The Magic of Basis: Proposed Regs on the Limitation of Conservation Easement Deductions Hinge on New Types of Basis

Just what we need.  More types of basis.  Basis is the bedrock of tax law but it shows up under all sorts of names and disguises.  Today, Treasury proposed new regs implementing the restriction on qualified conservation easement deductions. Those regs, and the statute they implement, rely on “relevant basis”  and “modified basis.”  Late last year, Congress enacted 170(h)(7) disqualifying conservation easement deductions “if the amount of such contribution exceeds 2.5 times the sum of each partner’s relevant basis in such partnership.”  The provision applies to other pass-through entities as well.  Is it just me, or does that provision create the proverbial “trap for the unwary?”  If I get allocated an conservation easement deduction of $1.1 million when my “relevant basis” is $400,000, do I get any of the deduction?  The provision does not read as though it disqualifies “so much of the deduction as exceeds basis times 2.5.”  Its just not a qualified conservation easement.  None of it. I bet others noticed this already.  Why create such a trap?

As I mentioned, the provision introduces new types of basis:  “relevant” and “modified.”  Here is a useful way to understand the importance of basis in tax law.  Have your students memorize this:

Anyway, like I was sayin’, basis is the fruit of the Tax Code. You can deduct it, offset it, inflate it, transfer it, amortize it, depreciate it. Dey’s uh, adjusted basis, recomputed basis, stepped up basis. Outside basis, inside basis, cost of goods sold basis, 754 basis adjustments, 745 basis adjustments.  There’s special partnership inside basis, split basis, loss basis, gain basis, at-risk basis, previously taxed capital invested in property basis, basis equals fair market value, carry-over basis, relevant basis, modified basis, basis salad, basis and potatoes, basis burger, basis sandwich . . . That- that’s about it.

darryll k. jones