By: Sarah Thomas
A circuit split between the Eleventh and Sixth Circuit Courts of Appeals has arisen regarding the validity of the perpetuity requirement for conservation easements.[1] The courts disagreed as to whether Treasury regulations concerning the perpetuity requirement of conservation easement deductions were procedurally valid pursuant to the APA and Chevron.[2]
Conservation easements are a popular tool for landowners seeking to achieve conservation goals.[3] In a conservation easement, a landowner may retain ownership of their land, while entering an “easement” which restricts development and other activities on the property.[4] These restrictions on development allow landowners to preserve the natural integrity of their land. Additionally, conservation easements need not apply to an entire portion of land. [5]Nor is public access to the conserved land required. These agreements were generally not recognized under the common law.[6] As such, conservation easements are creatures of statutory law: In practice, they are more similar to an equitable servitude than other traditional forms of easements.[7]
Conservation easements were first used by the National Park Service in the 1930s and 1940s to protect strips of land adjacent to federal highways. Since the 1980s, however, use of conservation easements have skyrocketed in popularity.[8] Their popularity may be due, in-part, to the federal tax dedication authorized in the 1980s for the charitable contribution of a conservation easement.[9] To incentivize conservation, Congress created the conservation easement deduction. Section 170(h) of the Internal Revenue Code (“IRC”) governs qualified deductions for charitable conservation easements.[10] To qualify for a charitable conservation easement deduction, a property owner must contribute: 1) a qualified real property interest; 2) to a qualified organization; 3) exclusively for conservation purposes.[11] Importantly, a contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.[12]
If it becomes impossible or impracticable to execute the goals of the conservation easement, the easement may be judicially extinguished. Treasury regulation 26 CFR § 1.170A-14(6)(ii) provides:
In case of a donation made after February 13, 1986, for a deduction to be allowed under this section, at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value 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.[13]
In Hewitt, plaintiffs challenged the denial of their conservation easement deduction.[14] After initially donating the easement, plaintiffs made post-donation improvements to the property.[15] These improvements, in-turn, raised the value of the easement.[16] Under the existing regulatory scheme, plaintiffs would not receive the proceeds from the post-donation improvements–the donee would.[17] Otherwise, plaintiffs would not satisfy the perpetuity requirement of Section 170(h)(5). Without satisfying the perpetuity requirement, the Tax Commissioner argued, the plaintiffs were not eligible for a deduction.[18]
In response, plaintiffs argued that Treasury regulation 1.170A-14(6)(ii) was invalid pursuant to the APA as the Treasury failed to respond to significant comments after publishing the Notice of Proposed Rule Making.[19] After publishing the Notice of Proposed Rule Making, the Treasury received a comment from the New York Land Conservancy (“NYLC”).[20] The NYLC’s comment raised concerns about the inability of a taxpayer to receive the proceeds from post-donation improvements in the case of judicial extinguishment.[21] Other commenters criticized facets of the perpetuity requirement. The Treasury did not respond to the NYLC.[22]
In its analysis, the Eleventh Circuit Court of Appeals reviewed the APA’s requirements for administrative agency rule making.[23] Because the NYLC’s comment stated that the Treasury regulation’s proceeds formula favored the donee over the donor, the regulation was contrary to the statute’s overall purpose of encouraging conservation.[24] Therefore, failure to respond rendered the regulation invalid.
The Sixth Circuit Court of Appeals disagreed with this analysis in Oakbrook Land Holdings, LLC v. Comm’r of Internal Revenue.[25] Therein, the court similarly analyzed NYLC’s comment, in addition to comments from others who raised concerns about the perpetuity requirement and the judicial extinguishment proceeds formula. Ultimately, the court concluded that these comments were not significant enough to require a response from the Treasury pursuant to the APA.
As conservation easements are popular tools for landowners, uncertainty surrounding the validity of the perpetuity requirement will necessarily affect potential donors of conservation easements.[26] While the Eleventh Circuit and Sixth Circuit have disagreed as to the validity of the regulations concerning the perpetuity requirement, it is unclear whether this issue will rise to the Supreme Court.[27]
[1] Peter J. Reilly, Circuits Split On Conservation Easement Perpetuity Regulation – Valuation Remains Critical, Forbes, Mar. 22, 2022 https://www.forbes.com/sites/peterjreilly/2022/03/22/circuits-split-on-conservation-easement-perpetuity-regulationvaluation-remains-critical/?sh=3b821856e1cb.
[2] Id.
[3] Conservation Easements, Western Pennsylvania Conservancy, https://waterlandlife.org/land-conservation/conservation-easements/#:~:text=A%20voluntary%20conservation%20easement%20is,pass%20it%20on%20to%20heirs.
[4] See id.
[5] Id.
[6] C. Timothy Lindstrom, A Tax Guide to Conservation Easements 5 (Island Press 1st ed. 2008).
[7] Id.
[8] Id.
[9] See id.
[10] I.R.C. § 170(h)
[11] Id.
[12] I.R.C. § 170(h)(5)
[13] 1.170A-14(6)(ii)
[14] Hewitt v. Comm’r of IRS, 21 F.4th 1336, 1338-39 (11th Cir. 2021).
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id. at 1345.
[20] Hewitt v. Comm’r of IRS, 21 F.4th 1336 at 1345.
[21] Id.
[22] Id.
[23] Id.
[24] Id.
[25] Oakbrook Land Holdings, LLC v. Comm’r of Internal Revenue, 28 F.4th 700, 705 (6th Cir. 2022)
[26] See Peter J. Reilly, Circuits Split On Conservation Easement Perpetuity Regulation – Valuation Remains Critical, Forbes, Mar. 22, 2022 https://www.forbes.com/sites/peterjreilly/2022/03/22/circuits-split-on-conservation-easement-perpetuity-regulationvaluation-remains-critical/?sh=3b821856e1cb.
[27] Id.