Conservation Easement Ruling Signals More APA Challenges Ahead

The Tax Court’s ruling last week on conservation easements is important for practitioners and taxpayers alike—and not just those with easement issues pending before the IRS.

The decision is another indication that courts are increasingly open to Administrative Procedures Act challenges to Treasury regulations and highlights the importance of making comments on proposed regulations and considering APA challenges in tax litigation.

In Valley Park Ranch LLC v. Commissioner, the Tax Court invalidated a Treasury regulation, finding it failed to comply with the APA’s procedural requirements—despite Treasury releasing proposed regulations to the public, inviting and receiving comments, then addressing those comments in the final regulation. The Treasury even revised the particular portion of the regulation at issue in this case before finalizing.

But the Tax Court held that the Treasury’s process had violated the APA—a 2022 invalidation of Notice 2017-10 that had made syndicated conservation easements “listed transactions” and required certain reporting.

Practitioners and taxpayers should be encouraged to examine both substantive and procedural challenges to Treasury regulations in their tax controversies, as courts are increasingly open to laying regulations aside.

Taxpayers, meanwhile, should note that substantive comments to proposed regulations are worth making, especially those joined by others in affected industries and those that use specific examples and hypotheticals.

The Treasury may take note of this and similar future rulings, spurring more meticulous consideration of significant comments and giving them a bigger impact on final regulations. If comments aren’t addressed or considered, taxpayers have yet another avenue for challenging regulations in future litigation.

Easements Battle

The IRS has been cracking down on syndicated conservation easements for years, including these structures in the “Dirty Dozen” list, and pursuing criminal punishment for promoters, lawyers, appraisers, and accountants involved in creating these structures.

As Judge Ronald Buch noted in his Valley Park Ranch concurrence, hundreds of these cases have come before the Tax Court, adding to its backlog. While many cases have been resolved in favor of the government, this is another in a line of more recent cases where Tax Court judges expressed skepticism about the IRS’s approach.

In addition to the 2022 notice that characterized these transactions as listed and imposed penalties for failure to report, other Tax Court rulings similarly indicate the IRS approach has painted these transactions with too broad a brush.

As to the specific provision at issue in Valley Park Ranch, the Tax Court will likely now evaluate these judicial extinguishment provisions under the federal tax code’s wording and not under the invalidated regulation.

Taxpayers with syndicated conservation easements in any stage of controversy should re-examine their deeds under the statute rather than the regulation as they relate to judicial extinguishment and raise this case with the IRS.

The Tax Court’s comments about Treasury’s inadequate response regarding judicial extinguishment are a signal for practitioners. If litigating syndicated conservation easement cases, practitioners should raise any APA concerns regarding other portions of Treasury regulations affecting these structures.

Reconsiderations

The dissent in this case rang alarm bells about stare decisis—the legal principle that courts should honor precedent.

It criticized the majority’s opinion for too quickly casting aside the Tax Court’s prior ruling in Oakbrook Land Holdings v. Commissioner, which upheld these same regulations as valid under the APA. The US Circuit Court of Appeals for the Sixth Circuit later upheld that ruling on appeal in 2022.

The majority instead followed much of the reasoning laid out by the Eleventh Circuit, which invalidated the same regulation in Hewitt v. Commissioner. In reversing its previous ruling, the Tax Court majority noted that Valley Park Ranch would be appealed to the Tenth Circuit, and it was therefore not bound by the rulings of the Eleventh or Sixth Circuits.

In response to the dissent’s stare decisis arguments, the majority noted that the Oakbrook ruling was only four years old and therefore wasn’t so engrained in the jurisprudence that it couldn’t be revisited.

Practitioners should take note of the Tax Court’s consideration of appellate court decisions that overturn its rulings. They should also review when and how to urge the court to adopt that reasoning in new cases bound by different circuits.

As the Tax Court’s makeup changes, practitioners should consider when and how to urge the court to reconsider prior rulings.

The case is Valley Park Ranch LLC v. Commissioner, T.C., 12384-20, 3/28/24

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

S. Starling Marshall is co-chair of Crowell & Moring’s tax group and a member of the litigation group.

Write for Us: Author Guidelines