Government Says Proceeds Reg Is Valid in Easement Deduction Case

DAVID F. HEWITT and TAMMY K. HEWITT,
Petitioners-Appellants
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT

ON APPEAL FROM THE DECISION OF THE
UNITED STATES TAX COURT

BRIEF FOR THE APPELLEE

DAVID A. HUBBERT
Acting Assistant Attorney General

FRANCESCA UGOLINI (202) 514-3361
ARTHUR T. CATTERALL (202) 514-2937
NATHANIEL S. POLLOCK (202) 514-8139
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT

Under Local Rules 26.1-1, 26.1-2, 26.1-3, and 28-1(b), it is hereby certified that the following persons, associations of persons, firms, partnerships, or corporations have an interest in the outcome of this case or have participated as attorneys or judges in the adjudication of this case:

Logan C. Abernathy, Attorney for Appellants

George Asimos, Jr., Attorney for North American Land Trust as amicus curiae

Arthur T. Catterall, Attorney, Appellate Section, Tax Division, U.S. Department of Justice

Edwin B. Cleverdon, Attorney, Office of Chief Counsel, Internal Revenue Service

Horace Crump, Attorney, Office of Chief Counsel, Internal Revenue Service

Ivan C. Dale, Attorney, Appellate Section, Tax Division, U.S. Department of Justice

Michael J. Desmond, (former) Chief Counsel, Internal Revenue Service

Judge Joseph Robert Goeke, United States Tax Court

David F. Hewitt, Appellant Tammy K. Hewitt, Appellant

Vivian D. Hoard, Attorney for Southern Conservation Trust, Inc. as amicus curiae

David A. Hubbert, Acting Assistant Attorney General, Tax Division, U.S. Department of Justice

Internal Revenue Service

Sidney Jackson, IV, Attorney for Appellants

Michelle Abroms Levin, Attorney for Appellants

Kip D. Nelson, Fox Rothschild, Attorney for Southern

Conservation Trust, Inc. as amicus curiae

William M. Paul, Acting Chief Counsel, Internal Revenue Service

Nathaniel S. Pollock, Attorney, Appellate Section, Tax Division, U.S. Department of Justice

Charles Rettig, Commissioner of Internal Revenue

Gregory P. Rhodes, Attorney for Appellants

Harry D. Shapiro, Attorney for North American Land Trust as amicus curiae

Francesca Ugolini, Chief, Appellate Section, Tax Division, U.S. Department of Justice

Sherra Tinyi Wong, Attorney, Appellate Section, Tax Division, U.S. Department of Justice

David M. Woolridge, Attorney for Appellants

Richard E. Zuckerman, (former) Principal Deputy Assistant Attorney General, Tax Division, U.S. Department of Justice

STATEMENT REGARDING ORAL ARGUMENT

Under 11th Cir. R. 28-1(c) and Fed. R. App. P. 34(a), counsel for the Commissioner respectfully inform this Court that they believe holding oral argument for this appeal would be helpful to the Court, given that the appellants have challenged the validity of a Treasury regulation.

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TABLE OF CONTENTS

Certificate of Interested Persons and Corporate Disclosure Statement

Statement regarding oral argument

Table of contents

Table of citations

Statement of jurisdiction

Introduction

Statement of the issue

Statement of the case

Summary of argument

Argument:

Conclusion

Certificate of compliance

Certificate of service

Attachment

TABLE OF CITATIONS

Cases:

* Cases or authorities chiefly relied upon have asterisks.

Altera Corp. & Subs. v. Commissioner, 926 F.3d 1061 (9th Cir. 2019), cert. denied, 141 S. Ct. 131 (2020)

Auer v. Robbins, 519 U.S. 452 (1997)

Belair Woods, LLC v. Commissioner, 120 T.C.M. (CCH) 73 (T.C. 2020)

Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)

Cottonwood Place, LLC v. Commissioner, 120 T.C.M. (CCH) 91 (T.C. 2020)

In re Gateway Radiology Consultants, P.A., 983 F.3d 1239 (11th Cir. 2020)

Home Box Off., Inc. v. F.C.C., 567 F.2d 9 (D.C. Cir. 1977

Hussion v. Madigan, 950 F.2d 1546 (11th Cir. 1992)

Judulang v. Holder, 565 U.S. 42 (2011)

Kardash v. Commissioner, 866 F.3d 1249 (11th Cir. 2017)

Lloyd Noland Hosp. & Clinic v. Heckler, 762 F.2d 1561 (11th Cir. 1985)

Lucky Stores, Inc. & Subsidiaries v. Commissioner, 153 F.3d 964 (9th Cir. 1998)

Mayo Found. for Med. Educ. and Research v. United States, 562 U.S. 44 (2011)

Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983)

Nat'l Min. Ass'n v. Sec'y, U.S. Dep't of Lab., 812 F.3d 843 (11th Cir. 2016)

Oakbrook Land Holdings, LLC v. Commissioner, 119 T.C.M. (CCH) 1352 (T.C. 2020)

* Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020)

* PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018)

Perez v. Mortg. Bankers Ass'n, 575 U.S. 92 (2015)

Red Oak Ests., LLC v. Commissioner, T.C. Memo. 2020-116, 2020 WL 4464260 (T.C. 2020)

Sells v. Commissioner, 121 T.C.M. (CCH) 1072 (T.C. 2021)

SIH Partners LLLP v. Commissioner, 923 F.3d 296 (3d Cir. 2019), cert. denied, 140 S. Ct. 854 (2020)

Union Equity Co-op. Exch. v. Commissioner, 481 F.2d 812 (10th Cir. 1973)

Vermont Yankee Nuclear Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519 (1978)

Wachter v. Commissioner, 142 T.C. 140 (2014)

Statutes:

Regulations:

Miscellaneous:

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STATEMENT OF JURISDICTION

1. Jurisdiction in the Tax Court

On August 16, 2017, the Internal Revenue Service (IRS) sent David F. Hewitt and Tammy K. Hewitt a notice of deficiency for 2013 and 2014. (A98-99, 106-38.)¹ On November 14, 2017, the Hewitts timely petitioned the United States Tax Court for a redetermination of those deficiencies and related penalties. (A5-18.) See I.R.C. (26 U.S.C.) §6213(a). The Tax Court had jurisdiction under I.R.C. §§ 6213(a), 6214, and 7442.

2. Jurisdiction in the Court of Appeals

The Tax Court entered a final decision on June 17, 2020. (A415.) The Hewitts timely filed a notice of appeal on September 15, 2020. (A418.) See I.R.C. § 7483; Fed. R. App. P. 13(a). This Court has jurisdiction under I.R.C. § 7482(a).

INTRODUCTION

To qualify for a charitable contribution deduction, the donor of a conservation easement must impose a perpetual restriction on the use that may be made of the real property subject to the easement. I.R.C. §170(h)(2)(C). The conservation purposes of that restriction also must be perpetually protected. I.R.C. § 170(h)(5)(A). But state laws generally allow conservation easements to be judicially extinguished if continued use of the property for conservation purposes becomes impossible or impractical. And because forever is indeed a long time, it is reasonably likely that a conservation easement may someday be judicially extinguished. Anticipating this possibility, regulations interpreting the protected-in-perpetuity requirement of § 170(h)(5)(A) condition eligibility for a charitable deduction on the donor and donee agreeing to split extinguishment proceeds based on the property values of their respective proportionate interests in the property, determined as of the date of grant. Treas. Reg. (26 C.F.R.) §§ 1.170A-14(g)(6)(i) & (ii).

The extinguishment-proceeds provision of the Hewitts' conservation easement deed violates the statute's protected-in-perpetuity requirement by subtracting from such proceeds any post-grant increase in value attributable to improvements on the property. This improvements-subtraction clause directly violates Treas. Reg. §1.170A-14(g)(6)(ii) (the proceeds regulation), which provides that all extinguishment proceeds must be allocated in accordance with the donor's and donee's fixed proportionate interests. The Hewitts contend that this regulation is procedurally and substantively invalid. But the regulation is procedurally valid because the Treasury Department satisfied the requirements of the Administrative Procedure Act when it issued the regulation more than 30 years ago. And the regulation is substantively valid because it reflects a reasonable interpretation of the statute's protected-in-perpetuity requirement.

STATEMENT OF THE ISSUE

Whether the Tax Court correctly upheld the IRS's disallowance of the charitable contribution deductions claimed by the Hewitts on their 2013 and 2014 tax returns in respect of their 2012 grant of a conservation easement.

STATEMENT OF THE CASE

(i) Course of proceedings and disposition in the court below

The Hewitts petitioned for a redetermination in the Tax Court to challenge the IRS's determination of federal income tax deficiencies of $336,894 for 2013 and $347,878 for 2014, along with accuracy-related penalties (see I.R.C. § 6662(a)) of $134,757.60 and $136,458.40 for 2013 and 2014, respectively. (A5, 25.) The deficiencies and penalties stemmed from the IRS's disallowance of over $2.7 million in charitable contribution deductions carried over from the Hewitts' 2012 tax year. (A30.) The Hewitts based those deductions on their 2012 contribution of a conservation easement on their property to Pelican Coast Conservancy. (A100-03.)

The trial focused on valuation of the easement, and also addressed (1) whether the easement complied with the legal prerequisites for a charitable contribution deduction (including the proceeds regulation), and (2) the applicability of accuracy-related penalties. (Docs. 33, 38-41.) In briefing, the Hewitts challenged the validity of the proceeds regulation as interpreted by the IRS to prohibit improvements-subtraction clauses. (Doc. 48 at 72-81.)

The Tax Court, in a memorandum opinion (T.C. Memo. 2020-89), held that the Hewitts were not entitled to the claimed conservation easement deduction because the improvements-subtraction clause in their easement deed violates the proceeds regulation, such that “the easement's conservation purposes are not protected in perpetuity” as required under I.R.C. § 170(h)(5)(A). (A371, 384.) The court therefore did not determine the fair market value of the easement. (A403.) The court also determined that the Hewitts were not liable for penalties. (A393-413.)²

(ii) Statement of the facts

1. Statutory and regulatory background

Though the Tax Code generally does not allow deductions for charitable donations of partial interests in property, I.R.C. §170(f)(3)(A), it does allow a deduction for a “qualified conservation contribution.” I.R.C. § 170(f)(3)(B)(iii). To qualify for the deduction, the property donated must be (1) a “qualified real property interest,” (2) donated to a “qualified organization,” and (3) donated “exclusively for conservation purposes.” I.R.C. § 170(h)(1)(A), (B), and (C); Treas. Reg. § 1.170A-14(a). As relevant here, a “qualified real property interest” is “a restriction (granted in perpetuity) on the use which may be made of the real property.” I.R.C. § 170(h)(2)(C). Under I.R.C. §170(h)(5)(A), a contribution “shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.”

Treasury Regulations address the issue of “perpetuity.” The extinguishment regulation, Treas. Reg. § 1.170A-14(g)(6)(i), acknowledges that “a subsequent unexpected change in the conditions surrounding the property . . . can make impossible or impractical the continued use of the property for conservation purposes,” but provides that “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding and all of the donee's proceeds . . . from a subsequent sale or exchange of the property are used . . . in a manner consistent with the conservation purposes of the original contribution.”

The proceeds regulation, § 1.170A-14(g)(6)(ii), provides that, for a deduction to be allowed, the donee's share of extinguishment proceeds must be determined by reference to the proportionate value of the conservation restriction, i.e., “the proportionate value that [such] restriction at the time of the gift, bears to the value of the property as a whole at that time.” The regulation further provides that this proportionate value (percentage) must remain constant. Id. And it provides that the donee organization “must be entitled to a portion of the [extinguishment] proceeds at least equal to that proportionate value” unless state law requires the donor to receive the full amount of the proceeds. Id.

2. The easement

This case concerns the first of many conservation easements that Mr. Hewitt had a hand in granting. As the Tax Court noted, after granting this first easement, “Mr. Hewitt began a troubling practice of purchasing rural, undeveloped land and selling interests in pass-through entities that he created to hold the land,” and these “entities associated with Mr. Hewitt granted conservation easements on the recently purchased land, and the investors, including Mr. Hewitt, claimed charitable contribution deductions for the easement donations far in excess of the original purchase prices for the recently purchased, underlying properties.” (A409-10.) The Tax Court, though, found that Mr. Hewitt granted this initial easement out of a sincere desire “to protect his family's farm land.” (A409.)

Mr. Hewitt and his sister separately owned about 1,325 acres in a rural part of eastern Alabama. (A373.) In 2012, Mr. Hewitt granted the conservation easement at issue here — covering a 257-acre portion of his property — to the Pelican Coast Conservancy. (A374-75.) The deed states that the easement's purpose is to ensure that the property “will be retained forever predominantly in its natural condition and to prevent any use of the Property that will impair or interfere with” certain “Conservation Values” of the property. (A142.) The deed identifies the “Conservation Values” as the “significant wildlife, forest, agricultural, open space, and plant habitat features” of the property, including “pastures with intermittent patches of planted Loblolly pine” and “a third-order freshwater stream (Cohabadiah Creek).” (A139-40.) The deed generally restricts the right of Mr. Hewitt and any successors to the property to construct buildings, communication facilities, and similar improvements, or to otherwise impair the conservation features of the property, and grants the Conservancy the right to enter the property at reasonable times to preserve and protect those conservation features. (A144-45.)

The deed also reserves to Mr. Hewitt and his successors certain “permitted uses” of the property. (A146-51.) The deed generally divides the property into three areas: a “Resource Protection Area,” consisting of a 100-foot linear buffer around Cohabadiah Creek, “Agricultural Areas,” and “Acceptable Development Areas.” (A147.) Within the “Resource Protection Area,” Mr. Hewitt reserves the right to conduct “normal agricultural activities,” build and maintain fences, hunting stands, platforms, creek crossings, and trails without notice to or permission from the Conservancy. (A149-50.) The “Acceptable Development Areas” included homesites within which Mr. Hewitt reserved the right to build, with prior written notice to the Conservancy, five single-family homes, as well as areas carved out for access roads and power lines. (A148.) Within the “Agricultural Areas,” which consisted of the entire property apart from the “Resource Protection Area” and the “Acceptable Development Areas,” Mr. Hewitt reserved the right to continue grazing cattle and producing timber (or other plant and animal products), as well as the right to build agricultural buildings and improvements without notice to or permission from the Conservancy as long as any structures are designed “to blend with natural surrounding and compliment the natural and scenic features of the landscape.” (A150-51.)

Section 15 of the easement deed provides that “[i]f circumstances arise in the future such as render the purpose of this Easement impossible to accomplish, this Easement can only be terminated or extinguished . . . by judicial proceedings[.]” (A157.) In such a case,

the amount of the proceeds to which [the] Conservancy shall be entitled . . . , from any sale, exchange, or involuntary conversion of all or any portion of the Property subsequent to such termination or extinguishment . . . shall be determined to be at least equal to the perpetual conservation restriction's proportionate value . . . in accordance with Subsection 15.2.

(A157.) Subsection 15.2, in turn, states:

the parties stipulate that this Easement shall have at the time of Extinguishment a fair market value determined by multiplying the then fair market value of the Property unencumbered by the Easement (minus any increase in value after the date of this grant attributable to improvements) by the ratio of the value of the Easement at the time of this grant to the value of the property, without deduction for the value of the Easement, at the time of this grant.

(Id. (emphasis added)). The deed also provides that the Conservancy must use “any proceeds received under the circumstances described in this Section 15 in a manner consistent with its conservation Values, which are exemplified by this grant.” (A157.)

3. The Hewitts' tax returns

The Hewitts reported a $2,788,000 charitable contribution on their 2012 income tax return based on the easement granted to the Conservancy. (A102.) Although, they were only able to claim $57,738 of that amount as a deduction on their 2012 return, they carried the balance of the deduction forward to the next two years, claiming a $1,868,782 deduction in 2013 and an $861,480 deduction in 2014. (A103.) The IRS later examined the Hewitts' 2013 and 2014 tax returns, disallowed the claimed charitable contribution deductions attributable to the conservation easement, and issued notices of deficiency. (A106-38.) The Hewitts challenged the deficiencies, and the related penalties, in the Tax Court. (A5.)

4. Tax Court decision in this case

The Tax Court upheld the deficiencies.³ The court concluded that the easement deed failed to satisfy the protected-in-perpetuity requirement of the statute, as explicated by the proceeds regulation, because the deed “subtracts the value of posteasement improvements before determining the Conservancy's share of the extinguishment proceeds.” (A383.) Rejecting the Hewitts' arguments for a different interpretation of the regulation, the Tax Court ruled that, under the correct interpretation, “[t]he value of posteasement improvements may not be subtracted out of the proceeds before determining the donee's proportionate share.” (A384-88.)

The Tax Court also rejected the Hewitts' argument that the IRS improperly changed its position on improvements-subtraction clauses in conservation easement deeds. (A389-91.) The court determined that the private letter ruling on which this argument was based was “neither persuasive nor relevant.” (A390.) It explained that the letter “makes no more than a passing reference to the deed's proceeds provision and does not evaluate whether the subtraction violates the perpetuity requirement of section 170(h)(5).” (Id.) The court concluded that the private letter ruling did not expressly interpret the proceeds regulation to allow improvements-subtraction clauses, and that, accordingly, the IRS's current interpretation of the regulation in this regard “is not a new or different interpretation.” (A391.)⁴

The Tax Court relied on its decision in Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), to reject the Hewitts' challenge to the “procedural and substantive validity” of the proceeds regulation as interpreted by the IRS and the court to prohibit improvements-subtraction clauses. (A384.) In Oakbrook, the full Tax Court held that the Treasury Department complied with the Administrative Procedure Act when it issued the proceeds regulation, and that the regulation reflects a reasonable interpretation of the statutory protected-in-perpetuity requirement. Oakbrook, 154 T.C. at 189-200.

(iii) Statement of the standard or scope of review

This Court “review[s] the tax court's factual findings for clear error and its legal conclusions de novo.” Kardash v. Commissioner, 866 F.3d 1249, 1252 (11th Cir. 2017).

SUMMARY OF ARGUMENT

1. The conservation easement deed on which the Hewitts based their disallowed tax deductions violates I.R.C. § 170(h)(5)(A)'s protected-in-perpetuity requirement as interpreted and implemented by the proceeds regulation. It does so by subtracting from judicial extinguishment proceeds — prior to the allocation of such proceeds between the donor and the donee — “any increase in value after the date of this grant attributable to improvements.” The proceeds regulation disallows this kind of improvements-subtraction clause. That regulation states that the donee must receive a portion of the extinguishment proceeds that is “at least equal to th[e] proportionate value of the perpetual conservation restriction.” And it defines “that proportionate value” as the easement's proportionate share of the “value of the property as a whole” at the time of the grant, specifying that the proportionate value must remain constant. As the Fifth Circuit has determined, subtracting the value of improvements before dividing extinguishment proceeds according to the regulatory formula results in the donee not receiving its proportionate amount of the total proceeds of the sale, in contravention of the proceeds regulation.

2. The proceeds regulation as so interpreted does not violate the APA's procedural requirements for notice-and-comment rule making. The Hewitts mainly contend that the Treasury Department failed to respond to relevant comments. But only one comment out of 90 (and one paragraph out of 700 pages) touched on the improvements-subtraction issue. This comment was not “significant” for APA purposes because it did not cast doubt on the reasonableness of the rule.

3. The prohibition against improvements-subtraction clauses that is embodied in the proceeds regulation is substantively valid because it reflects a reasonable interpretation of the statute's protected-in-perpetuity requirement. Such clauses undermine the required perpetual protection of conservation purposes, as donors (and their successors) have a strong incentive to overvalue improvements in the event of a judicial extinguishment, thereby decreasing the amount of extinguishment proceeds available to donee organizations. Moreover, the prohibition against improvements-subtraction clauses reflects an eminently practical solution to the improvements issue by virtue of being an administrable bright line rule.

ARGUMENT

The Tax Court correctly upheld the IRS's disallowance of the charitable contribution deductions claimed by the Hewitts in respect of their grant of a conservation easement to the Conservancy

A. The easement violates the proceeds regulation⁵

The Hewitts' easement deed provides that, in the event of a judicial extinguishment of the easement, “any increase in value [of the burdened property] after the date of this grant attributable to improvements” will be subtracted from the extinguishment proceeds before such proceeds are allocated between the donor and the donee. (A157.) This clause violates the proceeds regulation, Treas. Reg. §1.170A-14(g)(6)(ii), which does not brook any such pre-allocation subtraction.

The proceeds regulation provides that a donee “must be entitled to a portion of the proceeds at least equal to th[e] proportionate value of the perpetual conservation restriction.” Treas. Reg. § 1.170A-14(g)(6)(ii). The “proceeds” are those from a post-extinguishment “sale, exchange, or involuntary conversion of the subject property.” Id. And “th[e] proportionate value” is “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.” Id. The regulation expressly states that such “proportionate value of the donee's property rights shall remain constant.” Id.

An easement deed that subtracts the value of improvements from the total extinguishment proceeds and allocates to the donee only its proportionate share of the remaining amount violates the proceeds regulation. Under such a deed, the donee will not receive its proportionate share of “the proceeds” of the sale. The donee will, instead, receive its proportionate share of only a part of “the proceeds.” This is the conclusion the Fifth Circuit reached in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 207 (5th Cir. 2018). The court there explained that “[t]he ordinary meaning of 'proceeds' is 'the total amount brought in.'” Id. (quoting Merriam-Webster's Collegiate Dictionary (11th ed. 2003)).

The Hewitts prefer a different entry under the Merriam-Webster's definition of “proceeds”: “the net amount received . . . after deduction of any discount or charges.” (Br. 43 n.13.) But a portion of the proceeds attributable to the value of improvements cannot plausibly be described as a discount or charge associated with the transaction. Although the Hewitts' preferred definition might support an argument that the donor and donee can share court costs or banking fees associated with the post-extinguishment sale, it does not undercut the Fifth Circuit's analysis.

Stated differently, if the value of improvements is subtracted from extinguishment proceeds before such proceeds are allocated between the donor and the donee, then the donee's share of the proceeds would not be “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); it would be less. For example, if the proportionate value of the easement is equal to 50% of the value of the property as a whole (that is, land and improvements, unburdened by the easement) at the time of the donation, but the value of the improvements is subtracted from the extinguishment proceeds and the donee receives 50% of the remaining amount, then the donee will receive less than 50% of the total proceeds, i.e., less than its proportionate value vis-à-vis “the value of the property as a whole” as of the date of grant. And in that situation, the “proportionate value of the donee's property rights” will not have “remain[ed] constant.” Treas. Reg. § 1.170A-14(g)(6)(ii).

As the Fifth Circuit noted in PBBM-Rose Hill, 900 F.3d at 208, the proceeds regulation “does not indicate that any amount, including that attributable to improvements, may be subtracted out.” This omission is significant; as the Fifth Circuit further noted, the preceding paragraph of the regulations expressly recognizes the possibility of post-donation improvements.⁶ Id. This indicates that the Treasury Department, in drafting the proceeds regulation, consciously “chose not to carve out an exception for the allocation of proceeds in the event of extinguishment when such improvements have been made.” Id.

Like the Fifth Circuit, the Tax Court has consistently interpreted Treas. Reg. § 1.170A-14(g)(6)(ii) to preclude subtracting the value of improvements from extinguishment proceeds before allocating such proceeds between the donor and donee in accordance with their proportionate values. See, e.g., Sells v. Commissioner, 121 T.C.M. (CCH) 1072, at [*14] (T.C. 2021); Cottonwood Place, LLC v. Commissioner, 120 T.C.M. (CCH) 91, at [*8] (T.C. 2020); Red Oak Ests., LLC v. Commissioner, T.C. Memo. 2020-116, 2020 WL 4464260, at [*8] (T.C. 2020); Oakbrook Land Holdings, LLC v. Commissioner, 119 T.C.M. (CCH) 1352, [*20]-[*29] (T.C. 2020).

The Hewitts nevertheless argue (Br. 40-44) that Treas. Reg. §1.170A-14(g)(6)(ii) permits (perhaps even compels) improvements-subtraction clauses. They contend (Br. 40-44) that an interpretation of the regulation requiring the donee to receive a proportionate share of the entire amount of extinguishment proceeds — including any portion thereof attributable to post-donation improvements — results in a benefit to the donee “inconsistent with the property rights conveyed” because the donee has no “interest” in post-donation improvements. That premise is dubious at best. As we explain (pp. 40-41, infra), §170(h)(2)(C)'s requirement of a perpetual restriction on “the use that may be made of the real property” logically extends to improvements (a subset of real property), including future improvements. Indeed, conservation easements typically impose at least some restrictions on the use that may be made of improvements because, at a minimum, they generally prohibit improvements from being used in ways that impair the conservation purposes of the easement. (See A142 (imposing this kind of general restriction).)

Ultimately, the Hewitts' plea for a different interpretation of the proceeds regulation amounts to a policy argument. But even if the prohibition of improvements-subtraction clauses were a bad rule, that would not be a reason to ignore the regulation's plain terms. The Hewitts' only engagement with the text of the regulation is their reliance on the reading of the regulation espoused by Judge Toro in his concurring opinion in Oakbrook. Under that reading, the requirement that the “proportionate value” of the donee's interest “shall remain constant” is interpreted to mean its proportionate value as compared to the value of “the property as a whole” in the state it was in at the date of grant, such that the easement's constant, proportionate value (expressed as a percentage) is not applied to any portion of the extinguishment proceeds that is attributable to the value of post-grant improvements. See Oakbrook, 158 T.C. at 208-211 (Toro, J., concurring).

But this preferred reading, among other things, reads words into the regulation (the words italicized above) that are not there. Under the regulation as actually written, (1) the value of the donee's interest is determined as a percentage of the value of “the property as a whole,” (2) “that proportionate value” must remain constant, and (3) “that proportionate value” (expressed as a percentage) is applied to any extinguishment proceeds to determine the amount of such proceeds allocable to the donee. Because requirements (2) and (3) refer back to “that proportionate value” defined in requirement (1), the proportionate value of the donee's interest not only has to begin as a percentage of the value of “the property as a whole,” it also has to continue on and, upon extinguishment, end as that same percentage of the value of “the property as a whole.”

As the Hewitts concede (Br. 41), the Oakbrook concurrence did not suggest that the Commissioner's interpretation of the proceeds regulation is somehow precluded by the text of the regulation. See Oakbrook, 154 T.C. at 208 (Toro, J., concurring) (opining that the “shall remain constant” sentence “is susceptible to two different readings”). If anything (as explained above), the regulation's plain text forecloses the Oakbrook concurrence's alternate reading. At the very least, the Commissioner's interpretation of the regulation is textually superior.⁷

B. The proceeds regulation is procedurally valid

The Administrative Procedure Act (5 U.S.C. § 553) sets forth the requirements for notice-and-comment rule making, prescribing “a three-step procedure.” Perez v. Mortg. Bankers Ass'n, 575 U.S. 92, 96 (2015). First, the agency issues a notice of proposed rulemaking; second, it gives interested persons an opportunity to submit comments; and third, it includes a concise general statement of basis and purpose when it issues the final rule. Id.; see 5 U.S.C. § 553(a)-(c).

The agency also must “consider and respond to significant comments received during the period for public comment.” Perez, 575 U.S. at 96 (citations omitted). But “comments must be significant enough to step over a threshold requirement of materiality before any lack of agency response or consideration becomes of concern.” Vermont Yankee Nuclear Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519, 553 (1978) (citation omitted); see also Home Box Off., Inc. v. F.C.C., 567 F.2d 9, 36 n.58 (D.C. Cir. 1977) (explaining that comments are significant if they “raise points relevant to the agency's decision and which, if adopted, would require a change in an agency's proposed rule, but comments that are “purely speculative and do not disclose the factual or policy basis on which they rest require no response”). This Court has likewise explained that the APA only requires agencies to “respond to significant comments that cast doubt on the reasonableness of the rule the agency adopts.” Hussion v. Madigan, 950 F.2d 1546, 1554 (11th Cir. 1992) (citation omitted).

The Hewitts argue (Br. 29-33) that the proceeds regulation is procedurally invalid because the preamble to the final conservation easement regulations did not include a specific discussion of the proceeds regulation and did not respond to the 13 commenters (out of 90) who addressed that regulation. This argument fails.

1. Comments on aspects of the proceeds regulation that have no bearing on the issue of improvements are immaterial to the APA analysis here

As an initial matter, the Hewitts' argument incorrectly frames the issue. The Hewitts ask this Court to consider whether the Treasury Department adequately explained, and considered comments addressing, the proceeds regulation as a whole. But the Hewitts do not (and could not) mount some sort of facial challenge to the proceeds regulation. Whether, for instance, the proceeds regulation might discourage easement donation (Br. 31) or could be enforced against a grantor's heir or assigns (Br. 32) has no bearing on the denial of the Hewitts' conservation easement deduction. Thus, even if it were true that the Treasury Department should have addressed comments regarding those issues, the argument that its failure to do so somehow invalidates a completely different aspect of the regulation makes no sense. Indeed, if that were how § 553 operated, one could object to any of the host of rules included in the conservation easement regulations — regardless of Treasury's response to comments regarding that particular rule — on the theory that there must have been at least one significant comment, relating to some aspect of the regulations, in the 700 pages of submitted comments that Treasury did not adequately address. That cannot be the law.

So there is no need for this Court to decide whether any of the 13 comments that addressed the proceeds regulation raised any point that cast doubt upon any aspect of the proceeds regulation's reasonableness and therefore required a response. See Hussion, 950 F.2d at 1554. The relevant question is whether the Treasury Department failed to address significant comments addressing the fact that the proceeds regulation “does not indicate that any amount . . . may be subtracted out” of extinguishment proceeds in determining the donee's share of such proceeds. PBBM-Rose Hill, 900 F.3d at 208. That is the question on which the Tax Court correctly focused in Oakbrook. See 154 T.C. at 192-93. (See also A384 (relying on Oakbrook to reject the Hewitts' procedural APA challenge).)

2. The one comment that touched on the issue of improvements in the context of the proceeds regulation did not require a response

Of the 13 comments that addressed (many very briefly) some aspect of the proceeds regulation, only one addressed the issue of how to deal with improvements in determining the donor's and donee's proportionate shares of extinguishment proceeds. That comment came from the New York's Landmarks Conservancy. The Conservancy strongly recommended that the proceeds regulation and the extinguishment regulation be removed from the final version of the conservation easement regulations. (A200, 202.) It believed that these regulations would deter prospective donors of conservation easements because such persons “frequently raise the question that 'perpetuity' is a long time and may impose unforeseeably heavy burdens on themselves or future owners under unforeseeable future circumstances.” (A201.) The Conservancy explained that such concerns are ordinarily “mollified upon the donor's recognition that common law permits extinguishment of restrictions when they no longer serve the original intended purposes.” (Id.) But it expressed concern that “the prospect of extinguishment would no longer mollify these fears if a split of proceeds under unknown circumstances would be required.” (Id.) The Conservancy also argued that the extinguishment provision's assumption that conservation restrictions have “a market value” is “unrealistic” and contended that “[t]he value of a conservation restriction to the donee organization is not a monetary value but a philanthropic value.” (Id.)

The Conservancy made clear that, given its view that conservation restrictions do not have a monetary value to the donee, it believed that any share of extinguishment proceeds allocated to the donee would be a windfall. (A201.) It expressed the view that the potential deterrent effect of the extinguishment provision on prospective donors outweighed any benefit that it (the Conservancy) might enjoy from “the prospect of future windfalls when restrictions are extinguished.” (Id.)

In that same vein, the Conservancy pointed out that the proposed proceeds regulation did not permit the proportionate value of the conservation restriction to be altered “to take into account that improvements may be made thereafter by” the donor. (A201.) The Conservancy opined that entitling donees to a proportionate value of the full proceeds of a post-extinguishment sale in those circumstances, including the portion attributable to improvements, “would obviously be undesirable to the prospective donor and would constitute a windfall to the donee organization.” (Id.)

The Conservancy “strongly recommend[ed] deletion of the entire extinguishment provision.” (A202.) Alternatively, the Conservancy recommended revising the proceeds formula to prevent the purported “inequities” it had identified. (Id.) The Conservancy did not offer any specific language to implement that recommendation. (Id.)

The Conservancy's comment regarding the proposed rule's failure to account for post-grant improvements did not “cast doubt on the reasonableness of the rule” and thus did not require any response. See Hussion, 950 F.2d at 1554. The comment was limited to (1) the Conservancy's correct observation that the regulation would require the donee to receive a proportionate amount of the full proceeds of a post-extinguishment sale, including proceeds attributable to improvements, and (2) its contention that this would be “undesirable” to the donor and would be a “windfall” for the donee. (A201.) But Treasury's primary (if not exclusive) consideration in crafting the proceeds regulation was the meaning of the statutory perpetuity requirement. To cast doubt upon the reasonableness of the proposed rule, the Conservancy's comment would have needed to explain why the rule would not further the goal of ensuring that the conservation purpose embodied in the perpetual use restriction would be protected in perpetuity as required by the statute. The comment offered no such explanation.

The comment does assert that compensation for a proportionate share of the value of improvements would be a “windfall” to the donee. Perhaps if the Conservancy had offered a persuasive explanation for that conclusion, the comment may have warranted a response. But, again, it provided none. Indeed, the Conservancy's expressed belief that a conservation restriction does not have a monetary value to the donee — and that any extinguishment proceeds a donee received would therefore be a “windfall[ ]” (A201) — undermines the significance of its comment regarding improvements. It is not even apparent from that comment whether the Conservancy believed that a donee would be less entitled to extinguishment proceeds attributable to improvements than proceeds attributable to the land itself.

3. The Hewitts' reliance on Lloyd Noland is misplaced

In arguing that the basis and purpose statement of the final regulations insufficiently responded to comments regarding the proceeds regulation, the Hewitts principally rely on Lloyd Noland Hosp. & Clinic v. Heckler, 762 F.2d 1561 (11th Cir. 1985). They repeatedly cite that case for the proposition that an agency, when issuing a rule, must explain the facts underlying its conclusion and must respond to objections in a manner that enables a reviewing court to ascertain why the agency reacted to the objections as it did. (See Br. 28-39.) But Lloyd Noland does not support the Hewitts' argument for at least two reasons.

First, Lloyd Noland concerns the kind of response an agency must provide to comments that are highly relevant to the rule at issue in the case. The Court there explained that “an agency should rebut vital relevant comments” but confirmed that “irrelevant objections require no comment.” 762 F.2d at 1566-67; see Altera Corp. & Subs. v. Commissioner, 926 F.3d 1061, 1082 (9th Cir. 2019) (finding “no APA violation” where Treasury did not respond to “comments that proved irrelevant to its decisionmaking process”), cert. denied, 141 S. Ct. 131 (2020). Here, as demonstrated above, the one comment that touched upon the issue of improvements in the context of extinguishment proceeds was neither vital nor relevant.

Second, Lloyd Noland considered a factual, evidence-based rule — a change in the Medicare formula used for reimbursing malpractice costs. 762 F.2d at 1564-65. The agency used an empirical study to justify the change. Id. at 1566-67. This Court held that the agency violated the APA by failing to respond to significant comments contending that the study was unreliable, that the agency used data from the study in a way that the study's authors had specifically cautioned against, and that the agency failed to sufficiently explain the facts underlying its conclusion. Id. at 1566-67.

Nothing similar is present here. The proceeds rule is not based on empirical studies or fact finding. It is based, instead, on Treasury's interpretation of the statutory protected-in-perpetuity requirement. Thus, there were no comments contending that the proposed rule rested on erroneous data or fact finding, or pointing to other data that the commenters believed Treasury should consider. Cf. Altera, 926 F.3d at 1082 (noting that commenters pointing to evidence of allegedly comparable uncontrolled transactions that purportedly contradicted the cost-sharing rule in the § 482 regulations “overlook[ed] Treasury's decision to do away with analysis of comparable transactions [in this context] in the first place” in accordance with congressional intent as expressed in relevant legislative history). So there was no need for Treasury to explain any factual basis for the rule. As the Tax Court correctly observed, the purpose of the rule — ensuring compliance with the statute's protected-in-perpetuity requirement — “is plain on its face.” Oakbrook, 154 T.C. at 194.

4. The Treasury Department's actions support its representation in the preamble to the final regulations that it considered all comments

Contrary to the Hewitts' contentions (Br. 34-35), Treasury's statement in the preamble to the final regulations that it considered all submitted comments is not meaningless. Indeed, Treasury's revisions to the proposed version of the proceeds rule — revisions that the Hewitts likewise brush aside as irrelevant (Br. 35-39) — support its representation that it considered all submitted comments before determining which ones were significant enough to warrant a specific response.

To be sure, the revisions to the proposed version of the proceeds regulation were clarifications rather than substantive changes.⁸ But they are clarifications specifically responsive to comments expressing uncertainty about the regulation's meaning. (See, e.g., A229 (requesting that the final regulations clarify that “the proportionate value assigned to an easement at the time of gift is the minimum that a grantee organization should receive in the event of an extinguishment and sale of the easement, thus allowing the grantee to capture any increase in the proportionate value of the easement”); A236 (similar).) The Treasury Department's responsive clarifications are indicative of a comprehensive review of the submitted comments.

Relatedly, while Treasury did not specifically discuss the proceeds rule in the preamble to the final regulations, it did discuss the statutory protected-in-perpetuity requirement in a way that illuminates its rationale for that rule. Thus, even if Treasury had been required to explain its thinking with regard to the proceeds rule, it effectively did so. See Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (explaining that, under the reasoned decisionmaking standard embodied in the APA, courts should “uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned”).

Specifically, in discussing the mortgage-subordination rule, Treas. Reg. § 1.170A-14(g)(2), Treasury explained (in response to comments) that, because “the conservation purposes of the donation must be protected in perpetuity,” a “mortgagee must subordinate its rights under the mortgage to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.” 51 Fed. Reg. at 1498. In other words, Treasury made clear that it views the protected-in-perpetuity requirement as requiring express protection of the full value of the donee's interest in order to adequately protect the easement's conservation purposes. That statement is entirely consistent with the approach taken in the proceeds regulation.

C. The proceeds regulation is substantively valid

The Hewitts argue that a proceeds rule that does not countenance improvements-subtraction provisions represents an unreasonable interpretation of the statute under the framework set forth in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). Under that framework, this Court's first task is to determine whether Congress has “directly spoken to the precise question at issue.” Id. at 842. If so, that ends the matter. But if not, “[t]he second Chevron step is to determine if the agency's interpretation of the statute is reasonable.” In re Gateway Radiology Consultants, P.A., 983 F.3d 1239, 1256 (11th Cir. 2020) (citation omitted). “An interpretation is reasonable if it is rational and consistent with the statute.” Id. (citation omitted). Finally, this Court must “accept the agency's reasonable interpretation of the statute, 'even if the agency's reading differs from what the court believes is the best statutory interpretation.'” Id. (quoting Chevron).

1. The Hewitts' contention that the proceeds regulation is not based on sufficient fact finding or relevant data is inapt

The Hewitts first argue (Br. 47-49) that the Treasury Department has failed to show that the proceeds rule is the product of “reasoned decision making” because it offered “no explanation” for the rule, failed to examine “relevant data,” and failed to show “a rational connection between the facts found and decision made.” This argument is meritless and simply rehashes the Hewitts' procedural APA argument.

As explained above, the proceeds rule is not a factual, evidence-based rule; rather, it implements Treasury's understanding of the statutory protected-in-perpetuity requirement. Accordingly, the procedural APA issue in this case boils down to whether Treasury was required to respond to the one comment (out of 90 submitted comments) that touched on the issue of post-grant improvements in the context of extinguishment proceeds. If this Court agrees with the Commissioner that such a response was not required under the APA, then the Hewitts' reasoned decisionmaking argument necessarily fails. See Hussion, 950 F.2d at 1554 (explaining that “[t]he APA does not require the Agency to respond to comments which, in essence, reflect a policy-based preference”).

More to the point, the Hewitts' invocation of the reasoned decisionmaking standard — and their reliance on State Farm as a leading authority on that subject (Br. 47-51) — is inapt in the context of Chevron. State Farm review focuses on the agency's contemporaneously expressed rationale for its actions. Chevron analysis, on the other hand, examines whether an agency rule represents a permissible interpretation of the statute the agency is charged with administering. To repeat, the Chevron framework of analysis — to which we now turn — involves two inquiries: First, whether Congress has “directly spoken to the precise question at issue”; and second, if it has not, whether the agency's resolution of that question by regulation is “based on a permissible construction of the statute.” Chevron, 467 U.S. at 842-43.⁹

2. The proceeds regulation reflects a reasonable interpretation of the statutory protected-in-perpetuity requirement, and that interpretation is therefore entitled to deference under Chevron

The Hewitts do not contend (nor do we) that “'Congress has directly spoken to the question at issue,'” Gateway Radiology, 983 F.3d at 1255-56, so the analysis proceeds to Chevron step two. Here, the issue is whether a regulation that “does not indicate that any amount . . . may be subtracted out” of extinguishment proceeds in determining the donee's share of such proceeds, PBBM-Rose Hill, 900 F.3d at 208, reflects a permissible interpretation of the statute. See Mayo Found. for Med. Educ. and Research v. United States, 562 U.S. 44, 54, 58 (2011) (using “permissible” and “reasonable” interchangeably in this context). The proceeds regulation easily satisfies that test.

The proceeds regulation, in conjunction with the extinguishment regulation, implements the statutory protected-in-perpetuity requirement. See I.R.C. § 170(h)(5)(A) (providing that “[a] contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity”); Treas. Reg. § 1.170A-14(g)(6)(i) (providing that “the conservation purpose can . . . be treated as protected in perpetuity” if, in the event of a judicial extinguishment of the use restriction, “the donee's proceeds (determined under paragraph (g)(6)(ii) of this section) from a subsequent sale or exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution”), (ii) (providing rules for determining the donee's share of extinguishment proceeds).

Significantly, the Hewitts do not contend that the proceeds regulation reflects an impermissible interpretation of the statutory protected-in-perpetuity requirement (§ 170(h)(5)(A)) that it implements. Rather, they contend that the proceeds regulation is inconsistent with the statutory concept of the “qualified real property interest” that is the subject of the donation, see I.R.C. § 170(h)(2), since, in their view, the regulation overcompensates the donee for that interest in the context of a post-extinguishment sale. (See Br. 51-52 (quoting Judge Toro's concurrence in Oakbrook).)

But the “qualified real property interest” is a restriction “on the use which may be made of the real property.” I.R.C. § 170(h)(2)(C). And “real property” includes land and improvements. See Black's Law Dictionary (11th ed. 2019) (defining “real property” as “[l]and and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land”). Since the requisite restriction, by definition, pertains to both land and improvements, the Hewitts' claim that the donee of a deductible conservation easement has no “interest” in improvements that must be accounted for in allocating extinguishment proceeds is unsupportable. See Belair Woods, LLC v. Commissioner, 120 T.C.M. (CCH) 73, at [*15] (T.C. 2020) (concluding that restrictions imposed by a deductible conservation easement “apply, not only to the land, but also to any improvements made by the grantor pursuant to its reserved rights”).

Further, even if compensating the donee for a fixed percentage of the value of improvements on the property in the event of extinguishment would sometimes overcompensate the donee, it is equally true that giving the donee no percentage of the proceeds attributable to improvements would overcompensate the donor. For instance, an easement might impose a height restriction so that a house on the property (or which may be built on the property) can only be one story tall and also might disallow any garage, shed, or other out-building on the residential lot. Valuation of the easement would include the value of this restriction — i.e., the difference between the encumbered and unencumbered values of the house, such that the donee of the easement would be entitled to some portion of the extinguishment proceeds attributable to the house.

The obvious rejoinder is that the determination of “some portion” requires a case-by-case approach, rather than the application of a fixed percentage as required by the proceeds regulation. But “[r]egulation, like legislation, often requires drawing lines.” Mayo Foundation, 562 U.S. at 59 (upholding Treasury Regulation at Chevron step two over taxpayer's objection that the regulation “draw[s] an arbitrary distinction”). And, in implementing the statutory protected-in-perpetuity requirement, it was entirely reasonable for Treasury to prefer an easily administrable, bright-line rule that might err on the side of ensuring full compensation of the donee — and thus full protection of the conservation purposes — over (as the Hewitts would prefer) a potentially cumbersome, case-by-case approach that would perhaps better serve the interests of donors. Again, the regulations protect the public's investment in conservation easements (via the “tax expenditure” resulting from the deductibility of such easements) by requiring the donee to use its proportionate share of extinguishment proceeds “in a manner consistent with the conservation purposes of the original contribution.” Treas. Reg. § 1.170A-14(g)(6)(i). That protection would be of little value if the regulations failed to protect a donee's ability to receive extinguishment proceeds corresponding to the full value of its interest in the real property.

Thus, the proceeds regulation reflects an eminently reasonable (and practical) interpretation of the protected-in-perpetuity requirement of § 170(h)(5)(A). Donors of conservation easements who include improvements-subtraction clauses in their easement deeds can — or their successors can — manipulate such clauses to the detriment of the donee (and therefore to the detriment of the conservation purposes). In particular, such donors/successors have a powerful incentive to overvalue the improvements on the property in the event of a judicial extinguishment. By doing so, the donor would unfairly increase the share of extinguishment proceeds that flow only to the donor and decrease the amount that must be split based on the originally-determined proportionate values of the donor's and donee's interests. Moreover, as a leading scholar in this area of the law has pointed out, donee organizations may often have limited resources to engage in a valuation battle with the donor/successor, and may also have conflicting incentives in that regard. See Nancy A. McLaughlin, Conservation Easements and the Proceeds Regulation, 56 Real Prop. Tr. & Est. L.J. 1, 25 (2021) (forthcoming; copy attached).

Finally, the reasonableness of Treasury's interpretation of the statutory protected-in-perpetuity requirement, as reflected in the proceeds regulation, is confirmed by the passage of time. As the Tax Court aptly observed in Oakbrook, Congress has amended I.R.C. § 170 many times since the 1986 promulgation of the proceeds regulation, including after some cases addressing that regulation were decided, without suggesting any disagreement with the rule. Oakbrook, 154 T.C. at 199-200 & n.5. See also SIH Partners LLLP v. Commissioner, 923 F.3d 296, 302-05 (3d Cir. 2019), cert. denied, 140 S. Ct. 854 (2020) (declining to invalidate a more-than-50-year-old regulation on the basis of hindsight and finding significant the fact that, long after the regulation was issued, the IRS considered changing the regulation but “chose to maintain the status quo”).

3. The Hewitts' remaining arguments on this front are meritless

The Hewitts suggest throughout their brief that the proceeds regulation, as interpreted by the IRS to prohibit improvements-subtraction clauses, is unreasonable because the IRS only began enforcing the rule (as so interpreted) in 2016. But this timing issue is beside the point. The proceeds regulation has not changed.

Taxpayers do not have a reliance interest in the IRS's non-enforcement of the law. Union Equity Co-op. Exch. v. Commissioner, 481 F.2d 812, 817 (10th Cir. 1973) (“[I]t is well established that the Commissioner is not estopped from challenging erroneously reported items where Internal Revenue agents have failed in prior years to challenge similarly erroneously reported items.”). Thus, as long as the IRS's interpretation of the proceeds regulation is correct (and it is, see supra Part A), the possibility that the IRS may have missed the same problem in other conservation easement deeds it has reviewed does not affect the reasonableness of the regulation or its application to the Hewitts.

The IRS also has never articulated any conflicting understanding of the proceeds regulation. In the private letter ruling the Hewitts point to, the IRS employee issuing the letter appears to have believed that a conservation easement with an improvements-subtraction clause did not violate the proceeds regulation. See Priv. Ltr. Rul. 200836014 (June 3, 2008). But the letter does not include any reasoned determination in that regard. Id.; see also pp. 22-23 n.7, supra and (A389-91).

Additionally, the fact that the IRS did not raise the improvements issue in earlier cases when it apparently could have done so (Br. 17) is neither surprising nor relevant. The IRS has often provided several alternative bases for denying conservation easement deductions;¹⁰ by the same token, it does not have to litigate every possible basis for doing so.

The Hewitts also point out (Br. 15-16) that some model easement deeds include improvements-subtraction clauses.¹¹ That is hardly the IRS's fault, as it never blessed the soundness of those templates. And other conservation easement templates do not include improvements-subtraction clauses.¹²

Finally, the Southern Conservation Trust raises state-law issues (SCT Br. 8-14) that are beyond the scope of this appeal. Specifically, this appeal does not raise the issue of whether the proceeds regulation precludes deductibility of a conservation easement when state law does not allow the parties to follow the proportionate value rule set out in that regulation. Nor does it raise the question whether such a result would reflect a permissible interpretation of the statutory protected-in-perpetuity requirement. But cf. Wachter v. Commissioner, 142 T.C. 140, 149 (2014) (holding that the statutory perpetuity requirements could not be met in a state that limited conservation easements to a duration of 99 years).

In any event, even if the proceeds regulation does preclude a deduction when state law prevents the parties from agreeing to share extinguishment proceeds on the proportionate basis the regulation requires, that would not mean — as the Trust suggests — that the regulation creates a property right in contravention of state property law. It would simply mean that the regulation attaches federal tax consequences — i.e., the preclusion of a conservation easement deduction — based on a state property law rule.

CONCLUSION

This Court should affirm the decision of the Tax Court.

Respectfully submitted,

DAVID A. HUBBERT
Acting Assistant Attorney General

FRANCESCA UGOLINI (202) 514-3361
ARTHUR T. CATTERALL (202) 514-2937
NATHANIEL S. POLLOCK 202) 514-8139
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044
Appellate.TaxCivil@usdoj.gov
Line.Attorney@usdoj.gov

APRIL 1, 2021