Page 90 - TaxAdviser_Jan_Apr23_Neat

The IRS has been diligent in examining transactions that
it considers to lack economic substance or that are shams.

partnerships that are U.S. shareholders Conservation easements proceeding and all of the donee’s pro-
of foreign corporations. The final regu- The IRS has been auditing a number ceeds . . . from a subsequent sale or ex-
lations generally extend the treatment of tax returns for partnerships that took change of the property are used by the
of domestic partnerships as aggregates a deduction for a conservation ease- donee organization in a manner consis-
of their partners for purposes of deter- ment through a tax shelter. In many of tent with the conservation purposes of
mining income inclusions under Sec. the cases, the IRS has disallowed the the original contribution.”31 Proceeds
951 and for purposes of provisions deduction because it believed either are calculated by a formula included in
that apply by reference to it. The final the contribution did not meet the Regs. Sec. 1.170A-14(g)(6)(ii). This is
regulations also clarify that aggregate “protected in perpetuity” requirement called the proceeds regulation.
treatment of domestic partnerships or that the property contributed was In Oakbrook Land Holdings, the LLC
applies for purposes of Sec. 956(a) and overvalued. To deter this type of trans- challenged the validity of the proceeds
any provisions that specifically apply by action, Congress as of this writing has regulation. The taxpayer contended
reference to that provision. Aggregate included a provision in the proposed that, in developing this rule, Treasury
treatment does not apply, however, for Enhancing American Retirement Now violated the notice-and-comment re-
purposes of Sec. 956(c) or (d) (or provi- (EARN) Act30 that would limit the quirements of the Administrative Pro-
sions that apply by reference to these deduction if the amount exceeds 2.5% cedure Act (APA). The taxpayer also
subsections), because treating a domes- times the sum of each partner’s basis in argued that Treasury’s interpretation of
tic partnership as an entity separate the partnership. Sec. 170 was unreasonable and that the
from its partners is more appropriate to As described below, numerous recent proceeds regulation is arbitrary or ca-
carry out the purposes of these provi- court cases have dealt with the contri- pricious. The full Tax Court considered
sions. Certain existing final regulations bution of conservation easements. In these arguments and found in favor
treat domestic partnerships as entities most of the cases, the disputed issue is of the IRS.32 In 2022, the taxpayers
separate from their partners for pur- related to the facts of the case; however, appealed the case. An appellate court
poses of Sec. 956. The final regulations some taxpayers have contested the reviewed the case and agreed with the
remove those provisions. validity of the law, as in Oakbrook Land Tax Court, thus affirming the validity
The proposed regulations had Holdings LLC. of the regulation.33
requested comments with respect to As background to the decision, In another case,34 the taxpayer took
the application of the passive foreign taxpayers are allowed a charitable con- a charitable contribution deduction
investment company (PFIC) regime to tribution deduction under Sec. 170(h) for a conservation easement. The IRS
domestic partnerships that directly or if they donate an easement in land to issued the taxpayer an FPAA disallow-
indirectly own PFIC stock, particularly a conservation organization. However, ing this deduction. In this case, the Tax
with respect to whether elections and the easement’s conservation purpose Court examined two issues: (1) whether
income inclusions are more appropriate must be guaranteed to extend in per- the easement deed failed to protect
at the level of a domestic partnership or petuity to qualify. Treasury issued Regs. the conservation purpose in perpetu-
at the level of its partners. Treasury and Sec. 1.170A-14(g)(6) to address the sit- ity, and (2) whether the taxpayer’s
the IRS did not address these issues in uation in which unforeseen changes to appraisal and documentation failed
the final regulations. the surrounding land make it “impos- to meet the substantiation require-
sible or impractical” for an easement to ments of Sec. 170(h)(4)(B)(iii). The
Disallowed deductions fulfill its conservation purpose. In this IRS based its argument on an earlier
Many disputes arose about deductions, event, the conservation purpose may case35 that found that language in the
with conservation easements generating still be protected in perpetuity “if the deed that defined the numerator of the
a large amount of litigation. restrictions are extinguished by judicial apportionment fraction violated the

30. Enhancing American Retirement Now Act, S. 4808. 33. Oakbrook Land Holdings, LLC, 28 F.4th 700 (6th Cir. 2022).
31. Regs. Sec. 1.170A-14(g)(6)(i). 34. Corning Place Ohio, T.C. Memo. 2022-12.
32. Oakbrook Land Holdings, LLC, 154 T.C. 180 (2020). 35. Carroll, 146 T.C. 196 (2016).

www.thetaxadviser.com February 2023 35