Tax Court Holds Conservation Easement Proceeds Regulation Invalid Consistent with Eleventh Circuit Holding in Hewitt (3/28/24; 4/6/24)

In Valley Park Ranch, LLC v. Commissioner, 162 T.C. ___ No. 6 (3/28/24) (reviewed opinion), JAT Google Docs here and GS temp link here (GS permalink to follow when available)*, the Court declares the “proceeds” conservation easement regulation invalid by reversing its prior holding in Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), aff’d, 28 F.4th 700 (6th Cir. 2022) and adopting the holding of Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021). The Tax Court gets there with a thin one-judge majority because it drew only 7 agreements with the opinion of the Court (including the author, Judge Jones); there were two concurring opinions in result only and 4 dissenting opinions. (Note that the Tax Court has only 13 active judges, with six vacant positions per § 7443(a).)

I noted yesterday that the commotion about Chevron deference is just a battle in a “larger war to discredit what is perceived (or claimed for political purposes) to be an evil administrative state.” See Discussion with Reporter about Possible Demise of Deference, Now Often Called Chevron Deference (Federal Tax Procedure Blog 3/28/24), here (See Bryan Camp’s comment that, for APA issues, everything looks like a nail.) My initial reaction when I saw the positions of all the judges on this issue was to test whether some such bent may have been involved in Valley Park Ranch. Here is my breakdown (readers can click on the graphic of the spreadsheet for a cleaner view and download; NOTE THERE WAS A BUST IN THE CALCULATION IN THE ORIGINAL POSTING THAT UNDERSTATED THE OBAMA NOMINEES; I CORRECTED ON 3/29/24 @ 8:45AM):

The breakdown is interesting.

Now, more on the legal analysis.

I have already discussed the two competing opinions in the Courts of Appeals. See 11th Cir. Invalidates Proportionate Sharing Regulations As Procedurally Arbitrary and Capricious for Failing to Address a Significant Comment (Federal Tax Procedure Blog 12/30/21; 12/31/21), here; and Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (Federal Tax Procedure Blog 3/15/22), here. I see no need to go over that ground again.

I just point out two deeper-in-the-weeds issues:

1. The Valley Park Ranch holding (as was the Hewitt holding that it adopts) was that the regulation adopted in 1986 was procedurally irregular. I have recently noted that, for procedural foot faults in adopting the regulation, there is likely a six-year statute of limitations under 28 U.S.C. §2401(a) from the date of promulgation (in this case, in the 1980s). See Oral Argument in Corner Post on Whether Procedural Challenges to Regulations Are Subject to § 2401(a)’s Six-Year Statute of Limitations (Federal Tax Procedure Blog 2/21/24), here; and Susan C. Morse. Old Regs: The Default Six-Year Time Bar for Administrative Procedure Claims, 31 Geo. Mason L. Rev. 1 (2024), here. Of course, the statute of limitations defenses can be waived; there is no indication that the IRS asserted the defense in Valley Park Ranch (or in Hewitt or Oakland).

Added 4/6/24 1pm: 

On the distinction between procedural and substantive challenges, the Valley Park Ranch opinion says (slip 16 n. 12):

   n12 As best we understand Mr. Oppenheimer’s motion papers, he is challenging only the procedural validity of Treasury Regulation § 1.170A-14(g)(6)(ii). Nonetheless, we acknowledge his passing reference to the regulation’s purported substantive invalidity under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). However, this reference was raised for the first time in his response to our Order, see Pet’r’s Resp. to Order (No. 35); Order (No. 28), and is beyond the scope of the briefing requested through that Order. Oakbrook I also held that Treasury Regulation § 1.170A-14(g)(6) was substantively valid under Chevron. See Oakbrook I, 154 T.C. at 195–200. The Eleventh Circuit’s opinion in Hewitt did not reach the regulation’s substantive validity under Chevron. See Hewitt v. Commissioner, 21 F.4th at 1339 n.1. Consequently, Mr. Oppenheimer’s passing reference to the regulation’s purported substantive invalidity does not alter our disposition of the Motions.

The Tax Court did not address how this distinction plays out with respect to 28 U.S.C. §2401(a)'s six-year statute of limitations. The Supreme Court may address that issue in its opinion in Corner Post likely due by June 2024.

2. Otherwise, procedurally defective interpretive regulations interpreting ambiguous statutory text in statutes adopted before 1996 can be fixed by adopting a new interpretive regulation effective retroactively to the date of the statute or some appropriate intermediate date. See Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (Federal Tax Procedure Blog 1/6/22; 5/12/23), here. I don’t think that Treasury will use that specific congressionally approved fix for prudential reasons. However, the public has known the IRS's position since the 1980s and can hardly claim any unfair surprise or due process problems from retroactively applying the interpretation in a new interpretive regulation within the scope of the statute's ambiguity.

Added 3/30/24 @ 2:30 pm:

In the above I say something about the corrosive effect of attacks on the administrative state. I offer for further consideration the following by a noted scholar, Lisa Heinzerling of Georgetown Law, here. The offering is The Supreme Court’s Self-Coronation (The Regulatory Review 3/18/24), here. Key parts of her discussion include:

          Litigation in the U.S. Supreme Court has become the right wing’s genteel alternative to open rebellion. The three newest justices, who gave the Court a conservative supermajority, were installed in their posts precisely for the purpose of neutralizing the government. Billionaire-funded advocates declare that the United States is a “shell” of a republic and concede that their goal is to topple the government as it stands. One lawyer helping to wage this assault admits to preferring the Supreme Court as a venue for momentous change because it is “more efficient” than working through the electoral branches of government.

          This radical judicial project is well underway. Based on an aggressive and controversial vision of the constitutional separation of powers, the reconfigured Court, spurred on by well-heeled litigants, has already dramatically changed the structure and authority of the federal government. With each new case, the Court has enlarged its own power while shrinking the power of the other institutions of government.

* * * * 

          Chevron, as Justice Kagan explained at oral argument, is “a doctrine of humility,” a recognition that “agencies know things that courts do not”—about fisheries, about climate change, about pandemics, about the hydrology of wetlands and water pollution, and about all the complex matters that Congress has charged agencies with addressing. But it is not only disciplinary humility that the conservative justices lack; it is any indication that they value or even respect the actual work that agencies do. If you doubt this, read the oral argument transcripts in Loper and Relentless and spot the many times that conservative justices blasted agencies and their personnel.

          Perhaps the most unfortunate consequence of discarding Chevron is that it will mark the Supreme Court’s complete and dangerous transformation into an instrument of the anti-government wing of American politics.

* The Tax Court's Dawson system does not offer permalinks for Tax Court opinions and some other documents that can be accessed by the public through each case's docket entries. Hence, for a permalink, I will start using my Google Docs followed by the Google Scholar permalink for Tax Court decisions.