This morning I offer a guest blog from Professors Bruce McGovern, teaching tax law at the South Texas College of Law Houston (school resume here) and Cassady V. (“Cass”) Brewer teaching tax law at the Georgia State University College of Law (school resume here). Professor McGovern authors many articles, including an annual article co-authored with Professor Brewer titled Recent Developments in Federal Income Taxation: The Year 2023, 77 Tax Law. 805 (2024). Professor McGovern makes monthly presentations of material included in that annual offering to the Wednesday Tax Forum (“WTF”) in Houston. In the most recent offering on December 13, 2024, Professors McGovern and Brewer had significant items on tax procedure that I thought readers of this blog might find interesting and enlightening. With their permission, I am offering a copy and paste of the two items in two separate blogs (because they are two separate subjects). I offer some comments after that copy and paste.
The first involves the saga of cases starting with Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021) here, which held IRS proceeds regulation for conservation easements adopted in 1986 invalid under the APA for failure to respond to significant comment in adopting the final regulation. There have been significant developments since Hewitt that Professors McGovern and Brewer cover quite nicely.
IX. EXEMPT ORGANIZATIONS AND CHARITABLE GIVING Exempt Organizations Charitable Giving
With more
than 750 conservation easement cases on the docket, the Tax Court’s flip-flop
on the validity of the extinguishment proceeds regulation is not going to help
matters. Valley Park Ranch, LLC v. Commissioner, 162 T.C. No. 6
(3/28/24). In a reviewed opinion (7-2-4) by Judge Jones, the Tax Court refused
to follow its prior decision in a conservation easement case decided just four
years earlier Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180
(2020), aff’d, 28 F.4th 700 (6th Cir. 2022). Instead, rejecting Oakbrook, a
majority of the Tax Court in this case appealable to the Tenth Circuit
determined that Reg. § 1.170A-14(g)(6)(ii), one of the chief weapons the IRS
has used to combat conservation easements, is procedurally invalid under the
Administrative Procedure Act (“APA”). It is fair to say that the Tax Court’s
decision in Valley Park Ranch will have a significant impact on current
and future conservation easement litigation between the taxpayers and the IRS.
Background.
Other than challenging valuations, the IRS’s most successful strategy in
combating syndicated conservation easements generally has centered around the
“protected in perpetuity” requirement of § 170(h)(2)(C) and (h)(5)(A). The IRS
has argued in the Tax Court that the “protected in perpetuity” requirement is
not met where the taxpayer’s easement deed fails to meet the strict
requirements of the “extinguishment regulation.” See Reg. §
1.170A-14(g)(6)(ii). The extinguishment regulation ensures that conservation
easement property is protected in perpetuity because, upon destruction or
condemnation of the property and collection of any proceeds therefrom, the
charitable donee must proportionately benefit. According to the IRS’s reading
of the extinguishment regulation, the charitable donee’s proportionate benefit
must be determined by a fraction determined at the time of the gift as follows:
the value of the conservation easement as compared to the total value of the
property subject to the conservation easement (hereinafter the “proportionate
benefit fraction”). See Coal Property Holdings, LLC v. Commissioner, 153
T.C. 126 (10/28/19). Thus, upon extinguishment of a conservation easement due
to an unforeseen event such as condemnation, the charitable donee must be
entitled to receive an amount equal to the product of the proportionate benefit
fraction multiplied by the proceeds realized from the disposition of the
property.
Facts.
The taxpayer partnership in this case claimed a $14.8 million charitable
contribution deduction for its 2016 tax year after granting to a charity a
conservation easement over 45.76 acres of Oklahoma land it acquired in 1998 for
$91,610. The easement deed recited in part that the contributed property was to
be held “forever predominantly in its natural, scenic, and open space
condition” and that “the duration of the Easement shall be in perpetuity.” 162
T.C. at ___. The easement deed further provided in relevant part that if the
land was taken by eminent domain, the taxpayer and the charity would, “after
the satisfaction of prior claims,” share in the condemnation proceeds “as
determined by a Qualified Appraisal meeting standards established by the United
States Department of Treasury.” 162 T.C. at _____. Upon audit, the IRS took the
position, as it has in many prior cases, that the taxpayer’s deduction should
be disallowed for failing to meet the proportionate benefit fraction
requirement of the extinguishment proceeds regulation, Reg. [*9] §
1.170A-14(g)(6)(ii). The IRS’s litigating position is that the proportionate
benefit fraction must be fixed and unalterable as of the date of the donation
according to the following ratio: the value of the conservation easement as
compared to the total value of the property subject to the conservation
easement. Thus, according to the IRS, leaving the proportionate benefit upon
condemnation to be determined later by a qualified appraisal meeting certain
standards is insufficient. (Note: Section 4.01 of Notice 2023-30, 2023-17
I.R.B. 766 (4/10/23), sets forth what the IRS considers acceptable language
regarding the proportionate benefit fraction as it relates to extinguishment
clauses in conservation easement deeds.) After petitioning the Tax Court, the
taxpayer argued alternatively that either (i) the easement deed met the
requirements of Reg. § 1.170A-14(g)(6)(ii) by “explicit incorporation,” or (ii)
the regulation is procedurally invalid under the APA, in which case the
easement deed need not strictly comply with the regulation as long as it meets
the more general requirements of the applicable subsections of the statute, §
170(h) (qualified conservation contribution). The case was heard by the Tax
Court on cross-motions for summary judgment.
The Tax Court’s Majority Opinion. In a reviewed opinion (7-2-4) by Judge Jones (joined by Judges Foley, Urda, Toro, Greaves, Marshall, and Weiler), the court began its analysis by reviewing the conflicting decisions of the Sixth and Eleventh Circuits concerning the procedural validity of Reg. § 1.170A-14(g)(6)(ii) under the APA. See Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021) (concluding that the regulation is invalid under the APA); Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022) (concluding that the regulation satisfies the APA). The majority emphasized that a divided (2-1) Sixth Circuit panel decided Oakbrook, whereas a unanimous (3-0) Eleventh Circuit panel decided Hewitt. Thus, in a footnote, Judge Jones pointed out that of the six appellate court judges who have considered the issue, four decided that Reg. § 1.170A-14(g)(6)(ii) is invalid under the APA while only two upheld the regulation. Noting that the case is appealable to the Tenth Circuit, which has not taken a position on the validity of Reg. § 1.170A-14(g)(6)(ii), Judge Jones concluded for the majority that “after careful consideration of the Eleventh Circuit’s reasoning in Hewitt, we find it appropriate to change our position.” 162 T.C. at ____. The majority gave a nod to the principle of stare decisis—following established precedent—but reasoned that its holding in Oakbrook, even though affirmed by the Sixth Circuit, is not “entrenched precedent,” thereby allowing the Tax Court to strike down Reg. § 1.170A-14(g)(6)(ii) as procedurally invalid under the APA in line with Hewitt. 162 T.C. at ____.
