Paul L. Caron

Tuesday, December 6, 2022

Kane: The Dispute Over Perpetual Conservation Easements Just Got Worse

Mitchell A. Kane (NYU), The Dispute Over Perpetual Conservation Easements Just Got Worse, 177 Tax Notes Fed. 1211 (Nov. 28, 2022):

Tax Notes Federal (2022)In this report, Kane argues that the Supreme Court should not grant certiorari in Oakbrook Land Holdings LLC v. Commissioner, a conservation easement case in which the Sixth Circuit upheld a Treasury regulation regarding the agreed distribution of proceeds to follow on state law extinguishment of the easement.

The conservation easement stew that threatens to boil over into Supreme Court adjudication has all the ingredients for a bad outcome. We observe in these cases large revenue consequences, an intersection of broad administrative law ramifications and narrower tax policy considerations surrounding subsidization of land conservation, a mixture of arguably abusive shelters and wholly legitimate transactions, and strenuous disagreement among different members of the federal judiciary. In this report I have attempted to offer a route to sidestep the landmines and worst outcomes here.

First, the Court should deny certiorari in Oakbrook. The legal criterion of “significance” that determines the need for an agency to respond to a comment in rulemaking is already clear. The comment at issue in Oakbrook was not significant. Suggesting that it is even close to the line can only serve to destabilize tax regulatory law generally.

Second, we must not lose sight of the fact that judicial extinguishment is a sideshow to this drama. There is no evidence that judicial extinguishment is common or has occurred to any meaningful extent. If that situation changes, there is no reason to doubt that state courts can adequately assess extinguishment. And given that extinguishment could just as well accompany depreciated property values as appreciated ones, land trusts and donors should be left to negotiate over post-extinguishment proceeds. I have argued that such a negotiated outcome is already condoned under the best interpretation of the proceeds regulation. If that’s wrong, then a statutory amendment should embrace a negotiated solution to the post-extinguishment proceeds issue.

Third, pending regulatory or statutory resolution of the judicial extinguishment issue, the IRS should consider issuing a cease-fire notice on litigating under the proceeds regulation.

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