Sixth Circuit: Regulations on charitable donation of conservation easement upheld as valid; Tax Court affirmed

The U.S. Court of Appeals for the Sixth Circuit today affirmed a “reviewed opinion” of the U.S. Tax Court upholding the validity of the regulations under section 170 with respect to the rules for charitable donations of conservation easements.

The case is: Oakbrook Land Holdings LLC v. Commissioner, No. 20-2117 (6^th Cir. March 14, 2022). Read the Sixth Circuit’s decision [PDF 360 KB] that includes an opinion concurring in the judgment only.

The taxpayer in 2008 donated a conservation easement to a qualified organization and claimed a charitable contribution deduction under section 170(a).

The easement deed provided that, if the conservation restriction were to be extinguished at some future date, the donee would receive a share of the proceeds equal to the fair market value of the easement on the date the contribution was made. The deed further provided that the donee’s share as thus determined would be reduced by the value of any improvements made by the donor after granting the easement.

The IRS disallowed the deduction, contending (among other things) that the extinguishment clause violated the requirements of Reg. section 1.170A-14(g)(6). The IRS found that the easement deed violated the “protected in perpetuity” requirement of section 170(h)(5), as interpreted by Reg. section 1.170A-14(g)(6), because the donee’s share of the extinguishment proceeds: (1) was based on a fixed historical value rather than a proportionate share; and (2) was reduced by the value of any improvements made by the donor.

The taxpayer challenged the validity of the regulations, and in May 2020, the Tax Court issued a “reviewed opinion” in which the majority upheld the validity of the regulations under section 170 with respect to the rules for charitable donations of conservation easements. Read TaxNewsFlash

The Sixth Circuit today affirmed the Tax Court’s May 2020 decision.

As the appeals court noted, in challenging of the validity of the regulations, the taxpayer claimed that Treasury violated the notice-and-comment requirements of the Administrative Procedure Act (APA). Further, the taxpayer argued that Treasury’s interpretation of section 170(h)—the statute that the rule implements—was unreasonable. However, the Sixth Circuit noted that the full Tax Court had considered these arguments and found them to be unpersuasive.

As explained by the Sixth Circuit, taxpayers who donate an easement in land to a conservation organization may be eligible to claim a charitable deduction on their federal income tax returns—provided that the easement’s conservation purpose is guaranteed to extend in perpetuity. Because unexpected developments may make this impossible long after the donor has deeded the easement away, Treasury promulgated a rule—Reg. section 1.170A-14(g)(6)—to address situations when unforeseen changes to the surrounding land make it “impossible or impractical” for an easement to fulfill its conservation purpose. In such events, the conservation purpose may still be 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 by the donee” to further the original conservation purpose.

The Sixth Circuit, after examining the procedural and substantive validity of Reg. section 1.170A-14(g)(6)(ii), agreed with the Tax Court’s opinion upholding the regulations.