Overview
The Sixth Circuit in Oakbrook Holdings LLC v. Commissioner1 declined to reach the same result as the Eleventh Circuit in Hewitt v. Commissioner2 and affirmed the Tax Court’s holding that Treasury's conservation easement regulation is procedurally valid.
Both Oakbrook and Hewitt addressed Treasury Regulation § 1.170A-14(g)(6). This regulation provides guidance for situations in which unforeseen changes to the surrounding land make it "impossible or impractical" for an easement to fulfill its conservation purpose. In these events, the conservation purpose may still be protected in perpetuity "if the restrictions are extinguished by judicial proceeding and all of the donee’s proceeds . . . from a subsequent sale or exchange of the property are used by the donee" to further the original conservation purpose.3 The taxpayers challenged the validity of the regulation, contending that, in promulgating this rule, Treasury violated the notice-and-comment requirements of the Administrative Procedure Act (APA)4.
In the concise general statement of basis and purpose that accompanied the final regulation, Treasury did not include any statement to address comments that touched on Treasury Regulation § 1.170A-14(g)(6)(ii). The taxpayers in Oakbrook and Hewitt alleged that this absence is the main procedural deficiency with the regulation. The Eleventh Circuit in Hewitt agreed with the taxpayers and found that the comments were "significant" because they were specific to, and casted doubt on, the reasonableness of the proposed regulation, which required a response by Treasury to satisfy the APA's procedural requirements.
The Sixth Circuit was unpersuaded by Hewitt, for two primary reasons: (1) Treasury must give reasoned responses to all significant comments, not all comments; and, (2) Congress’ goal of limiting deductions to those instances in which the perpetuity requirement can be satisfied is evident from the regulations and a plain reading of the legislation. Because of the split in the Circuits, the validity of the regulation under the APA may be ripe for review by the Supreme Court.
Note that the Tax Court only has to follow Hewitt in the 11th Circuit, under the Golsen rule, so it is reasonable to assume that the Tax Court will continue to maintain its position in all other Circuits unless and until the Supreme Court weighs in to the contrary, or other Circuits follow Hewitt, as opposed to Oakbrook.
Endnotes
1 __ F.4th __, 2022 U.S. App. LEXIS 6512 (March 14, 2022)
2 21 F.4th 1336, 1339 (11th Cir. 2021)
3 Treas. Reg. § 1.170A-14(g)(6)
4 5 U.S.C § 553(b)
