[Federal Register Volume 87, Number 235 (Thursday, December 8, 2022)]
[Proposed Rules]
[Pages 75185-75196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26675]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-106134-22]
RIN 1545-BQ39


Syndicated Conservation Easement Transactions as Listed 
Transactions

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 that identify 
certain syndicated conservation easement transactions and substantially 
similar transactions as listed transactions, a type of reportable 
transaction. Material advisors and certain participants in these listed 
transactions are required to file disclosures with the IRS and are 
subject to penalties for failure to disclose. The proposed regulations 
affect participants in these transactions as well as material advisors. 
In addition, while the proposed regulations exclude qualified 
organizations from being treated as participants or parties to a 
prohibited tax shelter transaction subject to excise tax, this notice 
of proposed rulemaking requests comments on whether the final 
regulations should remove the exclusion from the application of the 
excise tax for qualified organizations that facilitate syndicated 
conservation easement transactions. Finally, this document provides 
notice of a public hearing on the proposed regulations.

DATES: 
    Comment date: Electronic or written comments must be received by 
February 6, 2023.
    Public hearing: The public hearing is scheduled to be held by 
teleconference on March 1, 2023, at 10 a.m. ET. Requests to speak and 
outlines of topics to be discussed at the public hearing must be 
received by February 6, 2022. If no outlines are received by February 
6, 2023, the public hearing will be cancelled. Requests to attend the 
public hearing must be received by 5 p.m. ET on February 27, 2023. The 
telephonic hearing will be made accessible to people with disabilities. 
Requests for special assistance during the telephonic hearing must be 
received by February 24, 2023.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-106134-
22). Once submitted to the Federal eRulemaking Portal, comments cannot 
be edited or withdrawn. The Department of the Treasury (Treasury 
Department) and the IRS will publish any comments to the public docket. 
Send paper submissions to: CC:PA:LPD:PR (REG-106134-22), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.
    For those requesting to speak during the hearing, send an outline 
of topic submissions electronically via the Federal eRulemaking Portal 
at www.regulations.gov (indicate IRS and REG-106134-22).
    Individuals who want to testify by telephone at the public hearing 
must send an email to [email protected] to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-106134-22 and the word TESTIFY. 
For example, the subject line may say: Request to TESTIFY at Hearing 
for REG-106134-22. The email should include a copy of the speaker's 
public comments and outline of topics. Individuals who want to attend 
by telephone the public hearing must also send an email to 
[email protected] to receive the telephone number and access code 
for the hearing. The subject line of the email must contain the 
regulation number REG-106134-22 and the word ATTEND. For example, the 
subject line may say: Request to ATTEND Hearing for REG-106134-22. To 
request special assistance during the telephonic hearing, contact the 
Publications and Regulations Branch of the Office of

[[Page 75186]]

Associate Chief Counsel (Procedure and Administration) by sending an 
email to [email protected] (preferred) or by telephone at (202) 
317-5177 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Theresa Melchiorre of the Office of Associate Chief Counsel (Income Tax 
and Accounting), (202) 317-7011; concerning submissions of comments and 
requests for hearing, Regina L. Johnson at (202) 317-5177 or 
[email protected] (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Comments and Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to any 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 comments submitted will 
be made available at www.regulations.gov or upon request.
    A public hearing is being held by teleconference on March 1, 2023, 
beginning at 10 a.m. ET unless no outlines are received by February 6, 
2023.
    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 February 6, 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. Copies of 
the agenda will be made available at www.regulations.gov, search IRS 
and REG-106134-22. Copies of the agenda will also be available by 
emailing a request to [email protected]. Please put ``REG-106134-
22 Agenda Request'' in the subject line of the email.
    Announcement 2020-4, 2020-17 I.R.B. 667 (April 20, 2020), provides 
that until further notice, public hearings conducted by the IRS will be 
held telephonically. Any telephonic hearing will be made accessible to 
people with disabilities.

Background

    This document contains proposed additions to 26 CFR part 1 (Income 
Tax Regulations) under section 6011 of the Internal Revenue Code 
(Code). The additions identify certain transactions that are ``listed 
transactions'' for purposes of section 6011.

I. Overview of the Reportable Transaction Regime

    Section 6011(a) generally provides that, when required by 
regulations prescribed by the Secretary of the Treasury or her delegate 
(Secretary), ``any person made liable for any tax imposed by this 
title, or with respect to the collection thereof, shall make a return 
or statement according to the forms and regulations prescribed by the 
Secretary. Every person required to make a return or statement shall 
include therein the information required by such forms or 
regulations.''
    On February 28, 2000, the Treasury Department and the IRS issued a 
series of temporary regulations (T.D. 8877; T.D. 8876; T.D. 8875) and 
cross-referencing notices of proposed rulemaking (REG-103735-00; REG-
110311-98; REG-103736-00) under sections 6011, 6111, and 6112. The 
temporary regulations and cross-referencing notices of proposed 
rulemaking were published in the Federal Register (65 FR 11205, 65 FR 
11269; 65 FR 11215, 65 FR 11272; 65 FR 11211, 65 FR 11271) on March 2, 
2000 (2000 Temporary Regulations). The 2000 Temporary Regulations were 
modified several times before March 4, 2003, the date on which the 
Treasury Department and the IRS, after providing notice and opportunity 
for public comment and considering the comments received, published 
final regulations (T.D. 9046) in the Federal Register (68 FR 10161) 
under sections 6011, 6111, and 6112 (2003 Final Regulations). The 2000 
Temporary Regulations and 2003 Final Regulations consistently provided 
that reportable transactions include listed transactions and that a 
listed transaction is a transaction that is the same as or 
substantially similar to one of the types of transactions that the IRS 
has determined to be a tax avoidance transaction and has identified by 
notice, regulation, or other form of published guidance as a listed 
transaction.
    Following the 2003 promulgation of Sec.  1.6011-4, Congress passed 
the American Jobs Creation Act of 2004 (AJCA), Public Law 108-357, 118 
Stat. 1418 (October 22, 2004), which added sections 6707A, 6662A, and 
6501(c)(10) to the Code, and revised sections 6111, 6112, 6707, and 
6708 of the Code. See sections 811-812 and 814-817 of the AJCA. The 
AJCA's legislative history explains that Congress incorporated in the 
statute the method that the Treasury Department and the IRS had been 
using to identify reportable transactions, and provided incentives, via 
penalties, to encourage taxpayer compliance with the new disclosure 
reporting obligations. As the Committee on Ways and Means explained in 
its report accompanying H.R. 4520, which became the AJCA:

    The Committee believes that the best way to combat tax shelters 
is to be aware of them. The Treasury Department, using the tools 
available, issued regulations requiring disclosure of certain 
transactions and requiring organizers and promoters of tax-
engineered transactions to maintain customer lists and make these 
lists available to the IRS. Nevertheless, the Committee believes 
that additional legislation is needed to provide the Treasury 
Department with additional tools to assist its efforts to curtail 
abusive transactions. Moreover, the Committee believes that a 
penalty for failing to make the required disclosures, when the 
imposition of such penalty is not dependent on the tax treatment of 
the underlying transaction ultimately being sustained, will provide 
an additional incentive for taxpayers to satisfy their reporting 
obligations under the new disclosure provisions.

House Report 108-548(I), 108th Cong., 2nd Sess. 2004, at 261 (June 16, 
2004) (House Report).
    In Footnote 232 of the House Report, the Committee on Ways and 
Means notes that the statutory definitions of ``reportable 
transaction'' and ``listed transaction'' were intended to incorporate 
the pre-AJCA regulatory definitions while providing the Secretary with 
leeway to make changes to those definitions:

    The provision states that, except as provided in regulations, a 
listed transaction means a reportable transaction, which is the same 
as, or substantially similar to, a transaction specifically 
identified by the Secretary as a tax avoidance transaction for 
purposes of section 6011. For this purpose, it is expected that the 
definition of ``substantially similar'' will be the definition used 
in Treas. Reg. sec. 1.6011-4(c)(4). However, the Secretary may 
modify this definition (as well as the definitions of ``listed 
transaction'' and ``reportable transactions'') as appropriate.

Id. at 261 n.232.
    Section 6707A(c)(1) defines a ``reportable transaction'' as ``any 
transaction with respect to which information is required to be 
included with a return or statement because, as determined under 
regulations prescribed under section 6011, such transaction is of a 
type which the Secretary determines as having a potential for tax 
avoidance or evasion.'' A ``listed transaction'' is defined by section 
6707A(c)(2) as ``a reportable transaction which is the same as, or 
substantially similar to, a transaction specifically identified by the 
Secretary

[[Page 75187]]

as a tax avoidance transaction for purposes of section 6011.''
    Section 6111(a), as revised by the AJCA, provides that each 
material advisor with respect to any reportable transaction must make a 
return setting forth: (1) information identifying and describing the 
transaction, (2) information describing any potential tax benefits 
expected to result from the transaction, and (3) such other information 
as the Secretary may prescribe. Such return must be filed not later 
than the date specified by the Secretary. Section 6111(b)(2) provides 
that a reportable transaction has the meaning given to such term by 
section 6707A(c).
    Section 6112(a), as revised by the AJCA, provides that each 
material advisor with respect to any reportable transaction (as defined 
in section 6707A(c)) must (whether or not required to file a return 
under section 6111 with respect to such transaction) maintain a list 
(1) identifying each person with respect to whom such advisor acted as 
a material advisor and (2) containing such other information as the 
Secretary may by regulations require.
    On August 3, 2007, the Treasury Department and the IRS published 
final regulations in the Federal Register (72 FR 43146-01, 72 FR 43157-
01, 72 FR 43154-01) under sections 6011, 6111, and 6112 modifying the 
rules relating to the disclosure of reportable transactions by 
participants in reportable transactions under section 6011, the 
disclosure of reportable transactions by material advisors under 
section 6111, and the list maintenance requirements of material 
advisors with respect to reportable transactions under section 6112 in 
response to the changes in the AJCA.

II. Disclosure of Reportable Transactions by Participants and Penalties 
for Failure To Disclose

    Section 1.6011-4(a) provides that every taxpayer that has 
participated in a reportable transaction within the meaning of Sec.  
1.6011-4(b) and who is required to file a tax return must file a 
disclosure statement within the time prescribed in Sec.  1.6011-4(e).
    Section 1.6011-4(d) and (e) provide that the disclosure statement--
Form 8886, Reportable Transaction Disclosure Statement (or successor 
form)--must be attached to the taxpayer's tax return for each taxable 
year for which a taxpayer participates in a reportable transaction. A 
copy of the disclosure statement must be sent to the IRS's Office of 
Tax Shelter Analysis (OTSA) at the same time that any disclosure 
statement is first filed by the taxpayer pertaining to a particular 
reportable transaction.
    Reportable transactions include listed transactions, confidential 
transactions, transactions with contractual protection, loss 
transactions, and transactions of interest. See Sec.  1.6011-4(b)(2) 
through (6). Consistent with the definitions previously provided in the 
2000 Temporary Regulations and later in the 2003 Final Regulations, as 
promulgated in 2007, Sec.  1.6011-4(b)(2) continues to define a 
``listed transaction'' as a transaction that is the same as or 
substantially similar to one of the types of transactions that the IRS 
has determined to be a tax avoidance transaction and identified by 
notice, regulation, or other form of published guidance as a listed 
transaction.
    Section 1.6011-4(c)(4) provides that a transaction is 
``substantially similar'' if it is expected to obtain the same or 
similar types of tax consequences and is either factually similar or 
based on the same or similar tax strategy. Receipt of an opinion 
regarding the tax consequences of the transaction is not relevant to 
the determination of whether the transaction is the same as or 
substantially similar to another transaction. Further, the term 
substantially similar must be broadly construed in favor of disclosure. 
For example, a transaction may be substantially similar to a listed 
transaction even though it may involve different entities or use 
different Code provisions.
    Section 1.6011-4(c)(3)(i)(A) provides that a taxpayer has 
participated in a listed transaction if the taxpayer's tax return 
reflects tax consequences or a tax strategy described in the published 
guidance that lists the transaction under Sec.  1.6011-4(b)(2). 
Published guidance may identify other types or classes of persons that 
will be treated as participants in a listed transaction. Published 
guidance may also identify types or classes of persons that will not be 
treated as participants in a listed transaction.
    Section 1.6011-4(e)(2)(i) provides that if a transaction becomes a 
listed transaction after the filing of a taxpayer's tax return 
reflecting the taxpayer's participation in the listed transaction and 
before the end of the period of limitations for assessment for any 
taxable year in which the taxpayer participated in the listed 
transaction, then a disclosure statement must be filed with OTSA within 
90 calendar days after the date on which the transaction becomes a 
listed transaction. This requirement extends to an amended return and 
exists regardless of whether the taxpayer participated in the 
transaction in the year the transaction became a listed transaction. 
The Commissioner of Internal Revenue (Commissioner) may also determine 
the time for disclosure of listed transactions in the published 
guidance identifying the transaction.
    Participants required to disclose these transactions under Sec.  
1.6011-4 who fail to do so are subject to penalties under section 
6707A. Section 6707A(b) provides that the amount of the penalty is 75 
percent of the decrease in tax shown on the return as a result of the 
reportable transaction (or which would have resulted from such 
transaction if such transaction were respected for Federal tax 
purposes), subject to minimum and maximum penalty amounts. The minimum 
penalty amount is $5,000 in the case of a natural person and $10,000 in 
any other case. For a listed transaction, the maximum penalty amount is 
$100,000 in the case of a natural person and $200,000 in any other 
case.
    Additional penalties may also apply. In general, section 6662A 
imposes a 20 percent accuracy-related penalty on any understatement (as 
defined in section 6662A(b)(1)) attributable to an adequately disclosed 
reportable transaction. If the taxpayer had a requirement to disclose 
participation in the reportable transaction but did not adequately 
disclose the transaction in accordance with the regulations under 
section 6011, the taxpayer is subject to an increased penalty rate 
equal to 30 percent of the understatement. See section 6662A(c). 
Section 6662A(b)(2) provides that section 6662A applies to any item 
which is attributable to any listed transaction and any reportable 
transaction (other than a listed transaction) if a significant purpose 
of such transaction is the avoidance or evasion of Federal income tax.
    Participants required to disclose listed transactions who fail to 
do so are also subject to an extended period of limitations under 
section 6501(c)(10). That section provides that the time for assessment 
of any tax with respect to the transaction shall not expire before the 
date that is one year after the earlier of the date the participant 
discloses the transaction or the date a material advisor discloses the 
participation pursuant to a written request under section 
6112(b)(1)(A).

III. Disclosure of Reportable Transactions by Material Advisors and 
Penalties for Failure To Disclose

    Section 301.6111-3(a) of the Procedure and Administration 
Regulations provides that each material advisor with respect to any 
reportable

[[Page 75188]]

transaction, as defined in Sec.  1.6011-4(b), must file a return as 
described in Sec.  301.6111-3(d) by the date described in Sec.  
301.6111-3(e).
    Section 301.6111-3(b)(1) provides that a person is a material 
advisor with respect to a transaction if the person provides any 
material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, insuring, or carrying out 
any reportable transaction, and directly or indirectly derives gross 
income in excess of the threshold amount as defined in Sec.  301.6111-
3(b)(3) for the material aid, assistance, or advice. Under Sec.  
301.6111-3(b)(2)(i) and (ii), a person provides material aid, 
assistance, or advice if the person provides a tax statement, which is 
any statement (including another person's statement), oral or written, 
that relates to a tax aspect of a transaction that causes the 
transaction to be a reportable transaction as defined in Sec.  1.6011-
4(b)(2) through (7).
    Material advisors must disclose transactions on Form 8918, Material 
Advisor Disclosure Statement (or successor form), as provided in Sec.  
301.6111-3(d) and (e). Section 301.6111-3(e) provides that the material 
advisor's disclosure statement for a reportable transaction must be 
filed with the OTSA by the last day of the month that follows the end 
of the calendar quarter in which the advisor becomes a material advisor 
with respect to a reportable transaction or in which the circumstances 
necessitating an amended disclosure statement occur. The disclosure 
statement must be sent to the OTSA at the address provided in the 
instructions for Form 8918 (or successor form).
    Section 301.6111-3(d)(2) provides that the IRS will issue to a 
material advisor a reportable transaction number with respect to the 
disclosed reportable transaction. Receipt of a reportable transaction 
number does not indicate that the disclosure statement is complete, nor 
does it indicate that the transaction has been reviewed, examined, or 
approved by the IRS. Material advisors must provide the reportable 
transaction number to all taxpayers and material advisors for whom the 
material advisor acts as a material advisor as defined in Sec.  
301.6111-3(b). The reportable transaction number must be provided at 
the time the transaction is entered into, or, if the transaction is 
entered into prior to the material advisor receiving the reportable 
transaction number, within 60 calendar days from the date the 
reportable transaction number is mailed to the material advisor.
    Additionally, material advisors must prepare and maintain lists 
identifying each person with respect to whom the advisor acted as a 
material advisor with respect to the reportable transaction in 
accordance with Sec.  301.6112-1(b) and furnish such lists to the IRS 
in accordance with Sec.  301.6112-1(e).
    Section 6707(a) provides that a material advisor who fails to file 
a timely disclosure, or files an incomplete or false disclosure 
statement, is subject to a penalty. Pursuant to section 6707(b)(2), for 
listed transactions, the penalty is the greater of (A) $200,000, or (B) 
50 percent of the gross income derived by such person with respect to 
aid, assistance, or advice which is provided with respect to the listed 
transaction before the date the return is filed under section 6111.
    A material advisor may also be subject to a penalty under section 
6708 for failing to maintain a list under section 6112(a) and failing 
to make the list available upon written request to the Secretary in 
accordance with section 6112(b) within 20 business days after the date 
of such request. Section 6708(a) provides that the penalty is $10,000 
per day for each day of the failure after the 20th day. However, no 
penalty will be imposed with respect to the failure on any day if such 
failure is due to reasonable cause.

IV. Tax-Exempt Entities as Parties to Prohibited Tax Shelter 
Transactions

    Section 4965 of the Code, which was enacted in 2006, is intended to 
deter certain ``tax-exempt entities'' (as defined in section 4965(c)) 
from facilitating prohibited tax shelter transactions, which include 
listed transactions. Section 4965(a)(1) provides, in part, that if a 
transaction is a prohibited tax shelter transaction at the time a tax-
exempt entity becomes a party to the transaction, the entity must pay a 
tax for the taxable year and any subsequent taxable year as provided in 
section 4965(b)(1). Tax-exempt entities subject to the tax are listed 
in section 4965(c)(1)-(3) and include, among others, entities and 
governmental units described in sections 501(c) and 170(c) (other than 
the United States). A tax-exempt entity that is a party to a prohibited 
tax shelter transaction generally is also subject to various reporting 
and disclosure obligations. Additionally, an entity manager is subject 
to excise taxes under section 4965(a)(2) if the manager approves the 
entity as a party (or otherwise causes the entity to be a party) to a 
prohibited tax shelter transaction and knows or has reason to know that 
the transaction is a prohibited tax shelter transaction.

A. The Excise Taxes

    The amount of the section 4965 tax owed by a tax-exempt entity 
depends on whether the tax-exempt entity knows, or has reason to know, 
that a transaction is a prohibited tax shelter transaction at the time 
the entity becomes a party to the transaction. A tax-exempt entity is 
treated as knowing or having reason to know that a transaction is a 
prohibited tax shelter transaction if one or more of its entity 
managers knew or had reason to know that the transaction was a 
prohibited tax shelter transaction at the time the entity manager(s) 
approved the entity as (or otherwise caused the entity to be) a party 
to the transaction.\1\ The tax-exempt entity is also attributed the 
knowledge or reason to know of certain entity managers--those persons 
with authority or responsibility similar to that exercised by an 
officer, director, or trustee of an organization--even if the entity 
manager does not approve the entity as (or otherwise cause the entity 
to be) a party to the transaction.
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    \1\ Section 53.4965-6 of the Foundation and Similar Excise Tax 
Regulations provides factors to be considered in determining whether 
an entity manager knows or has reason to know that a transaction is 
a prohibited tax shelter transaction.
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    Section 53.4965-4(a)(1) provides that a tax-exempt entity is a 
``party'' to a prohibited tax shelter transaction if it facilitates a 
prohibited tax shelter transaction by reason of its tax-exempt, tax-
indifferent, or tax-favored status. In addition, under Sec.  53.4965-
4(a)(2) and (b), the Secretary may issue published guidance to identify 
tax-exempt entities by type, class, or role that will or will not be 
treated as parties to a prohibited tax shelter transaction.
    If the tax-exempt entity unknowingly becomes a party to a 
prohibited tax shelter transaction, the section 4965 tax generally 
equals the greater of (1) the product of the highest rate of tax under 
section 11 (currently 21 percent) and the entity's net income 
attributable to the prohibited tax shelter transaction, or (2) the 
product of the highest rate of tax under section 11 and 75 percent of 
the proceeds received by the entity that are attributable to the 
prohibited tax shelter transaction. If the tax-exempt entity knew or 
had reason to know that the transaction was a prohibited tax shelter 
transaction at the time the tax-exempt entity became a party to the 
transaction, the section 4965 tax increases to the greater of (1) 100 
percent of the entity's net income attributable to the prohibited tax 
shelter transaction, or (2) 75 percent of the entity's proceeds 
attributable to the prohibited tax shelter transaction.
    The terms ``net income'' and ``proceeds'' are defined in Sec.  
53.4965-8.

[[Page 75189]]

In general, a tax-exempt entity's net income attributable to a 
prohibited tax shelter transaction is its gross income derived from the 
transaction, reduced by those deductions that are attributable to the 
transaction and that would be allowed by chapter 1 of the Code if the 
tax-exempt entity were treated as a taxable entity for this purpose, 
and further reduced by the taxes imposed by subtitle D of the Code 
(other than the tax imposed by section 4965) with respect to the 
transaction. In the case of a tax-exempt entity that is a party to the 
transaction by reason of facilitating a prohibited tax shelter 
transaction by reason of its tax-exempt, tax-indifferent, or tax-
favored status, the term ``proceeds,'' solely for purposes of section 
4965, means the gross amount of the tax-exempt entity's consideration 
for facilitating the transaction, not reduced for any costs or expenses 
attributable to the transaction. Published guidance with respect to a 
particular prohibited tax shelter transaction may designate additional 
amounts as proceeds from the transaction for purposes of section 4965. 
In addition, for all tax-exempt entities that are parties to a 
prohibited tax shelter transaction, any amount that is a gift or a 
contribution to a tax-exempt entity and that is attributable to a 
prohibited tax shelter transaction is treated as proceeds for purposes 
of section 4965, unreduced by any associated expenses.
    The amount of the section 4965 tax on an ``entity manager'' equals 
$20,000 for each time the manager approves the tax-exempt entity as (or 
otherwise causes such entity to be) a party to a prohibited tax shelter 
transaction and knows or has reason to know that the transaction is a 
prohibited tax shelter transaction. This liability is not joint and 
several.

B. Disclosures

    Section 53.6011-1 requires that a tax-exempt entity subject to the 
section 4965 excise tax must file Form 4720, Return of Excise Taxes 
Under Chapters 41 and 42 of the Internal Revenue Code, to report the 
liability and pay the tax due under section 4965(a)(1). Under Sec.  
1.6033-5, a tax-exempt entity that is a party to a prohibited tax 
shelter transaction must file Form 8886-T, Disclosure by Tax-Exempt 
Entity Regarding Prohibited Tax Shelter Transaction, to disclose that 
it is a party to a prohibited tax shelter transaction, the identity of 
any other party (whether taxable or tax-exempt) to such transaction 
that is known to the tax-exempt entity, and certain other information. 
Under Sec.  1.6033-2, if the tax-exempt entity is required to file Form 
990, Return of Organization Exempt From Income Tax, it must disclose on 
that form that it is a party to a prohibited tax shelter transaction, 
whether any taxable party notified the tax-exempt entity that it was or 
is a party to a prohibited tax shelter transaction, and whether the 
tax-exempt entity filed Form 8886-T.
    Section 6011(g) and Sec.  301.6011(g)-1 provide that any taxable 
party to a prohibited tax shelter transaction must disclose to each 
tax-exempt entity that the taxable party knows or has reason to know is 
a party to such transaction that the transaction is a prohibited tax 
shelter transaction.

V. Conservation Easements

    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.
    Section 170(h)(1) provides that, 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.
    Under section 170(h)(2), the term ``qualified real property 
interest'' means any of the following interests in real property: (A) 
the entire interest of the donor other than a qualified mineral 
interest as defined in section 170(h)(6); (B) a remainder interest; and 
(C) a restriction (granted in perpetuity) on the use that may be made 
of the real property.
    Section 170(h)(3) provides that the term ``qualified organization'' 
generally includes governmental units, certain public charities, and 
Type I supporting organizations thereto.
    Section 170(h)(4)(A) generally provides that the term 
``conservation purpose'' includes (1) the preservation of land areas 
for outdoor recreation by, or the education of, the general public; (2) 
the protection of a relatively natural habitat of fish, wildlife, or 
plants, or similar ecosystem; (3) the preservation of open space 
(including farmland and forest land) where such preservation is either 
for the scenic enjoyment of the general public, or pursuant to a 
clearly delineated Federal, State, or local governmental conservation 
policy, and that will yield a significant public benefit, or (4) the 
preservation of an historically important land area or a certified 
historic structure (as defined in section 170(h)(4)(C)).
    Section 170(h)(4)(B) provides a special rule with respect to 
buildings in registered historic districts. Among other requirements, 
any contribution of a qualified real property interest that is a 
restriction with respect to the exterior of a building described in 
section 170(h)(4)(C)(ii) is not considered to be exclusively for 
conservation purposes unless such interest includes a restriction which 
preserves the entire exterior of the building (including the front, 
sides, rear, and height of the building), and prohibits any change in 
the exterior of the building which is inconsistent with the historical 
character of such exterior.
    Section 170(h)(4)(C) provides that, for purposes of section 
170(h)(4)(A)(iv), the term ``certified historic structure'' means any 
building, structure, or land area which is listed in the National 
Register, or any building which is located in a registered historic 
district (as defined in section 47(c)(3)(B) of the Code) and is 
certified by the Secretary of the Interior to the Secretary as being of 
historic significance to the district. A building, structure, or land 
area satisfies section 170(h)(4)(C) if it satisfies that definition 
either at the time of the transfer or on the due date (including 
extensions) for filing the transferor's return under chapter 1 of the 
Code for the taxable year in which the transfer is made.
    Section 170(h)(5)(A) provides that, for purposes of section 170(h), 
a contribution is not treated as exclusively for conservation purposes 
unless the conservation purpose is protected in perpetuity. Section 
170(h)(2)(C) and section 1.170A-14(b)(2) provide in part that a 
perpetual conservation restriction is a restriction granted in 
perpetuity on the use that may be made of real property including an 
easement or other interest in property that under state law has 
attributes similar to an easement.

VI. Syndicated Conservation Easement Transactions and Notice 2017-10

    Some promoters have been syndicating conservation easement 
transactions that purport to give investors in a partnership or other 
pass-through entity (pass-through entity) the opportunity to claim a 
charitable contribution deduction in amounts that significantly exceed 
the amounts invested. In one type of an abusive syndicated conservation 
easement transaction, the promoter obtains an appraisal that purports 
to be a qualified appraisal as defined in section

[[Page 75190]]

170(f)(11)(E)(i). The appraisal greatly inflates the value of the 
conservation easement based on unreasonable and unrealistic conclusions 
about the highest and best use of the real property and does not take 
into account all of the factors necessary to support the valuation, 
such as the time and costs to achieve that highest and best use. In 
addition, investors who held their direct or indirect interests in the 
pass-through entity for one year or less take into account under 
section 1223 of the Code the pass-through entity's holding period in 
the conservation easement for purposes of section 1222 of the Code 
(taking into account any modification required by section 1061 of the 
Code) for purposes of potential treatment of the donated conservation 
easement as long-term capital gain property under section 170(e)(1).
    On December 23, 2016, the IRS released Notice 2017-10, 2017-4 
I.R.B. 544, which was subsequently modified by Notice 2017-29, 2017-20 
I.R.B. 1243, and Notice 2017-58, 2017-42 I.R.B. 326, alerting taxpayers 
and their representatives that syndicated conservation easement 
transactions described in Notice 2017-10, and substantially similar 
transactions, are tax avoidance transactions and identifying them as 
listed transactions for purposes of Sec.  1.6011-4(b)(2) and sections 
6111 and 6112. Notice 2017-10 also alerts persons involved with the 
transactions that certain responsibilities may arise from their 
involvement. Notice 2017-10, as modified by Notice 2017-29, 
specifically excludes a donee described in section 170(c) from being 
treated as a party to the transaction under section 4965 of the Code 
(``section 4965 carve-out''), a participant under Sec.  1.6011-4, or a 
material advisor under section 6111(b)(1). Notice 2017-10 applies to 
easements placed on any real property, including historically important 
land areas and certified historic structures.
    Notice 2017-10 describes the following transaction as a listed 
transaction. An investor receives promotional materials that offer 
investors in a pass-through entity the possibility of a charitable 
contribution deduction that equals or exceeds an amount that is two and 
one-half times (that is, 250 percent of) the amount of the investor's 
investment. The promotional materials may be oral or written. For 
purposes of Notice 2017-10, promotional materials include, but are not 
limited to, documents described in Sec.  301.6112-1(b)(3)(iii)(B). 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. The pass-through entity that holds the real 
property contributes a conservation easement encumbering the property 
to a tax-exempt entity and allocates, directly or through one or more 
tiers of pass-through entities, a charitable contribution deduction to 
the investor. Following that contribution, the investor reports on his 
or her federal income tax return a charitable contribution deduction 
with respect to the conservation easement.
    Notice 2017-10 creates a rule only for purposes of reporting and 
penalties under the reportable transaction rules. No inference should 
be drawn from Notice 2017-10 (or these regulations) regarding the 
appropriateness of any deduction in any specific case, including cases 
in which the deduction is less than two and one-half times the amount 
of an investor's investment.
    The foregoing efforts to combat abuse notwithstanding, the Treasury 
Department and IRS fully support otherwise proper deductions 
attributable to the voluntary contribution of a properly valued 
restriction on real property requiring the real property to be granted 
and protected for conservation purposes in perpetuity.

VII. Purpose of Proposed Regulations

    On March 3, 2022, the Sixth Circuit issued an order in Mann 
Construction v. United States, 27 F.4th 1138, 1147 (6th Cir. 2022), 
holding that Notice 2007-83, 2007-2 C.B. 960, which identified certain 
trust arrangements claiming to be welfare benefit funds and involving 
cash value life insurance policies as listed transactions, violated the 
Administrative Procedure Act (APA), 5 U.S.C. 551-559, because the 
notice was issued without following the notice-and-comment procedures 
required by section 553 of the APA. The Sixth Circuit concluded that 
Congress did not clearly express an intent to override the notice-and-
comment procedures required by section 553 of the APA when it enacted 
the AJCA. Id. at 1148. The Sixth Circuit reversed the decision of the 
district court, which held that Congress had authorized the IRS to 
identify listed transactions without notice and comment. See Mann 
Construction, Inc. v. United States, 539 F.Supp.3d 745, 763 (E.D. Mich. 
2021). See also GBX Associates, LLC, v. United States, 1:22cv401 (N.D. 
Ohio, Nov. 14, 2022).
    Relying on an analysis similar to the Sixth Circuit's analysis in 
Mann Construction, the Tax Court, in a reviewed decision with two 
judges dissenting, recently held that Notice 2017-10 was improperly 
issued because it was issued without following the APA's notice and 
comment procedures. See Green Valley Investors, LLC, et al. v. 
Commissioner, 159 T.C. No. 5 (Nov. 9, 2022). Accordingly, the court 
granted the petitioner's cross-motion for partial summary judgment on 
the application of section 6662A penalties. A final decision has not 
been entered in the case.
    The Treasury Department and the IRS disagree with the Sixth 
Circuit's decision in Mann Construction and the Tax Court's decision in 
Green Valley and are continuing to defend the validity of Notice 2017-
10 and other notices identifying transactions as listed transactions in 
circuits other than the Sixth Circuit. At the same time, however, to 
eliminate any confusion and ensure consistent enforcement of the tax 
laws throughout the nation, the Treasury Department and the IRS are 
issuing these proposed regulations to identify certain syndicated 
conservation easement transactions as listed transactions for purposes 
of all relevant provisions of the Code and Treasury Regulations.
    These proposed regulations inform taxpayers that participate in 
syndicated conservation easement transactions, and substantially 
similar transactions, and persons who act as material advisors with 
respect to these transactions, and substantially similar transactions, 
that, once these proposed regulations are published in final form, 
those taxpayers and material advisors must disclose the transactions in 
accordance with the final regulations and the regulations issued under 
section 6011 and 6111. Material advisors must also maintain lists as 
required by section 6112. Prior to the date these regulations are 
published as final regulations, it is the position of the Treasury 
Department and the IRS that disclosure and list maintenance 
requirements for syndicated conservation easement transactions 
identified as listed transactions in Notice 2017-10 continue to be in 
effect, other than in the Sixth Circuit. In addition, taxpayers, 
including taxpayers in the Sixth Circuit, who have filed a tax return 
reflecting their participation in a syndicated conservation easement 
transaction before the final regulations are published and who have not 
disclosed the transaction pursuant to Notice 2017-10 will be required 
to file a disclosure statement within 90 calendar days after the date 
on which the final regulations are published if the period of 
limitations for assessment for any taxable year in which the taxpayer 
participated in the transaction remains

[[Page 75191]]

open. Material advisors also have disclosure and list maintenance 
obligations with respect to such transactions. See Part VI. of the 
Explanation of Provisions section of this preamble.
    The IRS intends to challenge the purported tax benefits from these 
syndicated conservation easement transactions based on the 
overvaluation of the conservation easement. The IRS may also challenge 
the purported tax benefits from these transactions based on failure to 
comply with the requirements of section 170 (including, for example, 
lack of donative intent or the failure to comply with requirements of 
section 170(h)), lack of economic substance, lack of business purpose, 
violation of the partnership anti-abuse rule, or application of other 
rules or doctrines based on the facts of a particular case.

Explanation of Provisions

I. Definition of Syndicated Conservation Easement Transactions

    Proposed Sec.  1.6011-9(a) provides that a transaction that is the 
same as, or substantially similar to, a syndicated conservation 
easement transaction described in proposed Sec.  1.6011-9(b) is a 
listed transaction for purposes of Sec.  1.6011-4(b)(2) and sections 
6111 and 6112. ``Substantially similar to'' is defined in Sec.  1.6011-
4(c)(4) to include any transaction that is expected to obtain the same 
or similar types of tax consequences and that is either factually 
similar or based on the same or a similar tax strategy. In the context 
of a syndicated conservation easement transaction, that would include, 
for example, transactions in which the contributed property is 
described in section 170(h)(2)(A) or (B) or a fee interest in real 
property.
    Proposed Sec.  1.6011-9(b) defines a syndicated conservation 
easement transaction as a transaction in which the four elements 
described in proposed Sec.  1.6011-9(b)(1) through (4) occur 
(regardless of the order in which they occur). These four elements are 
as follows:

A. Promotional Materials Satisfy the 2.5 Times Rule

    A taxpayer receives promotional materials that offer investors in a 
pass-through entity the possibility of a charitable contribution 
deduction that equals or exceeds an amount that is two and one-half 
times the amount of the taxpayer's investment in the pass-through 
entity. The proposed regulations refer to this element as the ``2.5 
times rule.'' Proposed Sec.  1.6011-9(c)(4) states that, for this 
purpose, the term ``promotional materials'' includes materials 
described in Sec.  301.6112-1(b)(3)(iii)(B) and any other written or 
oral communication regarding the transaction provided to investors, 
such as marketing materials, appraisals (including preliminary 
appraisals, draft appraisals, and the appraisal that is attached to the 
taxpayer's return), websites, transactional documents such as the deed 
of conveyance, private placement memoranda, tax opinions, operating 
agreements, subscription agreements, statements of the anticipated 
value of the conservation easement, and statements of the anticipated 
amount of the charitable contribution deduction. These proposed 
regulations provide additional guidance on how to determine whether the 
2.5 times rule is met, as discussed in Part II of the Explanation of 
Provisions section of this preamble.

B. Taxpayer Invests in the Pass-Through Entity

    The taxpayer acquires an interest, directly or indirectly through 
one or more tiers of pass-through entities, in the pass-through entity 
that owns real property (that is, the taxpayer becomes an investor in 
the entity that owns the real property).

C. Pass-Through Entity Contributes the Conservation Easement to a 
Qualified Organization and Allocates a Charitable Contribution 
Deduction to Its Partners

    The pass-through entity that owns the real property contributes an 
easement on such real property to a qualified organization and treats 
the easement as a conservation easement. A conservation easement is 
defined in these proposed regulations (in proposed Sec.  1.6011-
9(c)(2)) as a restriction, exclusively for conservation purposes, 
granted in perpetuity (per the relevant subsections of section 170), on 
the use that may be made of specified real property.
    The pass-through entity allocates, directly or through one or more 
tiers of pass-through entities, a charitable contribution deduction to 
the taxpayer.

D. Taxpayer Reports Charitable Contribution Deduction on Taxpayer's 
Federal Income Tax Return

    The taxpayer reports on the taxpayer's Federal income tax return a 
charitable contribution deduction with respect to the conservation 
easement.

II. 2.5 Times Rule

    These proposed regulations include three rules to address potential 
avoidance of the 2.5 times rule. First, to prevent promoters from 
circumventing the 2.5 times rule by having promotional materials 
contain language that is ambiguous as to the amount of the potential 
charitable deduction, the proposed regulations provide that the highest 
deduction amount stated or implied in the promotional materials, taken 
as a whole, applies. Thus, if the promotional materials suggest a range 
of possible charitable contribution deduction amounts, the highest 
suggested deduction amount determines whether the 2.5 times rule is 
met. Similarly, if one piece of promotional materials (for example, an 
appraisal or oral statement) suggests a higher charitable contribution 
deduction amount than do other promotional materials, then the highest 
suggested charitable contribution deduction amount will determine 
whether the 2.5 times rule is met.
    Second, the proposed regulations include a rebuttable presumption 
deeming the 2.5 times rule to be met if (i) the pass-through entity 
donates a conservation easement within three years following taxpayer's 
investment in the pass-through entity, (ii) the pass-through entity 
allocates a charitable contribution deduction to the taxpayer that 
equals or exceeds two and one-half times the amount of the taxpayer's 
investment, and (iii) the taxpayer claims a deduction that equals or 
exceeds two and one-half times the amount of the taxpayer's investment. 
This presumption is intended to address taxpayers and promoters who may 
not be forthcoming about the content or receipt of the promotional 
materials (as broadly defined under the proposed regulations). By the 
fact that the taxpayer claimed a charitable contribution deduction that 
equals or exceeds an amount that is two and one-half times the amount 
of their investment in the pass-through entity, the Treasury Department 
and the IRS will presume that the taxpayer received promotional 
materials that offered investors the possibility of being allocated a 
charitable contribution deduction that equals or exceeds an amount that 
is two and one-half times the amount of the taxpayer's investment in 
the pass-through entity. The presumption may be rebutted if the 
taxpayer establishes to the satisfaction of the Commissioner that none 
of the promotional materials contained a suggestion or implication that 
investors might receive a charitable contribution deduction that equals 
or exceeds an amount that is two and one-half times the amount of their 
investment in the pass-through entity. The Treasury

[[Page 75192]]

Department and the IRS request comments on this rule.
    Finally, to prevent taxpayers from investing excess amounts in the 
pass-through entity to avoid meeting the 2.5 times rule, the proposed 
regulations contain an ``anti-stuffing'' rule. The anti-stuffing rule 
provides that the amount of a taxpayer's investment in the pass-through 
entity for purposes of determining application of the 2.5 times rule is 
limited to the portion of the taxpayer's investment that is 
attributable to the portion of the real property on which a 
conservation easement is placed and that produces the charitable 
contribution deduction described in paragraph (b)(3) of this section. 
For example, if a portion of the taxpayer's investment in the pass-
through entity is attributable to property held directly or indirectly 
by the pass-through entity other than the real property on which a 
conservation easement is placed (including any other real property, 
cash, cash equivalents, digital assets, marketable securities, or other 
assets), that portion of the taxpayer's investment is not attributable 
to the portion of the real property on which a conservation easement is 
placed for purposes of the 2.5 times rule. The proposed regulations 
include an example illustrating the application of this rule.

III. Participant

    Whether a taxpayer has participated in the listed transaction 
described in proposed Sec.  1.6011-9(b) is determined under Sec.  
1.6011-4(c)(3)(i)(A). Participants include, but are not limited to, an 
owner of a pass-through entity, the pass-through entity (any tier, if 
multiple tiers are involved in the transaction), or any other taxpayer 
whose tax return reflects tax consequences or a tax strategy described 
in these proposed regulations. The proposed regulations provide, 
consistent with Notice 2017-10, that a qualified organization to which 
a syndicated conservation easement described in proposed Sec.  1.6011-
9(b) is donated is not treated as a participant under Sec.  1.6011-
4(c)(3)(i)(A) to the listed transaction described in these proposed 
regulations.

IV. Material Advisors

    Material advisors, including promoters, appraisers and return 
preparers who make a tax statement with respect to transactions 
described in proposed Sec.  1.6011-9(b), have disclosure and list 
maintenance obligations under sections 6111 and 6112. See Sec. Sec.  
301.6111-3 and 301.6112-1. Notice 2017-10, as modified by Notice 2017-
29, provided that a qualified organization is not treated as a material 
advisor under section 6111. These proposed regulations differ from 
Notice 2017-10, as modified, in that they do not contain this rule. One 
of the requirements to be a material advisor under section 6111(b)(1) 
is that the person must directly or indirectly derive gross income in 
excess of the threshold amount provided in section 6111(b)(1)(B) for 
providing material aid, assistance, or advice with respect to the 
listed transaction. The regulations under section 6111 provide that 
gross income includes all fees for a tax strategy, for services for 
advice (whether or not tax advice), and for the implementation of a 
reportable transaction. However, a fee does not include amounts paid to 
a person, including an advisor, in that person's capacity as a party to 
the transaction. See Sec.  301.6111-3(b)(3)(ii). The Treasury 
Department and the IRS request comments on whether qualified 
organizations are receiving fees for providing material aid, 
assistance, or advice with respect to transactions described in these 
proposed regulations, the nature of the services being provided, and 
why a carve-out from the definition of material advisor is needed.

V. Party to a Prohibited Tax Shelter Transaction

    The proposed regulations provide, consistent with Notice 2017-10, 
that a qualified organization \2\ is not treated as a party to the 
transaction under section 4965. However, the Treasury Department and 
the IRS are considering whether a qualified organization that 
facilitates an abusive syndicated conservation easement transaction 
described in these proposed regulations should be subject to section 
4965. Since the issuance of Notice 2017-10, the IRS has received tens 
of thousands of listed transaction disclosures under sections 6011 and 
6111. These disclosures indicate that a small number of qualified 
organizations facilitate abusive syndicated conservation easement 
transactions, sometimes for several hundreds of investors per year. 
Eliminating or limiting the scope of the section 4965 carve-out could 
deter qualified organizations from facilitating these abusive 
transactions. Any elimination or limitation of the section 4965 carve-
out would apply only to transactions occurring after the date the 
Treasury decision adopting these regulations as final regulations is 
published in the Federal Register.
---------------------------------------------------------------------------

    \2\ As noted in Part V of the Background section of this 
preamble, a donation of a qualified conservation contribution must 
be made to a ``qualified organization,'' generally defined in 
section 170(h)(3) to include governmental units, certain public 
charities, and Type I supporting organizations thereto. Under 
section 4965(c), the term ``tax-exempt entity'' includes, among 
others, entities and governmental units described in sections 501(c) 
and 170(c) (other than the United States). Thus, absent the section 
4965 carve-out, tax-exempt entities that would be affected are 
donees that are qualified organizations described in section 
170(h)(3), other than the United States, that accept a conservation 
easement as part of the syndicated conservation easement transaction 
described in these proposed regulations.
---------------------------------------------------------------------------

    While some land trusts facilitate syndicated conservation easement 
transactions that the land trusts know, or have reason to know, are 
abusive, other land trusts take affirmative steps to avoid 
participating in abusive transactions. For example, some land trusts, 
when engaging in transactions with pass-through entities of unrelated 
parties, require a donor's appraisal and will decline to participate in 
any transaction in which, among other things: (i) the appraisal 
indicates an increase in value of more than two and one-half times the 
basis in the property; (ii) the easement or property is donated within 
36 months of the pass-through entity's acquisition of the property; and 
(iii) the value of the donation (not the deduction) is $1 million or 
greater.
    The Treasury Department and the IRS request comments on specific 
ways that qualified organizations can engage in due diligence to avoid 
entering into abusive syndicated conservation easement transactions 
described in these proposed regulations. For example: what questions 
should qualified organizations ask donors to avoid entering into a 
syndicated conservation easement transaction described in these 
proposed regulations; when is the qualified organization best 
positioned to make the inquiries; and what written information or 
materials could the donor provide to the qualified organization to 
ensure the qualified organization will not be participating in an 
inappropriate transaction?

A. Eliminating the Section 4965 Carve-Out

    Tax-exempt entities that facilitate abusive syndicated conservation 
easement transactions described in these proposed regulations do so by 
reason of their tax-exempt, tax-indifferent, or tax-favored status. 
Thus, if the final regulations were to eliminate the section 4965 
carve-out, a qualified organization that accepts a syndicated 
conservation easement described in these proposed regulations would be 
subject to the section 4965 excise tax. However, if the qualified 
organization did not know, or have reason to know, that the 
contribution of the easement was part of a syndicated conservation

[[Page 75193]]

easement transaction described in these proposed regulations, then the 
qualified organization would be subject only to the lesser section 4965 
entity-level tax provided in section 4965(b)(1)(A). See discussion in 
Part IV.A. of the Background section of this preamble. Further, if at 
the time an entity manager approves or otherwise causes the qualified 
organization to accept the contribution the manager does not know, or 
have reason to know, that the contribution is part of a syndicated 
conservation easement transaction described in these proposed 
regulations, the manager would not be subject to the tax imposed by 
section 4965(a)(2).
    Conversely, if the qualified organization knows or has reason to 
know (under the rules discussed in Part IV.A. of the Background section 
of this preamble) that a contribution of an easement is part of a 
syndicated conservation easement transaction described in these 
proposed regulations, the qualified organization would be subject to 
the increased section 4965 entity-level tax provided in section 
4965(b)(1)(B). In addition, any entity manager who approves or 
otherwise causes the qualified organization to accept the contribution 
of an easement that the entity manager knows or has reason to know is 
part of a syndicated conservation easement transaction described in 
these proposed regulations would be subject to the $20,000 tax imposed 
by section 4965(a)(2).
    The Treasury Department and the IRS request comments on eliminating 
the section 4965 carve-out in final regulations, including whether 
there are specific situations in which a qualified organization should 
or should not be considered to know or have reason to know that a 
conservation easement contribution is part of a syndicated conservation 
easement transaction described in these proposed regulations.

B. Limiting the Section 4965 Carve-Out

    As described in Part IV.A. of the Background section of this 
preamble, Sec.  53.4965-4(b) provides that the Secretary can identify 
tax-exempt entities that will not be treated as parties to a prohibited 
tax shelter transaction in published guidance by type, class, or role. 
As an alternative to eliminating the section 4965 carve-out in final 
regulations, the Treasury Department and the IRS are considering 
whether to include a more limited carve-out in the final regulations. 
Such a limited carve-out could provide, for example, that a tax-exempt 
entity that conducted an adequate amount of due diligence before 
entering into a transaction is not treated as a party to a syndicated 
conservation easement transaction.
    The Treasury Department and the IRS request comments on what would 
constitute adequate due diligence to warrant relieving a tax-exempt 
entity from potential liability for the section 4965 excise tax and 
what additional safeguards might be needed. For example, the Treasury 
Department and the IRS request comments on whether, if final 
regulations include a more limited carve-out, the carve-out should 
provide relief only for organizations that have not previously been 
involved \3\ in a syndicated conservation easement transaction.
---------------------------------------------------------------------------

    \3\ A tax-exempt entity might be considered ``involved'' for 
these purposes, for example, if it previously accepted a syndicated 
conservation easement or if any person who established the tax-
exempt entity, or related persons to any such person, were 
participants, material advisors, or involved in any other capacity 
with a previous syndicated conservation easement transaction.
---------------------------------------------------------------------------

C. Net Income and Proceeds

    As noted in Part IV.A. of the Background section of this preamble, 
the section 4965 excise tax is based on an entity's net income 
attributable to the prohibited tax shelter transaction or proceeds 
received by the entity that are attributable to a prohibited tax 
shelter transaction. The Treasury Department and the IRS request 
comments on determining the amount of net income and proceeds 
attributable to the prohibited tax shelter transaction in the context 
of a syndicated conservation easement transaction, including what gross 
income (if any) typically is derived from (and what deductions are 
attributable to) the transaction; the value of the gift or contribution 
that would be treated as proceeds for purposes of section 4965; and 
whether the IRS should designate additional amounts as proceeds for 
section 4965 purposes, as permitted by Sec.  53.4965-8.

D. General Request for Comments

    In addition to the specific comment requests above, the Treasury 
Department and the IRS request comments regarding all aspects of the 
potential elimination or limitation of the section 4965 carve-out in 
final regulations, including any alternative ways to deter tax-exempt 
entities from acting as parties to syndicated conservation easement 
transactions and whether any additional guidance is needed on the 
application of section 4965 in the syndicated conservation easement 
context.

VI. Effect of Transaction Becoming a Listed Transaction Under These 
Regulations

    Participants required to disclose these transactions under Sec.  
1.6011-4 who fail to do so are subject to penalties under section 
6707A. Participants required to disclose these transactions under Sec.  
1.6011-4 who fail to do so are also subject to an extended period of 
limitations under section 6501(c)(10). Material advisors required to 
disclose these transactions under section 6111 who fail to do so are 
subject to penalties under section 6707. Material advisors required to 
maintain lists of investors under section 6112 who fail to do so (or 
who fail to provide such lists when requested by the IRS) are subject 
to penalties under section 6708(a). In addition, the IRS may impose 
other penalties on persons involved in these transactions or 
substantially similar transactions, including accuracy-related 
penalties under section 6662 or section 6662A, the section 6694 penalty 
for understatements of a taxpayer's liability by a tax return preparer, 
the section 6695A penalty for certain valuation misstatements 
attributable to incorrect appraisals, the section 6700 penalty for 
promoting abusive tax shelters, and the section 6701 penalty for aiding 
and abetting understatement of tax liability.
    Taxpayers who have filed a tax return (including an amended return 
(or Administrative Adjustment Request (AAR) for certain partnerships)) 
reflecting their participation in these transactions prior to [DATE OF 
PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER] and who have not 
previously disclosed their participation in the transactions pursuant 
to Notice 2017-10 must disclose the transactions as provided in Sec.  
1.6011-4(d) and (e) provided that the period of limitations for 
assessment of tax, including any applicable extensions, for any taxable 
year in which the taxpayer participated in the transaction has not 
ended on or before [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL 
REGISTER]. Taxpayers that disclosed their participation in a 
transaction pursuant to Notice 2017-10 before final regulations are 
published will be treated as having made the disclosure pursuant to the 
final regulations for the years covered by that disclosure.
    In addition, material advisors have disclosure requirements with 
regard to transactions occurring in prior years. However, 
notwithstanding Sec.  301.6111-3(b)(4)(i) and (iii), material advisors 
are required to disclose only if they have made a tax statement on or 
after [DATE

[[Page 75194]]

6 YEARS BEFORE DATE OF PUBLICATION OF FINAL RULE].

VII. Applicability Date

    Proposed Sec.  1.6011-9(a) would identify syndicated conservation 
easement transactions described in proposed Sec.  1.6011-9(b) as listed 
transactions effective as of the date of publication in the Federal 
Register of a Treasury decision adopting these regulations as final 
regulations.

VIII. Effect on Other Documents

    These proposed regulations do not revoke or modify Notice 2017-10.

Special Analyses

I. Paperwork Reduction Act

    The collection of information contained in these proposed 
regulations is reflected in the collection of information for Forms 
8886 and 8918 that have been reviewed and approved by the Office of 
Management and Budget in accordance with the Paperwork Reduction Act 
(44 U.S.C. 3507(c)) under control numbers 1545-1800 and 1545-0865.
    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 Forms 8886 and 8918. The requirement to 
maintain records to substantiate information on Forms 8886 and 8918 is 
already contained in the burden associated with the control number for 
the forms and remains unchanged.
    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 OMB control number.

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). As previously explained, the 
basis for these proposed regulations is Notice 2017-10, 2017-4 I.R.B. 
544 (modified by Notice 2017-29, 2017-20 I.R.B. 1243, and Notice 2017-
58, 2017-42 I.R.B. 326). The following chart sets forth the gross 
receipts of respondents to Notice 2017-10 that report federal tax 
information using Form 1065 (U.S. Return of Partnership Income) and 
Form 1120-S (U.S. Income Tax Return for an S Corporation):

      Notice 2017-10--All Filings 2017 to 2021, Respondents by Size
------------------------------------------------------------------------
                   Receipts                     Respondents %  Filings %
------------------------------------------------------------------------
Under 5M.....................................            93.3       88.3
5M to 10M....................................             3.1        5.2
10M to 15M...................................             1.2        2.9
15M to 20M...................................             0.6        0.4
20M to 25M...................................             0.6        0.7
Over 25M.....................................             1.2        2.5
------------------------------------------------------------------------

    This chart shows that the majority of respondents to Notice 2017-10 
reported gross receipts under $5 million. Even assuming that these 
respondents constitute a substantial number of small entities, the 
proposed regulations will not have a significant economic impact on 
these entities because the proposed regulations implement sections 6111 
and 6112 and Sec.  1.6011-4 by specifying the manner in which and time 
at which an identified transaction must be reported. Accordingly, 
because the proposed regulations are limited in scope to time and 
manner of information reporting and definitional information, the 
economic impact of the proposal is expected to be minimal. Further, the 
Treasury Department and the IRS expect that the reporting burden is 
low; the information sought is necessary for regular annual return 
preparation and ordinary recordkeeping. The estimated burden for any 
taxpayer required to file Form 8886 is approximately 10 hours, 16 
minutes for recordkeeping, 4 hours, 50 minutes for learning about the 
law or the form, and 6 hours, 25 minutes for preparing, copying, 
assembling, and sending the form to the IRS. The IRS's Research, 
Applied Analytics, and Statistics division estimates that the 
appropriate wage rate for this set of taxpayers is $98.87 (2021 
dollars) per hour. Thus, it is estimated that a respondent will incur 
costs of approximately $2,127.00 per filing. Disclosures received to 
date by the Treasury Department and the IRS in response to the 
reporting requirements of Notice 2017-10 indicate that this small 
amount will not pose any significant economic impact for those 
taxpayers now required to disclose under the proposed regulations.
    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) of the Code, 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 Mandates 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). This proposed 
rule does 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. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on State and local governments or preempt state law 
within the meaning of the Executive Order.

V. Regulatory Planning and Review

    The Administrator of the Office of Information and Regulatory 
Affairs (OIRA), Office of Management and Budget, has determined that 
this proposed rule is not a significant regulatory action, as that term 
is defined in section 3(f) of Executive Order 12866. Therefore, OIRA 
has not reviewed this proposed rule pursuant to section 6(a)(3)(A) of 
Executive Order 12866 and the April 11, 2018, Memorandum of Agreement 
between the Treasury Department and the Office of Management and Budget 
(OMB).

Statement of Availability of IRS Documents

    Guidance cited in this preamble is published in the Internal 
Revenue Bulletin and is 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 author of these proposed regulations is Theresa 
Melchiorre, Office of Associate Chief Counsel (Income Tax & 
Accounting).

[[Page 75195]]

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, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.6011-9 also issued under 26 U.S.C. 6001 and 26 U.S.C. 
6011. * * *

0
Par. 2. Section 1.6011-9 is added to read as follows:


Sec.  1.6011-9   Syndicated conservation easement listed transactions.

    (a) Identification as listed transaction. Transactions that are the 
same as, or substantially similar to, a transaction described in 
paragraph (b) of this section are identified as listed transactions for 
purposes of Sec.  1.6011-4(b)(2).
    (b) Syndicated conservation easement transaction. The term 
syndicated conservation easement transaction means a transaction in 
which the following steps occur (regardless of the order in which they 
occur)--
    (1) A taxpayer receives promotional materials that offer investors 
in a pass-through entity the possibility of being allocated a 
charitable contribution deduction that equals or exceeds an amount that 
is two and one-half times the amount of the taxpayer's investment in 
the pass-through entity as determined under paragraph (d) of this 
section (2.5 times rule);
    (2) The taxpayer acquires an interest directly, or indirectly 
through one or more tiers of pass-through entities, in the pass-through 
entity that owns real property (that is, becomes an investor in the 
entity);
    (3) The pass-through entity that owns the real property contributes 
an easement on such real property, which it treats as a conservation 
easement within the meaning of paragraph (c)(2) of this section, to a 
qualified organization and allocates, directly or through one or more 
tiers of pass-through entities, a charitable contribution deduction to 
the taxpayer; and
    (4) The taxpayer claims a charitable contribution deduction with 
respect to the conservation easement on the taxpayer's Federal income 
tax return.
    (c) Definitions. The following definitions apply for purposes of 
this section:
    (1) Charitable contribution deduction. The term charitable 
contribution deduction means a deduction under section 170 of the 
Internal Revenue Code (Code), which includes a deduction arising from a 
qualified conservation contribution as defined in section 170(h)(1).
    (2) Conservation easement. The term conservation easement means a 
restriction, within the meaning of section 170(h)(2)(C), exclusively 
for conservation purposes, within the meaning of section 170(h)(1)(C) 
and section 170(h)(4), granted in perpetuity, on the use that may be 
made of specified real property.
    (3) Pass-through entity. The term pass-through entity means a 
partnership, S corporation, or trust (other than a grantor trust within 
the meaning of subchapter J of chapter 1 of the Code).
    (4) Promotional materials. The term promotional materials includes 
materials described in Sec.  301.6112-1(b)(3)(iii)(B) of this chapter 
and any other written or oral communication regarding the transaction 
provided to investors, such as marketing materials, appraisals 
(including preliminary appraisals, draft appraisals, and the appraisal 
that is attached to the taxpayer's return), websites, transactional 
documents such as the deed of conveyance, private placement memoranda, 
tax opinions, operating agreements, subscription agreements, statements 
of the anticipated value of the conservation easement, and statements 
of the anticipated amount of the charitable contribution deduction.
    (5) Qualified organization. The term qualified organization means 
an organization described in section 170(h)(3).
    (6) Real property. The term real property includes all land, 
structures, and buildings, including a certified historic structure 
defined in section 170(h)(4)(C).
    (d) Application of 2.5 times rule--(1) Multiple suggested deduction 
amounts. If the promotional materials, as defined in paragraph (c)(4) 
of this section and described in paragraph (b)(1) of this section, 
suggest or imply a range of possible charitable contribution deduction 
amounts that may be allocated to the taxpayer, the highest suggested or 
implied deduction amount will determine whether the 2.5 times rule is 
met. In addition, if one piece of promotional materials (for example, 
an appraisal or oral statement) suggests or implies a higher charitable 
contribution deduction amount than suggested or implied by other 
promotional materials, then the highest suggested charitable 
contribution deduction amount determines whether the 2.5 times rule is 
met.
    (2) Rebuttable presumption. The 2.5 times rule is deemed to be met 
if the pass-through entity donates a conservation easement within three 
years following taxpayer's investment in the pass-through entity, the 
pass-through entity allocates a charitable contribution deduction to 
the taxpayer that equals or exceeds two and one-half times the amount 
of the taxpayer's investment, and the taxpayer claims a charitable 
contribution deduction that equals or exceeds two and one-half times 
the amount of the taxpayer's investment. This presumption may be 
rebutted if the taxpayer establishes to the satisfaction of the 
Commissioner that none of the promotional materials contained a 
suggestion or implication that investors might be allocated a 
charitable contribution deduction that equals or exceeds an amount that 
is two and one-half times the amount of their investment in the pass-
through entity.
    (3) Anti-stuffing rule. For purposes of paragraph (b)(1) of this 
section, the amount of a taxpayer's investment in the pass-through 
entity is limited to the portion of the taxpayer's investment described 
in paragraph (b)(2) of this section that is attributable to the portion 
of the real property on which a conservation easement is placed and 
that produces the charitable contribution deduction described in 
paragraph (b)(3) of this section. For example, if a portion of the 
taxpayer's investment in the pass-through entity is attributable to 
property held directly or indirectly by the pass-through entity other 
than the real property on which a conservation easement is placed as 
described in paragraph (b)(3) of this section (including any other real 
property, cash, cash equivalents, digital assets, marketable 
securities, or other assets), that portion of the taxpayer's investment 
is not attributable to the portion of the real property on which a 
conservation easement is placed for purposes of paragraph (b)(1) of 
this section.
    (4) Example illustrating anti-stuffing rule.--(i) Facts. An 
individual (A) purchased an interest in a partnership (P) that owns 
real property with a fair market value of $500,000 and marketable 
securities with a fair market value of $500,000. A is one of four equal 
investors in P, each of whom purchased its interest in P for $250,000 
of cash. With respect to an investor's $250,000 payment for its 
interest in P, the

[[Page 75196]]

promotional materials stated that P expected to allocate a $500,000 
charitable contribution deduction to the investor (that is, a 
charitable deduction that is two times the amount an investor paid for 
its interest in P). After all four investors have purchased their 
interests in P, P donates a conservation easement to a qualified 
organization as defined in section 170(h)(3) of the Code and reports a 
$2,000,000 charitable contribution deduction on its Form 1065 based on 
P obtaining an appraisal indicating that the value of the conservation 
easement is $2,000,000. The Schedule K-1 (Form 1065) that P furnishes 
to A indicates that P allocated a $500,000 charitable contribution 
deduction to A for the taxable year.
    (ii) Analysis. Under paragraph (d)(2) of this section, for purposes 
of paragraph (b)(1) of this section, the amount of A's investment in P 
that is attributable to the real property on which a conservation 
easement is placed described in paragraph (b)(3) of this section is 
$125,000 (that is, only the portion of the investment that is 
attributable to the real property on which a conservation easement is 
placed and that produces the charitable contribution deduction 
described in paragraph (b)(3) of this section). Because A's investment 
for purposes of the 2.5 times rule is $125,000 and A's expected 
charitable contribution deduction, based on the promotional materials, 
is $500,000 (that is, an expected deduction that is four times the 
investor's investment), the requirements of the 2.5 times rule of 
paragraph (b)(1) of this section are satisfied.
    (e) Participation in a syndicated conservation easement 
transaction--(1) In general. Whether a taxpayer has participated in a 
syndicated conservation easement transaction described in paragraph (b) 
of this section is determined under Sec.  1.6011-4(c)(3)(i)(A).
    (2) Class of participants. For purposes of Sec.  1.6011-
4(c)(3)(i)(A), participants in a syndicated conservation easement 
transaction described in paragraph (b) of this section include--
    (i) An owner of a pass-through entity;
    (ii) A pass-through entity;
    (iii) Any other taxpayer whose Federal income tax return reflects 
tax consequences or a tax strategy arising from the syndicated 
conservation easement transaction described in paragraph (b) of this 
section.
    (3) Exclusion. A qualified organization to which the conservation 
easement is donated is not treated as a participant under Sec.  1.6011-
4(c)(3)(i)(A) in a syndicated conservation easement transaction 
described in paragraph (b) of this section.
    (f) Application of section 4965. A qualified organization is not 
treated under section 4965 of the Code as a party to the transaction 
described in paragraph (b) of this section.
    (g) Applicability date. This section's identification of 
transactions that are the same as, or substantially similar to, the 
transactions described in paragraph (b) of this section as listed 
transactions for purposes of Sec.  1.6011-4(b)(2) and sections 6111 and 
6112 of the Code is effective [DATE OF PUBLICATION OF FINAL RULE IN THE 
FEDERAL REGISTER].

Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2022-26675 Filed 12-6-22; 11:15 am]
BILLING CODE 4830-01-P