As the IRS and the Department of Justice continue to focus enforcement efforts on conservation easements, the Supreme Court has been asked to settle a dispute regarding the validity of the “protected in perpetuity” requirement, which has been repeatedly used to disallow taxpayers’ charitable deductions relating to conservative easements in their entirety. In the appeal, taxpayers argue that the regulation establishing how this requirement may be satisfied was finalized without a proper public notice and comment process as required by the Administrative Procedures Act (“APA”).

In 2007, a couple was driving on a country road about fifteen minutes outside of Chattanooga, Tennessee, in search of the perfect place for a new home. They found a large, overgrown piece of land, but Mr. Horton had experience developing similar plots of land with his construction company. He found investors to form Oakbrook Land Holdings and purchase the land with the intent to develop it into single-family residences with a commercial service area and began construction. A year later, Mr. Horton learned about conservation easements and presented the option of a donation to the other investors. After initial hesitation, the partnership donated a conservation easement on a portion of the land in 2008 and in turn claimed a $9.5 million charitable deduction.

On review of the partnership’s tax returns, the IRS disallowed Oakbrook’s entire $9.5 million deduction and assessed an accuracy penalty, on the basis that the deed conveying the charitable easement did not protect the conservation purpose in perpetuity. The IRS argued that, in order to be protected in perpetuity, the deed conveying a conservative easement must contain language to prohibit any potential scenario in which the donor would recover any compensation or use of the land for any purpose other than to further the charitable purpose. The Oakbrook investors challenged the decision with the U.S. Tax Court, arguing that the deed did not violate the perpetuity requirement and, in the alternative, presented a novel argument that the regulation used by the IRS to disallow the deduction was invalid pursuant to the APA. The Tax Court held that the IRS’ disallowance was proper and that the perpetuity regulation was not in conflict with the APA. While most of the Tax Court judges agreed with this position, in a strong dissenting opinion, Judge Holmes argued that the perpetuity requirement was invalid pursuant to the APA. Oakbrook then appealed the issues to the Sixth Circuit.

Following the divided response to the new administrative law argument, taxpayers David and Tammy Hewitt attempted to raise the same administrative issue as in Oakbrook in their appeal to the Eleventh Circuit, in hopes that the Eleventh Circuit would decide the case more favorably. The Eleventh Circuit disagreed with the Tax Court majority and found that the IRS’s interpretation of the perpetuity regulation was arbitrary and capricious in violation of the APA. However, in deciding Oakbrook’s appeal, the Sixth Circuit expressly disagreed with the Eleventh Circuit’s analysis and found for the IRS, leading to a circuit split and potentially paving a path for the Supreme Court to definitively decide the issue. Oakbrook has appealed to the United States Supreme Court.

After Oakbrook filed their petition with the Supreme Court, the National Taxpayers Union Foundation, filed an amicus brief supporting the taxpayers’ position. While there is no guarantee that the Supreme Court will elect to resolve this case, the existence of a circuit split is one of the factors Justices consider when deciding whether to grant certiorari or agree to review the case. Here, the Sixth Circuit decision conflicts with a unanimous decision in the Eleventh Circuit regarding the same regulation, so the Supreme Court may be inclined to resolve the present conflict. If the Court finds that the treasury regulation is invalid, that decision would have a substantial impact on all pending IRS reviews of conservation easement deductions. However, a determination that the regulation is invalid would not entirely clear the way for taxpayers due to the other tools the IRS may use to disallow deductions it disagrees with. The government’s response to the taxpayer petition is due on December 7, 2022.