Tax Court’s Invalidation of Conservation Easement Regs Will Shut Down DAF Guidance Too

The Tax Court is demanding the Service end its war on conservation easements and, in the process of enforcing that demand, has essentially slammed the breaks on any new administrative guidance regarding a host of other issues.  Although it took almost 20 years for the Service to announce proposed regulations on donor advised funds, we might just expect another 20 years before those proposed regulations are finalized.  Maybe not 20 years, but it is reasonable to think that the DAF regulations will now sit for a couple more years while the Service sifts through the nearly 200 comments submitted. All to comply with the Tax Court’s bad law from bad facts. 

That’s because the Tax Court decided in Valley Park Ranch LLC v. Commissioner that it is arbitrary and capricious, and thus a violation of the APA, if the Service does not consider, and address in preambles, comments “that can be thought to challenge a fundamental premise underlying the proposed agency decision. Thus, an agency should respond to significant points and consider vital relevant comments.”  The Court did a whole 180, wholly reversing itself on the exact issue it decided only 4 years ago.  The Sixth Circuit affirmed that earlier decision though the Eleventh Circuit took the opposite approach.  But faced with the very same issue, the Tax Court now decided that the Service’s failure to address and state its response to 2 of the nearly 100 comments regarding the conservation easement regulations violated the APA and rendered the regulation invalid.  Remember, there were nearly 200 comments submitted in response to the proposed DAF regulations

The decision must be the most bizarre opinion about the driest most boring topic ever known to tax and administrative law students in the whole history of legal jurisprudence.  Even so, the opinion is the judicial equivalent of pouring sugar in Treasury’s gas tank.  It will gum up everything by encouraging antagonistic commenters to pour as much sugar in administrative guidance gas tanks as possible.      

I was on a flight from California to Connecticut – efficiently harvesting cold and flu germs that flowered like DC cherry blossoms over the weekend – so I read the opinion thrice.  What might have motivated the Tax Court’s bizarre course reversal?  I think its that the Tax Court is just sick and tired of conservation easement cases.  Here is how the Tax Court described the Service’s antipathy in that earlier case decided just four years ago:

In recent years the Commissioner has attacked a popular form of charitable contribution–the donation of conservation easements. Many of these attacks are surgical strikes on what he believes are gross exaggerations of the value of particular easements. But he has also launched three sorties–all predicated on the requirement that such easements be “perpetual”–that he hopes will cause more widespread casualties:

• an attack on the power of donor and donee to change the terms of the easement after its contribution;
• an attack on the retained right of the donor to add improvements to the property described in the easement; and
• an attack on a clause commonly found in easements, particularly in the southeastern part of the country, that divides between donor and donee future hypothetical proceeds from a future hypothetical extinguishment of the easement in a way that he claims violates one of his regulations.

Surgical strikes, sorties, mass casualties, and napalm in the morning!  And then here is a Freudian slip, of sorts, from Judge Buch’s concurrence, perhaps exposing the Court’s real motivation. 

The Court, indeed the tax system at large, is currently faced with a flood of conservation easement cases. In 2022 it was reported that the Court had over 425 conservation easement cases. Aysha Bagchi, Tax Court Pondering Three Options for Ballooning Easement Docket, Daily Tax Rep. (BL) (Dec. 16, 2022). A year later that number ballooned to more than 750. See Armando Gomez & Roland Barral, It’s High Time to Clear Out the Tax Court’s Easement Backlog, 179 Tax Notes Fed. 251 (2023). And with the Commissioner’s recent commitment to challenging conservation easements, that number will continue to increase.  

Judge Buch goes on to complain that the Service has attacked conservation easements even for mere “foot faults.”  I might be reading too closely between the lines, but I bet the Tax Court has just about had enough of the conservation easement cases.  The problem of course is that its solution to that fatigue might only create more uncertainty and litigation.  

darryll k. jones