Oakbrook Land Holdings, LLC v. Comm'r

Citation28 F.4th 700
Decision Date14 March 2022
Docket NumberNo. 20-2117,20-2117
Parties OAKBROOK LAND HOLDINGS, LLC; William Duane Horton, Tax Matters Partner, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

ARGUED: David William Foster, SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP, Washington, D.C., for Appellants. Nathaniel S. Pollock, UNITED STATES DEPARTMENT OF JUSTICE, Washington, DC, for Appellee. ON BRIEF: Michelle Abroms Levin, SIROTE & PERMUTT, P.C., Huntsville, Alabama, Gregory P. Rhodes, SIROTE & PERMUTT, P.C., Birmingham, Alabama, for Appellants. Nathaniel S. Pollock, Francesca Ugolini, Arthur T. Catterall, UNITED STATES DEPARTMENT OF JUSTICE, Washington, DC, for Appellee. Joseph D. Henchman, NATIONAL TAXPAYERS UNION FOUNDATION, Washington, D.C., Kip D. Nelson, FOX ROTHSCHILD LLP, Greensboro, North Carolina, for Amici Curiae.

Before: GUY, MOORE, and GIBBONS, Circuit Judges.

MOORE, J., delivered the opinion of the court in which GIBBONS, J., joined. GUY, J. (pg. –––– – ––––), delivered a separate opinion concurring in the judgment only.


Under § 170(h) of the Internal Revenue Code, 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. Crucially, the easement's conservation purpose must be guaranteed to extend in perpetuity to qualify for the deduction. See 26 U.S.C. (I.R.C.) § 170(h)(5)(A). Unexpected developments, however, may make this impossible long after the donor has deeded the easement away. How, then, can an easement satisfy the perpetuity requirement?

Contemplating such scenarios, the Department of Treasury has promulgated a rule, 26 C.F.R. (Treas. Reg.) § 1.170A-14(g)(6). This regulation addresses situations in which unforeseen changes to the surrounding land make it "impossible or impractical" for an easement to fulfill its conservation purpose. Treas. Reg. § 1.170A-14(g)(6)(i). In these 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. Id . Proceeds are calculated by a formula in § 1.170A-14(g)(6)(ii), a provision to which we refer as the "proceeds regulation."

On this appeal from the United States Tax Court, the petitioners, Oakbrook Land Holdings, LLC (Oakbrook) and William Duane Horton, challenge the validity of the proceeds regulation. The petitioners contend that, in promulgating this rule, Treasury violated the notice-and-comment requirements of the Administrative Procedure Act (APA). The petitioners also argue that Treasury's interpretation of § 170(h) —the statute that the rule implements—is unreasonable. Finally, the petitioners argue that the proceeds regulation is arbitrary or capricious. The full Tax Court considered these arguments and found them to be unpersuasive. See Oakbrook Land Holdings v. Comm'r , 154 T.C. 180, 181 (T.C. 2020). We agree with the Tax Court and AFFIRM .


Due to the nature of the issues, we outline the statutory and regulatory framework that governs charitable deductions for conservation easements before describing the rulemaking process of the proceeds regulation. Once that is established, we turn to the facts of this case.

A. Statutory and Regulatory Framework

Section 170(a)(1) of the Internal Revenue Code allows taxpayers to deduct charitable donations made during the tax year. The Code generally disallows gifts that consist of less than the taxpayer's entire interest in the property—such as an easement—from qualifying for a deduction.

See I.R.C. § 170(f)(3)(A) ; Glass v. Comm'r , 471 F.3d 698, 706 (6th Cir. 2006). There is an exception if the interest is a "qualified conservation contribution." I.R.C. § 170(f)(3)(B)(iii). This type of gift may qualify for a deduction if it is "of a qualified real property interest," "to a qualified organization," and is "exclusively for conservation purposes." I.R.C. § 170(h)(1)(A)(C). Easements can qualify as such contributions. See Glass , 471 F.3d at 699–700.

Perpetuity is vital to the statutory scheme. An easement is a qualified real property interest only if its deed creates "a restriction (granted in perpetuity ) on the use which may be made of the real property." I.R.C. § 170(h)(2)(C) (emphasis added). Driving home how important the parenthetical phrase in § 170(h)(2)(C) is, a nearby provision explains that a contribution will not be treated as having been made exclusively for conservation purposes "unless the conservation purpose is protected in perpetuity ." I.R.C. § 170(h)(5)(A) (emphasis added). In other words, the donation of an easement will not qualify for a charitable deduction unless the taxpayer can guarantee that both the grant of the interest and the conservation goals which it serves will endure for quite a long time—forever, to be exact. See Hoffman Props. II, LP v. Comm'r , 956 F.3d 832, 835 (6th Cir. 2020).

Although I.R.C. § 170(h)(5)(A) expressly mandates that a donated easement's conservation purpose must be protected in perpetuity, the section does not detail what should happen if some external event frustrates this purpose, such as when unforeseen changes in the surrounding land undermine the easement's conservation goals or when a government entity condemns the property. See generally Nancy A. McLaughlin, Conservation Easements and the Proceeds Regulation , 56 REAL PROP. TR. & EST. L. J. 111, 122, 150–52 (2021) (discussing ways in which easements’ conservation purposes can be thwarted). For guidance in these scenarios, taxpayers must turn from the text of I.R.C. § 170(h)(5)(A) to the administrative regulation implementing it.

Treasury Regulation § 1.170A-14(g)(6) governs in the event of an "extinguishment." When a "subsequent unexpected change in the conditions surrounding the property .... make[s] impossible or impractical the continued use of the property for conservation purposes," the perpetuity requirement of I.R.C. § 170(h)(5)(A) can still be satisfied if two conditions are met. First, the restriction is "extinguished by judicial proceeding." Treas. Reg. § 1.170A-14(g)(6)(i). Second, "all of the donee's proceeds (determined under paragraph (g)(6)(ii) of this section) from a subsequent sale or exchange of the property are used by the donee organization in a manner consistent with the conservation purposes of the original contribution." Id .

Upon extinguishment, a donee organization must receive as proceeds "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." Treas. Reg. § 1.170A-14(g)(6)(ii) (emphasis added). To determine the "proportionate value" of an easement, the fair market "value of the conservation easement at the time of the gift [must be] divided by the value of the property as a whole at that time." PBBM-Rose Hill, Ltd. v. Comm'r , 900 F.3d 193, 207 (5th Cir. 2018). For example, if, at the time of the donation, the fair market value of an easement was $25,000 and the value of the land was $100,000, then the easement would be assessed at twenty-five percent of the value of the property. Next, if a judicial extinguishment occurs, the donee must receive proceeds equal to the proportionate value from any "subsequent sale, exchange, or involuntary conversion." Treas. Reg. § 1.170A-14(g)(6)(ii). The donee in the previous example would therefore receive twenty-five percent of any proceeds of a sale, exchange, or involuntary conversion that followed judicial extinguishment of the easement. Finally, no "amount, including that attributable to improvements, may be subtracted out" of this percentage.1 PBBM-Rose Hill, Ltd. , 900 F.3d at 208.

Although the possibility of an easement being judicially extinguished is a contingency, taxpayers still need to address this issue in the easement's deed. The deed must entitle the donee "to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction" should a judicial extinguishment occur.2 Treas. Reg. § 1.170A-14(g)(6)(ii). Failure to draft a deed that achieves this goal will leave the taxpayer unable to claim a charitable deduction for their donation. Treas. Reg. § 1.170A-14(g)(1).

B. Promulgation of Treas. Reg. § 1.170A-14(g)(6)(ii)

On May 23, 1983, Treasury issued a notice of proposed rulemaking with "proposed regulations relating to contributions of partial interests in property for conservation purposes." 48 Fed. Reg. 22940, 22940 (May 23, 1983). In that notice, Treasury detailed the legislative history of § 170(h), describing how Congress had shifted from limiting the deductibility of conservation easements to allowing them when the easement was "perpetual." Id. The preamble noted that the proposed regulations "reflect the major policy decisions made by the Congress and expressed in [its] committee reports." Id. Among the proposed rules was the proceeds regulation.

A period of public input followed Treasury's publication of the notice of proposed rulemaking in which the agency received comments regarding the regulations. Ninety organizations submitted over 700 pages of commentary that addressed various aspects of the regulations. Oakbrook Land Holdings , 154 T.C. at 186. Of these commentators, approximately a dozen mentioned the proceeds regulation, though mostly in passing. Id . We detail several of these comments further below. Treasury also held a public hearing on the proposed regulations on September 15, 1983. Id . at 188.

When Treasury issued the final regulations, the accompanying preamble stated that the agency had promulgated the regulations "[a]fter consideration of all comments regarding...

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