Last week’s Tax Court ruling on conservation easements signals an increasing openness to Administrative Procedures Act (APA) challenges to Treasury regulations. Its impact extends beyond practitioners and taxpayers currently grappling with easement issues before the IRS.
In the case of Valley Park Ranch LLC v. Commissioner, the Tax Court invalidated a Treasury regulation, highlighting the weight of APA’s procedural requirements. The regulation was repealed despite the Treasury’s endeavor to release proposed regulations to the public, seek comments, and assimilate those comments in the final regulation. A specific section of the regulation concerning this case was even revised before finalization.
This legal event entwines with the 2022 invalidation of Notice 2017-10, which had classified syndicated conservation easements as “listed transactions” requiring specific reporting. To practitioners and taxpayers, this underlines the value of closely examining both the substantive and procedural aspects of challenging Treasury regulations in tax litigation.
The IRS has a history of cracking down on so-called syndicated conservation easements, included in the IRS’s “Dirty Dozen” list, and pursuing criminal punishment for those engaged in creating these structures. However, a growing number of Tax Court cases display judges’ skepticism over the IRS’s approach.
The Tax Court’s rejection of the Treasury’s insufficient response concerning judicial extinguishment holds significant implications. If litigating syndicated conservation easement cases, practitioners should address APA concerns regarding other sections of Treasury regulations affecting these structures.
The recent ruling also prompts discussions about legal precedent. In particular, the Tax Court ruled against the precedent set in Oakbrook Land Holdings v. Commissioner which upheld the same regulations. The judges followed much of the reasoning set out by the Eleventh Circuit in Hewitt v. Commissioner which invalidated the same regulation.
As the Tax Court’s composition evolves, practitioners are advised to evaluate when and how to persuade the court to reconsider previous rulings.
With this Tax Court ruling and potential similar future judgments, the Treasury may be spurred to consider substantive comments to proposed regulations more meticulously, handling them with more gravity. If comments are not addressed or considered, taxpayers have yet another avenue to challenge regulations in prospective litigation.