Key takeaways

• The Tax Court's decision in Valley Park Ranch reflects the growing importance of compliance with the APA, and signals that it be more important to the Tax Court than automatically following precedent. 

• Opportunities may exist for challenging the validity of other regulations in the Tax Court in the same procedural posture as the Extinguishment Regulation contemplated here.

In depth

Section 170 sets forth the requirements for a taxpayer to claim a deduction for the charitable contribution of a conservation easement. One of those requirements is that the contribution must be “protected in perpetuity”¹ . However, the property rights underlying an easement donation can be extinguished by the government through the function of eminent domain or impaired by other specific events (e.g., fire). To address this possibility, Treasury issued the Extinguishment Regulation, which effectively requires a conservation easement deed to include language addressing the allocation of any proceeds resulting from such extinguishment of impairment². A portion of the funds awarded pursuant to this regulation is due to the donee as the holder of the conservation easement, as the proceeds derived from extinguishment or impairment “step into the place” of the easement rights held by the donee³. To ensure that the donee and other rights holders are ratably compensated, the Extinguishment Regulation requires the deed to include a formula commonly known as an extinguishment proceeds clause⁴. This clause dictates how the proceeds are to be divided when a payout is made by a third party⁵. 

When Treasury issued regulations contemplating conversation easements during the 1980s, including the Extinguishment Regulation, it did not follow established notice-and-comment procedures under the APA as a historical practice⁶. In particular, Treasury did not adequately respond to a comment submitted by the New York Landmarks Conservancy (NYLC) concerning the Extinguishment Regulation⁷. The veracity of Treasury’s approach was questioned by various courts:

• The Tax Court originally held in 2020 in the Hewitt case that the NYLC comment was not significant enough to warrant a thorough response from Treasury under APA procedures, thereby maintaining the validity of the Extinguishment Regulation⁸. 
  • The 11th Circuit Court overturned the Tax Court's decision, finding that the comment was significant, and therefore the Extinguishment Regulation was invalid under the APA⁹. 
• The Tax Court again considered the Extinguishment Regulation’s validity in 2020 in the Oakbrook case. Because the Tax Court had historically followed its own precedent despite a differing decision in a Circuit court¹⁰, the Tax Court again found that the comment was not significant under the APA¹¹. 
  • The 6th Circuit affirmed the Tax Court’s decision that the comment was not significant under the APA, and therefore the Extinguishment Regulation was valid under the APA¹². 

These decisions resulted in a split between the 11th and 6th Circuits. Historically, the Tax Court limits adverse rulings to subsequent cases coming out of that Circuit (i.e., that the Extinguishment Regulation would be invalid in cases located in the 11th Circuit), while following its own precedent (i.e., that the Extinguishment Regulation would be valid) in all other Tax Court cases from different Circuit jurisdictions¹³. In other words, in following stare decisis, the Tax Court has traditionally respected the precedent established by its own decisions, unless a different result is reached by the appellate court to which an appeal would lie that is “squarely in point”¹⁴. 

The court intentionally departed from this practice in the Valley Park Ranch case. Instead of maintaining the position it expressed in Hewitt and Oakbrook, the court adopted the reasoning and holding of the 11th Circuit in Hewitt¹⁵. This departure from strict adherence to the concept of stare decisis reflects the Tax Court's growing awareness of APA requirements and its evolved thinking on APA matters. For taxpayers, this means new opportunities exist to challenge the validity of other Treasury regulations under the APA, even those that were not recently implemented or those that do not pertain to conservation easements. If a taxpayer can thoughtfully argue that a comment is significant because it challenges a fundamental premise underlying a proposed regulation and the taxpayer can establish that Treasury failed to address that comment, then the Tax Court could invalidate the regulation based on the approach set forth in Valley Park Ranch. Thus, the Tax Court's evolved views and clarifications in Valley Park Ranch illuminate another avenue for taxpayers to ensure that Treasury complies with the APA's notice-and-comment requirements.

1 See Section 170(h)(5)(A); Treas. Reg. § 1.170A-14(g)(6)(ii).

2 See Treas. Reg. § 1.170A-14(g)(6).

3 See id.

4 See Treas. Reg. § 1.170A-14(g)(6)(ii).

5 See id.

6 Valley Park Ranch, 162 T.C. No. 6 at 8.

7 Valley Park Ranch, 162 T.C. No. 6 at 11.

8 Hewitt, T.C. Memo. 2020-89.

9 Hewitt, 21 F.4th 1336 (11th Cir. 2021).

10 See Golsen v. Commissioner, 54 T.C. 742, 756 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971) (stating that when a “squarely [o]n point” decision of the appellate court to which an appeal would lie contradicts the Tax Court’s precedent, it follows the appellate court’s decision).

11 Oakbrook, 154 T.C. 180 (2020).

12 Oakbrook, F.4th 700 (6th Cir. 2022).

13 See Golsen, 54 T.C. at 757.

14 See id.

15 See Valley Park Ranch, 162 T.C. No. 6.