Conservation Easement Deductions: The Partnership Test

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Final Treasury regulations 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 the applicable section times the sum of each partner's or S corporation shareholder's relevant basis. The regulations, cited as 89 FR 54284, are effective June 28, 2024 and bind contributing partnerships and S corporations, and the partners and shareholders who receive a share of a noncash charitable contribution, under 26 CFR Part 1. Three statutory exceptions exist; they are narrow, and one of them depends on a holding period the partnership must be able to evidence.

The numbers and dates on this page sit inside a sealed index of 1086 federal rules from 11 agencies, published September 1, 2023 – September 1, 2026. That window is a snapshot.

Source: Federal Register / eCFR.

What is in force now?

The regulations are already effective. The Treasury Department, through the Internal Revenue Service, published them on June 28, 2024 at 89 FR 54284, RIN 1545-BQ90. The dates text states that these regulations are effective on June 28, 2024.

A partnership tax preparer or reviewer who is still signing returns that carry a conservation contribution as if the the applicable section-times test were proposed guidance is working from superseded procedure. The notice is a set of final regulations, not a proposal.

The statutory disallowance itself applies to contributions made after December 29, 2022. The regulations implement that rule, including definitions, methods to calculate relevant basis, the three statutory exceptions, and related reporting. The obligation on a current-year return is therefore live: run the multiple-of-basis test, document any exception, and complete the reporting the regulations attach to the contribution.

The rule does not say a contribution made on or before December 29, 2022 is covered by this disallowance. The SECURE the applicable section Act provision the notice implements applies to contributions made after that date, and the notice states that no inference is intended as to the appropriate treatment of contributions made in taxable years ending on or before that date.

What does the rule require?

The arithmetic test in one line is this: if a partnership or an S corporation makes a qualified conservation contribution after December 29, 2022, and the amount of the contribution exceeds the applicable section times the sum of each partner's or S corporation shareholder's relevant basis, the contribution is not treated as a qualified conservation contribution for purposes of section 170, unless an exception applies. That is the sentence the notice is written to implement.

Relevant basis, as the notice restates the statute, is the portion of a partner's modified basis in the partnership that is allocable to the portion of the real property with respect to which the contribution is made. Modified basis is the partner's adjusted basis in the partnership as determined immediately before the contribution, without regard to section the partnership-liability provision, and by the partnership after taking into account those adjustments and such other adjustments as the Secretary may provide. The regulations apply the same structure to S corporations except as the Secretary otherwise provides.

The final regulations provide the methods to calculate that relevant basis, including upper-tier partnerships and upper-tier S corporations. This page does not restate the full computational sequence. A reviewer who needs the steps should read 26 CFR Part 1 as amended by the notice.

Three statutory exceptions survive the test. The notice names them as the exception for contributions that satisfy a three-year holding period, the exception for contributions from family pass-through entities, and the exception for qualified conservation contributions the conservation purpose of which is the preservation of a certified historic structure.

Those exceptions are narrow. The holding-period exception depends on a holding period the partnership must be able to evidence. The family-pass-through exception depends on family composition the partnership must be able to evidence. The certified-historic-structure exception depends on a conservation purpose the partnership must be able to evidence, and the notice also describes related reporting under section 170(f)(19) when a certified-historic-structure contribution exceeds the applicable section times the sum of relevant basis.

The rule does not say there is a de minimis overage exception that lets a contribution a little above the applicable section times relevant basis through. The notice discusses comments asking for one; this page does not treat such an exception as adopted.

The regulations also 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. That reporting reach is broader than the easement itself.

If the amount exceeds the applicable section times the sum of relevant basis and no exception applies, the notice treats the contribution as a disallowed qualified conservation contribution. The rule does not say the excess over the applicable section times is the only amount disallowed; the statutory structure the notice implements is a disallowance of the deduction for that contribution, not a haircut to the the applicable section-times line. A qualified professional should read the primary text before a return positions a partial deduction.

The rule does not state a penalty dollar in the sealed display values used for this page. This brief does not invent one.

Who has to comply?

The final regulations 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.

The reader this brief is written for is a partnership tax preparer or reviewer signing returns that carry a conservation contribution. The same person often also reviews the Form the noncash contribution statement package and the K-1 footnotes that flow the contribution to ultimate members.

Upper-tier partnerships and upper-tier S corporations are in the computational rules the notice adopts. A reviewer who stops at the contributing partnership's own partners will miss ultimate members sitting one or two tiers up.

Adjacent accounting-compliance reading that is already live, and that this page does not restate, includes the syndicated conservation easement listed-transaction brief, the charitable remainder annuity trust listed-transaction brief, and the information-reporting and transfer-for-valuable-consideration brief. Listed-transaction status is a different duty from this statutory disallowance; a return can face both.

Where do accounting firms commonly fall short?

The shortfalls below are process patterns. The rule does not publish an audit-adjustment rate, and this page does not invent one.

The first pattern is running the the applicable section-times test against the partnership's basis in the donated property instead of against the sum of relevant basis. The notice is built on relevant basis, which is a slice of modified basis allocable to the contributed real-property interest, computed immediately before the contribution and without section the partnership-liability provision liabilities.

The second pattern is leaving section the partnership-liability provision liabilities inside modified basis. The statute the notice implements requires modified basis to be determined without regard to section the partnership-liability provision. A computation that keeps those liabilities in the denominator understates the the applicable section-times ratio.

The third pattern is claiming an exception without the evidence the exception requires. The holding-period exception is not a narrative; it is a dated holding period. The family exception is not a last-name match; it is the family definition the regulations apply. The historic-structure exception is not a brochure about an old building; it is the conservation purpose and the reporting the notice describes.

The fourth pattern is treating Form the noncash contribution statement as optional when the contribution is "small" or when an exception applies. The regulations attach reporting to noncash charitable contributions received as a partnership or S corporation share, and they attach additional reporting to conservation contributions, including contributions that satisfy an exception. The rule does not say an excepted contribution skips reporting.

The fifth pattern is signing the return before upper-tier relevant basis has been collected. A contributing partnership that cannot see an upper-tier partner's modified basis cannot finish the sum the test requires. The notice is written for that structure; a file that stops at the first tier is incomplete.

The sixth pattern is reducing a disallowed contribution to the applicable section times relevant basis and deducting that reduced amount. The rule does not say the statute works as a cap. A qualified professional should read the disallowance language before a return takes that position.

What self-audit can a preparer run now?

A firm can run this checklist against every open engagement that carries a partnership or S corporation noncash charitable contribution, not only the files already labeled "easement."

1. List every partnership and S corporation engagement whose current-year or open-year return includes a qualified conservation contribution, or any noncash charitable contribution that will flow to partners or shareholders.

2. For each conservation contribution, record the contribution date and confirm whether it is after December 29, 2022.

3. Compute, or obtain, each ultimate member's relevant basis using modified basis immediately before the contribution, without section the partnership-liability provision liabilities, allocated to the contributed real-property interest as the regulations require.

4. Compare the claimed contribution to the applicable section times the sum of those relevant bases.

5. If the contribution exceeds that product, identify which of the three statutory exceptions is being claimed and pull the holding-period, family, or historic-structure evidence before the return is signed.

6. Confirm the Form the noncash contribution statement and any required statement are in the workpapers for the contributing entity and for partners and shareholders who received a share of a noncash charitable contribution.

7. Route any file whose relevant-basis computation or exception evidence is incomplete to the responsible preparer. The rule does not say a reviewer may assume an exception applies.

The two products a partnership tax desk already runs for this work are UltraTax CS and SafeSend. UltraTax CS is the professional tax-preparation system many firms use to prepare partnership and S corporation returns, including the noncash charitable and K-1 output. SafeSend is the return-delivery and signature collection tool many of the same firms use to send the finished return and gather e-signatures. Neither product decides whether a contribution is a qualified conservation contribution. They hold the return and the delivery trail a person uses when the the applicable section-times test fails.

A third product name would turn this page into a roundup. These two are named because they are the systems a reviewer already opens on the day the return is signed and sent.

What can be automated is the flag that a return still carries a conservation contribution whose workpapers lack a relevant-basis computation, a contribution date after December 29, 2022, or an exception file. What needs a human decision is whether an exception applies and whether the deduction may be claimed.

How does a workflow flag engagements still using superseded treatment?

Reconcile the client book against the change: each client engagement maps to the forms, elections, and filing dates the rule touches. US Tech Automations flags engagements whose workpapers still reflect the superseded treatment and routes the review to the responsible preparer.

That is flag-and-route. A queue item that says "this the partnership return still has a conservation contribution with no relevant-basis memo" is useful. A queue item that says "this deduction is allowed" is not a determination this workflow is allowed to make.

US Tech Automations can watch the engagement list for conservation-contribution and noncash-charitable codes, attach the 89 FR 54284 citation to the task, and send the file to the named preparer. It cannot compute relevant basis, choose an exception, or sign the return.

A useful configuration is the conservation-contribution engagement list, the seven-step checklist, and a count of files whose workpapers still lack the the applicable section-times memo. US Tech Automations should sit around UltraTax CS return status and SafeSend delivery events rather than inside the tax determination. The status is evidence. The deduction belongs to the preparer and, where the text is unclear, to a qualified professional.

Key Takeaways

• The Treasury and IRS final regulations at 89 FR 54284, RIN 1545-BQ90, are effective June 28, 2024 and amend 26 CFR Part 1.

• A partnership or S corporation conservation contribution made after December 29, 2022 is disallowed if it exceeds the applicable section times the sum of each partner's or shareholder's relevant basis, unless an exception applies.

• The three statutory exceptions are the three-year holding period, family pass-through entities, and preservation of a certified historic structure. They are narrow, and the holding-period exception depends on evidence the partnership must keep.

• Reporting reaches partners and shareholders who receive a share of any noncash charitable contribution, not only conservation easements.

• The rule does not say the statute functions as a cap at the applicable section times relevant basis.

Frequently asked questions

Is the the applicable section-times test still only a proposal?

No. The regulations are final and effective June 28, 2024. The statutory disallowance applies to contributions made after December 29, 2022.

What is relevant basis?

The notice restates relevant basis as the portion of modified basis allocable to the portion of the real property with respect to which the contribution is made. Modified basis is determined immediately before the contribution, without regard to section the partnership-liability provision.

What exceptions still allow the deduction?

The notice names three: a three-year holding period, family pass-through entities, and preservation of a certified historic structure. Each one must be evidenced. The rule does not say a near-miss over the applicable section times is excepted.

Do partners still file Form the noncash contribution statement if an exception applies?

The regulations provide reporting for conservation contributions and for partners and shareholders who receive a share of any noncash charitable contribution. The rule does not say an excepted contribution skips reporting. Read the primary text for the form that applies to the file.

Does this page state a penalty amount?

No. The closed fact set does not include a penalty amount. The rule does not say a dollar figure this page may copy as a penalty.

Does passing the self-audit mean the deduction is allowed?

No. This page is informational. It is not legal or tax advice and does not create an attorney-client relationship. Consult a qualified professional and read the rule.

Disclaimer

This page is for informational purposes only. It is not legal or tax advice and does not create an attorney-client relationship. Consult a qualified professional about a particular partnership, contribution, or return. Read the rule.

Every date, citation, RIN, CFR reference, and figure in these posts is copied verbatim from the Federal Register and eCFR as of the snapshot date. Nothing is estimated, modeled, or extrapolated. This is not legal or tax advice.

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Last reviewed: June 28, 2024

The exception path is the agentic workflow layer.