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Federal Tax

Supreme Court Asked to Resolve Circuit Split Over Easement Reg

· 5 minute read

· 5 minute read

A partnership has petitioned the U.S. Supreme Court to review a Sixth Circuit ruling that a conservation easement regulation complies with the Administrative Procedure Act (APA), saying the justices should step in to resolve a circuit split over the issue.

In seeking certiorari, Oakbrook Land Holdings LLC said in its October 4 petition that a review by the high court is needed to determine when a federal agency must respond to comments received during its pre-rulemaking public notice period. The case at hand, Oakbrook Land Holdings LLC v. Commissioner of Internal Revenue, involves Treasury Reg §1.170A-14(g)(6)(ii), which a divided Sixth Court panel ruled in March was procedurally valid under the APA.

Oakbrook in its Supreme Court petition reiterated arguments made in challenging the panel’s finding and a subsequent request in June for a full Sixth Circuit hearing on APA-compliance grounds. According to Oakbrook, the reg is invalid because it was finalized by Treasury and the IRS without a proper public notice-and-comment process, in violation of the 1946 statute. Starting with a U.S. Tax Court petition in 2016, Oakbrook has challenged the validity of Reg §1.170A-14(g)(6)(ii), which the IRS cited in rejecting a $9.5 million conservation easement tax deduction under Code Sec. 170(h) claimed on the partnership’s 2008 federal tax return.

“This Court should grant certiorari to correct the Sixth Circuit’s and the Tax Court’s flawed application of the Administrative Procedure Act … and to restore uniformity to administrative agency obligations to respond to public comments,” attorneys for Oakbrook wrote.

The Sixth Circuit’s finding that the reg was valid and complied with the APA conflicts with a December 2021 decision in which an Eleventh Circuit panel concluded, in Hewitt v. Commissioner, (CA11 2021) 128 AFTR 2d 2021-7033), that Reg §1.170A-14(g)(6)(ii) ran afoul of administrative law. The full Sixth Circuit on July 6 rejected Oakbrook’s bid for a rehearing, thereby establishing the split between the two appellate circuits.

At issue, Oakbrook told the Supreme Court in its petition, is what can be defined as a “significant” public comment that requires a response from a rulemaking agency. The Sixth Circuit’s definition is too narrow, the partnership argued.

“Treasury’s decision not to respond to the comments that it received regarding the Proceeds Regulation denied the regulated public fair warning of the IRS’ eventual litigating position and led to the confusion reflected in the 2008 IRS private letter ruling that the IRS now claims are incorrect,” Oakbrook’s petition stated. “As a result, the IRS has denied hundreds if not thousands of deductions with a resulting flood of litigation. Allowing the Sixth Circuit’s cramped definition of ‘significant comments’ to stand would serve only to ensure that similar scenarios will play out in other administrative law contexts.”

Reg §1.170A-14(g)(6)(ii), issued in 1986, 40 years after the APA became law, directs the allocation of proceeds between donors and donees if a conservation easement were judicially extinguished and the property sold. According to the reg, a deed can’t allow for proceeds given to a donee in the event of a judicial extinguishment to be reduced by any post-donation improvements to the land.

Oakbrook had claimed the $9.5 million deduction under Code Sec. 170(h) on its 2008 returns after donating 106 acres in Tennessee to the Southeast Regional Land Conservancy as a conservation easement. The Tax Court found in favor of the IRS’ disallowance of the deduction because the deed to the land conservancy violated the reg in creating an easement with a fixed, rather than proportionate, amount of proceeds while also providing for subtraction of post-donation improvements. Those findings were affirmed by the Sixth Circuit, which rejected Oakbrook’s arguments citing the Hewitt decision, in which the Eleventh Circuit found that Treasury was obligated to consider some public comments as “significant” and that failing to do so effectively voided the reg.

Oakbrook’s petition cited the circuit split in the questioning the validity of a reg as being based on location. Without intervention by the Supreme Court, the partnership said, “the outcome in this case will turn not on uniform nationwide application of tax law, but on geography: If the Oakbrook property were located just a half-mile to the south on the other side of the Tennessee/Georgia border (and therefore in the Eleventh Circuit), Hewitt would dictate the opposite result.”

The petition also tackled the question of when a federal agency, in following the APA as part of rulemaking, must respond to public comments. The Sixth Court’s interpretation of the Treasury reg “may be invoked by other administrative agencies to disregard comments they receive from the public,” Oakbrook argued.


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