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Sirote & Permutt Lawyers in the Tax Press
May 9, 2012
Two members of the Sirote & Permutt, PC Conservation Easement Practice Group, Ronald A. Levitt and Donald Johnson, were interviewed for, and quoted in, an article in the April 24, 2012 issue of BNA's Daily Tax Report entitled: "Tax Code Basis Extender Intertwines S Corporations, Land Preservationists." In addition to Mr. Levitt and Mr. Johnson, the author interviewed and quoted several nationally regarded Tax Practitioners and an Executive Officer of the Land Trust Alliance.
The article discussed a complex but favorable S Corporation rule, which expired at the end of 2011. This favorable rule encouraged gifts by S Corporations of appreciated assets to charitable organizations, which included conservation easement gifts by S Corporations. Specifically the special rule created an exception to normal S Corporation rules that limit the flow through of deductions to an S Corporation's shareholder's basis in his S shares, and allowed the amount of a shareholder's basis reduction in his S Corporation stock to equal the shareholder's pro rata share of the basis of the contributed property. Without this rule, it is unlikely although not impossible for S Corporations which own land that might be the subject of a conservation easement gift to be able to take full advantage of the tax incentives provided by Code Section 170(h), the conservation easement provisions of the Code. This favorable but expired provision might be reenacted and made permanent as it currently is included in the tax extenders package now being considered by Congress.
The favorable S Corporation rule allowed S Corporations to make conservation easement gifts without being subject to the basis limitation rule, which is very similar to how the Partnership rules apply to gifts of appreciated property to charitable organizations. The special rule was enacted by Congress in 2006 and was intended to make the basis rules for S Corporations and Partnerships similar. Now that the favorable S Corporation rule has expired, the favorable rule now only applies to such charitable gifts of appreciated assets, such as conservation easements, by Partnerships. The limitations do not apply to gifts by individuals.
This quirky intersection of rules explains why most of the conservation easement transactions on which we work (to either implement or defend conservation easement gifts) involve gifts by individuals and partnerships and not S Corporations. The Daily Tax Report Article explains how the favorable rule worked, how it impacted conservation easement transactions in general and why it would make sense for the favorable S corporation basis rule to be made permanent by Congress.