Guest Blog: Professors McGovern and Brewer on Developments in Hewitt Holding Regulation Procedurally Invalid (12/8/24)

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 ____.

          Upon agreeing with the Eleventh Circuit that Reg. § 1.170A-14(g)(6)(ii) is procedurally invalid under the APA, the majority then turned to the applicable statute itself and the language of the easement deed. Specifically, the majority examined § 170(h)(2)(C), which requires a “restriction (granted in perpetuity)” on the use of the property subject to a conservation easement. The majority also examined § 170(h)(5), which states that a contribution is not exclusively for conservation purposes unless it is “protected in perpetuity.” Agreeing again with the Eleventh Circuit, but this time based upon the Eleventh Circuit’s decision in Pine Mountain Preserve, LLLP v. Commissioner, 978 F.3d 1200 (11th Cir. 2020), aff’g in part, rev’g in part, vacating and remanding 151 T.C. 247 (2018), the majority concluded that the § 170(h)(2)(C) requirement of a “restriction (granted in perpetuity)” was met because the deed in this case recited that the easement property was to be held for conservation purposes “forever predominantly in its natural, scenic, and open space condition.” 162 T.C. at ___. Further, as the Eleventh Circuit held in Pine Mountain, the majority agreed that a broad limitation on the use of the property as a whole for conservation purposes satisfies § 170(h)(2)(C) even if there are narrow exceptions to that limitation in the easement deed. Concerning the “protected in perpetuity” requirement of § 170(h)(5), the majority again followed the Eleventh Circuit’s decision in Pine Mountain. The Eleventh Circuit reasoned in Pine Mountain that the “protected in perpetuity” language of § 170(h)(5) draws upon the common law usage of the term, meaning simply that the granted property will not automatically revert to the grantor or the grantor’s heirs and assigns. The majority concluded that its “review of the entire deed reveals nothing in the grant that ‘envisions a reversion of the easement interest to [*10] the landowner, its heirs, or assigns.’” 162 T.C. at ____ (quoting Pine Mountain, 978 F.3d at 1206). Lastly, the majority rejected a last-ditch argument by the IRS that the easement deed’s language about sharing eminent domain proceeds “after the satisfaction of prior claims” violated the “perpetuity” requirement of either § 170(h)(2)(C) or (h)(5). The majority rejected this argument by the IRS because (i) the IRS conceded that there were no existing “prior claims” at the time the taxpayer granted the conservation easement, and (ii) the IRS could not point to any interpretation under Oklahoma law that the “after the satisfaction of prior claims” language applies to claims arising after the conservation easement deed is granted but before the condemnation or other disposition of the property.

          Concurring opinion. Judge Buch, joined by Judge Copeland, concurred in the result, but wrote separately to express his opinion that the majority could have decided the case on the basis of the conservation easement deed and the relevant statutory language without invalidating the “extinguishment proceeds regulation” (Reg. § 1.170A-14(g)(6)(ii)). Judge Buch and Judge Copeland apparently would have accepted the taxpayer’s first argument that the easement deed met the requirements of Reg. § 1.170A-14(g)(6)(ii) by “explicit incorporation.”

          Dissenting opinion. Judge Kerrigan, joined by Judges Nega, Pugh, and Ashford), dissented from the majority and concurring opinions, writing succinctly:

I disagree with the opinion of the Court for three reasons. First, I do not think it necessary to decide the validity of Treasury Regulation § 1.170A-14(g)(6)(ii) to resolve the Cross-Motions for Partial Summary Judgment. Second, I supported the opinion of the Court in [Oakbrook], and I find no compelling reason to change my position. Third, the longstanding principle of stare decisis should be followed.

162 T.C. at ____.

          Comment. The slim (7-2-4) Tax Court majority in this case (Jones, Foley, Urda, Toro, Greaves, Marshall, and Weiler) sustained taxpayer arguments that an overwhelming (12-1-1) majority (Lauber, Foley, Gale, Thornton, Paris, Morrison, Kerrigan, Buch, Nega, Pugh, Ashford, and Copeland) rejected only four years earlier in Oakbrook. Moreover, as mentioned above, Oakbrook was upheld by the Sixth Circuit in 2022. Consequently, the Tax Court has now aligned itself with the Eleventh Circuit, which, as mentioned above, struck down the extinguishment proceeds regulation in 2021 as procedurally invalid under the APA. Further, the Tax Court has reversed itself even though the U.S. Supreme Court declined in 2023 to resolve the split between the Sixth and Eleventh Circuits. See Oakbrook Land Holdings, LLC v. Commissioner, 143 S.Ct. 626 (1/9/23). On one hand, as Judge Jones wrote for the majority, perhaps the Tax Court’s recent flip-flop “is the right time to ‘gracefully and good naturedly surrender . . . former views to a better considered position.’” 162 T.C. at ____. On the other hand, if the Tax Court desires to resolve the hundreds of conservation easement cases on its docket, completely changing its mind from just a few years ago may not be the best course. As Judge Kerrigan wrote in dissent, “In 21 cases between 2016 and 2021, [the Tax Court] sustained the disallowance of charitable contribution deductions because the deeds of easement failed to comply with the [extinguishment] proceeds regulation.” 162 T.C. at ____. We cannot help but wonder if the taxpayers who lost in those 21 prior Tax Court cases are a bit upset and are scrambling to file claims for refund (assuming, of course, the statute of limitations has not expired).

* * * *

JAT COMMENTS:

1. The latest development, a major one, that Professors McGovern and Brewer cover is Valley Park Ranch, LLC v. Commissioner, 162 T.C. No. 6 (3/28/24). In that case, as noted, the Tax Court holds (Slip Op. 22) that the regulation is “procedurally invalid.” As I cover in Federal Tax Procedure (Practitioner Ed. pp. 85-86 and Student Ed. p. 60), the opinion in Corner Post, Inc. v. Board of Governors, FRS, 603 U. S. ___, 144 S. Ct. 2440 (2024) and the oral argument in Corner Post suggest that procedural invalidity may be subject to 28 U.S.C. § 2401(a)’s six-year statute of limitations, meaning that the statute of limitations could foreclose attacks such as in Valley Park Ranch and Hewitt. The statute of limitations was apparently not raised in Hewitt or Valley Park Ranch. If not, then the “defense” is waived in those cases only under traditional procedure. The defense can be asserted in future cases. Interesting issues will be raised if it is ultimately determined that the six-year statute of limitations applies. For example, can or will the IRS employ the regulation in the Eleventh Circuit (the venue for Hewitt) so long as Hewitt remains the law in the Circuit?

2. Professors McGovern and Brewer do a fine job of reviewing the varying opinions in Valley Park Ranch where the Tax Court decides to reject its prior holdings and adopt the holding in Hewitt. One might compare this aspect of Valley Park Ranch with the recent holding in Murrin v. Commissioner, T.C. Memo. 2024-10, GS here, where the Tax Court declined to reconsider its holding in Allen v. Commissioner, 128 T.C. 37 (2007), GS here, that the return preparer’s fraud invoked the unlimited statute of limitations in § 6501(c)(1) despite an intervening rejection of that holding in BASR P'ship v. United States, 795 F.3d 1338 (Fed. Cir. 2015), GS here. Murrin is currently on Appeal in the Third Circuit (No. 24-2037).

3. [Added 12/8/24 2:30pm] I have previously asserted that the IRS could have fixed Hewitt by a retroactive interpretive regulation. See Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 5/12/23), here. Now that Loper Bright has swept Chevron deference to the trash bin of history, Chevron deference is no longer a confusion in the APA distinction between legislative and interpretive regulations and the traditional understanding of the distinction can apply. Although the regulations fix was not retroactive in the manner I suggest, it practically has a retroactive feature in applying when the statute of limitations is still open.

Links to Cases Cited in Blog (Aphabetical Order)

• Allen v. Commissioner, 128 T.C. 37 (2007), GS here.
• BASR P'ship v. United States, 795 F.3d 1338 (Fed. Cir. 2015), GS here.
• Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126 (10/28/19), GS here.
• Corner Post, Inc. v. Board of Governors, FRS, 603 U. S. ___, 144 S. Ct. 2440 (2024), GS here.
• Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), GS here,
• Murrin v. Commissioner, T.C. Memo. 2024-10, GS here.
• Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), GS here, aff’d, 28 F.4th 700 (6th Cir. 2022), GS here.
• Pine Mountain Preserve, LLLP v. Commissioner, 978 F.3d 1200 (11th Cir. 2020), GS here, aff’g in part, rev’g in part, vacating and remanding 151 T.C. 247 (2018), GS here.
• Valley Park Ranch, LLC v. Commissioner, 162 T.C. No. 6 (3/28/24), GS here. [Full T.C. citation and Permanent GS link to come].

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