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New South Wales, and exercises stringent controls over the
placement of levees, banks, water channels, and reservoirs to
ensure proper floodplain management. Pursuant to Part VIII of
the New South Wales Water Act (the Water Act), the partnerships'
conservation expenditures received general approval from the
Department of Water Resources as being consistent with the
conservation guidelines and plan for the area. Thus, the
conservation expenditures incurred by the partnerships were
consistent and in accordance with a conservation plan approved by
the Department of Water Resources for the floodplain in which the
land was located.
In connection with the filing of Forms 1065, U.S.
Partnership Return of Income, the partnerships elected to deduct
conservation expenditures under section 175. Respondent accepted
the deductibility of the conservation expenditures incurred
through December 31, 1986, but has disallowed the deductibility
of subsequent conservation expenditures. In so doing, respondent
has taken the position that section 175, as modified by the Tax
Reform Act of 1986, Pub. L. 99-514, sec. 401(a), 100 Stat. 2221,
which added section 175(c)(3), no longer applies to conservation
expenditures incurred with respect to land located outside the
United States. Respondent concedes that, but for the application
of section 175(c)(3)(A), all of the partnerships' conservation
expenditures would qualify for section 175 treatment.
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