Splitting the proceeds

We are now in the interesting situation where two different federal appellate courts differ in their opinions on the “proceeds regulation.” As a quick reminder, charitable conservation contributions must include clauses addressing easement extinguishment and the allocation of proceeds commonly known as the proceeds regulation.

So what’s going on? Here’s a courtside play by play.

As we flagged in a Jan. 11 post, How to proceed with proceeds?, the IRS has been challenging donations on the basis that the termination proceeds provision in a conservation easement document violates federal tax regulation and law and therefore invalidates the deduction for the donation. In Dec. 2021, the Eleventh Circuit in the case of Hewitt v. Commissioner concluded that the IRS’ interpretation was arbitrary and capricious and violated the Administration Procedures Act (and possibly found the proceeds regulation invalid, though the opinion is a bit unclear) and sent it back to the Tax Court for a redo.

Then, on March 14, the United States Court of Appeals for the Sixth Circuit decided the Oakbrook Land Holdings case, which addressed the validity of the proceeds regulation and the IRS interpretation of that regulation (in this case, specifically about the subtraction of the value of post-donation improvements from the proceeds). The IRS has challenged charitable conservation contributions on the basis of violating this regulation and its interpretation.

The taxpayer in Oakbrook claimed that the IRS had violated the Administrative Procedures Act in adopting the regulation and that the IRS interpretation was unreasonable. The United States Tax Court in 2020 disagreed with the taxpayer, upholding the validity of the regulation and the interpretation. The Sixth Circuit has now affirmed the Tax Court opinion.

Which means we now have a split in the circuits, with Hewitt applying in Georgia, Florida and Alabama but the tax court’s decision affirmed by the Sixth Circuit applying in the remainder of states.

What do we do now?

The Alliance Conservation Defense team stands ready to assist our members in understanding the impact of these decisions. For now, we are waiting to see how the Tax Court addresses Hewitt on remand; whether the taxpayers ask for and are granted reconsideration in Oakbrook; and, subsequently, whether the Supreme Court of the United States will take up the case if or when Oakbrook files for it. The latter is a possibility as the existence of a circuit split is one of the factors that the Supreme Court considers when deciding whether to grant review of a case.

In the meantime, we continue to be measured in our response. We recommend to land trusts to sit tight, avoid quick reactions—such as altering any easement template or agreeing to any donor request to eliminate or alter the proceeds clause language at this time—and let this evolve in the courts.