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 ____.

Does Corner Post Permit § 2401(a)’s 6-year Statute of Limitation to Apply from Date of Regulation for Procedural Challenges? (7/10/24; 8/17/24)

Added 7/11/24 4:00 pm: Caveat: My blog post below was an attempt to hammer Corner Post into the interpretive system as I understood it. Within that parameter, I think I got it right. But, since posting the blog below (after this update in red), I went back to basics to try to understand what this all means in the real world. So, here is another way to think about the interpretive regime we now have as a result of the confluence of Loper Bright (deference gone) and Corner Post. Here are the key bullet points:

• Loper Bright teaches that the best interpretation of the statute controls. The best interpretation gains or loses nothing (i) by being adopted in an agency regulation or (ii) whether the regulation is procedurally valid. 
•  The best interpretation issue is substantive and can be raised at any time (i.e., upon application or enforcement to the particular person).
• Ergo, Corner Post is the proverbial tempest in a teapot.

To extend the analysis:

• The best interpretation (whether or not in a regulation) is the interpretation applicable from the effective date of the interpreted statute. That means that the § 7805(b) constraints on retroactivity are meaningless if the IRS includes the best interpretation in a regulation.
• The adoption of the best interpretation in a regulation adds nothing of interpretive value to the regulation. However, perhaps at the theoretical margins, a procedurally regular notice and comment regulation interpretation might add some Skidmore oomph (whatever that is) to the persuasive value of the agency interpretation in the regulation.

If that makes sense and—dare I say—is persuasive to readers, there is no need to read the older portion of this blog below (but I think if one were to wallow around in the concepts presented below (as have I), one might get to the same point).

___________________________________

In Corner Post, Inc. v. Board of Governors, FRS, 603 U. S. ____ (2024), SC here and GS here, the Court (Justice Barrett) held that cause of action “accrues” for purposes of the fallback 6-year statute of limitations in 28 U. S. C. § 2401(a), here, when the particular plaintiff first suffered injury from an agency action. The agency action was a regulation promulgated well before the 6-year period prescribed by § 2401(a). Corner Post, a new entity, suffered injury once it was created, thus its judicial challenge to the Regulation was timely under § 2401(a).

The gravamen of the Court’s holding is its focus on § 2401(a)’s text starting the statute of limitations when “the right of action first accrues.” That requires that the Court determine “the right of action” in the context.

The majority held that Corner Post’s claim was that the agency acted without statutory authority, an ultra vires claim. A party is injured and can challenge an invalid interpretation when the agency action applies to that party. This permitted the challenge by Corner Post, an entity created within the 6-year period before filing the challenge.

But, there is another type of APA challenge, a procedural challenge, that can be asserted to invalidate a regulation. The procedural challenges arise upon promulgation regardless of whether the regulation is otherwise substantively valid. Procedural challenges include the claim that notice and comment regulations have been promulgated without the agency having engaged in the APA procedural requirements of considering and responding to material comments. In such a procedural foot-fault case, the regulation can be within the authority conferred (e.g., offer the best interpretation of the statute) but might be invalid qua regulation solely for an alleged procedural defect. In such a case, of course, the interpretation (as opposed to the regulation) can still be valid and still be applied in a judicial proceeding despite the procedural invalidity of the regulation.

An aside: Prior to Chevron’s demise, the only effect of a procedurally invalid regulation was that the interpretation did not qualify for Chevron deference, so the court could still apply the best interpretation. See Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022), CA6 here and GS here (rejecting Hewitt’s procedural invalidity holding but in any event holding that the agency interpretation was the best interpretation thus valid even without Chevron deference); see also Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (Federal Tax Procedure Blog 3/15/22), here.

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.

Oral Argument in Corner Post on Whether Procedural Challenges to Regulations Are Subject to § 2401(a)’s Six-Year Statute of Limitations (2/21/24; 4/6/24)

I previously included in another blog an introduction to Corner Post v. Board of Governors of the Federal Reserve System (Sup. Ct. Case No. 22-1008), here, See Update on Supreme Court Deference Case (with Speculation) and New Supreme Court case on General 6-year Statute for Challenging Regulations Interpretations (Without Speculation) (Federal Tax Procedure Blog 10/1/23), here. The question presented in Corner Post is addressed to § 2401(a)’s general fallback statute of limitations of six years :

Does a plaintiffs APA claim "first accrue[]" under 28 U.S.C. §2401(a) when an agency issues a rule-regardless of whether that rule injures the plaintiff on that date (as the Eighth Circuit and five other circuits have held)-or when the rule first causes a plaintiff to "suffer[] legal wrong" or be "adversely affected or aggrieved" (as the Sixth Circuit has held)? 

The Solicitor General (“SG”) worded the question presented slightly differently (appellate fans will understand the subtle difference):

Whether the court of appeals correctly held that petitioner’s freestanding challenge to a rule adopted by the Board of Governors of the Federal Reserve System in 2011 was untimely under the six-year statute of limitations in 28 U.S.C. 2401(a) because petitioner had brought that challenge more than six years after the rule was adopted.

I noted that the resolution of Corner Post could affect many cases, including tax cases. E.g., Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), GS here (where the Court invalidated an interpretive tax regulation promulgated in the 1980s for procedural irregularity (failing to consider and respond to meaningful comments during the notice and comment process).

Oral argument in Corner Post was held Tuesday, February 20, 2024. See the transcript here and the recording here. I won’t cover oral argument except as it might affect an issue I have discussed before—the difference between arbitrary and capricious procedural review and interpretation review through Chevron deference. The context for the following excerpts is whether procedural challenges (such as failure to consider and respond to comments in the notice and comment process) are subject to § 2401(a)’s six-year statute of limitations. Other nonprocedural challenges, referred to as substantive but, I think, meaning interpretive challenges of whether the regulation properly interprets the statute may be made on an as-applied basis during enforcement many years after the regulation was promulgated. [Added 4/6/24 1pm - see * at end of this blog entry] I quote the entire portions of the transcript (Tr. 33-24; & 73-74; note that Mr. Weir is counsel for Corner Post. and Mr. Snyder is Assistant Solicitor General, counsel for the Government):

Update on Supreme Court Deference Case (with Speculation) and New Supreme Court case on General 6-year Statute for Challenging Regulations Interpretations (Without Speculation) (10/1/23)

 Loper Bright (22-451)

The Supreme Court docket for the October Term includes Loper Bright Enterprises v. Raimondo (SEC) (Sup. Ct. Dkt. 22-451 here.) (“Loper Bright”) where the issue for which certiorari was granted is:

Whether the Court should overrule Chevron or, at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

After being quiet on Chevron for several years (at least in an outcome-determinative sense), the Court appears poised to make some statement about Chevron. As I read the earlier decision in Kisor v. Wilkie, 139 S. Ct. 589 U.S. ___, 2400 (2019) (“Kisor”) (GS, here), where the Court approved so-called Auer deference to reasonable agency subregulatory interpretations of ambiguous regulations text, the Court could not have rendered the decision in Kisor without thinking that Chevron deference was still good law. If that is true, I speculate (correctly or not) the outcome in Loper Bright. (Emphasis on outcome.) I undertook this speculation in preparing a paper where the paper discusses the tax deference opinions before the APA was enacted in 1946 which have been largely ignored in discussing the meaning of APA 5 USC § 706, here [§ 10(e) of the original APA] and how central they were to the shape of the text of §10(e) [§ 706].

I undertook the speculation on the assumption that those voting in the majority to adopt Auer deference as formulated would vote to accept Chevron deference. The Court fine-tuned Auer deference in Kisor and perhaps that may be what happens in Loper Bright. 

Of course, there have been two key changes on the Court since Kisor – Justices Ginsburg and Breyer, both accepting deference in Kisor, are no longer on the Court and have been replaced by Justices Barrett and Jackson. I infer that Justice Barrett will vote to overturn or severely constrict Chevron deference (E.g., E.g., Jeremy W. Peters, Trump’s New Judicial Litmus Test: ‘Shrinking the Administrative State’ (NYT 3/26/18)); I infer that Justice Jackson will vote to approve Chevron deference, perhaps joining a majority will want to constrict somewhat the sweep of Chevron deference as it did for Auer deference in Kisor.

I assume that the Justices still on the Court who voted to accept Auer deference in Kisor will vote for Chevron deference. Those Justices are Kagan and Sotomayor and perhaps Roberts (although not clear to me). The reverse of that is true as to those Justices voting against Auer deference or constricting it to equipoise. Those Justice are Thomas, Alito, and Gorsuch.  I think Justice Roberts as in Kisor might be persuaded by stare decisis, and Justice Kavanaugh may approve Chevron on the basis he approved Kisor (with rigorous Chevron Footnote 9 interpretation, which, as he articulates it in Kisor, comes close to rejecting deference without formally rejection of Chevron deference except in rare interpretive equipoise where the court cannot determine that the agency interpretation is not best). 

So the lineup I see is:

For deference: Kagan, Sotomayor, Jackson

Against deference: Thomas, Aito, Gorsuch, and Barrett

Can't call: Roberts and Kavanaugh.

Corner Post (No. 22-1008)

Pre-Enforcement Litigation of IRS Guidance (8/6/19)

I just finished today my 2019 editions (Practitioner and Student) of my Federal Tax Procedure Book.  I have submitted those editions to SSRN and expect that they will be published there in the next few days.  I will post the SSRN links on this blog for download and on the page titled 2018 Federal Tax Procedure Book & Supplements, here, in the right hand column.

In the meantime, I offer the following which is new to the 2019 editions.  I offer some (but not all of the footnotes).

Litigating IRS Interpretations in Guidance Documents.

For most agency guidance, particularly guidance in a binding format such as legislative regulations, affected parties have an opportunity to raise procedural challenges in court under the APA upon promulgation of the guidance and before the agency attempts to enforce the guidance against the affected parties. n371  The statute of limitations for such review is the general six-year statute of limitations in 28 U.S.C. § 2401(a).  However, for Treasury guidance documents, such pre-enforcement litigation challenges are prohibited under the Anti-Injunction Act (“AIA”), § 7421(a), and related statutory and common law prohibitions which have historically channeled tax litigation, including challenges to agency guidance, into post-enforcement litigation venues such as deficiency, refund or collection suits.  Those post-enforcement venues have their own statutes of limitations triggered by the enforcement being challenged (e.g., a deficiency notice, denial of a claim for refund, or collection action).  Accordingly, historically, IRS guidance has not been allowed for pre-enforcement procedural challenges to agency guidance. n375 If § 2401(a) were applicable, post-enforcement review would not be adequate for APA procedural challenges in tax litigation because, in most cases, the six-year statute would have expired before IRS enforcement action made the case ripe for the traditional tax challenge venues.  As a result, the general six-year statute of statute of limitations in § 2401(a) has not barred procedural challenges to IRS guidance in post-enforcement cases outside the six-year period in § 2401(a).

  n371 See Altera Corp. v. Commissioner, 926 F.3d 1061, 1075 n. 6 (9th Cir. 2018); see generally Kristin E. Hickman & Gerald Kerska, Restoring the Lost Anti-Injunction Act, 103 Va. L. Rev. 1683 (2017) (referred to in the footnotes in this section as Hickman & Kerska, supra.
  n375 See generally Hickman & Kerska, supra.  As noted in the article, there have been cracks in this pre-enforcement prohibition scheme, citing Chamber of Commerce v. IRS, No. 1:16-cv-944-LY, 2017 WL 4682050 (W.D. Tex. Oct. 6, 2017), where the IRS appeal to the Fifth Circuit was withdrawn as moot.  But see CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019) (holding pre-enforcement procedural challenge to an IRS Notice was barred).
In Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2018), the taxpayer challenged in a straight-forward Tax Court deficiency redetermination case a regulations interpretation of § 482.  The challenge was well after six years from the date the regulation was adopted.  The Ninth Circuit panel on the reargument in Altera asked the parties to brief the issue of whether § 2401(a) was a potential bar to the suit, because Altera was raising procedural challenges. DOJ Tax responded that § 2401(a) 's six-year statute of limitations did not apply from the date of the regulation and that, rather, the statutes of limitation normally applying to post-enforcement tax litigation applied.  Under this position, Altera Corp’s challenge to the regulation in a deficiency redetermination proceeding in the Tax Court was clearly timely.  In any event, DOJ Tax argued that the Commissioner had waived the statute of limitations defense.  In the final opinion, the Court relegated the issue to a footnote (p. 1075, n. 6), concluding that the Commissioner had waived the statute of limitations defense by not asserting it.  The Court seems to have skirted the issue of whether there was a defense that could be waived.  It is not at all clear that, given the well-established methods for contesting the validity of regulations in post-enforcement proceedings (such as deficiency proceedings in the Tax Court and refund suits), a pre-enforcement post promulgation review is available for tax regulations because of § 7421(a), the Anti Injunction Act and related statutes and concepts pushing litigation to the standard post-enforcement procedures.  One could argue that the Court could not have gotten to waiver without a defense in the first place and there could be a defense in the first place only if the taxpayer had a post-promulgation, pre-enforcement right to contest the regulation, thus invoking the six-year statute that could be waived.  Under that way of thinking, the Court decided the issue.  But, I don’t think that is what the Court intended to do, because it concludes “Therefore, we need not address it.”  The “it,” I think, is whether § 2401 applied in the first place, which would have required that there be some post-promulgation, pre-enforcement remedy.  For a succinct discussion of the issue, see Kristin Hickman, Altera Meets Chamber Of Commerce (Tax Prof Blog 10/17/17) and for more detail see Alan Horwitz, Supplemental Briefing Completed in Altera (Tax Appellate Blog 10/10/18) (with links to the supplemental briefing in Altera and a Government Statute of Limitations Letter Brief).  Now, tax procedure students should thank me for relegating this to a footnote, and a long one at that, which even practitioners are unlikely to encounter.
Finally, in Bullock v. IRS, 2019 U.S. Dist. LEXIS 126921 (D. Mont. 2019), prompt APA review was allowed but not in a context where the aggrieved parties (States of Montana and New Jersey) had  traditional post-enforcement review.