In an about face, the U.S. Tax Court in Valley Park Ranch, LLC v. Commissioner, 162 T.C. No. 6, Docket No. 12384-20 (slip op.) (U.S. Tax Ct. March 28, 2024), vacated the so-called "proceeds regulation" in a reviewed opinion, finding that the regulation was not promulgated in compliance with the Administrative Procedure Act (APA). The Tax Court previously upheld the very same regulation in Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), aff'd, 28 F.4th 700 (6th Cir. 2022), against a similar APA challenge just four years ago. The opinion presents the Tax Court's analytical framework for assessing whether Treasury and the IRS responded to comments in compliance with the APA. It also paints an interesting picture of the Tax Court in a moment of transition.

The proceeds regulation (codified at Treas. Reg. § 1.170A-14(g)(6)(ii)) provides guidance on how to allocate condemnation sale proceeds between the donor and the donee in the rare event of an extinguishment of a conservation easement. This regulation is intended to ensure that a donation complies with the "protected-in-perpetuity" requirement under IRC section 170(h)(5). The proceeds regulation requires a proportional allocation of proceeds between the donor and the donee according to a specific formula. The donee must receive a share of the sale proceeds that is "at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time." Treas. Reg. § 1.170A-14(g)(6)(ii). Taxpayers can deviate from that formula only where "state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction." Id.

In 2020, the Tax Court sustained the proceeds regulation against procedural and substantive validity challenges in Oakbrook. The Tax Court reached the same conclusion in Hewitt v. Commissioner, a subsequent decision, but was reversed on appeal by the Eleventh Circuit Court of Appeals, which found that Treasury and the IRS failed to respond to significant comments, in violation of the APA notice and comment requirement. Then in 2022, the Sixth Circuit Court of Appeals affirmed the Tax Court's decision in Oakbrook creating a circuit split on the validity of the proceeds regulation. 

The deed language at issue in Valley Park Ranch would allocate proceeds as "determined by the court, unless otherwise provided by State or Federal law at the time." On the parties' summary judgment motion, they disputed whether the deed language satisfied the proceeds regulation. In the alternative, the taxpayer argued that proceeds regulation is procedurally invalid based on the Eleventh Circuit's decision in Hewitt. By a seven-judge majority, the Tax Court held that reconsideration of its decision in Oakbrook is appropriate and that the proceeds regulation was procedurally invalid. 

First, the court concluded that reconsideration of its prior decisions, based on its reasoning in Oakbrook, is appropriate in this case. It observed that the Tenth Circuit Court of Appeals, to which Valley Park Ranch is appealable, has not ruled on this issue. The court also explained that it is obligated to thoroughly reconsider its position when one of its decisions is reversed, as it was by the Eleventh Circuit in Hewitt. The court determined that it was not bound to follow its 2020 decision in Oakbrook in light of the split between the Sixth and Eleventh Circuits and because the reliance interests that animate stare decisis principles do not exist in this case.

Next, the court held that the proceeds regulation is procedurally invalid because it did not comply with notice and comment procedures under the APA. Adopting the reasoning of the Eleventh Circuit's decision in Hewitt, the court found that Treasury and the IRS failed to respond to significant comments regarding the proceeds regulation in its statement of basis and purpose when promulgating the final regulation in 1983. The court identified several significant comments, including some "that can be thought to challenge a fundamental premise" underlying the proposed agency decision, and found that Treasury failed to adequately respond to those comments. In so finding, the court expressly disagreed with and disavowed its previous reasoning in Oakbrook. Having concluded that the proceeds regulation is invalid under the APA as applied to the taxpayer, the court determined that the deed satisfied the statutory requirements that a conservation easement be granted in perpetuity and that it protected the conservation purpose in perpetuity.

A dissenting opinion authored by Chief Judge Kathleen Kerrigan and joined by three additional judges disagrees with the majority for three reasons. First, the dissent argues that the deed satisfied the proceeds regulation, so there is no reason to consider the regulation's validity. Second, the dissent argues that the reasoning in Oakbrook is correct and should apply in this case. And third, the dissent notes that the reversal disregards stare decisis without justification and that it "will result in instability of the law."

Valley Park Ranch increases uncertainty in the law regarding conservation easements. The Tax Court's previous strict application of the proceeds regulation provided the IRS with a straightforward route to dispose of some of the several hundred conservation easement cases pending on the court's docket (not including those appealable to the Eleventh Circuit) without taking the cases to trial. The court's ruling in Valley Park Ranch closes that route (except, perhaps, with respect to cases appealable to the Sixth Circuit) and likely means more conservation easement cases going to trial and more IRS and judicial resources devoted to resolving those cases.

This case also highlights the difficulties in assessing whether Treasury and the IRS met their obligation under the APA to respond to significant comments in the rulemaking process. While the majority and dissenting opinions agree on the test for identifying significant comments, they disagree on the application of the test. The majority's broad construction of a "significant comment" could signal a taxpayer-friendly approach to these kinds of APA challenges. 

Finally, the court's approach to this case may also indicate a willingness on the part of the Tax Court's newer judges to take a fresh look at previously decided issues. With the notable exception of Judge Maurice Foley, all of the judges who made up the majority in Valley Park Ranch were appointed in 2016 or later. The dissenting judges, on the other hand, were all appointed before 2016. The effects of this transitional period at the Tax Court are amplified by fact that there are seven vacant seats on the court – roughly a third of its seats. While there are 11 senior judges, many of whom are prolific and have served for a long time, they generally cannot vote on reviewed opinions. Thus, a relatively small group of judges – the majority in this case was only seven judges – can win the day where cases are subject to review by the entire court. President Biden recently nominated judges to fill three of the court's vacancies. It is worth paying attention to opportunities for the court to revisit prior decisions while this period of transition continues. 

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