In another closely watched case involving the validity of the conservation easement regulations, the U.S. Court of Appeals for the Sixth Circuit affirmed the Tax Court in finding that the regulations were valid, creating a split in the circuits on the issue. The taxpayer in Oakbrook Land Holdings, LLC v. Commissioner, No. 20-2117, 2022 BL 84909 (6th Cir. Mar. 14, 2022), challenged a rule in the conservation easement regulations based on the Administrative Procedure Act (APA) and other administrative law principles. The regulation at issue (Treas. Reg. § 1.170A-14(g)(6)(ii)) provides guidance for allocating proceeds between the donor and donee in the rare event that a conservation easement is later extinguished (the proceeds regulation). The Sixth Circuit affirmed the Tax Court's holding that the taxpayer was not entitled to a charitable contribution deduction for a donation of a conservation easement. While all three judges agreed on that result, they differed on the rationale. Two judges concluded that the proceeds regulation was both procedurally and substantively valid, and therefore the taxpayer was not entitled to the deduction. The third judge concluded that the regulation was invalid under the APA, but that the taxpayer's deed failed to meet the requirements of the statute. Notably, the Sixth Circuit's decision conflicts with the only other Circuit Court of Appeals to address this issue. In December 2021, the Eleventh Circuit reached the opposite conclusion, holding in Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), that the proceeds regulation is procedurally invalid under the APA (see here for our coverage of Hewitt).

The majority in Oakbrook held that Treasury complied with the APA when it promulgated the proceeds regulation. Specifically, the majority found that Treasury included a concise statement of basis and purpose and adequately responded to comments from interested parties. Although Treasury's statement of basis and purpose did not specifically explain the rationale behind the proceeds regulation, the majority noted that the APA's concise-statement requirement "is not meant to be particularly onerous" and found that there was no APA violation because Treasury's basis and purpose for the rule was "apparent" when considering Treasury's rulemaking. The majority focused on explanations Treasury offered in the notice of proposed rulemaking for the proposed version of the regulations, including a discussion of the legislative history of charitable deductions for contributions of partial interests in property. That history reveals that Congress previously had disfavored tax deductions for the grant of conservation easements but then later permitted deductions for such donations subject to certain restrictions, including a requirement that the donation be made in perpetuity. Based on that context, the majority concluded that the regulation's basis and purpose were to provide a workable method for complying with the perpetuity requirement in the case of judicial extinguishment of the conservation easement. Because the majority was able to discern the purpose behind the regulation from information Treasury provided during the rulemaking, the court held that the very succinct statement in the preamble to the final regulation was sufficient.¹

The majority also rejected the taxpayer's argument that Treasury failed to adequately respond to comments from interested parties. Agencies must respond only to significant comments in the rulemaking process. The majority found that none of the comments identified by the taxpayer were significant because none took issue with the fundamental premise of the proceeds regulation — implementing the perpetuity requirement upon judicial extinguishment. In this respect, Oakbrook stands in sharp contrast with the Eleventh Circuit's recent decision in Hewitt. The Oakbrook majority disagreed with the Eleventh Circuit's conclusion that comments submitted by interested parties were significant and that Treasury's failure to address them was fatal to the regulation's validity. In dismissing Hewitt, the Oakbrook majority took the position that the purpose for the proceeds regulation was singularly focused on protecting the easement's conservation purpose in perpetuity. And while it agreed that "encouraging a donation of conservation easements in undeniably a goal of the statute" (a goal that was critical to the Eleventh Circuit's assessment of the comments' significance), it refused to recognize that Treasury might have, or should have, weighed those competing goals when promulgating the regulations and should have been required to explain its rationale for its rules in response to reasonable comments raised. 

The majority also concluded that the proceeds regulation is entitled to deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. and that under that analysis, it is substantively valid. There was no dispute under Chevron step 1 that the statute did not address how to enforce the perpetuity requirement in the case of a judicial extinguishment. The majority found the proceeds regulation to be a reasonable interpretation of the statute under Chevron step 2 because the statutory perpetuity requirement was meant to prevent enrichment of donors and therefore supports the allocation of a proportional amount of condemnation sales proceeds to donees. The majority found support for its conclusion under Chevron step 2 in its finding that Congress acquiesced to the proceeds regulation because it made dozens of amendments to section 170 while the proceeds regulation has been in force without rejecting the proceeds regulation. In addition, the majority found that the proceeds regulation is not arbitrary or capricious under the APA because the explanation for the proceeds regulation was obvious — that Treasury aimed to apply the perpetuity requirement in the event of a judicial extinguishment — and because the taxpayer had not demonstrated that Treasury failed to consider alternatives in promulgating the proceeds regulation. 

Judge Ralph B. Guy, Jr., in his concurring opinion, disagreed with the majority's opinion that the proceeds regulation is procedurally valid under the APA. Judge Guy concluded that the majority's assessment of the comments submitted in response to the proposed proceeds regulation was too narrow. Under a broader analysis, he found one comment to be significant. Because Treasury did not respond to that comment, Judge Guy found that Treasury violated APA requirements. Moreover, Judge Guy held that Treasury's rationale for the proceeds regulation contains only post hoc explanations, which are not sufficient to explain agency action. Nonetheless, Judge Guy determined that the taxpayer's deed violated the perpetuity requirement as set forth in the statute.² Therefore, Judge Guy concurred in the result. 

As noted, the Sixth Circuit's holding conflicts with the Eleventh Circuit's holding in Hewitt that Treasury violated the APA notice-and-comment requirements by failing to respond to a significant comment in issuing the proceeds regulation. The conflict between Oakbrook and Hewitt, which is based on the question of how to determine if a comment is "significant" for purposes of the APA, represents a circuit split. We expect that the parties in both cases may petition the Supreme Court for review and look forward to seeing if the Supreme Court takes up this important issue. 

For more information, please contact:

Maria O'Toole Jones, mjones@milchev.com, 202-626-6057

Kevin L. Kenworthy, kkenworthy@milchev.com, 202-626-5848

Lisandra Ortiz, lortiz@milchev.com, 202-626-5841

Samuel A. Lapin, slapin@milchev.com, 202-626-5807

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¹As the court noted, Treasury's statement explained only that the regulations contained in Treas. Reg. § 1.170A-14 "provide necessary guidance to the public for compliance with the law and affect donors and donees of qualified conservation contributions," 51 Fed. Reg. at 1496, and did not contain any explanation "for the policy rationale behind Treas. Reg. § 1.170A-14(g)(6)(ii) specifically." Oakbrook Land Holdings, LLC v. Comm'r, No. 20-2117, 2022 BL 84909, at *7 (6th Cir. Mar. 14, 2022). 
²The majority declined to address this statutory argument because it concluded that the Commissioner had waived the argument by not raising it in the Tax Court proceedings. 

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