section 1361(a)(2)), non-grantor trust, or an estate, or an S 
corporation shareholder that is a non-grantor trust or an estate, the 
direct interest in the partnership or S corporation, as applicable, is 
held by the C corporation, non-grantor trust, or estate; the C 
corporation's shareholders, trust beneficiaries, and estate 
beneficiaries are not considered to hold any interest in the 
partnership or S corporation, as applicable, for purposes of this 
paragraph (j) and paragraphs (k) through (n) of this section.
    (vi) Directly. An ownership interest is held directly if it is not 
held through one or more upper-tier partnerships or upper-tier S 
corporations. A distributive share or pro rata share of a qualified 
conservation contribution is received directly if it does not pass 
through one or more upper-tier partnerships or upper-tier S 
corporations.
    (vii) Disallowed qualified conservation contribution. The term 
disallowed qualified conservation contribution means a qualified 
conservation contribution or allocated portion for which no deduction 
is allowed pursuant to section 170(h)(7) and this paragraph (j).
    (viii) Indirect interest. The term indirect interest refers to an 
ownership interest in a contributing partnership, contributing S 
corporation, upper-tier partnership, or upper-tier S corporation held 
through an upper-tier S corporation or one or more upper-tier 
partnerships.
    (ix) Indirectly. An ownership interest is held indirectly if it is 
held through one or more upper-tier partnerships or upper-tier S 
corporations. A distributive share or pro rata share of a qualified 
conservation contribution is received indirectly if it passes through 
one or more upper-tier partnerships or upper-tier S corporations.
    (x) Ultimate member. The term ultimate member means, with respect 
to any partnership or S corporation, any partner (that is not itself a 
partnership or S corporation) or S corporation shareholder that 
receives a distributive share or pro rata share, directly or 
indirectly, of a qualified conservation contribution. Thus, ultimate 
members will either be partners holding a direct interest in a 
partnership, which may be the contributing partnership or an upper-tier 
partnership, or shareholders holding a direct interest in an S 
corporation, which may be the contributing S corporation or an upper-
tier S corporation. Upper-tier S

[[Page 80933]]

corporations and upper-tier partnerships themselves are not considered 
ultimate members.
    (xi) Upper-tier partnership. The term upper-tier partnership means 
a partnership that receives an allocated portion.
    (xii) Upper-tier S corporation. The term upper-tier S corporation 
means an S corporation that receives an allocated portion.
    (4) Effect of Disallowance Rule--(i) If the Disallowance Rule 
applies to a contributing partnership or contributing S corporation. If 
a contributing partnership's or contributing S corporation's qualified 
conservation contribution is a disallowed qualified conservation 
contribution under this paragraph (j), then:
    (A) Any upper-tier partnership's or upper-tier S corporation's 
allocated portion of such contribution is a disallowed qualified 
conservation contribution, regardless of whether such allocated portion 
exceeds 2.5 times the sum of each of the upper-tier partnership's or 
upper-tier S corporation's ultimate member's relevant basis; and
    (B) No person (whether holding a direct or indirect interest in 
such contributing partnership or contributing S corporation) may claim 
a deduction under any provision of the Code with respect to any amount 
of such disallowed qualified conservation contribution, regardless of 
whether that person's distributive share or pro rata share of the 
disallowed qualified conservation contribution exceeds 2.5 times its 
relevant basis.
    (ii) If the Disallowance Rule does not apply to a contributing 
partnership or contributing S corporation. If a contributing 
partnership's or contributing S corporation's qualified conservation 
contribution is not a disallowed qualified conservation contribution 
under this paragraph (j), then:
    (A) The distributive share or pro rata share of any ultimate member 
holding a direct interest in the contributing partnership or 
contributing S corporation is not a disallowed qualified conservation 
contribution; and
    (B) Any upper-tier partnership or upper-tier S corporation that 
receives an allocated portion of such qualified conservation 
contribution must separately apply the rules of section 170(h)(7) and 
this paragraph (j) and paragraphs (k) through (m) of this section to 
determine whether that upper-tier partnership's or upper-tier S 
corporation's allocated portion is a disallowed qualified conservation 
contribution.
    (iii) If the Disallowance Rule applies to an upper-tier partnership 
or an upper-tier S corporation. If an upper-tier partnership's or 
upper-tier S corporation's allocated portion is a disallowed qualified 
conservation contribution under this paragraph (j), then:
    (A) Any subsequent upper-tier partnership's or upper-tier S 
corporation's allocated portion of such allocated portion is a 
disallowed qualified conservation contribution, regardless of whether 
the subsequent upper-tier partnership's or upper-tier S corporation's 
allocated portion exceeds 2.5 times the sum of each of subsequent 
upper-tier partnership's or upper-tier S corporation's ultimate 
member's relevant basis; and
    (B) No person holding a direct or indirect interest in that upper-
tier partnership or upper-tier S corporation may claim a deduction 
under any provision of the Code with respect to any amount of that 
upper-tier partnership's or upper-tier S corporation's allocated 
portion, regardless of whether that person's distributive share or pro 
rata share of the allocated portion exceeds 2.5 times its relevant 
basis. However, this does not affect the application of this paragraph 
(j) and paragraphs (k) through (m) of this section to another partner 
of the contributing partnership; for example, if the qualified 
conservation contribution is not a disallowed qualified conservation 
contribution with respect to the contributing partnership, then the 
distributive share of such contribution of an ultimate member holding a 
direct interest in the contributing partnership is not a disallowed 
qualified conservation contribution, notwithstanding that the qualified 
conservation contribution is a disallowed qualified conservation 
contribution with respect to one or more upper-tier partnerships or 
upper-tier S corporations.
    (iv) If the Disallowance Rule does not apply to an upper-tier 
partnership or upper-tier S corporation. If an upper-tier partnership's 
or upper-tier S corporation's allocated portion is not a disallowed 
qualified conservation contribution under this paragraph (j), then:
    (A) The distributive share or pro rata share of such allocated 
portion of any ultimate member holding a direct interest in the upper-
tier partnership or upper-tier S corporation is not a disallowed 
qualified conservation contribution; and
    (B) Any subsequent upper-tier partnership or upper-tier S 
corporation that receives an allocated portion of such allocated 
portion must separately apply the rules of section 170(h)(7) and this 
paragraph (j) and paragraphs (k) through (m) of this section to 
determine whether that subsequent upper-tier partnership's or upper-
tier S corporation's allocated portion is treated as a disallowed 
qualified conservation contribution.
    (5) No inference. There is no presumption that a qualified 
conservation contribution that is not a disallowed qualified 
conservation contribution as defined in paragraph (j)(3)(vii) of this 
section is compliant with section 170, any other section of the Code, 
the regulations, or any other guidance. Compliance with section 
170(h)(7) and this paragraph (j) and paragraphs (k) through (n) of this 
section is not a safe harbor for purposes of any other provision of law 
or with respect to the value of the contribution. Such transactions are 
subject to adjustment or disallowance for any other reason, including 
failure to satisfy the other requirements of section 170 and 
overvaluation of the contribution. In addition, taxpayers who engage in 
such transactions may be required to disclose under Sec.  1.6011-4 the 
transactions as listed transactions.
    (6) Examples. The following examples illustrate the rules of this 
paragraph (j). For these three examples in this paragraph (j)(6), 
assume that the partnership allocations comply with the rules of 
subchapter K of chapter 1 of the Code, and that the exceptions in 
paragraph (n) of this section do not apply.
    (i) Example 1: Disallowed qualified conservation contribution--(A) 
Facts. A, an individual, and B, a C corporation, form AB Partnership, a 
partnership for Federal income tax purposes. AB Partnership acquires 
real property. Two years later, AB Partnership makes a qualified 
conservation contribution with respect to the property and claims a 
contribution of $100X on its return. AB Partnership allocates the 
contribution equally to A and B. A's relevant basis is $30X, and B's 
relevant basis is $8X.
    (B) Analysis. A and B are the ultimate members of AB Partnership 
because they each receive a distributive share of the qualified 
conservation contribution and are not partnerships or S corporations. 
The claimed amount of AB Partnership's qualified conservation 
contribution is $100X, which exceeds 2.5 times the sum of A's and B's 
relevant bases, which is $95X ($95X = 2.5 x (A's $30X relevant basis + 
B's $8X relevant basis)). Therefore, AB Partnership's contribution is a 
disallowed qualified conservation contribution. No person may claim any

[[Page 80934]]

deduction with respect to this contribution, even though A's $50X 
distributive share of the contribution does not exceed 2.5 times A's 
$30X relevant basis.
    (ii) Example 2: Not a disallowed qualified conservation 
contribution--(A) Facts. Individuals C and D form CD Partnership, a 
partnership for Federal income tax purposes. CD Partnership acquires 
real property. Two years later, CD Partnership makes a qualified 
conservation contribution with respect to the property and claims a 
contribution of $100X on its return. CD Partnership allocates the 
contribution $5X to C and $95X to D. C's relevant basis is $6X, and D's 
relevant basis is $34X.
    (B) Analysis. C and D are the ultimate members of CD Partnership 
because they each receive a distributive share of the qualified 
conservation contribution and are not partnerships or S corporations. 
The claimed amount of CD Partnership's qualified conservation 
contribution is $100X, which does not exceed 2.5 times the sum of C's 
and D's relevant bases, which is also $100X ($100X = 2.5 x (C's $6X 
relevant basis + D's $34X relevant basis)). Therefore, CD Partnership's 
contribution is not a disallowed qualified conservation contribution 
(that is, not disallowed by section 170(h)(7) and this paragraph (j)) 
with respect to CD Partnership, C, or D, even though D's $95X 
distributive share of the contribution exceeds 2.5 times D's $34X 
relevant basis.
    (iii) Example 3: Tiered partnerships--(A) Facts. Individuals E and 
F form UTP Partnership, a partnership for Federal income tax purposes. 
UTP Partnership and G, a C corporation, form LTP Partnership, a 
partnership for Federal income tax purposes. LTP Partnership acquires 
real property. Two years later, LTP Partnership makes a qualified 
conservation contribution with respect to the property and claims a 
contribution of $100X on its return. LTP Partnership allocates the 
contribution $5X to G and $95X to UTP Partnership. UTP Partnership 
allocates its $95X portion of the contribution $45X to E and $50X to F. 
G's relevant basis is $10X, E's relevant basis is $11X, and F's 
relevant basis is $21X.
    (B) Analysis for LTP Partnership. The ultimate members of LTP 
Partnership are G, E, and F because they each receive a distributive 
share of the qualified conservation contribution and are not a 
partnership or S corporation. Because UTP Partnership is a partnership, 
it is not an ultimate member of LTP Partnership, even though it 
receives a distributive share of the qualified conservation 
contribution. The amount of LTP Partnership's qualified conservation 
contribution is $100X, which does not exceed 2.5 times the sum of each 
of the ultimate member's relevant basis, which is $105X ($105X = 2.5 x 
(G's $10X relevant basis + E's $11X relevant basis + F's $21X relevant 
basis)). Therefore, LTP Partnership's contribution is not a disallowed 
qualified conservation contribution (that is, is not disallowed by 
section 170(h)(7) and this paragraph (j)) with respect to LTP 
Partnership and G.
    (C) Analysis for UTP Partnership. Because UTP Partnership receives 
an allocated portion, UTP Partnership must apply this paragraph (j) and 
paragraphs (k) through (m) of this section to determine whether its 
allocated portion is a disallowed qualified conservation contribution. 
The ultimate members of UTP Partnership are E and F because they each 
receive a distributive share of UTP Partnership's allocated portion and 
are not partnerships or S corporations. The amount of UTP Partnership's 
allocated portion of LTP Partnership's qualified conservation 
contribution is $95X, which exceeds 2.5 times the sum of E's and F's 
relevant bases, which is $80X ($80X = 2.5 x (E's $11X relevant basis + 
F's $21X relevant basis)). Therefore, UTP Partnership's allocated 
portion of LTP Partnership's contribution is a disallowed qualified 
conservation contribution with respect to UTP Partnership, E, and F. No 
partner of UTP Partnership may claim any deduction with respect to this 
contribution, even though F's $50X distributive share of the 
contribution does not exceed 2.5 times F's $21X relevant basis. This 
does not affect the determination that G's distributive share of the 
contribution is not a disallowed qualified conservation contribution.
    (k) Determination of relevant basis. For purposes of this section, 
the term relevant basis means, with respect to any ultimate member, the 
portion of such ultimate member's modified basis (as determined under 
paragraph (l) of this section) that is allocable (under the rules of 
paragraph (m) of this section) to the portion of the real property with 
respect to which the qualified conservation contribution is made.
    (l) Determination of modified basis--(1) In general. In the case of 
an ultimate member holding a direct interest in a partnership, the 
ultimate member's modified basis is determined by such partnership 
immediately before the qualified conservation contribution is made in 
the manner described in paragraph (l)(2) of this section. In the case 
of an ultimate member holding a direct interest in an S corporation, 
the ultimate member's modified basis is determined by such S 
corporation in the manner described in paragraph (l)(3) of this 
section.
    (2) Partners in partnerships--(i) Computation. For purposes of this 
section, the term modified basis means, with respect to any ultimate 
member that is a direct partner in either a contributing partnership or 
an upper-tier partnership, such ultimate member's adjusted basis in its 
interest in the partnership in which the ultimate member holds a direct 
interest as of the beginning of the first day of the partnership's 
taxable year in which the qualified conservation contribution is made, 
with adjustments as determined under paragraphs (l)(2)(ii) through (v) 
of this section. However, if the ultimate member was not a partner as 
of the beginning of the first day of the partnership's taxable year in 
which the qualified conservation contribution is made, then the term 
modified basis means such ultimate member's adjusted basis in its 
interest in the partnership immediately after the transaction that 
resulted in the ultimate member becoming a partner, with adjustments as 
determined under paragraphs (l)(2)(ii) through (v) of this section. The 
adjustments under paragraphs (l)(2)(ii) through (v) of this section 
must be made in the order in which they are listed.
    (ii) Step 1. First, the computation of modified basis must start 
with the ultimate member's adjusted basis under paragraph (l)(2)(i) of 
this section and then reflect an increase for any contributions made by 
the ultimate member to the partnership during the portion of the year 
commencing with the beginning of the taxable year of the partnership 
and ending immediately prior to the time of day at which the qualified 
conservation contribution is made as provided in section 722 of the 
Code.
    (iii) Step 2. Second, the amount determined under paragraph 
(l)(2)(ii) of this section must be adjusted, as provided in section 705 
of the Code, by the ultimate member's hypothetical distributive share 
of partnership items attributable to the portion of the year commencing 
with the beginning of the taxable year of the partnership and ending 
immediately prior to the time of day at which the qualified 
conservation contribution is made. In making this determination, the 
partnership must apply the rules of Sec.  1.706-4 and apply a 
hypothetical interim closing method to allocate the partnership's items 
attributable to the portion of the year commencing with the beginning 
of the taxable year of the partnership and ending immediately prior to 
the time of

[[Page 80935]]

day at which the qualified conservation contribution is made. The 
partnership cannot apply any convention in Sec.  1.706-4(c) to the 
hypothetical determination of the partners' distributive shares, but 
rather must perform the calculation as though the determination 
occurred immediately prior to the time of day at which the qualified 
conservation contribution is made. This hypothetical determination of 
the partners' distributive shares is only for purposes of calculating 
modified basis. This paragraph (l) does not require the partnership to 
use the interim closing method with respect to the determination of its 
partners' actual distributive shares of partnership items of income, 
gain, loss, deduction, and credit for the taxable year in which the 
qualified conservation contribution is made or otherwise. See Sec.  
1.706-4 for applicable rules for the determination of a partner's 
distributive share when a partner's interest varies during a 
partnership taxable year.
    (iv) Step 3. Third, the amount determined under paragraph 
(l)(2)(iii) of this section must be reduced (but not below zero) by any 
distributions made by the partnership to the ultimate member during the 
portion of the year commencing with the beginning of the taxable year 
of the partnership and ending immediately prior to the time of day at 
which the qualified conservation contribution is made as provided in 
section 733 of the Code.
    (v) Step 4. Fourth, the amount determined under paragraph 
(l)(2)(iv) of this section must be reduced by the full amount of the 
ultimate member's share of Sec.  1.752-1 liabilities of any partnership 
(including a lower-tier partnership). The remaining amount is such 
ultimate member's modified basis. Thus, an ultimate member's modified 
basis may be less than zero.
    (3) S corporation shareholder--(i) Computation. For purposes of 
this section, the term modified basis means, with respect to any 
ultimate member that is a shareholder of either a contributing S 
corporation or an upper-tier S corporation, such ultimate member's 
adjusted basis in its shares in the S corporation as of the end of the 
S corporation's taxable year in which the qualified conservation 
contribution is made, with adjustments as determined under paragraphs 
(l)(3)(ii) and (iii) of this section. However, if the ultimate member 
was not a shareholder at the end of the S corporation's taxable year in 
which the qualified conservation contribution is made, then the term 
modified basis means such ultimate member's adjusted basis in its 
shares in the S corporation immediately prior to the transaction that 
terminated its interest in the S corporation, with adjustments as 
determined under paragraphs (l)(3)(ii) and (iii) of this section. 
Modified basis does not include the ultimate member's adjusted basis of 
any indebtedness of the S corporation to the ultimate member. The 
adjustments under paragraphs (l)(3)(ii) and (iii) of this section must 
be made in the order in which they are listed.
    (ii) Step 1. First, the computation of modified basis must start 
with the ultimate member's adjusted basis under paragraph (l)(3)(i) of 
this section, and then reflect an increase for the extent to which the 
ultimate member's adjusted basis reflects a reduction as a result of 
the qualified conservation contribution. Thus, the ultimate member's 
modified basis with respect to a qualified conservation contribution 
does not reflect any reduction for the ultimate member's pro rata share 
of the S corporation's basis in the conservation easement or other 
property contributed in the qualified conservation contribution.
    (iii) Step 2. Second, the amount determined under paragraph 
(l)(3)(ii) of this section must be multiplied by the number of days 
during the S corporation's taxable year in which the ultimate member 
was a shareholder and divided by the total number of days during the S 
corporation's taxable year. The resulting amount is such ultimate 
member's modified basis.
    (4) Examples. The following examples illustrate the provisions of 
this paragraph (l). For the three examples in this paragraph (l)(4), 
assume that the exceptions in paragraph (n) of this section do not 
apply.
    (i) Example 1--(A) Facts. AB Partnership is a calendar-year 
partnership for Federal income tax purposes whose partners are A and B, 
each of whom is an individual and has a 50 percent interest in income, 
gain, loss, and deduction. Several years ago, B contributed property to 
AB Partnership subject to a Sec.  1.752-1 liability. At the beginning 
of AB Partnership's 2024 taxable year (the beginning of the day on 
January 1, 2024), A's adjusted basis in its interest in AB Partnership 
is $19X, and B's adjusted basis in its interest in AB Partnership is 
$17X. At 10:01 a.m. on August 29, 2024, AB Partnership makes a 
qualified conservation contribution. On August 29, 2024, the amount of 
the Sec.  1.752-1 liability is $10X and is allocated under the rules of 
section 752 to A. During 2024, there were no variations in any 
partner's interests in AB Partnership within the meaning of section 
706. During 2024, AB Partnership earned $8X of ordinary income and 
sustained ($4X) of capital loss in the ordinary course of its business, 
both of which are allocated equally to A and B. Within 2024, AB 
Partnership earned $6X of ordinary income, and sustained ($4X) of 
capital loss between the beginning of the day on January 1, 2024, and 
10:00 a.m. on August 29, 2024, and AB Partnership earned $2X of 
ordinary income, and sustained $0X of capital loss between 10:01 a.m. 
on August 29, 2024, and the end of the day on December 31, 2024. Other 
than the qualified conservation contribution, none of AB Partnership's 
items are extraordinary items within the meaning of Sec.  1.706-
4(e)(2). In April 2024, AB Partnership distributed $1X cash to A. In 
November 2024, B contributed $2X cash to AB Partnership.
    (B) Analysis. The ultimate members of AB Partnership are A and B 
because they each receive a distributive share of the qualified 
conservation contribution and are not partnerships or S corporations. 
To determine A's and B's modified bases, AB Partnership must start with 
A's and B's adjusted bases in the AB Partnership as of the beginning of 
the first day of the taxable year of AB Partnership and then make the 
adjustments required under paragraphs (l)(2)(ii) through (v) of this 
section. Accordingly, the computation of A's beginning modified basis 
begins with $19X, and the computation of B's modified basis begins with 
$17X. First, those amounts must be increased by any contributions 
between the beginning of the day on January 1, 2024, and 10:00 a.m. on 
August 29, 2024. Because there were none, after this step, the 
computation of A's modified basis remains at $19X and the computation 
of B's modified basis remains at $17X. Then these amounts must be 
adjusted as provided in section 705 by A's and B's hypothetical 
distributive share of AB Partnership's items attributable to the 
portion of the year between the beginning of the day on January 1, 
2024, and 10:00 a.m. on August 29, 2024. Thus, the computations of A's 
and B's modified bases will each reflect an increase for their 
hypothetical $3X distributive share of the $6X ordinary income that AB 
Partnership earned between the beginning of the day on January 1, 2024, 
and 10:00 a.m. on August 29, 2024, and a decrease for their 
hypothetical ($2X) distributive share of the ($4X) capital loss that AB 
Partnership incurred between the beginning of the day on January 1, 
2024, and 10:00 a.m. on August 29, 2024. Therefore, after this step, 
the computation of A's modified basis

[[Page 80936]]

reflects an increase from $19X to $20X, and the computation of B's 
modified basis reflects an increase from $17X to $18X. Next, these 
amounts must be reduced by any distributions between the beginning of 
the day on January 1, 2024, and 10:00 a.m. on August 29, 2024. Thus, 
the computation of A's modified basis reflects a reduction from $20X to 
$19X. B did not receive any distribution, so the computation of B's 
modified basis remains at $18X. Finally, the full amount of A's and B's 
shares of Sec.  1.752-1 liabilities must be subtracted. Thus, the 
computation of A's modified basis reflects a reduction from $19X to 
$9X, which is A's modified basis. B's modified basis is $18X.
    (ii) Example 2--(A) Facts. CD Partnership, a partnership for 
Federal income tax purposes, is a calendar-year partnership using the 
calendar day convention under Sec.  1.706-4 whose partners on January 
1, 2024, are C and D, each of whom is an individual and has a 50 
percent interest in income, gain, loss, and deduction. On March 15, 
2024, C sells its interest to E, a C corporation. At 1:15 p.m. on 
September 15, 2024, CD Partnership makes a qualified conservation 
contribution. On September 21, 2024, D sells its interest to F, an 
individual. During 2024, CD Partnership earned $8X of ordinary income 
and sustained ($14X) of ordinary loss. Within 2024, CD Partnership 
earned all $8X of ordinary income in November and December, and 
sustained all ($14X) of ordinary loss in April through August. In May 
2024, D contributed $6X cash to CD Partnership, and E contributed 
property with a fair market value of $6X and basis of $3X. D and E are 
equal partners during the period in which they are both partners. CD 
Partnership made no distributions during 2024. CD Partnership had no 
Sec.  1.752-1 liabilities during 2024. In accordance with Sec.  1.706-
4(e)(2)(ix), CD Partnership treats its qualified conservation 
contribution as an extraordinary item allocable only to D and E, its 
partners at 1:15 p.m. on September 15, 2024. Other than the qualified 
conservation contribution, none of AB Partnership's items are 
extraordinary items within the meaning of Sec.  1.706-4(e)(2). CD 
Partnership uses the proration method under Sec.  1.706-4 to allocate 
its items among C, D, E, and F. Under the proration method, CD 
Partnership allocates each C, D, E, and F a distributive share of a 
portion of both the $8X ordinary income and the ($14X) ordinary loss. 
D's adjusted basis in its interest in CD Partnership at the beginning 
of CD Partnership's 2024 taxable year (the beginning of the day on 
January 1, 2024), is $8X. E's adjusted basis in its interest in CD 
Partnership immediately after E acquires C's interest in CD Partnership 
is $6X.
    (B) Analysis. The ultimate members of CD Partnership are D and E 
because they each receive a distributive share of the qualified 
conservation contribution and are not partnerships or S corporations. 
To determine D's and E's modified bases, CD Partnership must start with 
D's and E's adjusted bases in CD Partnership as of the beginning of the 
day on January 1, 2024, and then make the adjustments required under 
paragraphs (l)(2)(ii) through (v) of this section. However, because E 
was not a partner as of the beginning of the day on January 1, 2024, CD 
Partnership must start with E's adjusted basis immediately after E's 
purchase of C's interest in CD Partnership. Accordingly, the 
computation of D's modified basis begins with $8X, and the computation 
of E's modified basis begins with $6X. Then, these amounts must be 
increased by any contributions made by D or E, respectively, to CD 
Partnership between the beginning of the day on January 1, 2024, and 
1:14 p.m. on September 15, 2024. Therefore, the computation of D's 
modified basis reflects an increase from $8X to $14X (for D's $6X 
contribution of cash to CD Partnership in May 2024), and the 
computation of E's modified basis reflects an increase from $6X to $9X 
(for E's contribution of property to CD Partnership with a basis of $3X 
in May 2024). Next, these amounts must be adjusted as provided in 
section 705 by D's and E's hypothetical distributive share of CD 
Partnership's items attributable to the portion of the year between the 
beginning of the day on January 1, 2024, and 1:14 p.m. on September 15, 
2024. CD Partnership must perform the analysis using an interim closing 
method to a hypothetical variation at 1:14 p.m. on September 15, 2024, 
immediately prior to the qualified conservation contribution. The 
computation of D's modified basis will reflect an adjustment for its 
hypothetical distributive share of all CD Partnership's items incurred 
from the beginning of the day on January 1, 2024, through 1:14 p.m. on 
September 15, 2024. The computation of E's modified basis will reflect 
an adjustment for its hypothetical distributive share of all CD 
Partnership's items incurred from the end of the day on March 15, 2024, 
through 1:14 p.m. on September 15, 2024. For purposes of this paragraph 
(l)(4)(ii)(B) (Example 2), it does not matter that CD Partnership 
actually used the proration method to allocate its 2024 income. 
Instead, under this hypothetical calculation of the distributive share, 
the computation of D's and E's modified bases will each reflect a 
reduction for their 50 percent share of the ($14X) ordinary loss. 
Because none of CD Partnership's $8X of ordinary income was earned 
between the beginning of the day on January 1, 2024, and 1:14 p.m. on 
September 15, 2024, neither D's nor E's modified basis will reflect an 
increase for any amount of that income. Thus, after this step, the 
computation of D's modified basis reflects a reduction from $14X to 
$7X, and the computation of E's modified basis reflects a reduction 
from $9X to $2X. Then, these amounts must be reduced by any 
distributions between the beginning of the day on January 1, 2024, and 
1:14 p.m. on September 15, 2024. Because there were none, after this 
step, the computation of D's modified basis remains at $7X, and the 
computation of E's modified basis remains at $2X. Finally, the full 
amount of D's and E's shares of Sec.  1.752-1 liabilities must be 
subtracted. Because there were none, D's modified basis is $7X, and E's 
modified basis is $2X.
    (iii) Example 3--(A) Facts. HI Inc. is a calendar-year S 
corporation whose shareholders on January 1, 2024, are H and I, each of 
whom owns 50 percent of the shares. On May 1, 2024, H sells all of its 
stock to J. In June 2024, HI Inc. contributes a conservation easement 
that is a qualified conservation contribution on 400 acres of real 
property. HI Inc.'s adjusted basis in the conservation easement is $12X 
(which is different from HI Inc.'s adjusted basis in the 400 acres and 
also may be different from the value of the conservation easement). On 
July 1, 2024, I sells all of its stock to K. Under Sec.  1.1377-1, HI 
Inc. allocates its qualified conservation contribution \1/6\ to H, \1/
4\ to I, \1/3\ to J, and \1/4\ to K. Pursuant to the second sentence of 
section 1367(a)(2)(B), as a result of the qualified conservation 
contribution, H's adjusted basis in its shares is reduced by $2X, I's 
adjusted basis in its shares is reduced by $3X, J's adjusted basis in 
its shares is reduced by $4X, and K's adjusted basis in its shares is 
reduced by $3X. At the end of HI Inc.'s 2024 taxable year (the end of 
the day on December 31, 2024), J's adjusted basis in its shares is $15X 
and K's adjusted basis in its shares is $11X. Immediately prior to H's 
sale to J, H's adjusted basis in its shares was $8X. Immediately prior 
to I's sale to K, I's adjusted basis in its shares was $7X. Whether H, 
I, J, or K have adjusted basis in indebtedness of HI Inc., has no 
effect on the computation of their modified bases. H is an estate of a 
deceased

[[Page 80937]]

shareholder, and I, J, and K are individuals that are not nonresident 
aliens.
    (B) Analysis. The ultimate members of HI Inc. are H, I, J, and K, 
because they each receive a pro rata share of the qualified 
conservation contribution and are not partnerships or S corporations. 
To determine H's, I's, J's, and K's modified bases, HI Inc. must begin 
with each shareholder's adjusted basis in its shares as of the end of 
the day on December 31, 2024 (the end of the S corporation's taxable 
year in which it made the qualified conservation contribution). 
However, because H and I were not shareholders as of the end of the day 
on December 31, 2024, HI Inc. must begin with H's adjusted basis 
immediately before H's sale to J, and I's adjusted basis immediately 
before I's sale to K. Accordingly, the computation of H's modified 
basis begins with $8X, the computation of I's modified basis begins 
with $7X, the computation of J's modified basis begins with $15X, and 
the computation of K's modified basis begins with $11K. Next, HI Inc. 
must increase these amounts by the extent the adjusted bases were 
reduced as a result of the qualified conservation contribution. 
Accordingly, the computation of H's modified basis reflects an increase 
from $8X to $10X, the computation of I's modified basis reflects an 
increase from $7X to $10X, the computation of J's modified basis 
reflects an increase from $15X to $19X, and the computation of K's 
modified basis reflects an increase from $11X to $14X. Finally, HI Inc. 
must multiply each of these amounts by the number of days during 2024 
in which each ultimate member was a shareholder, and divide by 366 (the 
total number of days in HI Inc.'s 2024 taxable year). H was a 
shareholder for 122 days. Thus, H's modified basis is $3.33X ($10X x 
122/366). I was a shareholder for 183 days. Thus, I's modified basis is 
$5X ($10X x 183/366). J was a shareholder for 244 days. Thus, J's 
modified basis is $12.67X ($19X x 244/366). K was a shareholder for 183 
days. Thus, K's is $7X ($14X x 183/366).
    (m) Allocation of modified basis--(1) In general. An allocation of 
an ultimate member's modified basis to the portion of the real property 
with respect to which the qualified conservation contribution is made 
must be made in accordance with this paragraph (m). Rules for 
allocating an ultimate member's modified basis in a contributing 
partnership are provided in paragraph (m)(2) of this section. Rules for 
allocating an ultimate member's modified basis in a contributing S 
corporation are provided in paragraph (m)(3) of this section. Rules for 
allocating an ultimate member's modified basis in an upper-tier 
partnership are provided in paragraph (m)(4) of this section. Rules for 
allocating an ultimate member's modified basis in an upper-tier S 
corporation are provided in paragraph (m)(5) of this section. Records 
must be kept in accordance with paragraph (m)(6) of this section.
    (2) Determination of relevant basis for an ultimate member holding 
a direct interest in a contributing partnership--(i) Narrative rule. 
This paragraph (m)(2) applies in the case of an ultimate member holding 
a direct interest in a contributing partnership and provides that a 
contributing partnership must determine each such ultimate member's 
relevant basis as provided in this paragraph (m)(2). Relevant basis 
equals each ultimate member's modified basis as determined under 
paragraph (l)(2) of this section multiplied by a fraction--
    (A) The numerator of which is the ultimate member's share of the 
contributing partnership's adjusted basis in the portion of the real 
property with respect to which the qualified conservation contribution 
is made as determined under paragraph (m)(2)(ii) of this section; and
    (B) The denominator of which is the ultimate member's portion of 
the adjusted basis in all the contributing partnership's properties as 
determined under paragraph (m)(2)(iii) of this section.
    (ii) Ultimate member's share of the contributing partnership's 
adjusted basis in the portion of the real property with respect to 
which the qualified conservation contribution is made. For purposes of 
this paragraph (m)(2), an ultimate member's share of the contributing 
partnership's adjusted basis in the portion of the real property with 
respect to which the qualified conservation contribution is made equals 
the contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made (determined as of the time of day of the 
contribution) multiplied by a fraction--
    (A) The numerator of which is the ultimate member's distributive 
share of the qualified conservation contribution; and
    (B) The denominator of which is the total amount of the 
contributing partnership's qualified conservation contribution.
    (iii) Ultimate member's portion of the adjusted basis in all the 
contributing partnership's properties. For purposes of this paragraph 
(m)(2), an ultimate member's portion of the adjusted basis in all the 
contributing partnership's properties is equal to the sum of:
    (A) The ultimate member's share of the contributing partnership's 
adjusted basis in the portion of the real property with respect to 
which the qualified conservation contribution is made as determined 
under paragraph (m)(2)(ii) of this section; plus
    (B) The ultimate member's portion of the adjusted basis in all the 
contributing partnership's properties other than the portion of the 
real property with respect to which the qualified conservation 
contribution is made. To determine the ultimate member's portion of the 
adjusted basis in all the contributing partnership's properties, the 
contributing partnership must apportion among its partners in 
accordance with their interests in the partnership under section 704(b) 
its adjusted basis in each of its properties (except the portion of the 
real property with respect to which the qualified conservation 
contribution is made), using the adjusted bases immediately before the 
qualified conservation contribution, without duplication or omission of 
any property, and by treating the adjusted basis in each property as 
not less than zero.
    (iv) Formulaic rule. The rule of this paragraph (m)(2) is also 
expressed in the following formula:

Figure 1 to Paragraph (m)(2)(iv)
R = M x (T / (D + T))

Where:

R = Relevant basis.
M = Modified basis as determined under paragraph (l) of this 
section.
D = Ultimate member's portion of the adjusted basis in all the 
contributing partnership's properties (other than the portion of the 
real property with respect to which the qualified conservation 
contribution is made), determined by apportioning among the partners 
of the contributing partnership in accordance with their interests 
in the partnership under section 704(b) its adjusted basis in each 
of its properties (other than the portion of the real property with 
respect to which the qualified conservation contribution is made), 
using the adjusted bases immediately before the qualified 
conservation contribution, without duplication or omission of any 
property, and by treating the adjusted basis in each property as not 
less than zero.
T = Ultimate member's share of the contributing partnership's 
adjusted basis in the portion of the real property with respect to 
which the qualified conservation contribution is made, determined 
according to the following formula: A x (B / C).
A = Contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made.

[[Page 80938]]

B = Ultimate member's distributive share of the qualified 
conservation contribution.
C = Total amount of the contributing partnership's qualified 
conservation contribution.

    (3) Determination of relevant basis for an ultimate member holding 
a direct interest in a contributing S corporation--(i) Narrative rule. 
This paragraph (m)(3) applies in the case of an ultimate member holding 
a direct interest in a contributing S corporation and provides that a 
contributing S corporation must determine each such ultimate member's 
relevant basis as provided in this paragraph (m)(3). Relevant basis 
equals each ultimate member's modified basis as determined under 
paragraph (l)(3) of this section multiplied by a fraction--
    (A) The numerator of which is the ultimate member's pro rata 
portion of the contributing S corporation's adjusted basis in the 
portion of the real property with respect to which the qualified 
conservation contribution is made; and
    (B) The denominator of which is the ultimate member's pro rata 
portion of the adjusted basis in all the contributing S corporation's 
properties (including the portion of the real property with respect to 
which the qualified conservation contribution is made).
    (ii) Formulaic rule. The rule of this paragraph (m)(3) is also 
expressed in the following formula:

Figure 2 to Paragraph (m)(3)(ii)
R = M x (E / F)

Where:

R = Relevant basis.
M = Modified basis as determined under paragraph (l) of this 
section.
E = Ultimate member's pro rata portion of the contributing S 
corporation's adjusted basis in the portion of the real property 
with respect to which the qualified conservation contribution is 
made.
F = Ultimate member's pro rata portion of the adjusted basis in all 
the contributing S corporation's properties (including the portion 
of the real property with respect to which the qualified 
conservation contribution is made).

    (4) Determination of relevant basis for an ultimate member holding 
a direct interest in an upper-tier partnership--(i) In general. This 
paragraph (m)(4) applies in the case of an ultimate member holding a 
direct interest in an upper-tier partnership. Each such ultimate 
member's modified basis must be traced through all upper-tier 
partnerships to the contributing partnership, and the contributing 
partnership must determine the relevant basis. This involves a multi-
step process under which, beginning with the upper-tier partnership in 
which the ultimate member holds a direct interest, each upper-tier 
partnership must perform calculations, and then finally the 
contributing partnership must use those calculations to compute the 
ultimate member's relevant basis. For simplicity, this paragraph (m)(4) 
describes a situation in which there are two tiers of partnerships--a 
contributing partnership and an upper-tier partnership. In a situation 
involving more tiers, each partnership must apply the rules and 
principles of this paragraph (m)(4) iteratively to determine relevant 
basis.
    (ii) Upper-tier partnership--(A) Narrative rule. The upper-tier 
partnership must determine the portion of each ultimate member's 
modified basis that is allocable to the upper-tier partnership's 
interest in the partnership in which it holds a direct interest (in a 
situation involving only two tiers of partnerships, that will be the 
contributing partnership). This determination must be done in 
accordance with the principles of paragraph (m)(2) of this section, and 
the formula provided in paragraph (m)(4)(ii)(B) of this section. In 
other words, the formula provided in paragraph (m)(4)(ii)(B) is similar 
to the formula provided in paragraph (m)(2)(iv) of this section, except 
that, instead of determining the portion of modified basis that is 
allocable to the portion of the real property with respect to which the 
qualified conservation contribution is made, the formula in paragraph 
(m)(4)(ii)(B) determines the portion of modified basis that is 
allocable to the upper-tier partnership's interest in the next lower-
tier partnership. As explained in paragraph (m)(4)(iii) of this 
section, the contributing partnership will then use the amount 
determined under the formula in paragraph (m)(4)(ii)(B) to compute the 
portion of modified basis that is allocable to the portion of the real 
property with respect to which the qualified conservation contribution 
is made.
    (B) Formulaic rule. The rule of this paragraph (m)(4)(ii) is also 
expressed in the following formula:

Figure 3 to Paragraph (m)(4)(ii)(B)
G = M x (U / (J + U))

Where:

G = The portion of the ultimate member's modified basis that is 
allocable to the upper-tier partnership's interest in the 
contributing partnership.
M = Modified basis as determined under paragraph (l) of this 
section.
J = Ultimate member's portion of the adjusted basis in all the 
upper-tier partnership's properties (other than the upper-tier 
partnership's interest in the contributing partnership), determined 
by apportioning among the partners of the upper-tier partnership in 
accordance with their interests in the partnership under section 
704(b) its adjusted basis in each of its properties (other than the 
upper-tier partnership's interest in the contributing partnership), 
using the adjusted bases immediately before the qualified 
conservation contribution, without duplication or omission of any 
property, and by treating the adjusted basis in each property as not 
less than zero.
U = Ultimate member's share of the upper-tier partnership's adjusted 
basis in its interest in the contributing partnership, determined 
according to the following formula: H x (B / K).
H = Upper-tier partnership's adjusted basis in its interest in the 
contributing partnership.
B = Ultimate member's distributive share of the qualified 
conservation contribution.
K = Upper-tier partnership's allocated portion of the qualified 
conservation contribution.

    (iii) Contributing partnership--(A) Narrative rule. After 
completion of the computations under paragraph (m)(4)(ii) of this 
section, the contributing partnership must determine the portion of the 
amount determined under item G (see paragraph (m)(4)(ii)(B) of this 
section) with respect to each ultimate member that is allocable to the 
portion of the real property with respect to which the qualified 
conservation contribution is made. This determination must be done in 
accordance with the principles of paragraph (m)(2) of this section, and 
the formula provided in paragraph (m)(4)(iii)(B) of this section.
    (B) Formulaic rule. The rule of this paragraph (m)(4)(iii) is also 
expressed in the following formula:

Figure 5 to Paragraph (m)(4)(iii)(B)
R = G x (V / (L + V))

Where:

R = Relevant basis.
G = Amount determined with respect to item G as described under 
paragraph (m)(4)(ii)(B) of this section.
L = Upper-tier partnership's portion of adjusted basis in all the 
contributing partnership's properties (other than the portion of the 
real property with respect to which the qualified conservation 
contribution is made), determined by apportioning among the partners 
of the contributing partnership in accordance with their interests 
in the partnership under section 704(b) its adjusted basis in each 
of its properties (except the interest in the contributing 
partnership), using the adjusted bases immediately before the 
qualified conservation contribution, without duplication or omission 
of any property, and by treating the adjusted basis in each property 
as not less than zero.

[[Page 80939]]

V = Upper-tier partnership's share of the contributing partnership's 
adjusted basis in the portion of the real property with respect to 
which the qualified conservation contribution is made, determined 
according to the following formula: A x (K / C).
A = Contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made.
K = Upper-tier partnership's allocated portion of the qualified 
conservation contribution.
C = Total amount of the contributing partnership's qualified 
conservation contribution.

    (5) Determination of relevant basis for an ultimate member holding 
a direct interest in an upper-tier S corporation--(i) In general. This 
paragraph (m)(5) applies in the case of an ultimate member holding a 
direct interest in an upper-tier S corporation. Each such ultimate 
member's modified basis must be traced through the upper-tier S 
corporation and any upper-tier partnerships to the contributing 
partnership, and the contributing partnership must determine the 
relevant basis. This involves a multi-step process under which, 
beginning with the upper-tier S corporation, the upper-tier S 
corporation and any upper-tier partnerships must perform calculations, 
and then finally the contributing partnership must use those 
calculations to compute the ultimate member's relevant basis. For 
simplicity, this paragraph (m)(5) describes a situation in which there 
are two tiers--a contributing partnership and an upper-tier S 
corporation. In a situation involving more tiers, each partnership and 
the upper-tier S corporation must apply the rules and principles of 
this paragraph (m) iteratively to determine relevant basis.
    (ii) Upper-tier S corporation--(A) Narrative rule. The upper-tier S 
corporation must determine the portion of each ultimate member's 
modified basis that is allocable to the upper-tier S corporation's 
interest in the partnership in which it holds a direct interest (in a 
situation involving only two tiers, that will be the contributing 
partnership). This determination must be done in accordance with the 
principles of paragraph (m)(3) of this section, and the formula 
provided in paragraph (m)(5)(ii)(B) of this section. In other words, 
the formula provided in paragraph (m)(5)(ii)(B) is similar to the 
formula provided in paragraph (m)(3)(ii) of this section, except that, 
instead of determining the portion of modified basis that is allocable 
to the portion of the real property with respect to which the qualified 
conservation contribution is made, the formula in paragraph 
(m)(5)(ii)(B) determines the portion of modified basis that is 
allocable to the upper-tier S corporation's interest in the next lower-
tier partnership. As explained in paragraph (m)(5)(iii) of this 
section, the contributing partnership will then use the amount 
determined under the formula in paragraph (m)(5)(ii)(B) to compute the 
portion of modified basis that is allocable to the portion of the real 
property with respect to which the qualified conservation contribution 
is made.
    (B) Formulaic rule. The rule of this paragraph (m)(5)(ii) is also 
expressed in the following formula:

Figure 6 to Paragraph (m)(5)(ii)(B)
N = M x (P / Q)

Where:

N = Portion of the ultimate member's modified basis that is 
allocable to the upper-tier S corporation's interest in the 
contributing partnership.
M = Modified basis as determined under paragraph (l) of this 
section.
P = Ultimate member's pro rata portion of the upper-tier S 
corporation's adjusted basis in its interest in the contributing 
partnership.
Q = Ultimate member's pro rata portion of the adjusted basis in all 
the upper-tier S corporation's properties (including the upper-tier 
S corporation's adjusted basis in its interest in the contributing 
partnership).

    (iii) Contributing partnership--(A) Narrative rule. After 
completion of the computations under paragraph (m)(5)(ii) of this 
section, the contributing partnership must determine the portion of the 
amount determined under item N (see paragraph (m)(5)(ii)(B) of this 
section) with respect to each ultimate member that is allocable to the 
portion of the real property with respect to which the qualified 
conservation contribution is made. This determination must be done in 
accordance with the principles of paragraph (m)(2) of this section, and 
the formula provided in paragraph (m)(5)(iii)(B) of this section.
    (B) Formulaic rule. The rule of this paragraph (m)(5)(iii) is also 
expressed in the following formula:

Figure 7 to Paragraph (m)(5)(iii)(B)
R = N x (W / (S + W))

Where:

R = Relevant basis.
N = Amount determined with respect to item N as described under 
paragraph (m)(5)(ii)(B) of this section.
S = Upper-tier S corporation's portion of the adjusted basis in all 
the contributing partnership's properties (other than the portion of 
the real property with respect to which the qualified conservation 
contribution is made), determined by apportioning among the partners 
of the contributing partnership in accordance with their interests 
in the partnership under section 704(b) its adjusted basis in each 
of its properties (other than the portion of the real property with 
respect to which the qualified conservation contribution is made), 
using the adjusted bases immediately before the qualified 
conservation contribution, without duplication or omission of any 
property, and by treating the adjusted basis in each property as not 
less than zero.
W = Upper-tier S corporation's share of the contributing 
partnership's adjusted basis in the portion of the real property 
with respect to which the qualified conservation contribution is 
made, determined according to the following formula: A x (Y / C).
A = Contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made.
Y = Upper-tier S corporation's allocated portion of the qualified 
conservation contribution.
C = Total amount of the contributing partnership's qualified 
conservation contribution.

    (6) Recordkeeping requirements. Contributing partnerships, 
contributing S corporations, upper-tier partnerships, and upper-tier S 
corporations must maintain dated, written statements in their books and 
records, by the due date, including extensions, of their Federal income 
tax returns, substantiating the computation of each ultimate member's 
adjusted basis, modified basis, and relevant basis. See Sec.  1.6001-1. 
These statements need not be maintained (nor does modified basis or 
relevant basis need to be computed) with respect to contributions that 
meet an exception in paragraph (n)(2) or (3) of this section.
    (7) Examples. The following examples illustrate the provisions of 
this paragraph (m). For the three examples in this paragraph (m)(7), 
assume that the partnership allocations comply with the rules of 
subchapter K of chapter 1 of the Code and the exceptions in paragraph 
(n) of this section do not apply.
    (i) Example 1--(A) Facts. YZ Partnership is a partnership for 
Federal income tax purposes whose partners are individuals Y and Z. YZ 
Partnership owns 100 acres of real property with an adjusted basis of 
$10X. YZ Partnership makes a qualified conservation contribution on 60 
acres of the property. YZ Partnership claims a contribution of $18X, 
which it allocates $12X to Y and $6X to Z. YZ Partnership's adjusted 
basis in the 60 acres is $6X, and its adjusted basis in all of its 
other properties (including its $4X basis in the 40 acres on which a 
qualified conservation contribution was not made) is $18X. Y's modified 
basis is

[[Page 80940]]

$8X. Y's portion of YZ Partnership's adjusted basis in all partnership 
property (other than the 60 acres) as determined in accordance with Y's 
interest in YZ Partnership is $4X. Z's modified basis is $12X. Z's 
portion of YZ Partnership's adjusted basis in all partnership property 
(other than the 60 acres) as determined in accordance with Z's interest 
in YZ Partnership is $14X.
    (B) General analysis. Y and Z are the ultimate members of YZ 
Partnership because they each receive a distributive share of the 
qualified conservation contribution and are not partnerships or S 
corporations. Their relevant bases must be determined according to the 
following formula:

Figure 8 to Paragraph (m)(7)(i)(B)
R = M x (T / (D + T))

Where:

R = Relevant basis.
M = Modified basis as determined under paragraph (l) of this 
section.
D = Ultimate member's portion of the adjusted basis in all of the 
contributing partnership's properties (other than the portion of the 
real property with respect to which the qualified conservation 
contribution is made).
T = Ultimate member's share of the contributing partnership's 
adjusted basis in the portion of the real property with respect to 
which the qualified conservation contribution is made, determined 
according to the following formula: A x (B / C).
A = Contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made.
B = Ultimate member's distributive share of the qualified 
conservation contribution.
C = Total amount of the contributing partnership's qualified 
conservation contribution.

    (C) Y's relevant basis. With respect to Y:
    (1) M = $8X.
    (2) D = $4X.
    (3) A = $6X.
    (4) B = $12X.
    (5) C = $18X.
    (6) Thus, T is $4X = $6X x ($12X / $18X).
    (7) Accordingly, Y's relevant basis is $4X = $8X x ($4X / ($4X + 
$4X)).
    (D) Z's relevant basis. With respect to Z:
    (1) M = $12X.
    (2) D = $14X.
    (3) A = $6X.
    (4) B = $6X.
    (5) C = $18X.
    (6) Thus, T is $2X = $6X x ($6X / $18X).
    (7) Accordingly, Z's relevant basis is $1.5X = $12X x ($2X / ($14X 
+ $2X)).
    (E) Sum of relevant bases. The amount of YZ Partnership's claimed 
contribution is $18X, which exceeds 2.5 times the sum of Y's and Z's 
relevant bases, which is $13.75X ($13.75X = 2.5 x (Y's relevant basis 
of $4X + Z's relevant basis of $1.5X)). Accordingly, YZ Partnership's 
contribution is a disallowed qualified conservation contribution. No 
person may claim any deduction with respect to this contribution.
    (ii) Example 2--(A) Facts. CD Inc. is an S corporation with 
shareholders C and D, each of whom is an individual that is not a 
nonresident alien. C owns one third of the outstanding stock in CD 
Inc., and D owns the remaining two thirds. CD Inc. owns 100 acres of 
real property with an adjusted basis of $10X. CD Inc. makes a qualified 
conservation contribution on 60 acres of the property. CD Inc. claims a 
contribution of $9X, which it allocates $3X to C and $6X to D. CD 
Inc.'s adjusted basis in the 60 acres is $6X, and its adjusted basis in 
all its properties (including its $6X basis in the 60 acres) is $24X. 
C's modified basis in CD Inc. is $8X. D's modified basis in CD Inc. is 
$12X.
    (B) General analysis. C and D are the ultimate members of CD Inc. 
because they each receive a pro rata share of the qualified 
conservation contribution and are not partnerships or S corporations. 
Their relevant bases must be determined according to the following 
formula:

Figure 9 to Paragraph (m)(7)(ii)(B)
R = M x (E / F)

Where:

R = Relevant basis.
M = Modified basis as determined under paragraph (l) of this 
section.
E = Ultimate member's pro rata portion of the contributing S 
corporation's adjusted basis in the portion of the real property 
with respect to which the qualified conservation contribution is 
made.
F = Ultimate member's pro rata portion of the adjusted basis in all 
the contributing S corporation's properties (including the portion 
of the real property with respect to which the qualified 
conservation contribution is made).

    (C) C's relevant basis. With respect to C:
    (1) M = $8X.
    (2) E = $2X (\1/3\ of $6X).
    (3) F = $8X (\1/3\ of $24X).
    (4) Thus, C's relevant basis is $2X = $8X x ($2X / $8X).
    (D) D's relevant basis. With respect to D:
    (1) M = $12X.
    (2) E = $4X (\2/3\ of $6X).
    (3) F = $16X (\2/3\ of $24X).
    (4) Thus, D's relevant basis is $3X = $12X x ($4X / $16X).
    (E) Sum of relevant bases. The amount of CD Inc.'s claimed 
qualified conservation contribution is $9X, which does not exceed 2.5 
times the sum of C's and D's relevant bases, which is $12.50 ($12.50X = 
2.5 x (C's relevant basis of $2X + D's relevant basis of $3X)). 
Accordingly, CD Inc.'s contribution is not a disallowed qualified 
conservation contribution (that is, is not disallowed by section 
170(h)(7) and paragraph (j) of this section).
    (iii) Example 3--(A) Facts. LTP Partnership is a partnership for 
Federal income tax purposes whose partners are individual E and UTP 
Partnership, a partnership for Federal income tax purposes. UTP 
Partnership's partners are C corporations P and Q. LTP Partnership owns 
300 acres of real property. LTP Partnership makes a qualified 
conservation contribution on all 300 acres. LTP Partnership claims a 
qualified conservation contribution of $22X, which it allocates $2X to 
E and $20X to UTP Partnership. UTP Partnership allocates its $20X share 
of the qualified conservation contribution $6X to P and $14X to Q. LTP 
Partnership's basis in the 300 acres is $18X, and its adjusted basis in 
all of its other properties is $12X. E's modified basis in LTP 
Partnership is $4X. E's portion of LTP Partnership's adjusted basis in 
all partnership property (other than the 300 acres) as determined in 
accordance with E's interest in LTP Partnership is $4.36X. UTP 
Partnership's portion of LTP Partnership's adjusted basis in all 
partnership property (other than the 300 acres) as determined in 
accordance with UTP Partnership's interest in LTP Partnership is 
$7.64X. UTP Partnership's adjusted basis in its interest in LTP 
Partnership is $19, and its adjusted basis in all other properties is 
$6X. P's modified basis in UTP Partnership is $12X. P's portion of UTP 
Partnership's adjusted basis in all partnership property (other than 
the interest in LTP Partnership) as determined in accordance with P's 
interest in UTP Partnership is $3.6X. Q's modified basis in UTP 
Partnership is $8X. Q's portion of UTP Partnership's adjusted basis of 
all partnership property (other than the interest in LTP Partnership) 
as determined in accordance with Q's interest in UTP Partnership is 
$2.4X.
    (B) Analysis: partner E. (1) The ultimate members of LTP 
Partnership are E, P, and Q because they each receive a distributive 
share of the qualified conservation contribution and are not 
partnerships or S corporations. Because E holds a direct interest in 
LTP Partnership, E's relevant basis must be determined in accordance 
with the following formula:


[[Page 80941]]


Figure 10 to Paragraph (m)(7)(iii)(B)(1)
R = M x (T / (D + T))

Where:

R = Relevant basis.
M = Modified basis as determined under paragraph (l) of this 
section.
D = Ultimate member's portion of the adjusted basis in all the 
contributing partnership's properties (other than the portion of the 
real property with respect to which the qualified conservation 
contribution is made).
T = Ultimate member's share of the contributing partnership's 
adjusted basis in the portion of the real property with respect to 
which the qualified conservation contribution is made, determined 
according to the following formula: A x (B / C).
A = Contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made.
B = Ultimate member's distributive share of the qualified 
conservation contribution.
C = Total amount of the contributing partnership's qualified 
conservation contribution.

    (2) With respect to E:
    (i) M = $4X.
    (ii) D = $4.36X.
    (iii) A = $18X.
    (iv) B = $2X.
    (v) C = $22X.
    (vi) Thus, T is $1.64X = $18X x ($2X / $22X).
    (vii) Accordingly, E's relevant basis is $1.09X = $4X x ($1.64X / 
($4.36X + $1.64X)).
    (C) Analysis: General rule for UTP Partnership. Because P and Q 
hold interests in an upper-tier partnership, UTP Partnership must first 
determine the portions of P's and Q's modified bases that are allocable 
to UTP Partnership's interest in LTP Partnership. This is to be done 
according to the following formula:

Figure 11 to Paragraph (m)(7)(iii)(C)
G = M x (U / (J + U))

Where:

G = The portion of the ultimate member's modified basis that is 
allocable to the upper-tier partnership's interest in the 
contributing partnership.
M = Modified basis as determined under paragraph (l) of this 
section.
J = Ultimate member's portion of adjusted basis in all the upper-
tier partnership's properties (other than the upper-tier 
partnership's interest in the contributing partnership).
U = Ultimate member's share of the upper-tier partnership's adjusted 
basis in its interest in the contributing partnership, determined 
according to the following formula: H x (B / K).
H = Upper-tier partnership's adjusted basis in its interest in the 
contributing partnership.
B = Ultimate member's distributive share of the qualified 
conservation contribution.
K = Upper-tier partnership's allocated portion of the qualified 
conservation contribution.

    (D) Analysis: Step 1 for P. With respect to P:
    (1.
    (E) Analysis: Step 1 for Q. With respect to Q:
    (1) M = $8X.
    (2) J = $2.4X.
    (3) H = $19X.
    (4) B = $14X.
    (5) K = $20X.
    (6) Thus, U is $13.30X = $19X x ($14X / $20X).
    (7) Accordingly, the portion of Q's modified basis that is 
allocable to UTP Partnership's interest in LTP Partnership is $6.78X = 
$8X x ($13.30X / ($2.40X + $13.30X)).
    (F) Analysis: General rule for LTP Partnership. Next, LTP 
Partnership must determine P's and Q's relevant bases, which equals the 
portions of the amounts determined under paragraphs (m)(7)(iii)(D) and 
(E) of this section (Example 3) that are allocable to the portion of 
the real property with respect to which the qualified conservation 
contribution was made. This must be done according to the following 
formula:

Figure 12 to Paragraph (m)(7)(iii)(F)
R = G x (V / (L + V))

Where:

R = Relevant basis.
G = Amount determined with respect to item G under paragraph 
(m)(4)(ii)(B) of this section.
L = Upper-tier partnership's portion of adjusted basis in all the 
contributing partnership's properties (other than the portion of the 
real property with respect to which the qualified conservation 
contribution is made).
V = Upper-tier partnership's share of the contributing partnership's 
adjusted basis in the portion of the real property with respect to 
which the qualified conservation contribution is made, determined 
according to the following formula: A x (K / C).
A = Contributing partnership's adjusted basis in the portion of the 
real property with respect to which the qualified conservation 
contribution is made.
K = Upper-tier partnership's allocated portion of the qualified 
conservation contribution.
C = Total amount of the contributing partnership's qualified 
conservation contribution.

    (G) Analysis: Step 2 for P. With respect to P:
    (1) G = $7.35X.
    (2) L = $7.64X.
    (3) A = $18X.
    (4) K = $20X.
    (5) C = $22X.
    (6) Thus, V is $16.36X = $18X x ($20X / $22X).
    (7) Accordingly, P's relevant basis is $5.01X = $7.35X x ($16.36X / 
($7.64X + $16.36X)).
    (H) Analysis: Step 2 for Q. With respect to Q:
    (1) G = $6.78X.
    (2) L = $7.64X.
    (3) A = $18X.
    (4) K = $20X.
    (5) C = $22X.
    (6) Thus, V is $16.36X = $18X x ($20X / $22X).
    (7) Accordingly, Q's relevant basis is $4.62X = $6.78X x ($16.36X / 
($7.64X + $16.36X)).
    (I) Analysis: Computation of 2.5 times sum of relevant bases. The 
ultimate members of LTP Partnership are E, P, and Q. The amount of LTP 
Partnership's qualified conservation contribution is $22X. This does 
not exceed 2.5 times the sum of each of the ultimate member's relevant 
basis, which totals $26.80 ($26.80 = 2.5 x (E's relevant basis of 1.09X 
+ P's relevant basis of $5.01X + Q's relevant basis of $4.62X)). 
Therefore, LTP Partnership's contribution is not a disallowed qualified 
conservation contribution (that is, is not disallowed by section 
170(h)(7) and paragraph (j) of this section). Because UTP Partnership 
receives an allocated portion, it must apply paragraphs (j) through (l) 
of this section and this paragraph (m) to determine whether its 
allocated portion is a disallowed qualified conservation contribution. 
The ultimate members of UTP Partnership are P and Q. The amount of UTP 
Partnership's allocated portion of LTP Partnership's qualified 
conservation contribution is $20X. This does not exceed 2.5 times the 
sum of P's and Q's relevant bases, which is $24.08X ($24.08X = 2.5 x 
(P's relevant basis of $5.01X + Q's relevant basis of $4.62X)). 
Therefore, UTP Partnership's allocated portion of LTP Partnership's 
contribution is not a disallowed qualified conservation contribution 
(that is, is not disallowed by section 170(h)(7) and paragraph (j) of 
this section).
    (n) Exceptions--(1) In general. Paragraph (j) of this section does 
not apply to any qualified conservation contribution that satisfies one 
or more of the three exceptions in this paragraph (n). However, as 
provided in paragraph (j)(5) of this section, there is no presumption 
that such a contribution is compliant with section 170, any other 
section of the Code, or the regulations in this part or any other 
guidance. Being described in this paragraph (n) is not a safe harbor 
for purposes of any other provision of law or with respect to the value 
of the contribution. Such transactions are subject to adjustment or 
disallowance for any other reason,

[[Page 80942]]

including failure to satisfy other requirements of section 170 and 
overvaluation of the contribution. In addition, taxpayers who engage in 
such transactions may be required to disclose under Sec.  1.6011-4 the 
transactions as listed transactions.
    (2) Exception for contributions outside three-year holding period--
(i) In general. Paragraph (j) of this section does not apply to any 
qualified conservation contribution by a contributing partnership or 
contributing S corporation made at least three years after the latest 
of--
    (A) The last date on which the contributing partnership or 
contributing S corporation acquired any portion of the real property 
with respect to which such qualified conservation contribution is made;
    (B) The last date on which any partner in the contributing 
partnership or shareholder in the contributing S corporation acquired 
any interest in such partnership or S corporation; and
    (C) If the interest in the contributing partnership is held through 
one or more upper-tier partnerships or upper-tier S corporations--
    (1) The last date on which any such upper-tier partnership or 
upper-tier S corporation acquired any interest in the contributing 
partnership or any other upper-tier partnership; and
    (2) The last date on which any partner or shareholder in any such 
upper-tier partnership or upper-tier S corporation acquired any 
interest in such upper-tier partnership or upper-tier S corporation.
    (ii) Acquisition of partnership interest. For purposes of this 
paragraph (n)(2), an acquisition of any interest in a partnership is 
any variation within the meaning of that term in Sec.  1.706-4(a)(1); 
however, a variation does not include a change in allocations that 
satisfies the requirements of Sec.  1.706-4(b)(1).
    (iii) Acquisition of interest in an S corporation. For purposes of 
this paragraph (n)(2), an acquisition of any interest in an S 
corporation is any transfer, issuance, redemption, or other disposition 
of stock in the S corporation; however, an acquisition does not include 
any issuance or redemption involving all shareholders that does not 
affect the proportionate ownership of any shareholder.
    (iv) Exception is determined at the level of the contributing 
partnership or contributing S corporation. If the contributing 
partnership or contributing S corporation does not satisfy the 
requirements of this paragraph (n)(2), then this paragraph (n)(2) will 
not apply to any person who receives a distributive share or pro rata 
share of the qualified conservation contribution (including an upper-
tier partnership or upper-tier S corporation), regardless of whether 
the person receiving such distributive share or pro rata share would 
have satisfied the requirements of this paragraph (n)(2) if the person 
had been the one to make the qualified conservation contribution.
    (v) Examples. The following examples illustrate the provisions of 
this paragraph (n)(2). For the two examples in this paragraph 
(n)(2)(v), assume that the exceptions in paragraphs (n)(3) and (4) of 
this section do not apply.
    (A) Example 1--(1) Facts. ABC Partnership is a partnership for 
Federal income tax purposes. Since 2015, ABC Partnership's partners 
have been A, an individual, and BC Inc., an S corporation. Since 2015, 
BC Inc.'s shareholders have been B and C, each of whom is an individual 
that is not a nonresident alien. On December 27, 2024, ABC partnership 
acquires real property. On August 29, 2025, BC Inc. redeems half of B's 
shares in BC Inc. On December 28, 2027, ABC Partnership makes a 
qualified conservation contribution.
    (2) Analysis. Pursuant to paragraph (n)(2)(iii) of this section, BC 
Inc.'s redemption of some of B's shares is treated as an acquisition of 
an interest in BC Inc. for purposes of this paragraph (n)(2). 
Accordingly, ABC Partnership's contribution occurred less than three 
years after the latest acquisition of an interest in a partnership or S 
corporation that held an interest in ABC Partnership, the contributing 
partnership. Therefore, ABC Partnership's contribution fails to satisfy 
the requirements of this paragraph (n)(2) and must apply the provisions 
of paragraphs (j) through (m) of this section to determine whether the 
contribution is a disallowed qualified conservation contribution.
    (B) Example 2--(1) Facts. LTP partnership is a partnership for 
Federal income tax purposes. Since 2017, LTP Partnership's partners 
have been UTP Partnership, a partnership for Federal income tax 
purposes, and FG Inc., an S corporation. Since 2018, UTP Partnership's 
partners have been individuals D and E, and there has been no variation 
in their ownership. Since 2019, FG Inc.'s shareholders have been F and 
G, each of whom is an individual that is not a nonresident alien. On 
March 15, 2024, LTP Partnership acquires real property. On September 
15, 2026, D dies and D's interest in UTP Partnership passes to D's 
estate. On March 18, 2027, LTP Partnership makes a qualified 
conservation contribution. LTP Partnership allocates all of the 
qualified conservation contribution to FG Inc.
    (2) Analysis. Pursuant to paragraph (n)(2)(ii) of this section, the 
transfer of D's interest in UTP Partnership to D's estate is treated as 
an acquisition of an interest in UTP Partnership for purposes of 
paragraph (n)(2) of this section. Accordingly, LTP Partnership's 
contribution occurred less than three years after the latest 
acquisition of an interest in a partnership or S corporation that held 
an interest in LTP Partnership, the contributing partnership. 
Therefore, LTP Partnership's contribution fails to satisfy the 
requirement of this paragraph (n)(2). Pursuant to paragraph (n)(2)(iv) 
of this section, FG Inc. cannot avail itself of this paragraph (n)(2) 
with respect to its allocated portion of LTP Partnership's 
contribution. Accordingly, FG Inc. must apply the provisions of 
paragraphs (j) through (m) of this section to determine whether its 
allocated portion is a disallowed qualified conservation contribution.
    (3) Exception for family partnerships and S corporations--(i) 
General rule. Paragraph (j) of this section does not apply with respect 
to any qualified conservation contribution made by a contributing 
partnership or contributing S corporation if at least 90 percent of the 
interests in the contributing partnership or contributing S corporation 
are held by an individual and members of the family of such individual, 
and the contributing partnership or contributing S corporation meets 
the requirements of this paragraph (n)(3).
    (ii) Ninety percent of the interests--(A) Family partnerships. In 
the case of a contributing partnership, at least 90 percent of the 
interests in the contributing partnership are held by an individual and 
members of the family of such individual if, at the time of the 
qualified conservation contribution, at least 90 percent of the 
interests in capital and profits in such partnership are held, directly 
or indirectly, by an individual and members of the family of such 
individual.
    (B) Family S corporations. In the case of a contributing S 
corporation, at least 90 percent of the interests in the contributing S 
corporation are held by an individual and members of the family of such 
individual if, at the time of the qualified conservation contribution, 
at least 90 percent of the total value and at least 90 percent of the 
total voting power of the outstanding stock in such S corporation are 
held by an individual and members of the family of such individual.
    (iii) Members of the family. For purposes of this paragraph (n)(3), 
the

[[Page 80943]]

term members of the family means, with respect to any individual--
    (A) The spouse of such individual; and
    (B) Any individual who bears a relationship to such individual that 
is described in section 152(d)(2)(A) through (G) of the Code.
    (iv) Anti-abuse rules--(A) Holding period. This paragraph (n)(3) 
does not apply unless at least 90 percent of the interests in the 
property with respect to which the qualified conservation contribution 
was made were owned, directly or indirectly, by one individual and 
members of the family of that individual for at least one year prior to 
the date of the contribution. The members of the family during that 
year need not be the same members of the family that own an interest at 
the time of the qualified conservation contribution; however, at least 
one individual must own an interest for the entire year, and at least 
90 percent of the interests in the property must be owned, directly or 
indirectly, during that year by that individual and members of that 
individual's family.
    (B) Allocations. This paragraph (n)(3) does not apply unless at 
least 90 percent of the qualified conservation contribution is 
allocated to the individual and all members of the family who own at 
least 90 percent of the interests in the contributing partnership or 
contributing S corporation under paragraph (n)(3)(ii) of this section.
    (v) Exception is determined at the level of the contributing 
partnership or contributing S corporation. If the contributing 
partnership or contributing S corporation satisfies the requirements of 
this paragraph (n)(3), then any upper-tier partnership or upper-tier S 
corporation need not apply paragraphs (j) through (m) of this section 
and this paragraph (n) to its allocated portions of such contribution. 
If the contributing partnership or contributing S corporation does not 
satisfy the requirements of this paragraph (n)(3), then the exception 
in this paragraph (n)(3) will not apply to any person who receives a 
distributive share or pro rata share of the qualified conservation 
contribution (including an upper-tier partnership or upper-tier S 
corporation), regardless of whether the person receiving such 
distributive share or pro rata share would have satisfied the 
requirements of this paragraph (n)(3) if the person had been the one to 
make the contribution.
    (vi) Examples. The following examples illustrate the provisions of 
this paragraph (n)(3). For the two examples in this paragraph 
(n)(3)(vi), assume that the exceptions in paragraphs (n)(2) and (4) of 
this section do not apply.
    (A) Example 1--(1) Facts. Individual A and A's sibling B acquire 
real property on July 5, 2024. On September 14, 2024, B transfers its 
interest in the real property to B's child C. On February 21, 2025, A 
and C transfer their interests in the real property to AC Partnership, 
a partnership for Federal income tax purposes whose only partners are A 
and C. On March 18, 2025, A's stepfather D becomes a partner in AC 
Partnership in exchange for a capital contribution. On September 15, 
2025, AC Partnership makes a qualified conservation contribution on the 
real property. AC Partnership never had any partners other than A, C, 
and D.
    (2) Analysis. B, C, and D qualify as members of the family with 
respect to A. Accordingly, as of the time of the qualified conservation 
contribution, at least 90 percent of the interests in capital and 
profits of AC Partnership were owned by an individual and members of 
that individual's family. In addition, at least 90 percent of the 
interests in the property with respect to which the qualified 
conservation contribution was made were owned, directly and indirectly, 
by A and members of A's family for at least one year prior to the date 
of the contribution. Moreover, at least 90 percent of the contribution 
is allocated to A and members of A's family. Accordingly, the 
requirements of this paragraph (n)(3) are satisfied, and the 
Disallowance Rule in section 170(h)(7)(A) and paragraph (j) of this 
section does not apply.
    (B) Example 2--(1) Facts. LTP Partnership is a partnership for 
Federal income tax purposes whose partners are EF Inc., an S 
corporation, and UTP Partnership, a partnership for Federal income tax 
purposes. EF Inc. and UTP Partnership each hold a 50 percent interest 
in the profits and capital of LTP Partnership. The shareholders of EF 
Inc. are E and E's sibling F. The partners of UTP Partnership are G and 
G's child H. E and F are not related to G and H. LTP Partnership has 
held real property since 2019. On July 5, 2024, LTP Partnership 
distributes half of the acres of its real property to EF Inc., and the 
remaining acres to UTP Partnership. On October 21, 2024, EF Inc., makes 
a qualified conservation contribution on the real property it received 
from LTP Partnership.
    (2) Analysis. F qualifies as a member of the family with respect to 
E. Accordingly, as of the time of EF Inc.'s qualified conservation 
contribution, EF Inc. was owned at least 90 percent by an individual 
and members of that individual's family. In addition, at least 90 
percent of EF Inc's qualified conservation contribution is allocated to 
E and members of E's family. However, E and members of E's family 
failed to own at least 90 percent of the property with respect to which 
the qualified conservation contribution was made for at least one year 
prior to the date of the contribution. In particular, G and H (who are 
not members of the family with respect to E or F) indirectly owned a 50 
percent interest in the property until July 5, 2024. Accordingly, the 
requirements of this paragraph (n)(3) are not satisfied. EF Inc. must 
apply the provisions of paragraphs (j) through (m) of this section to 
determine whether the contribution is a disallowed qualified 
conservation contribution.
    (4) Exception for contributions to preserve certified historic 
structures. Paragraph (j) of this section does not apply to any 
qualified conservation contribution the conservation purpose of which 
is the preservation of any building that is a certified historic 
structure (as defined in section 170(h)(4)(C)). See Sec.  1.170A-
16(f)(6) for special reporting requirements for a contribution that 
meets the exception in this paragraph (n)(4).
    (o) Applicability dates--(1) In general. Except as provided in 
paragraphs (g)(4)(ii), (i), and (o)(2) of this section, paragraphs (a) 
through (i) of this section apply only to contributions made on or 
after December 18, 1980. Paragraphs (j) through (n) of this section 
apply to contributions made after December 29, 2022.
    (2) Exception. Paragraph (h)(4)(ii) of this section applies on and 
after June 1, 2023.
0
Par. 3. Section 1.170A-16 is amended by:
0
1. In paragraph (c)(3)(iv)(F), adding the word ``and'' at the end of 
the paragraph;
0
2. In paragraph (c)(3)(iv)(G), removing the language ``and'' at the end 
of the paragraph;
0
3. Redesignating paragraph (c)(3)(v) as paragraph (c)(3)(vi) and adding 
new paragraph (c)(3)(v);
0
4. In paragraph (d)(3)(vii), removing the language ``and'' at the end 
of the paragraph;
0
5. Redesignating paragraph (d)(3)(viii) as paragraph (d)(3)(x) and 
adding new paragraph (d)(3)(viii);
0
6. Adding paragraph (d)(3)(ix);
0
7. Revising paragraph (f)(4);
0
8. Adding paragraph (f)(6);
0
9. Revising paragraph (g).
    The additions and revisions read as follows:

[[Page 80944]]

Sec.  1.170A-16  Substantiation and reporting requirements for noncash 
charitable contributions.

* * * * *
    (c) * * *
    (3) * * *
    (v) Where a number can be inserted into any box on Form 8283 
(Section A), the number inserted in the box on Form 8283 (Section A). 
Alternatively, taxpayers may attach a statement to the Form 8283 
explaining why a number cannot be inserted. Nothing in this paragraph 
(c)(3)(v) precludes a taxpayer from both inserting the number in the 
appropriate box on Form 8283 (Section A) and including an attached 
statement explaining any additional information regarding the number. 
Taxpayers may not respond to a request for information on Form 8283 
(Section A) with nonresponsive responses, for example, by indicating 
that the requested information is available upon request or will be 
provided upon request. The inclusion of such nonresponsive language in 
response to a request for information on Form 8283 (Section A) may be 
treated by the IRS as being an incomplete filing of Form 8283; and
* * * * *
    (d) * * *
    (3) * * *
    (viii) In the case of a partnership or S corporation that makes a 
qualified conservation contribution, the sum of each ultimate member's 
relevant bases, computed in accordance with Sec.  1.170A-14(j) through 
(m), but only:
    (A) For contributions described in section 170(h)(7)(E) and Sec.  
1.170A-14(n)(4) (for contributions to preserve certified historic 
structures), regardless of whether they are also described in section 
170(h)(7)(C) and Sec.  1.170A-14(n)(2) (for contributions made outside 
of the three-year holding period) and/or section 170(h)(7)(D) and Sec.  
1.170A-14(n)(3) (for contributions made by certain family partnerships 
or S corporations); and
    (B) For all contributions not described in section 170(h)(7)(E) and 
Sec.  1.170A-14(n)(4), provided they are not described in section 
170(h)(7)(C) and Sec.  1.170A-14(n)(2) (for contributions made outside 
of the three-year holding period) and/or section 170(h)(7)(D) and Sec.  
1.170A-14(n)(3) (for contributions made by certain family partnerships 
or S corporations);
    (ix) Where a number can be inserted into any box on Form 8283 
(Section B), the number inserted in the box on Form 8283 (Section B). 
Alternatively, taxpayers may attach a statement to the Form 8283 
explaining why a number cannot be inserted. Nothing in this paragraph 
(d)(3)(ix) precludes a taxpayer from both inserting the number in the 
appropriate box on Form 8283 (Section B) and including an attached 
statement explaining any additional information regarding the number. 
Taxpayers may not respond to a request for information on Form 8283 
(Section B) with nonresponsive responses, for example, by indicating 
that the requested information is available upon request or will be 
provided upon request. The inclusion of such nonresponsive language in 
response to a request for information on Form 8283 (Section B) may be 
treated by the IRS as being an incomplete filing of Form 8283; and
* * * * *
    (f) * * *
    (4) Partners and S corporation shareholders--(i) Form 8283 (Section 
A or Section B) must be provided to partners and S corporation 
shareholders. If the donor is a partnership or an S corporation, the 
donor must provide a copy of its completed Form 8283 (Section A or 
Section B) to every partner or shareholder who receives an allocation 
of a charitable contribution under section 170 for the property 
described in Form 8283 (Section A or Section B). Similarly, a recipient 
partner that is a partnership or S corporation must provide a copy of 
the donor's completed Form 8283 (Section A or Section B) to each of its 
partners or shareholders who receives an allocation of the charitable 
contribution, and so on through any additional tiers.
    (ii) Partners and S corporation shareholders must attach Forms 8283 
(Section A or Section B) to return. A partner of a partnership or 
shareholder of an S corporation who receives an allocation of a 
charitable contribution under section 170 for property to which 
paragraph (c), (d), or (e) of this section applies must attach to the 
return on which the contribution is claimed a copy of each Form 8283 
that must be provided to them under paragraph (f)(4)(i) or (iii) of 
this section.
    (iii) Partners and S corporation shareholders must file separate 
Forms 8283 and provide copies to any partners--(A) In general. Subject 
to paragraph (f)(4)(iii)(B) of this section, every partner of a 
partnership (including a partner that is itself a partnership or S 
corporation) or shareholder of an S corporation that receives an 
allocation of a charitable contribution under section 170 for which 
paragraph (c), (d), or (e) of this section applies must complete a 
separate Form 8283 with any information required by Form 8283 and the 
instructions to Form 8283. In the case of a partner that is itself a 
partnership or S corporation, that partnership or S corporation must 
provide a copy of its completed separate Form 8283 to every partner or 
shareholder who receives an allocation of the charitable contribution, 
and so on through any additional tiers. The partner or shareholder must 
attach its separate Form 8283 to the return on which the contribution 
is claimed, in addition to the copy of each Form 8283 that the partner 
or shareholder is required to attach pursuant to paragraph (f)(4)(ii) 
of this section.
    (B) Conservation contributions. The terms defined in Sec.  1.170A-
14(j)(3) apply for purposes of this paragraph (f)(4)(iii)(B). In the 
case of a qualified conservation contribution that is made by a 
partnership or S corporation, an ultimate member's separate Form 8283 
must include their own relevant basis. An upper-tier partnership's or 
upper-tier S corporation's separate Form 8283 must include the sum of 
each of its ultimate member's relevant bases (as computed in accordance 
with Sec.  1.170A-14(j) through (m)). This paragraph (f)(4)(iii)(B) 
does not apply to contributions described in section 170(h)(7)(C) and 
Sec.  1.170A-14(n)(2) (for contributions made outside of the three-year 
holding period) or section 170(h)(7)(D) and Sec.  1.170A-14(n)(3) (for 
contributions made by certain family partnerships or S corporations), 
provided that they are not also described in section 170(h)(7)(E) and 
Sec.  1.170A-14(n)(4) (for contributions to preserve certified historic 
structures), in which case this paragraph (f)(4)(iii)(B) does apply.
* * * * *
    (6) Conservation contributions by pass-through entities preserving 
certified historic structures--(i) In general. The terms defined in 
Sec.  1.170A-14(j)(3) apply for purposes of this paragraph (f)(6). For 
any contribution described in paragraph (f)(6)(ii) of this section, 
pursuant to section 170(f)(19), no deduction is allowed under section 
170 or any other provision of the Code under which deductions are 
allowable to pass-through entities with respect to such contribution 
unless the contributing partnership, the contributing S corporation, 
the upper-tier partnership, or the upper-tier S corporation, 
respectively--
    (A) Includes on its return for the taxable year in which the 
contribution is made a statement that it made such a contribution or 
received such allocated portion, as described in paragraph (f)(6)(iii) 
of this section; and

[[Page 80945]]

    (B) Provides such information about the contribution as the 
Secretary may require in guidance, forms, or instructions.
    (ii) Contributions to which this paragraph (f)(6) applies. This 
paragraph (f)(6) applies to any qualified conservation contribution (as 
defined in section 170(h)(1) and Sec.  1.170A-14):
    (A) The conservation purpose of which is preservation of a building 
that is a certified historic structure (as defined in section 
170(h)(4)(C));
    (B) That is either made by a contributing partnership or 
contributing S corporation (as defined in Sec.  1.170A-14(j)(3)(iv)), 
or that is an allocated portion (as defined in Sec.  1.170A-
14(j)(3)(i)) of an upper-tier partnership (as defined in Sec.  1.170A-
14(j)(3)(xi)) or upper-tier S corporation (as defined in Sec.  1.170A-
14(j)(3)(xii)); and
    (C) The amount of such contribution (as defined in Sec.  1.170A-
14(j)(3)(ii)) or such allocated portion (as defined in Sec.  1.170A-
14(j)(3)(i)) exceeds 2.5 times the sum of each ultimate member's 
relevant basis (as defined in Sec.  1.170A-14(j) through (m)).
    (iii) Required information. A partnership or S corporation 
satisfies the requirements of section 170(f)(19)(A) and paragraph 
(f)(6)(i) of this section by filing a completed Form 8283, including 
information about relevant basis, in accordance with section 170, the 
regulations under section 170, and the instructions to Form 8283.
    (g) Applicability dates--(1) In general. Except as provided in 
paragraph (g)(2) of this section, this section applies to contributions 
made after July 30, 2018.
    (2) Certain paragraphs. Paragraphs (c)(3)(vi), (d)(3)(viii) and 
(x), and (f)(4) and (6) of this section apply to taxable years ending 
on or after November 20, 2023.
0
Par. 4. Section 1.706-0 is amended by revising the entry for Sec.  
1.706-3 to read as follows:


Sec.  1.706-0  Table of contents.

* * * * *


Sec.  1.706-3  Items attributable to interest in lower-tier 
partnership.

    (a) Conservation contributions.
    (b) Applicability date.
* * * * *
0
Par. 5. Section 1.706-3 is revised to read as follows:
    Sec.  1.706-3 Items attributable to interest in lower-tier 
partnership.
    (a) Conservation contributions. For purposes of section 706(d)(3), 
in the case of a qualified conservation contribution (as defined in 
section 170(h)(1) and Sec.  1.170A-14(a) without regard to whether such 
contribution is a disallowed qualified conservation contribution within 
the meaning of Sec.  1.170A-14(j)(3)(vii)) by a partnership that is 
allocated to an upper-tier partnership, the upper-tier partnership must 
allocate the contribution among its partners in proportion to their 
interests in the upper-tier partnership at the time of day at which the 
contribution was made, regardless of the method (interim closing or 
proration) and convention (daily, semi-monthly, or monthly) otherwise 
used by the upper-tier partnership under Sec.  1.706-4.
    (b) Applicability date. Paragraph (a) of this section applies to 
qualified conservation contributions made after December 29, 2022.
0
Par. 6. Section 1.706-4 is amended by:
0
1. Redesignating paragraphs (e)(2)(ix) through (xi) as paragraphs 
(e)(2)(x) through (xii), respectively, and adding new paragraph 
(e)(2)(ix);
0
2. Adding the word ``and'' at the end of newly redesignated paragraph 
(e)(2)(xi); and
0
3. Revising paragraphs (e)(3) and (g).
    The addition and revisions read as follows:


Sec.  1.706-4  Determination of distributive share when a partner's 
interest varies.

* * * * *
    (e) * * *
    (2) * * *
    (ix) Any qualified conservation contribution (as defined in section 
170(h)(1) and Sec.  1.170A-14(a) without regard to whether such 
contribution is a disallowed qualified conservation contribution within 
the meaning of Sec.  1.170A-14(j)(3)(vii));
* * * * *
    (3) Small item exception. A partnership may treat an item described 
in paragraph (e)(2) of this section (except for an item described in 
paragraph (e)(2)(ix) of this section) as other than an extraordinary 
item for purposes of this paragraph (e) if, for the partnership's 
taxable year the total of all items in the particular class of 
extraordinary items (as enumerated in paragraphs (e)(2)(i) through 
(xii) of this section, for example, all tort or similar liabilities, 
but in no event counting an extraordinary item more than once) is less 
than five percent of the partnership's gross income, including tax-
exempt income described in section 705(a)(1)(B), in the case of income 
or gain items, or gross expenses and losses, including section 
705(a)(2)(B) expenditures, in the case of losses and expense items; and 
the total amount of the extraordinary items from all classes of 
extraordinary items amounting to less than five percent of the 
partnership's gross income, including tax-exempt income described in 
section 705(a)(1)(B), in the case of income or gain items, or gross 
expenses and losses, including section 705(a)(2)(B) expenditures, in 
the case of losses and expense items, does not exceed $10 million in 
the taxable year, determined by treating all such extraordinary items 
as positive amounts.
* * * * *
    (g) Applicability dates--(1) In general. Except as provided in 
paragraphs (g)(2) and (3) of this section, this section applies for 
partnership taxable years that begin on or after August 3, 2015.
    (2) Paragraph (c)(3) of this section. The rules of paragraph (c)(3) 
of this section apply for taxable years of partnerships other than 
existing publicly traded partnerships that begin on or after August 3, 
2015. For purposes of this paragraph (g)(2), an existing publicly 
traded partnership is a partnership described in section 7704(b) that 
was formed prior to April 14, 2009. For purposes of this paragraph 
(g)(2), the termination of a publicly traded partnership under section 
708(b)(1)(B) due to the sale or exchange of 50 percent or more of the 
total interests in partnership capital and profits in a taxable year 
beginning on or before December 31, 2017, is disregarded in determining 
whether the publicly traded partnership is an existing publicly traded 
partnership.
    (3) Paragraph (e)(2)(ix) of this section. Paragraph (e)(2)(ix) of 
this section applies to qualified conservation contributions made after 
December 29, 2022.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-25423 Filed 11-17-23; 8:45 am]
BILLING CODE 4830-01-P


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