Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (3/15/22)

I recently discussed the Eleventh Circuit’s opinion in  Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021). 11th Cir. Invalidates Proportionate Sharing Regulations As Procedurally Arbitrary and Capricious for Failing to Address a Significant Comment (12/30/21; 12/31/21), here; and Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 1/7/22), here. In Hewitt, the Eleventh Circuit invalidated the regulation § 1.170A-14(g)(6)(ii) requiring for charitable conservation donations of partial interests (such as easements) that the deed does not permit the donor to share in proceeds on extinguishment in the property values attributable to post donation improvements made by the donor. Yesterday, the Sixth Circuit sustained the regulation, thus creating a Circuit conflict between Hewitt and Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), CA6 here and GS here.

The Sixth Circuit in Oakbrook holds the regulations are procedurally valid, rejecting the reasoning of the Eleventh Circuit for holding the regulations procedurally invalid. The Sixth Circuit so holds in separate parts of the majority opinion that

(i)                addresses procedural regularity or “arbitrary or capricious” review (in 5 USC § 706 stated in disjunctive but often stated in conjunctive “arbitrary and capricious review) (28 F.4th at 710-718 and 720- 722); and 

(ii)              Chevron analysis (28 F.4th at 718-720). 

 (It is not clear to me why the Court sandwiched Chevron analysis between components of arbitrary and capricious review, but there is a lot of confusion in this general area.)

On procedural regularity (Reasoned Decisionmaking, Adequate Statement of Basis and Purpose, Proper Responses to Material Comments and arbitrary or capricious review), the Sixth Circuit majority panel concluded that the regulations passed procedural regularity review. This portion of the opinion conflicts with Hewitt.

On Chevron analysis, the precise holding of the Sixth Circuit majority panel is not clear to me. I think it can be read as either (i)) applying Chevron deference because the agency interpretation is reasonable but not the best interpretation (the only situation where Chevron is outcome determinative) or applying the agency interpretation because it is the best interpretation (a situation not needing or receiving Chevron deference). Recall also that Hewitt did not reach the issue of whether the regulation was the best interpretation issue because it declared the regulation procedurally invalid which eliminates the potential for Chevron deference.  As I there noted, if the agency interpretation was not the best interpretation, then Chevron could not warrant deference, but if the agency interpretation was the best interpretation, the IRS could prevail without Chevron deference.  Perhaps the Hewitt Court did not think the agency interpretation was the best, but it did not say that and remanded to the Tax Court to decide the case pursuant to the Hewitt Court's opinion (which, to repeat, could have the agency interpretation prevail without Chevron deference if it is the best interpretation).   (That circumstance animated Judge Guy's concurring opinion in Oakbrook -- invalid regulation because procedural irregularity but still controlling because the best interpretation.)

Based on analyses I have made of all Circuit Court cases “seeming” to apply Chevron deference for a one-year period ending 11/30/21, no Circuit ever said that it was deferring to a lesser agency interpretation, which is the only circumstance that Chevron is outcome determinative. Courts usually said or inferred they were applying a “reasonable” interpretation, without stating whether the reasonable interpretation was (i) the best interpretation (of course best interpretations are reasonable and need no Chevron deference) or (ii) a lesser but not best agency interpretation deemed reasonable (the only circumstance in which Chevron deference is outcome determinative). (Based on my further analysis of that data set, I inferred that actual Chevron outcome-determinative deference--where less than the best interpretation receives deference--in the Courts of Appeals is rare, just as it has become rare in the Supreme Court.)

There is a lot more in the case warranting further comment, but I wanted to get this preliminary discussion out. I will add further discussion either by supplementing this blog entry or one or more separate blog entries later.