# UNITED STATES TAX COURT

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A79bf75b84dc8348c

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

81

SD

154 T.C. No. 10

UNITED STATES TAX COURT

OAKBROOK LAND HOLDINGS, LLC, WILLIAM DUANE HORTON, TAX
MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5444-13.

Filed May 12, 2020.

In 2008 P donated a conservation easement to a qualified organization and claimed a charitable contribution deduction under
I.R.C. sec. 170(a). The easement deed provided that, if the conserVation restriction were extinguished at some future date, the donee
would receive a share of the proceeds equal to the fair market value
of the easement on the date the contribution was made. The deed
further provided that the donee's share as thus determined would be
reduced by the value of any improvements made by the donor after
granting the easement. R disallowed the deduction, contending
(among other things) that the extinguishment clause violated the
requirements of sec. 1.170A-14(g)(6), Income Tax Regs.
In Oakbrook Land Holdings, LLC v. Commissioner, T.C.
Memo. 2020-54, issued concurrently with this Opinion, the Court
holds that the easement deed violates the "protected in perpetuity"
requirement of I.R.C. sec. 170(h)(5), as interpreted in sec.
1.170A-14(g)(6), Income Tax Regs., because the donee's share of the

SERVED May 12 2020

-2extinguishment proceeds (1) is based on a fixed historical value rather
than a proportionate share, and (2) is reduced by the value of any
improvements made by the donor. This Opinion addresses petitioner's challenge to the validity of the regulation.
[Ield: Sec. 1.170A-14(g)(6), Income Tax Regs., was properly
promulgated and is valid under the Administrative Procedure Act, 5
U.S.C. sec. 553 (2018).
Held, further, the construction of I.R.C. sec. 170(h)(5) as set
forth in sec. 1.170A-14(g)(6), Income Tax Regs., is valid under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).

David M. Wooldridge, Michelle A. Levin, Ronald A. Levitt, and Gregory P.
Rhodes, for petitioner.
W. Benjamin McClendon, Bruce K. Meneely, Robert W. Dillard, and
William W. Kiessling, for respondent.

LAUBER, Judge: Oakbrook Land Holdings, LLC (Oakbrook), purchased
143 acres of land near Chattanooga, Tennessee, in December 2007 for $1,700,000.
In December 2008, slightly more than one year later, Oakbrook donated a conservation easement over a portion of the tract to the Southeast Regional Land Conservancy (SRLC). On its Federal income tax return for 2008, Oakbrook claimed for
this donation a charitable contribution deduction of $9,545,000. Oakbrook thus

-3took the position that the land covered by the easement had appreciated in value
by about 700% in a single year during the worst real estate crisis to hit the United
States since the Great Depression.
The case was tried before Judge Holmes in 2016, and the facts are stated
more fully in a separate Memorandum Opinion authored by him and filed concurrently herewith. Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo.
2020-54. That opinion holds that the easement Oakbrook granted did not satisfy
the "protected in perpetuity" requirement of section 170(h)(5)(A) and section
1.170A-14(g)(6), Income Tax Regs.¹ That is because the donee's share of the
proceeds, in the event the property were sold following a judicial extinguishment
of the easement, would be (1) determined according to a fixed historical value
rather than a proportionate share of the proceeds and (2) reduced by the value of
any improvements made by the donor. See Oakbrook Land Holdings, LLC, T.C.
Memo. 2020-54, at *36-*37. In this Opinion we address and reject petitioner's
challenge to the validity of this regulation.

¹Unlessotherwise indicated, all statutory references are to the Internal
Revenue Code (Code) in effect for the year at issue. We round most monetary
amounts to the nearest dollar.

-4FINDINGS OF FACT
In December 2008 Oakbrook executed a Conservation Easement and Declaration of Restrictions and Covenants (Deed) with SRLC, a "qualified organization" under section 170(h)(3). This easement covered 106 acres (or 75%) of the
tract Oakbrook had purchased the previous December. The parties understood that
changed circumstances might make it impossible, at some point in the future, to
continue protecting the conservation area. Should that happen, article VI, section
B(2), of the Deed governed how Oakbrook and SRLC would divide the proceeds
of sale following a judicial extinguishment of the easement. It provided:
This Conservation Easement gives rise to a real property right
and interest immediately vested in SRLC. For purposes of this Conservation Easement, the fair market value of SRLC's right and interest shall be equal to the difference between (a) the fair market value
of the Conservation Area as if not burdened by this Conservation
Easement and (b) the fair market value of the Conservation Area
burdened by this Conservation Easement, as such values are determined as of the date of this Conservation Easement, (c) less amounts
for improvements made by * * * [Oakbrook] in the Conservation
Area subsequent to the date of this Conservation Easement, the
amount of which will be determined by the value specified for these
improvements in a condemnation award in the event all or part of the
Conservation Area is taken in exercise of eminent domain * * * . If a
change in conditions makes impossible or impractical any continued
protection of the Conservation Area for conservation purposes, the
restrictions contained herein may only be extinguished by judicial
proceeding. Upon such proceeding, SRLC, upon a subsequent sale,
exchange or involuntary conversion of the Conservation Area, shall

-5be entitled to a portion of the proceeds equal to the fair market value
of the Conservation Easement as provided above.
In the event all or part of the conservation area were taken by eminent domain "so
as to abrogate the restrictions imposed by this Conservation Easement, * * * [the]
proceeds shall be divided in accordance with the proportionate value of SRLC's
and * * * [Oakbrook's] interests as specified above." Deed art. VI, sec. B(3).
Oakbrook timely filed a Form 1065, U.S. Return of Partnership Income, for
its 2008 taxable year. On that return it claimed a charitable contribution deduction
of $9,545,000 for its donation of the easement. The Internal Revenue Service
(IRS) selected Oakbrook's return for examination. On December 6, 2012, the IRS
issued Oakbrook's tax matters partner (TMP or petitioner) a notice of final partnership administrative adjustment that disallowed the charitable contribution
deduction in full. The TMP timely petitioned for readjustment of the partnership
items.
Trial was held before Judge Holmes in Birmingham, Alabama, in 2016. At
trial the Court heard testimony from the SRLC representative who had drafted the
Deed. In post-trial briefs petitioner contended that (1) the extinguishment provision of the Deed complies with the requirements of section 1.170A-14(g)(6), Income Tax Regs., and (2) in the alternative, the regulation is invalid.

-6Judge Holmes interpreted the Deed to mean that, in the event of a sale following judicial extinguishment of the easement, SRLC's share of the proceeds
would be limited to the "initial fixed value" of the easement, i.e., its fair market
value (FMV) on the date it was granted. Oakbrook Land Holdings, LLC, T.C.
Memo. 2020-54, at *35. The donee's proceeds as thus determined would then be
reduced by the value (as specified in any future condemnation award) of any improvements that Oakbrook had made to the conservation area after donating the
easement. M Thus, if property values rose after that date, SRLC's share would
not "be protected from inflation either in local land prices or the economy more
generally." R at *35-*36. Conversely, if property values fell, SRLC might not
receive even the initial fixed value of the easement because of the reduction for
improvements. E at *36.
The Court concluded that the Deed, as thus construed, failed to satisfy the
requirements of section 1.170A-14(g)(6), Income Tax Regs., for two reasons.
First, the regulation requires that the donee be entitled to a proportionate share of
the proceeds, not to a fixed dollar amount keyed to the easement's initial value.

Oakbrook Land Holdings, LLC, T.C. Memo. 2020-54, at *37. Second, the
regulation does not permit a reduction of the donee's proceeds on account of
improvements made by the donor. R at *37-*38 (citing PBBM-Rose Hill, Ltd. v.

-7Commissioner, 900 F.3d 193, 208 (5th Cir. 2018)). In this Opinion we address
petitioner's challenge to the validity of this regulation.

OPINION
A.

Statutory and Regulatory Framework

Section 170(a)(1) allows a deduction for any charitable contribution made
within the taxable year. If the taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the FMV
of the property at the time the gift is made. See sec. 1.170A-1(c)(1), Income Tax
Regs.
The Code generally restricts a taxpayer's charitable contribution deduction
for the donation of "an interest in property which consists of less than the taxpayer's entire interest in such property." Sec. 170(f)(3)(A). But there is an exception
to this rule for a "qualified conservation contribution." Sec. 170(f)(3)(B)(iii).
This exception applies where: (1) the taxpayer makes a contribution of a "qualifled real property interest," (2) the donee is a "qualified organization," and (3) the
contribution is "exclusively for conservation purposes." Sec. 170(h)(1).
Section 170(h)(5)(A) provides that a contribution will not be treated as being made exclusively for conservation purposes "unless the conservation purpose
is protected in perpetuity." The regulation interpreting this provision recognizes

-8that "a subsequent unexpected change in the conditions surrounding the [donated]
property * * * can make impossible or impractical the continued use of the property for conservation purposes." Sec. 1.170A-14(g)(6)(i), Income Tax Regs. Despite that possibility "the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding" and
the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. M In effeet, the "perpetuity" requirement is deemed satisfied because the sale proceeds
replace the easement as an asset deployed by the donee "exclusively for conservation purposes." Sec. 170(h)(5)(A).
Section 1.170A-14(g)(6)(i), Income Tax Regs., provides that the donee must
be entitled to proceeds "determined under paragraph (g)(6)(ii)." That paragraph,
captioned "Proceeds," provides in part as follows:
[F]or a deduction to be allowed under this section, at the time of the
gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in
the donee organization, with 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. * * * For purposes of this paragraph * * * , that proportionate value of the donee's property rights shall remain constant. Accordingly, when a change in conditions give[s] rise to the extinguish-

-9ment of a perpetual conservation restriction under paragraph (g)(6)(i)
of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be
entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction, unless state law
provides that the donor is entitled to the full proceeds * * * .
This regulation requires that the easement deed guarantee the donee "a proportionate share of extinguishment proceeds." Carroll v. Commissioner, 146 T.C.

196, 219 (2016); see PBBM-Rose Hill, 900 F.3d at 207 ("[T]he 'proportionate
value' is a fraction equal to the value of the conservation easement at the time of
the gift, divided by the value of the property as a whole at that time."). Further,
the regulation does not permit that "any amount, including that attributable to improvements, may be subtracted out" of the proceeds against which the proportion-

ate value is applied. PBBM-Rose Hill, 900 F.3d at 208; accord, Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126, 136-137 (2019).
B.

Regulatory Background

The Tax Reform Act of 1969, Pub. L. No. 91-172, sec. 201, 83 Stat. at 556,
generally disallowed charitable contribution deductions for gifts of partial interests
in property. In 1980 Congress revised the Code to allow deductions for such gifts
when they constitute "qualified conservation contributions." See Tax Treatment

Extension Act of 1980 (1980 Act), Pub. L. No. 96-541, sec. 6, 94 Stat. at 3206

-10(adding section 170(h)). Congress specified numerous requirements for a "qualifled conservation contribution," including the requirements that the contribution

be made "exclusively for conservation purposes" and that the "conservation purpose [be] protected in perpetuity." M (codified at section 170(h)(1)(C), (5)(A)).
On May 23, 1983, the Department of the Treasury (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 (May
23, 1983). The preamble explained the history of congressional enactments in this
area, highlighting the requirement that a donated easement "be perpetual in order
to qualify for a deduction." M Treasury noted that the House and Senate committee reports accompanying the 1980 Act had "provided, for the first time, an indepth statement of congressional intent concerning the donation of partial interests
for conservation purposes." M The preamble stated that the proposed regulations "reflect the major policy decisions made by the Congress and expressed in
these committee reports." Ibid.
The proposed regulations spanned nine pages of the Federal Register and
included provisions--many quite technical--addressing concepts such as "qualified
real property interest," "perpetual conservation restriction," "historically important
land area," "certified historic structure," "conservation purpose," and "significant

-11public benefit." Id. at 22941-22949. Overall, the proposed regulations covering
"qualified conservation contributions" consisted of 10 paragraphs, 23 subparagraphs, 30 subdivisions, and 21 examples. One of these 23 subparagraphs became
what is now section 1.170A-14(g)(6), Income Tax Regs., covering judicial extinguishment of easements and allocation of the resulting proceeds. 48 Fed. Reg.

at 22946.
In response to its request for public comments, Treasury received more than
700 pages of commentary. Ninety organizations or individuals submitted comments addressing various aspects of the proposed rules. Of the 90 commenters
only 13 mentioned the judicial extinguishment provision. Of those 13 most
devoted only a few sentences to this subject, generally at the end of a submission
that emphasized other matters.
Most of the commenters who mentioned the judicial extinguishment provision supported it. The Maine Coast Heritage Trust "strongly endorse[d] the proposed provisions for extinguishing easements." Other commenters echoed this
point, emphasizing that the proportionate value assigned to the easement should be
"the minimum that a grantee organization should receive." Several commenters
recommended that the proceeds formula be revised to make it more favorable to

-12the donee, such that the donee's share would be "equal to the greater of its original
proportionate value or its proportionate value at the time of the extinguishment."
Some commenters who supported the judicial extinguishment rule suggested minor tweaks to it. The National Trust for Historic Preservation recommended
"including 'refinancing' in the list of events that would trigger the property owner's obligation to pay the easement holder for the value of its extinguished easement rights." The Washington Trust for Historic Preservation recommended that
the list of triggering events, rather than being expanded, should be restricted to
"'acts of God' which substantially destroy the property." The Natural Lands Trust
recommended that the fraction determining the donee's share be computed on the
basis of values existing "at the time of the extinguishment."
Several commenters suggested that the judicial extinguishment rule might
be unnecessary or difficult to enforce against future owners. Two commenters
noted concern that donors or donees mfight be subject to State transfer taxes upon
distribution of extinguishment proceeds. Three commenters questioned the "proportionate value" approach as applied to facade easements on certified historic
structures, while agreeing that this approach was appropriate "as applied to open
space easements" on land.

-13Two commenters were definitely opposed to the judicial extinguishment
rule, fearing that it would "create a potential disincentive to the donation of easements." According to the Landmarks Preservation Council of Illinois, the "proportionate value" approach to distribution of proceeds was problematic as applied
to facade easements on "endangered historic properties * * * in downtown commercial areas." The New York Landmarks Conservancy (NYLC), which was
"dedicated to the preservation of architecturally, historically and culturally significant buildings," devoted two pages of comments to the judicial extinguishment
rule, focusing its concern on the supposed "deterrent effect" of this provision.
Noting that judicial extinguishment was a "relatively remote" possibility, it
questioned whether the regulations needed to address this point.
NYLC was the only commenter to mention donor improvements to the conservation area. It urged that the proportionate value formula "fails to take into account that improvements may be made * * * by the owner which should properly
alter the ratio." It contended that failure to offset improvements against the
donee's share of the proceeds "would obviously be undesirable to the prospective
donor and would constitute a windfall to the donee organization." But NYLC
suggested no alternative text to address this concern, other than to "recommend

-14deletion of the entire extinguishment provision." Nor did any other commenter
suggest alternative text to address the concerns (if any) that it expressed.
A public hearing on the proposed amendments to the regulations was held
on September 15, 1983. On January 14, 1986, Treasury adopted the proposed
amendments with numerous revisions. See T.D. 8069, 1986-1 C.B. 89. The
preamble to the final regulations provides a summary of the law and states that,
"[a]fter consideration of all comments regarding the proposed amendments * * * ,
those amendments are adopted as revised by this Treasury decision." R at 90.
In a section captioned "Summary of Comments," the preamble explained
that Treasury had made substantial revisions in response to the comments it received. The preamble discussed seven aspects of the proposed regulations in
detail; in each case Treasury revised or clarified text, filled in gaps, or provided
additional explanatory examples. E at 90-91. Several of these provisions had
generated "many comments." Ibid.
The "judicial extinguishment" provision is not among the amendments specifically addressed in the "Summary of Comments." However, Treasury did make
changes to that provision in response to the comments it received. As originally
proposed, the "judicial extinguishment" rule vested the donee with a property right
having an FMV "that is a minimum ascertainable proportion of the fair market

-15value to the entire property." 48 Fed. Reg. at 22946. The final regulation revised
subparagraph (6)(ii) to refer to a property right with an FMV "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." Sec. 1.170A14(g)(6)(ii), Income Tax Regs.; see T.D. 8069, 1986-1 C.B. at 99. Treasury concurrently made three other technical and conforming changes to the text of this
provision.
These changes to the "judicial extinguishment" rule responded to comments
that Treasury had received from the Nature Conservancy, the Maine Coast Heritage Trust, the Brandywine Conservancy, and the Land Trust Exchange. (The
Land Trust Exchange had synthesized comments from land trusts across the
country.) These commenters urged that "the proportionate value, not the absolute
value, * * * is the important figure," and that "the proportionate value assigned to
an easement at the time of gift is the minimum that a grantee organization should
receive in the event of an extinguishment and sale."
C.

Procedural Validity of the Regulation
Petitioner first contends that the judicial extinguishment regulation is pro-

cedurally defective on the theory that it was not properly promulgated as required

by the Administrative Procedure Act (APA), 5 U.S.C. sec. 553 (2018).

-161.

Legislative vs. Interpretive Rules

Administrative law distinguishes between interpretive and legislative agency rules. "An interpretive rule merely clarifies or explains preexisting substantive
law or regulations." SIH Partners LLLP v. Commissioner, 150 T.C. 28, 40 (2018)

(citing Elizabeth Blackwell Health Ctr. for Women v. Knoll, 61 F.3d 170, 181 (3d
Cir. 1995)), affd, 923 F.3d 296 (3d Cir. 2019); see Tenn. Hosp. Ass'n v. Azar,
908 F.3d 1029, 1042 (6th Cir. 2018). A legislative rule, on the other hand, "creates rights, assigns duties, or imposes obligations, the basic tenor of which is not
already outlined in the law itself." SIH Partners, 150 T.C. at 40 (quoting Dia

Navigation Co. v. Pomeroy, 34 F.3d 1255, 1264 (3d Cir. 1994)); see Tenn. Hosp.
Ass'n, 908 F.3d at 1042. Legislative rules have "the force and effect of law."
Chrysler Corp. v. Brown, 441 U.S. 281, 303 (1979) (quoting Batterton v. Francis,

432 U.S. 419, 425 n.9 (1977)).
Section 170(h)(5)(A) requires that the conservation purpose underlying the
easement be "protected in perpetuity." But the statute does not indicate how (or
whether) this requirement could be deemed satisfied given the possibility that the
easement might later be extinguished. The regulation specifies the circumstances
in which "the conservation purpose can nonetheless be treated as protected in perpetuity." Sec. 1.170A-14(g)(6)(i), Income Tax Regs.

-17To secure this treatment the regulation requires that the donor agree, at the
time of the gift, to a specified division of proceeds in the event the property is sold
following judicial extinguishment of the easement. M The required division of
proceeds is set forth in subparagraph (6)(ii). Because the regulation imposes a
requirement not explicitly set forth in the statute, it is appropriately treated as a
legislative rule. C[ SIH Partners, 150 T.C. at 40-41.
2.

Procedural Requirements for Legislative Rules

Legislative rules are subject to APA notice-and-comment rulemaking procedures. See 5 U.S.C. sec. 553(b); Tenn. Hosp. Ass'n, 908 F.3d at 1042. To issue
a legislative regulation consistently with the APA an agency must: (1) publish a
notice of proposed rulemaking in the Federal Register; (2) provide "interested persons an opportunity to participate * * * through submission of written data, views,
or arguments"; and (3) "[a]fter consideration of the relevant matter presented,
* * * incorporate in the rules adopted a concise general statement of their basis
and purpose." See 5 U.S.C. sec. 553(b) and (c).
The administrative record for T.D. 8069 shows (and petitioner does not
dispute) that Treasury satisfied the first two requirements. Petitioner contends that
Treasury failed to consider a "relevant matter presented" to it and failed to include
in the final regulations a "concise general statement of their basis and purpose."

-18The APA provides that a reviewing court shall set aside agency action that
is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance
with law." 5 U.S.C. sec. 706(2)(a). The scope of our review "is a narrow one"
because "[t]he court is not empowered to substitute its judgment for that of the
agency." Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281, 285

(1974) (quoting Citizens to Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 416
(1971)). We consider only whether the agency "articulate[d] a satisfactory explanation for its action." Motor Vehicle Mfrs. Ass'n, Inc. v. State Farm Mut. Auto.

Ins. Co. (State Farm), 463 U.S. 29, 43 (1983).
While we cannot provide a reasoned basis for agency action that the agency
itself did not supply, we will "uphold a decision of less than ideal clarity if the
agency's path may reasonably be discerned." Bowman Transp., Inc., 419 U.S.
at 285-286. "So long as an agency's rationale can reasonably be discerned and
that rationale coincides with the agency's authority and obligations under the
relevant statute, a reviewing court may not 'broadly require an agency to consider
all policy alternatives in reaching decision.'" SIH Partners, 150 T.C. at 47 (quoting State Farm, 463 U.S. at 51). Indeed, "regulations with no statement of basis
and purpose have been upheld where the basis and purpose w[ere] considered

obvious." Cal-Almond, Inc. v. U.S. Dep't of Agric., 14 F.3d 429, 443 (9th Cir.

-191993) (citing Citizens to Save Spencer Cty. v. EPA, 600 F.2d 844, 884 (D.C. Cir.
1979)).2
The preamble to the final regulations explains that they were being promulgated to "provide necessary guidance to the public for compliance with the law,"
as recently amended by Congress, "relating to contributions * * * of partial interests in property for conservation purposes." T.D. 8069, 1986-1 C.B. at 89. The
preamble to the proposed regulations supplied extensive background about the
legislative history, explaining that "[t]he regulations reflect the major policy
decisions made by the Congress and expressed in the[] committee reports." 48
Fed. Reg. at 22940. Treasury noted that "[t]he most difficult problem posed in this
regulation was how to provide a workable framework for donors, donees, and the
* * * [IRS] to judge the deductibility of open space easements," inviting public
comments on this and other points. Ibid.

2In State Farm the Supreme Court found agency action arbitrary and capricious because it "failed to present an adequate basis and explanation" of its decision to reverse a longstanding rule. State Farm, 463 U.S. at 34. On the basis of
the record in that case, the agency's explanation was "not sufficient to enable * * *
[the Court] to conclude that the recission was a product of reasoned decisionmaking." Id. at 52. Here, Treasury was promulgating new rules in response to Congress' amendments to section 170. Treasury was not reversing an earlier policy
supported by a body of fact that would require substantial evidence to justify a
reversal of course. See SIH Partners, 150 T.C. at 43-44 (distinguishing State Farm
on the same ground).

-20In response to this request Treasury received comments from 90 organizations and individuals who supplied voluminous commentary on many aspects of
the proposed regulations. Treasury considered these comments and made numerous changes throughout, highlighting the most important revisions in a two-page
"Summary of Comments." T.D. 8069, 1986-1 C.B. at 90-91. The preamble to the
final regulations states that, "[a]fter consideration of all comments regarding the
proposed amendments * * * , those amendments are adopted as revised by this
Treasury decision." Id. at 90. This Court has found a similar statement, coupled
with the administrative record, sufficient to find that Treasury had considered the
relevant matter presented to it. See Wing v. Commissioner, 81 T.C. 17, 31-32
(1983) (upholding a regulation whose preamble stated that, "[a]fter consideration
of all comments regarding the proposed amendments, this Treasury Decision is

adopted" (quoting T.D. 7523, 42 Fed. Reg. 63640 (Dec. 19, 1977))).
The preamble to the final regulations discusses seven major groups of comments and the changes Treasury made in response to them. But an agency cannot
reasonably be expected to address every comment it received. The APA "has
never been interpreted to require the agency to respond to every comment, or to
analyse every issue or alternative raised by the comments, no matter how insub-

stantial." Thompson v. Clark, 741 F.2d 401, 408 (D.C. Cir. 1984). "We do not

-21expect the agency to discuss every item of fact or opinion included in the submissions made to it." Simms v. Nat'l Highway Traffic Safety Admin., 45 F.3d 999,
1005 (6th Cir. 1995) (quoting Auto. Parts & Accessories Ass'n, Inc. v. Boyd, 407

F.2d 330, 338 (D.C. Cir. 1968)); see Action on Smoking & Health v. Civil Aeronautics Bd., 699 F.2d 1209, 1216 (D.C. Cir. 1983) ("An agency need not respond
to every comment.").
The two aspects of the "judicial extinguishment" rule to which petitioner
objects are the requirement that the donee receive a proportional share of the proceeds and the fact that the "proportionate share" formula does not account for the
possibility of donor improvements. Treasury clearly considered the comments it
received on the first point because it substantially revised the text of section
1.170A-14(g)(6)(ii), Income Tax Regs., in response to those comments. See supra

pp. 14-15.
Only one of the 90 commenters mentioned donor improvements, and it devoted exactly one paragraph to this subject. That commenter, NYLC, was concerned about facade easements on historic structures, as opposed to "perpetual
open space easements," with which Treasury was chiefly concerned. See 48 Fed.
Reg. at 22940. And NYLC mentioned this point to support its belief that donors

-22of facade easements "are likely to be discouraged from making a donation," a supposition that Treasury may reasonably have discounted.
In any event, "[t]he administrative record reflects that no substantive alternatives to the final rules were presented for Treasury's consideration." SIH Partneni, 150 T.C. at 44; see dissenting op. p. 102 ("A comment is * * * more likely to
be significant if the commenter suggests a remedy for the purported problem it
identifies."). NYLC offered no suggestion about how the subject of donor improvements might be handled; it simply recommended "deletion of the entire extinguishment provision." Only one other commenter of the 13 mentioning judicial
extinguishment voiced that recommendation.3
30ur dissenting colleague errs in relying on United States v. Nova Scotia
Food Prods. Corp., 568 F.2d 240 (2d Cir. 1977), to support his position. See
dissenting op. pp. 110-113. That case involved a Food and Drug Administration
(FDA) regulation establishing minimum "time, temperature, and salinity" requirements for processing fish. The Second Circuit invalidated the regulation as
applied to one category of fish product, "non-vacuum-packed hot-smoked whitefish." Nova Scotia Food Prods. Corp., 568 F.2d at 253. The court first held that
the FDA had "failed to disclose to interested parties the scientific data and the
methodology upon which it relied." Id. at 250. "When the basis for a proposed
rule is a scientific decision, the scientific material which is believed to support the
rule should be exposed to the view of interested parties for their comment." I£ at
252. The court also held that the agency had failed to consider: (1) evidence that
heating "certain types of fish to high temperatures will completely destroy the
product," (2) the suggestion that using "nitrite and salt as additives could safely
lower the high temperature otherwise required," and (3) the suggestion that
different processing requirements should be established for different species of
(continued...)

-23The APA requires "consideration of the relevant matter presented" during
the rulemaking process. 5 U.S.C. sec. 553(c). Our review of the administrative
record leaves us with no doubt that Treasury considered the relevant matter presented to it. See Wing, 81 T.C. at 33. And we find equally little merit in petitioner's assertion that Treasury failed to "incorporate in the rules adopted a concise
general statement of their basis and purpose." See 5 U.S.C. sec. 553(c).
The preamble to the final regulations explains that they were being promulgated to "provide necessary guidance to the public for compliance with the law,"
as recently amended by Congress, "relating to contributions * * * of partial interests in property for conservation purposes." T.D. 8069, 1986-1 C.B. at 89. The
preamble to the proposed regulations emphasized the requirement that conservation easements "be perpetual in order to qualify for a deduction." 48 Fed. Reg.
22940. The purpose of the "judicial extinguishment" rule is plain on its face--to
provide a mechanism to ensure that the conservation purpose can be deemed

3(...continued)
fish. Id. at 245. Here, the basis for the proposed regulation was not "a scientific
decision"; Treasury relied on no undisclosed data when proposing its regulation;
the two commenters who opposed the judicial extinguishment rule offered no
concrete alternative suggestions; and the concerns they expressed lacked the
significance of concerns about destroying the commercial viability of a product,
which the Second Circuit aptly described as "vital questions" in Nova Scotia Food

Prods. Corp., 568 F.2d at 252.

-24"protected in perpetuity" notwithstanding the possibility that the easement might
later be extinguished. Sec. 1.170A-14(g)(6)(i), Income Tax Regs. Even where a
regulation contains no statement of basis and purpose whatsoever, it may be upheld "where the basis and purpose * * * [are] considered obvious." Cal-Almond,

Inc., 14 F.3d at 443.
Petitioner insists that Treasury failed to comply with the APA because the
preamble to the final regulations did not discuss the "basis and purpose" of the
judicial extinguishment provision specifically. But this provision represented one
subparagraph of a regulation project consisting of 10 paragraphs, 23 subparagraphs, 30 subdivisions, and 21 examples. No court has ever construed the APA
to mandate that an agency explain the basis and purpose of each individual component of a regulation separately. "[T]he detail required in a statement of basis
and purpose depends on the subject of the regulation and the nature of the comments received." Reytblatt v. U.S. Nuclear Regulatory Comm'n, 105 F.3d 715,

722 (D.C. Cir. 1997) (quoting Action on Smoking & Health, 699 F.2d at 1216).
This statement need only "contain sufficient information to allow a court to exercise judicial review." United States v. Garner, 767 F.2d 104, 117 (5th Cir. 1985);
s_ee Simms, 45 F.3d at 1005 (quoting Auto. Parts & Accessories Ass'n, Inc., 407

F.2d at 338).

-25The broad statements of purpose contained in the preambles to the final and
proposed regulations, coupled with obvious inferences drawn from the regulations
themselves, are more than adequate to enable us to perform judicial review. We
find that Treasury's rationale for the judicial extinguishment rule "can reasonably
be discerned and * * * coincides with the agency's authority and obligations under
the relevant statute." SIH Partners, 150 T.C. at 47. We accordingly hold that
Treasury satisfied all applicable APA requirements when promulgating this rule.4

4Petitioner cites only one case in which a Federal court has invalidated a
Treasury regulation on the theory that the regulation was not properly promulgated
under the APA. See Dominion Res., Inc. v. United States, 681 F.3d 1313 (Fed.
Cir. 2012). That case involved a regulation governing capitalization of interest
under section 263A. The Federal Circuit first held the regulation substantively
invalid under Chevron step two, concluding that it "directly contradict[ed] the
avoided-cost rule that Congress intended the statute to implement." Dominion
Res., Inc., 681 F.3d at 1317. The court also held that Treasury did not "provide a
reasoned explanation for adopting * * * [the] regulation," thus violating "the State
Farm requirement that the regulation must articulate a satisfactory or cogent
explanation." Id. at 1319. Since the court found the regulation inconsistent with
the statute, it unsurprisingly found that Treasury was obligated to explain why it
nevertheless adopted the rule. No such problem exists here: The judicial extinguishment rule is clearly consistent with, and was designed to ensure satisfaction
of, the statutory requirement that the conservation purpose be "protected in perpetuity." Sec. 170(h)(5)(C). Petitioner does not allege any inconsistency between
the statute and the regulation; rather, it faults Treasury for failing to refine the
proceeds formula to make it slightly more favorable to donors in the unlikely event
ofjudicial extinguishment. As explained in the text, only 1 of 90 commenters
(NYLC) even mentioned this issue, and its proposed solution was to eliminate the
judicial extinguishment rule in its entirety. Treasury did not abuse its discretion in
rejecting that option.

-26D.

Substantive Validity of the Regulation
1.

The "Judicial Extinguishment" Provision Generally

Having concluded that the regulation was properly promulgated, we turn to
petitioner's contention that the regulation is substantively invalid. When considering a challenge to the substantive validity of a regulation, we generally employ the
two-part test established by Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,
467 U.S. 837 (1984). The first prong of that test asks "whether Congress has
directly spoken to the precise question at issue." Id. at 842. "If the intent of
Congress is clear, that is the end of the matter." M
Section 170(h)(5)(A) sets forth a general requirement that the conservation
purpose be "protected in perpetuity." Congress does not appear to have considered the possibility that an easement might be judicially extinguished, and the
statute does not address how that possibility would affect a taxpayer's ability to
satisfy the "perpetuity" requirement. Congress therefore did not speak directly to
the question at issue.
We accordingly proceed to Chevron step two, which requires us to consider
whether the regulation "is based on a permissible construction of the statute."
Chevron, 467 U.S. at 843. If the statute is silent, we must give deference to the
interpretation embodied in the agency's regulation unless it is "arbitrary, caprici-

-27ous, or manifestly contrary to the statute." R at 844; see United States v. Mead
Corp., 533 U.S. 218, 227 (2001). In other words we must sustain the regulation so
long as it represents a "reasonable interpretation" of the law Congress enacted.

Chevron, 467 U.S. at 844; see SIH Partners, 150 T.C. at 50.
Petitioner does not challenge the validity of the "judicial extinguishment"
regulation as a whole, and it would be difficult to do so. Treasury faced a conundrum: How could the IRS determine that a conservation purpose was protected in
perpetuity, thus enabling the donor to qualify for a deduction in the year he made
the gift, when the easement might be extinguished at some future date? The regulation solves this problem by requiring the donor to agree, up front, to divide with
the donee any proceeds from a post-extinguishment sale. The "perpetuity" requirement is deemed satisfied because "the donee organization can use its proportionate share of the proceeds to advance the cause of historic preservation else-

where." Carroll, 146 T.C. at 214 (quoting Kaufman v. Shulman, 687 F.3d 21, 26

(1 st Cir. 2012)).
2.

Proportionate Value

While not disputing the validity of Treasury's overall objective, petitioner
urges that the regulation is unreasonable in two respects. First, petitioner challenges the "proportionate value" approach to division of sale proceeds. Under

-28section 1.170A-14(g)(6)(ii), Income Tax Regs., the donee's share is determined by
multiplying the sale proceeds by a fraction, the numerator of which is the FMV of
the easement at the time it was granted, and the denominator of which is the FMV
of the entire property at that time. Petitioner contends that Treasury should have
capped the donee's share at the FMV of the easement at the time it was granted.
We cannot say that the regulation's "proportionate value" approach is "arbitrary, capricious, or manifestly contrary to the statute." Chevron, 467 U.S. at 844.
Under the regulation the donee acquires "a property right, immediately vested in
the donee organization," in a share of any future proceeds. Sec. 1.170A14(g)(6)(ii), Income Tax Regs. Needless to say, the easement might be extinguished many years after it was granted, and considerable inflation in property
values might occur in the interim. If the donee's share were limited to the easement's historical FMV, its property right could be eviscerated in real dollar terms.
This would allow the donor or its successors to "reap[] a windfall if the property is
destroyed or condemned." Carroll, 146 T.C. at 214 (quoting Kaufman, 687 F.3d
at 26). That outcome would be at odds with the regulation's central purpose: to
ensure satisfaction of the statute's "protected in perpetuity" requirement by
supplying the donee with an asset that replaces, in real terms, the easement that
has been lost.

-293.

Donor Improvements

Second, petitioner contends that the regulation is invalid because it does not
permit the donee's share of the proceeds to be reduced by the value of improvements (if any) made by the donor. The regulation as proposed did not address
donor improvements, and only one of 90 commenters mentioned the point. See
supra pp. 21-22. Once again, we cannot say that the absence of a provision addressing donor improvements renders the regulation "arbitrary, capricious, or
manifestly contrary to the statute." Chevron, 467 U.S. at 844.
Treasury's goal in prescribing this regulation was to ensure satisfaction of
the statute's "protected in perpetuity" requirement. In effect this requirement is

deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee "exclusively for conservation purposes." Sec. 170(h)(5)(A).
In certain factual scenarios, reducing the donee's proceeds on account of donor
improvements could frustrate this goal, especially if local land values should decline.
For example, assume that a taxpayer donates an easement valued at $1 million on property valued at $2 million without the easement. The taxpayer thereafter spends $1 million improving the property. Many years later, there is an economic downturn, the easement is extinguished, and the property is sold for $2 mil-

-30lion. Under the regulation the donee would be entitled to $1 million (half of the
proceeds) and the conservation purpose would be deemed "protected in perpetuity." Sec. 170(h)(5)(A). But if improvements were carved out, the donee's share
would be reduced to $500,000 or zero, depending on whether the carve-out was
applied to the entire proceeds or to the donee's 50% share.
NYLC, the only commenter to mention donor improvements, notably did
not suggest any text to address this problem. And addressing it would have raised
a host of questions: Would the donee's proceeds be reduced by improvements the
donor had made before granting the easement, after granting it, or both? Would
the donor get credit for improvements to the land itself (such as grading) or only
for erecting structures? Would the donee's proceeds be reduced by the donor's
cost for the improvements or by their FMV at the time the easement was extinguished? And how would the problem mentioned in the previous paragraph be
solved, to prevent the donee's share from being severely reduced or even eliminated? It is conceivable that Treasury could have drafted a regulation that addressed the possibility of donor improvements, dealing with these ancillary questions in some rational way. But that was a policy decision for Treasury, not this
Court, to make.

-31Treasury's overarching goal was to guarantee that the donee, upon judicial
extinguishment of the easement, would receive the full share of proceeds to which
it was entitled. The few commenters who addressed this point offered differing
views on precisely how the donee's "proportionate share" should be determined.
NYLC regarded the formula as too favorable to the donee because it did not account for possible donor improvements. Other commenters urged that the formula
should be made more favorable to the donee, with the donee's share being "equal
to the greater of its original proportionate value or its proportionate value at the
time of the extinguishment."
We find that Treasury exercised reasoned judgment by adhering to a simple
rule that splits sale proceeds in a direct proportional manner on the basis of a
fraction determined as of the date the gift was made. Because the regulation as
drafted ensures satisfaction of the statutory mandate that the conservation purpose
be "protected in perpetuity," sec. 170(h)(5)(A), we cannot find the regulation to be
"arbitrary, capricious, or manifestly contrary to the statute," Chevron, 467 U.S.

at 844.
Finally, the age of this regulation gives weight to the presumption of reasonableness. "Treasury regulations and interpretations long continued without substantial change, applying to unamended or substantially reënacted statutes, are

-32deemed to have received congressional approval and have the effect of law." C_o±
tage Sav. Ass'n v. Commissioner, 499 U.S. 554, 561 (1991) (quoting United

States v. Correll, 389 U.S. 299, 305-306 (1967)). "[A]gency interpretations that
are of long standing come before us with a certain credential of reasonableness,
since it is rare that error would long persist." Smiley v. Citibank (S.D.), N.A., 517

U.S. 735, 740 (1996); see Carlebach v. Commissioner, 139 T.C. 1, 12 (2012) (sustaining under Chevron step two a regulation that had "gain[ed] legitimacy" because it had persisted substantially unchanged since 1944).
The regulation petitioner challenges was promulgated in January 1986. It
has never been amended. In the past 34 years Congress has amended section 170
more than 30 times,5 but these amendments have never suggested any

5See Pub. L. No. 99-514, secs. 142(d), 231(f), 301(b)(2), 1831, 100 Stat.
at 2120, 2180, 2217, 2851 (1986); Pub. L. No. 100-203, sec. 10711(a)(1), 101
Stat. at 1330-464 (1987); Pub. L. No. 100-647, sec. 6001(a), 102 Stat. at 3683
(1988); Pub. L. No. 101-508, secs. 11801(a)(11), (c)(5), 11813(b)(10), 104 Stat.
at 1388-520, 1388-523, 1388-554 (1990); Pub. L. No. 103-66, secs. 13172(a),
13222(b), 107 Stat. at 455, 479 (1993); Pub. L. No. 104-188, secs. 1206(a),
1316(b), 110 Stat. at 1776, 1786 (1996); Pub. L. No. 105-34, secs. 224(a), 508(d),
602(a), 973(a), 111 Stat. at 818, 860, 862, 898 (1997); Pub. L. No. 105-206, sec.
6004(e), 112 Stat. at 795 (1998); Pub. L. No. 105-277, sec. 1004(a)(1), 112 Stat.
at 2681-888 (1998); Pub. L. No. 106-170, secs. 532(c)(1)(A) and (B), 537(a), 113
Stat. at 1930, 1936 (1999); Pub. L. No. 106-554, secs. 1(a)(7), 165(a)-(e), 114
Stat. at 2763, 2763A-626 (2000); Pub. L. No. 107-16, sec. 542(e)(2)(B), 115 Stat.
at 84 (2001); Pub. L. No. 107-147, sec. 417(7), (22), 116 Stat. at 56, 57 (2002);
Pub. L. No. 108-81, sec. 503, 117 Stat. at 1003 (2003); Pub. L. No. 108-311, secs.
(continued...)

-33disagreement with the construction of the statute that Treasury adopted in section
1.170A-14(g)(6), Income Tax Regs. This "strongly suggests that * * * [Congress]
did not view Treasury's construction * * * as unreasonable or contrary to the law's
purpose." SIH Partners, 150 T.C. at 53-54 (sustaining under Chevron step two a
regulation that had persisted substantially unchanged for nearly 50 years).

5(...continued)

207(15), (16), 306(a), 118 Stat. at 1177, 1179 (2004); Pub. L. No. 108-357, secs.
335(a), 413(c)(30), 882(a), (b), (d), 883(a), 884(a), 118 Stat. at 1478, 1509, 1627,
1631, 1632 (2004); Pub. L. No. 109-73, secs. 305(a), 306(a), 119 Stat. at 2025
(2005); Pub. L. No. 109-135, sec. 403(a)(16), (gg), 119 Stat. at 2619, 2631 (2005);
Pub. L. No. 109-222, sec. 204(b), 120 Stat. at 350 (2006); Pub. L. No. 109-280,
secs. 1202(a), 1204(a), 1206(a), (b)(1), 1213(a)(1), (b)-(d), 1214(a) and (b),
1215(a), 1216(a), 1217(a), 1218(a), 1219(c)(1), 1234(a), 120 Stat. at 1066, 1068,
1075, 1077, 1079, 1080, 1085, 1100 (2006); Pub. L. No. 109-432, sec. 116(a)(1),
(b)(1) and (2), 120 Stat. at 2941 (2006); Pub. L. No. 110-172, secs. 3(c),
11(a)(l4)(A) and (B), (l5) and (l6), 121 Stat. at 2474, 2485 (2007); Pub. L. No.
110-234, sec. 15302(a), 122 Stat. at 1501 (2008); Pub. L. No. 110-246, secs. 4(a),
15302(a), 122 Stat. at 1664, 2263 (2008); Pub. L. No. 110-343, secs. 321(b),
323(a)(1), (b)(1), 324(a), (b), 122 Stat. at 3873, 3874, 3875 (2008); Pub. L. No.
111-312, secs. 301(a), 723(a) and (b), 740(a), 741(a), 742(a), 124 Stat. at 3300,
3316, 3319 (2010); Pub. L. No. 112-240, secs. 206(a) and (b), 314(a), 126 Stat.
at 2324, 2330 (2013); Pub. L. No. 113-295, secs. 106(a) and (b), 126(a),
221(a)(28), 128 Stat. at 4013, 4017, 4041 (2014); Pub. L. No. 114-41, sec.
2006(a)(2)(A), 129 Stat. at 457 (2015); Pub. L. No. 114-113, secs. 111(a)-(b)(2),
113(a) and (b), 331(a), 129 Stat. at 3046, 3047, 3104 (2015); Pub. L. No. 115-97,
secs. 11011(d)(5), 11023(a), 13305(b)(2), 13704(a), 13705(a), 131 Stat. at 2071,
2074, 2126, 2169 (2017); Pub. L. No. 115-141, sec. 401(a)(52), (b)(14), 132 Stat.
at 1186, 1202 (2018); Pub. L. No. 115-232, sec. 809(h)(1), 132 Stat. at 1842
(2018).

-34To implement the foregoing,

An appropriate decision will be
entered.
Reviewed by the Court.

FOLEY, GALE, THORNTON, PARIS, MORRISON, KERRIGAN, BUCH,
NEGA, PUGH, ASHFORD, and COPELAND, JJ., agree with this opinion of the
Court.

GUSTAFSON, J., agrees with parts A, B, C, D.1, and D.2 of this opinion.
HOLMES, J., dissents.

-35TORO, J., concurring in the result: The question before the Court is
whether an easement granted by Oakbrook Land Holdings, LLC ("Oakbrook") to
the Southeast Regional Land Conservancy ("SRLC") in December 2008
constitutes a "qualified conservation contribution" under section 170(h)(1),
entitling Oakbrook to the charitable contribution deduction claimed for that year.
Applying the text of the statute to the terms of the easement before us leads me to
conclude that the easement is not a "qualified conservation contribution" because
it fails to grant to the charity all of the rights inherent in the interest in real
property contemplated by the statute. Thus, in my view, the Commissioner was
right to disallow Oakbrook's charitable contribution deduction, and the deficiency
that the Commissioner determined must be upheld. See infra Part I. Because the
opinion of the Court announces the same disposition, I concur in that result.
Since applying the text of the statute to the terms of the easement before us
suffices to resolve the dispute before the Court, there is no need to address the
much more difficult question of the validity of section 1.170A-14(g)(6), Income
Tax Regs. Accord Stromme v. Commissioner, 138 T.C. 213, 218 n.8 (2012) ("For
now, the better course is 'to observe the wise limitations on our function and to
confine ourselves to deciding only what is necessary to the disposition of the

immediate case.'" (quoting Whitehouse v. Ill. Cent. R.R., 349 U.S. 366, 372-373

-36-

(1955))); see McLaine v. Commissioner, 138 T.C. 228, 242 (2012) (expressing the
same view); see also, e.g., PDK Labs. Inc. v. DEA, 362 F.3d 786, 799 (D.C. Cir.
2004) (Roberts, J., concurring in part and concurring in the judgment) (explaining

that where "a sufficient ground [exists] for deciding * * * [a] case, * * * the
cardinal principle ofjudicial restraint--if it is not necessary to decide more, it is
necessary not to decide more--counsels us to go no further"). Unlike the opinion
of the Court, I would leave that question for another day when its answer would
make a difference to the resolution of a case before us.
Because the opinion of the Court decides to do otherwise, however, I
explain below why a portion of the regulation upheld by the opinion of the Court,
if interpreted as the Commissioner urges, reflects an unreasonable interpretation of
the statute under step two of the framework established by Chevron, U.S.A., Inc.
v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), see infra Part II, and also
fails to meet the procedural requirements of the Administrative Procedure Act

("APA"), 5 U.S.C. sec. 553 (2018), see infm Part III.
I.

The Easement Fails To Meet the Statutory Requirements.
I begin by considering first things first: whether the Conservation Easement

and Declaration of Restrictions and Covenants (the "Deed") through which
Oakbrook granted an easement covering about three-quarters of its tract to SRLC

-37passes muster under section 170(h). As the opinion of the Court observes, the
parties understood that changes in circumstances might make it impossible to
continue protecting the conservation area in the future. See op. Ct. p. 4.
The dispute before us focuses on the provisions of the Deed addressing the
possibility of unanticipated changes in circumstances. If that possibility were to
materialize, the Deed provides that the donee will be entitled to an amount
equal to the difference between (a) the fair market value of the
Conservation Area as if not burdened by this Conservation Easement
and (b) the fair market value of the Conservation Area burdened by
this Conservation Easement, as such values are determined as of the
date of this Conservation Easement, (c) less amounts for
improvements made by [Oakbrook] in the Conservation Area
subsequent to the date of this Conservation Easement * * *
Deed art. VI, sec. B(2). As explained further below, this provision fails to convey
to the donee the requisite rights under section 170(h)(2)(C) and (5)(A).
A.

Statutory Framework

Section 170 generally allows a deduction for contributions to certain
charitable organizations. See sec. 170(a), (c). See generally Glass v.

Commissioner, 471 F.3d 698, 706-708 (6th Cir. 2006) (providing a summary of
the rules governing deductions for qualified conservation easements), aR 124
T.C. 258 (2005). But section 170 also imposes restrictions on the types of
contributions for which a deduction is allowed. As relevant here, subparagraph A

-38of section 170(f)(3) generally disallows a deduction for contributions of partial
interests in property. Yet what subparagraph A takes away, subparagraph B gives
back in certain circumstances. In the words of that provision, "[s]ubparagraph (A)
shall not apply to * * * [among others] a qualified conservation contribution."

Sec. 170(f)(3)(B)(iii).
Section 170(h)(1) tells us what a "qualified conservation contribution" is:
For purposes of subsection (f)(3)(B)(iii), the term "qualified
conservation contribution" means a contribution-(A) of a qualified real property interest,
(B) to a qualified organization,
(C) exclusively for conservation purposes.
That definition includes its own defined terms. Thus, section 170(h)(2)
explains:
For purposes of * * * [section 170(h)], the term "qualified real
property interest" means any of the following interests in real
property:
(A) the entire interest of the donor other than a qualified
mineral interest,
(B) a remainder interest, and
(C) a restriction (granted in perpetuity) on the use which
may be made of the real property. [Emphasis added.]

-39Section 170(h)(3) goes on to explain what a "qualified organization" is for these
purposes,¹and section 170(h)(4) defines what constitutes a "conservation
purpose." The statute also provides that "[a] contribution shall not be treated as
exclusively for conservation purposes unless the conservation purpose is protected

in perpetuity." Sec. 170(h)(5)(A) (emphasis added).2
The upshot of these provisions is that a donor who contributes to an
appropriate organization a partial "interest[] in real property" may be entitled to a
charitable contribution deduction if (1) that interest is a restriction on how the real
property may be used, (2) the restriction is granted in perpetuity, (3) the restriction
advances (that is, is "for") a conservation purpose, and (4) the conservation
purpose is protected in perpetuity.
B.

Application of Statutory Framework to the Easement

Oakbrook cannot prevail because the easement at issue here fails to meet the
requirements of the statute. Specifically, Deed article VI, section B(2), which sets
forth the formula to determine the amount to which SRLC would be entitled where

¹Theparties agree that the easement at issue was granted to a "qualified
organization," making it unnecessary to linger over this requirement.
2The parties also agree that the easement was for a "conservation purpose."
As explained in more detail below, the dispute is whether it was "exclusively" so.

-40an unexpected change in conditions makes impossible or impractical the continued
use of the easement for conservation purposes, runs counter to the Code.
The Code does not address explicitly what should happen if unexpected
changes that occur after the granting of the easement make it impossible or
impractical to continue using the property for the conservation purposes set out in
the Deed. But that does not mean that it is silent on this score, and the parties
appear to agree that, if the donor and the donee's real property interests are
converted into money as a result of such unexpected changes, the statutory
requirement of section 170(h)(5)(A) can be satisfied so long as the donee receives
an appropriate amount of money and uses that money in a manner consistent with
the purposes of the original contribution. The only question is what the
appropriate amount of money should be.
Oakbrook maintains that the requirement of section 170(h)(5)(A) is met so
long as the donee, upon a sale or other disposition after extinguishment by judicial
proceeding, would obtain an amount equal to the fair market value of the easement
at the time the easement was established, subject to reduction for subsequent
improvements funded exclusively by the donor.3 But Oakbrook's position ignores
3By contrast, the Commissioner maintains that, under the terms of the
easement, the donee must both get the benefit of any appreciation in the value of
(continued...)

-41the fact that, to be eligible for a deduction under section 170(h) in the first place, a
donor must grant to a donee an "interest[] in real property." Sec. 170(h)(2). One
of the rights inherent in a real property interest (and presumably required to be
transferred to the donee in order to satisfy section 170(h)(2)(C)) is the property
holder's right to be compensated at fair market value upon a subsequent transfer or
taking. See Tenn. Code Ann. sec. 29-17-910 (2020) ("In all instances the amount
to which an owner is entitled shall be determined by ascertaining the fair cash
market value of the property or property rights taken[.]"); McKinney v. Smith

h, No. M1998-00074-COAR3CV, 1999 WL 1000887, at *6-*7 (Tenn. Ct. App.
Nov. 5, 1999) (addressing the compensation due to the owner of an "easement of
access [that] has been taken or impaired by the State" and collecting authorities).4
3(...continued)
the easement from the time the easement was granted up to the time it is converted
into money and share in any appreciation attributable to improvements to the
property funded exclusively by the donor.

4For additional analysis on this point, consider also Olson v. United States,
292 U.S. 246, 254-255 (1934) (noting, in a case involving an easement permitting
private land to be flooded from time to time, that "'no private property shall be
appropriated to public uses unless a full and exact equivalent for it be returned to
the owner'" and observing that "[t]hat equivalent is the market value of the
property at the time of the taking contemporaneously paid in money" (quoting
Monongahela Navigation Co. v. United States, 148 U.S. 312, 326 (1893))), and

United States v. Miller, 317 U.S. 369, 373-374 (1943) (observing that "the courts
early adopted, and have retained, the concept of market value" for determining the
(continued...)

-42The fair market value of a real property interest would be expected to change--i.e.,
increase or decrease--based on changes in circumstances.5 But, under the
4(...continued)
value of property taken by Government action). See also United States ex rel.
Tenn. Valley Auth. v. Easement and Right of Way Over a Tract of Land in

Madison Cty., 405 F.2d 305, 307 (6th Cir. 1968) (calculating "just compensation"
after State condemnation of easement); Turner v. United States, 23 Cl. Ct. 447
(1991) (applying Miller in awarding damages with respect to a flooding
easement); United States v. An Easement and Right-of-Way Over 3.74 Acres of
Land, More or Less, in Montgomery Cty., 415 F. Supp. 3d 812, 818-819 (M.D.
Tenn. 2019) (calculating "just compensation" after State condemnation of
easement); 2 Thompson on Real Property, Thomas Editions, sec. 14.04(c)(1)
(2019) ("Ownership has been likened to a bundle of sticks. Each stick represents
one of the total number of possible interests in sum of rights, powers, privileges,
immunities and liabilities. * * * If one conceives of property as likened thus to a
bundle of rights, privileges, immunities and liabilities adaptable to any physical
thing, the fee simple absolute is the largest segment thereof that the political
philosophy of the time and place permits any private individual to obtain."); 9
Thompson on Real Property, supra, sec. 80.08(b)(2)(ii) ("Where the taking is not
total, the 'before and after' rule is commonly used. Just compensation for a partial
taking is calculated either at (a) the value of the remainder before taking minus the
value of the remainder after taking, or (b) the value of the entire tract before the
taking minus the value of the remainder after the taking." (Fn. ref. omitted.)).
5"For those who consider legislative history relevant," Warger v. Shauers,
574 U.S. 40, 48 (2014), I note for context that, in their reports on the bills
proposing what became section 170(h), both the House Ways and Means
Committee and the Senate Finance Committee took as a given the right of an
easement holder to be compensated at fair market value for transferring that right,
s e H.R. Rept. No. 96-1278, at 19 (1980); S. Rept. No. 96-1007, at 14 (1980),
1980-2 C.B. 599, 606. As the House committee report observed:
In general, a deduction is allowed for a charitable contribution in the
amount of the fair market value of the contributed property, defined
(continued...)

-43approach Oakbrook proposes (and the Deed reflects), the only amount guaranteed
to the owner of the easement (i.e., the donee) in the event the real property rights
are converted into cash is a fixed dollar amount equal to the fair market value of
the easement as of the grant date. That fixed dollar amount fails to account for any
market-based appreciation that may have occurred after the grant of the easement.
The formula set out in the Deed exposes the fundamental problem for Oakbrook-under the terms of the Deed, the donee never received the type of "interest[] in real
property" contemplated by section 170(h)(2)(C) and further protected by section
170(h)(5)(A). Put another way, by failing to convey to the donee the unrestricted
right to be compensated at fair market value upon a future transfer or taking, the

5(...continued)
as the price at which the property would change hands between a
willing buyer and a willing seller. Thus, the amount of the deduction
for the contribution of a conservation easement or other restriction is
the fair market value of the interest conveyed to the recipient.
However, because markets generally are not well established for
easements or similar restrictions, the willing buyer/willing seller test
may be difficult to apply (although it may become increasingly
possible to determine the value of conservation easements by
reference to amounts paid for such interests in easement acquisition
programs as such programs increase). * * *

H.R. Rept. No. 96-1278, at 19 (emphasis added); S. Rept. No. 96-1007, at 14,
1980-2 C.B. at 606.

-44Deed so restricted the donee's interest as to cause it to fall outside the purview of

section 170(h)(2)(C).
The shortcoming inherent in the Deed also affects Oakbrook's compliance
with section 170(h)(5)(A). The payment of a predetermined fixed amount would
be insufficient as compensation for a right "protected in perpetuity" if the fair
market value of the property had appreciated since the date the easement was
granted. When a transfer of money to the donee is intended to satisfy the
"perpetuity of purpose" requirement of section 170(h)(5)(A), no reasonable
reading of the statute would bless the donee receiving an amount that is less than
the fair market value of its "interest[] in real property" as of the time of the
conversion of its interest into cash.6

6As the Supreme Court has observed, "[b]ecause the Constitution protects
rather than creates property interests, the existence of a property interest is
determined by reference to 'existing rules or understandings that stem from an
independent source such as state law.'" Phillips v. Wash. Legal Found., 524 U.S.

156, 164 (1998) (quoting Bd. of Regents of State Colls. v. Roth, 408 U.S. 564, 577
(1972)). Tennessee accordingly could mandate that the donor receive all amounts
from any judicial extinguishment. As Oakbrook has not made that point (which
would clinch the case on its behalf), I assume that, under Tennessee law,
Oakbrook is not entitled to such proceeds and that such proceeds would be
allocated to the donor and the donee on the basis of the relevant values of the real
property interests at issue at the time of extinguishment. Cf Tenn. Code Ann.
sec. 29-16-203(c)(1) (2020) (providing rules for the allocation of proceeds
between a landlord and a tenant in an eminent domain proceeding).

-45In short, because the Deed fails to satisfy the provisions of the statute,
Oakbrook would not be entitled to a charitable contribution deduction. The
Commissioner's disallowance of that deduction must therefore be sustained.
II.

The Commissioner's Reading of the Donor Improvements Portion of the
Regulation Does Not Survive Substantive Review Under Step Two of
Chevron.
As explained above, the statute provides a sufficient basis for denying the

deduction at issue here. In light of that conclusion, I need not address the validity
of the regulation. Indeed, we should not. As Justice Frankfurter once cautioned,
when faced with "perplexing questions," "[t]heir difficulty admonishes us to
observe the wise limitations on our function and to confine ourselves to deciding
only what is necessary to the disposition of the immediate case." Whitehouse, 349
U.S. at 372-373. This Court has heeded that admonition in the past. Stromme v.

Commissioner, 138 T.C. at 218 n.8 (citing Whitehouse, 349 U.S. at 372-373,
Ashwander v. Tenn. Valley Auth., 297 U.S. 288, 345-346 (1936) (Brandeis, J.,
concurring), and Liverpool, N.Y. & Phila. S.S. Co. v. Comm'rs of Emigration, 113

U.S. 33, 39 (1885)); accord McLaine v. Commissioner, 138 T.C. at 242. It should
do so here as well.
The opinion of the Court nonetheless has chosen to consider and uphold the
validity of the regulation. In so doing, it endorses the gloss that the Commissioner

-46has applied to the regulation with respect to donor improvements--a topic wholly
absent from the text of the regulation. Because the opinion of the Court upholds
the regulation in its entirety, it becomes necessary to set out my reasons for
disagreeing with the Court's conclusion on this score. As explained in further
detail below, I believe that, if interpreted as the Commissioner requests, the
portion of the regulation addressing donor improvements does not survive
substantive review under step two of the Chevron framework.
Before turning to this point, however, I consider first whether the regulation
at issue needs to be interpreted as the Commissioner urges.
A.

Section 1.170A-14(g)(6) Is Susceptible to Two Potential Readings.

As discussed above section 170(h)(1)(C) allows a deduction only when the
contribution of a qualified real property interest is "exclusively for conservation
purposes," and section 170(h)(5)(A) provides that "[a] contribution shall not be
treated as exclusively for conservation purposes unless the conservation purpose is
protected in perpetuity." (Emphasis added.) Moreover, when it comes to
easements, the grant must be "in perpetuity." Sec. 170(h)(2)(C). Implementing
these provisions, section 1.170A-14(g)(6)(ii), Income Tax Regs., provides that
for a deduction to be allowed under this section, at the time of the gift
the donor must agree that the donation of the perpetual conservation
restriction gives rise to a property right, immediately vested in the

-47donee organization, with 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. * * *
The regulation provides, in my view, a fuller description of what the statute
requires--that is, the conveyance of an "interest[] in real property" "granted in
perpetuity" that does not limit in any way the charity's inherent right to monetize
the fair market value of the conveyed interest at some point in the future. See
supra Part I.A. and B. So far, the regulation is consistent with the statute and is
unobjectionable.
The regulation goes on to explain that "[f]or purposes of this
paragraph (g)(6)(ii), that proportionate value of the donee's property rights shall
remain constant." Sec. 1.170A-14(g)(6)(ii), Income Tax Regs. This sentence is
susceptible to two different readings.
1.

Alternative 1

On the one hand, the sentence could be read to provide that, all else being
equal, the proportionate values of the partial interests owned by the donor and the
donee, respectively, do not change even as the fair market value of the property as
a whole may vary with market conditions. To illustrate, if the value of the
easement at the time the gift is made is $500,000, and the value of the property as

-48a whole at the same time is $1,000,000, the proportionate value of the donee's
property right would be 50% and the proportionate value of the donor's property
right would also be 50%. Thus, if the property remains unchanged by the donor
and is sold after a judicial extinguishment proceeding, as provided in
section 1.170A-14(g)(6)(i), Income Tax Regs., the donee and the donor would
each be entitled to 50% of the proceeds. This would be true whether the property
as a whole had increased in value to, say, $1,500,000 or had decreased in value to,
say, $500,000. In the first instance, the donee would be entitled to $750,000 of the
proceeds (i.e., 50% of $1,500,000), and, in the second, the donee would be entitled
to $250,000 (i.e., 50% of $500,000). In either situation, the donee would receive a
portion of the proceeds attributable to its own interest, taking into account market
developments. Consistent with this reading, the last sentence of section
1.170A-14(g)(6)(ii), Income Tax Regs., provides:
Accordingly, when a change in conditions give rise to the
extinguishment of a perpetual conservation restriction under
paragraph (g)(6)(I) of this section, the donee organization, on a
subsequent sale, exchange, or involuntary conversion of the subject
property, must be entitled to a portion of the proceeds at least equal to
that proportionate value of the perpetual conservation restriction * * *
[Emphasis added.]
This reading of the regulation leaves open the possibility that improvements
by the donor to its own partial real property interest may need to be taken into

-49account if they occur. When such improvements are made, the parties would be
expected to determine the fair market value of their respective interests as of the
time of the improvements and provide for future allocations of proceeds in light of
the improvements. Continuing with the example set out above, assume that three
years after the easement is granted, when the value of the property as a whole has
increased to $2,000,000, the donor decides to build a house worth $2,000,000 on
the property as permitted by the express terms of the easement. E
sec. 1.170A-14(f), Examples (B and (4), Income Tax Regs.; Letter from Michael
S. Gruen, Easements Comm. Chairman, New York Landmarks Conservancy, to
Commissioner of Internal Revenue (Aug. 31, 1983), Respondent's Response to

Order Dated 02/27/2019, at 372 (filed Mar. 27, 2019) (the "NYLC Comment
Letter") (setting out a similar example in comments provided to Treasury in
response to the proposed regulations on conservation easements). Before the
house is built, the value of the easement would be $1,000,000 ($2,000,000 times
the preimprovement share of 50%). After the house is built, one would expect the
value of the easement not to have changed, since the house improved the donor's
retained real property interest. With respect to the donor, the interest in the

unimproved land would be expected to be worth $1,000,000 ($2,000,000 times the
preimprovement share of 50%), and the interest in the improvements would be

-50expected to be worth $2,000,000. If, shortly after completion of the house, the
property were required to be sold to a governmental entity for $4,000,000 to
permit the construction of a highway, the proceeds could be allocated as follows:
Recipient and interest

Amount

Share of total proceeds

Proceeds attributable to
donee's interest

$1,000,000

25%

Proceeds attributable to

1,000,000

25%

2,000,000

50%

4,000,000

100%

donor's interest in
unimproved land

Proceeds attributable to
donor's improvements

Total

As the example illustrates, the "proportionate value of the donee's property
rights" remains constant when compared to the donor's property rights as they
existed at the time of the grant. Although each of those rights is now worth only
25% of the total value of the property as a whole (and they were worth 50% of the
total value of the property as a whole before the house was constructed), they still
have a one-to-one relationship to each other.7 Thus, under this reading of the
7The analysis set out in this Part II.A.l. is consistent with the analysis of the
U.S. Court of Appeals for the Fifth Circuit in PBBM-Rose Hill, Ltd. v.
Commissioner, 900 F.3d 193, 207-208 (5th Cir. 2018). There the Fifth Circuit
made clear that all of the proceeds from a future sale must be taken into account
before the ratio is applied and that those proceeds may not be reduced first to
(continued...)

-51regulation, permitting the donor to be compensated with respect to future
expenditures incurred in improving the donor's own property interest would not be
inconsistent with the text of the regulation.8

7(...continued)
account for donor improvements. Id. at 208 (explaining that, because the deed at
issue "permits the deduction of the value of improvements from the proceeds,
prior to the donee taking its share, the provision fails to meet the requirement set
forth in § 1.170A-14(g)(6)(ii)"); see also Carroll v. Commissioner, 146 T.C. 196,
203 (2016) (addressing a deed that had a similar provision). The Fifth Circuit did
not consider the central analytical issue in this case--how to determine the proper
ratio between the interests of donee and donor when the donor has made
subsequent improvements to its retained interest, thereby increasing the fair
market value of the property as a whole. The analysis set out in the text starts at
the same point as the Fifth Circuit did--"the total amount brought in from the
sale," PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d at 208--and then focuses
on how the donee's and donor's shares are computed before those shares are
applied to the undiminished proceeds from the sale, see also infra note 8.

8Note that, under this reading of the regulation, donor improvements would
not receive priority of compensation as compared to the donee's interest. For
example, if, after the house was built, real property values in the area declined
significantly and the overall fair market value of the property was reduced to
$1,000,000, proceeds from a sale at that time would be distributed as follows:
(continued...)

-522.

Alternative 2

The Commissioner maintains that the regulation does considerably more
work than suggested by the reading under Alternative 1. In his view, the Deed
must provide that the proportionate value of the donee's property rights will
remain constant no matter what the donor does with respect to its own partial real
property interest after the easement is granted. Under this categorical reading, if
the donor makes significant improvements to its own partial interest, the donor

8(...continued)

Recipient and interest

Amount

Share of total proceeds

Proceeds attributable to
donee's interest

$250,000

25%

Proceeds attributable to
donor's interest in
unimproved land

250,000

25%

Proceeds attributable to

500,000

50%

1,000,000

100%

donor's improvements

Total

As before, the "proportionate value of the donee's property rights" remains
constant when compared to the donor's property rights as they existed at the time
of the grant. They still have a one-to-one relationship to each other. And,
although the donee would receive only $250,000 of the overall proceeds, the
reduction from the initial value of $500,000 is attributable to market forces. As
the initial example in the text shows, see supra pp. 47-48, the donee would have
received a similar (reduced) compensation if no improvements had been made and
the overall value of the property at some point had declined to $500,000 from the
initial overall value of $1,000,000.

-53may not be entitled to be compensated for the value of those improvements if the
value of the property is converted into cash in the future.
To illustrate using the example from above, if, shortly after the house is
completed, the property were required to be sold to a governmental entity for
$4,000,000 to permit the construction of a highway, according to the
Commissioner, the proceeds should be allocated as follows:
Recipient and interest

Amount

Share of total proceeds

Proceeds allocated to
donee

$2,000,000

50%

Proceeds allocated to

2,000,000

50%

4,000,000

100%

donor (for unimproved
land and the house)

Total

It is not clear to me how a rule that is focused on the "proportionate value of
the perpetual conservation restriction," sec. 1.170A-14(g)(6)(ii), Income Tax
Regs. (emphasis added), may be read to force the donor to promise in the deed that
the donor will turn over to the donee proceeds properly attributable to the donor's
own retained real property interest. But that is how the Commissioner reads the

-54regulation and what the opinion of the Court accepts today. To my eye, however,
that reading cannot survive step two of the Chevron analysis.°
B.

The Commissioner's Reading of the Donor Improvements Portion of
the Regulation Does Not Survive Substantive Review Under Step
Two of Chevron.

Two preliminary comments before getting to the substantive issue. First,
although in reviewing the validity of a regulation a court generally begins by
considering whether the regulation complies with the APA's procedural
requirements, in this case, it is useful to turn first to the substantive validity of the
regulation, as an understanding of the substantive merits of the issue also sheds
light on the validity of the procedures employed by Treasury in promulgating the
regulation.

Second, for purposes of this analysis, I assume without deciding that the
statute is ambiguous regarding the allocation of proceeds in the event of a judicial
extinguishment of an easement. See Good Fortune Shipping SA v. Commissioner,

897 F.3d 256, 261 (D.C. Cir. 2018) ("[W]e may * * * assume arguendo that the

°Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984),
provides the framework for analysis here unless and until that case is overruled.
S_e_e Baldwin v. United States, 589 U.S. __, 140 S. Ct. 690 (2020) (Thomas, J.,
dissenting from denial of certiorari).

-55statute is ambiguous and proceed to Chevron's second step."), rev'g 148 T.C. 262

(2017).
Now to the merits. The question under Chevron step two is whether the
interpretation of the regulation offered by the Commissioner reflects a permissible
reading of the statute. As the Supreme Court has said:
Chevron directs courts to accept an agency's reasonable resolution of
an ambiguity in a statute that the agency administers. * * *
[Chevron], at 842-843. Even under this deferential standard,
however, "agencies must operate within the bounds of reasonable
interpretation." Utility Air Regulatory Group v. EPA, 573 U.S. __,
__ (2014) (slip op., at 16) (internal quotation marks omitted). * * *
Michigan v. EPA, 576 U.S. __, __, 135 S. Ct. 2699, 2707 (2015); see also Tenn.

Hosp. Assoc. v. Azar, 908 F.3d 1029, 1037-1038 (6th Cir. 2018) (summarizing
standard of review); Atrium Med. Ctr. v. U.S. Dep't of Health & Human Servs.,
766 F.3d 560, 566-568 (6th Cir. 2014) (same). Here, the Commissioner "strayed
far beyond those bounds" when he read section 170(h)(5)(A) to require a donor to
turn over to the donee a portion of the proceeds attributable to its own permissible
retained real property interest. Michigan, 576 U.S. at __, 135 S. Ct. at 2707.
It is well settled that
[w]hether an agency's construction is reasonable depends, in
part, "on the construction's 'fit' with the statutory language, as well
as its conformity to statutory purposes." Goldstein v. SEC, 451 F.3d

873, 881 (D.C. Cir. 2006) (quoting Abbott Labs. v. Young, 920 F.2d

-56984, 988 (D.C. Cir. 1990)). Indeed, "[t]he starting place for any
Chevron Step Two inquiry is the text of the statute." Van Hollen v.

F_E_C, 811 F.3d 486, 492 (D.C. Cir. 2016).
Good Fortune Shipping SA v. Commissioner, 897 F.3d at 262.
I begin at the same starting place--the statutory text. The statute provides a
deduction for a contribution to a qualified organization of a "qualified real
property interest" made "exclusively for conservation purposes." Although the
statute makes clear that there can be no deduction unless the conservation
purposes are "protected in perpetuity," one cannot lose track of the fact that the
deduction is predicated on a "qualified real property interest" being contributed to
a qualified organization. Thus, the most that a qualified organization can be
entitled to receive if its "qualified real property interest" is extinguished in the
future is the full value of that interest. Whatever the purpose of a contribution,
that purpose may not be invoked to require the donor to give the donee, as a
precondition to receiving a deduction for his contribution, a right to receive
compensation properly attributed to the real property interest that the Code permits
the donor to retain. A regulation interpreted to require otherwise cannot be a
permissible interpretation of the statutory text before us. Under that text, the
interest the donee organization must obtain in connection with a contribution is
the "qualified real property interest" transferred to it. Requiring the donor to

-57promise to turn over to the donee proceeds in excess of the fair market value of
that interest is inconsistent with the statutory framework, and nothing in the
"statutory purposes" compels a different conclusion. Goldstein, 451 F.3d at 881

(quoting Abbott Labs., 920 F.2d at 988).
The opinion of the Court admits that "[i]t is conceivable that Treasury could
have drafted a regulation that addressed the possibility of donor improvements,
dealing with [the types of questions noted above] in some rational way." See op.
Ct. p. 30. But the opinion of the Court overlooks the lack of a "rational" solution
to those problems, by noting that "that was a policy decision for Treasury, not this
Court, to make." h 4 In the Court's view, "Treasury's overarching goal [in
prescribing the regulation] was to guarantee that the donee, upon judicial
extinguishment of the easement, would receive the full share of proceeds to which
it was entitled. * * * Treasury exercised reasoned judgment by adhering to a
simple rule that splits sale proceeds in a direct proportional manner." h id.

p. 31.
I agree with the opinion of the Court that the donee should "receive the full
share of proceeds to which it was entitled." See 4 (emphasis added). But a rule
interpreted to require the deed to allocate to the donee not only the proceeds
attributable to its own real property interest but also a share of the proceeds

-58attributable to the interest the Code permits the donor to retain does not
"'"fit"' with the statutory language" and is unreasonable. Good Fortune Shipping

SA v. Commissioner, 897 F.3d at 262 (quoting Goldstein, 451 F.3d at 881).
Calling it a "policy decision" does not change the fact that the rule, as interpreted
by the Commissioner, yields in certain circumstances a result that is entirely
unreasonable and without any basis in the statute. Under Chevron, Treasury is
entitled to draw lines on the page provided by Congress; Chevron does not give
Treasury legislative authority to substitute a different page for the one Congress
enacted into law. See id. (citing Goldstein, 451 F.3d at 881). In short, in my
judgment, if section 1.170A-14(g)(6)(ii), Income Tax Regs., is interpreted as the
Commissioner maintains with respect to all future donor improvements, it is an
unreasonable interpretation of the statute and therefore invalid.¹°

¹°Inote that my conclusion here does not help Oakbrook. The Deed
provides that proceeds from a future sale must first be paid to Oakbrook in respect
of "improvements made by * * * [Oakbrook] in the Conservation Area subsequent
to the date of this Conservation Easement." Deed art. VI, sec. B(2). As explained
above, see supra notes 7 and 8, I do not think that an "improvements are
compensated first" approach is consistent with the real property interests
contemplated by the Code. Accordingly, this aspect of Oakbrook's Deed provides
an additional, and independent, ground for denying the deduction at issue. This
aspect of the Deed also provides one more reason to reserve for another day a
decision on whether the regulation, as interpreted by the Commissioner, is valid
insofar as it addresses improvements made by a donor after the granting of the
easement.

-59III.

If Read as the Commissioner Proposes, the Donor Improvements Portion of
the Regulation Does Not Comply With the Procedural Requirements of the
APA.
Treasury might not have found itself in this predicament under Chevron if it

had followed more carefully the APA's procedural requirements, which are
designed to help agencies consider exactly this type of issue before a rule becomes
final. It is to those requirements that I now turn.

In evaluating whether the categorical reading of the donor improvements
rule advanced by the Commissioner meets the procedural requirements of the
APA, I consider first the framework that governs judicial review in this area. I
then apply that framework to Treasury's rulemaking process in the case before us.
A.

Applicable Framework for Judicial Review

The APA sets out procedural requirements for the promulgation of
legislative rules. As relevant here, an agency wishing to adopt such a rule must
provide notice in the Federal Register. 5 U.S.C. sec. 553(b). In addition,
[a]fter notice required by this section, the agency shall give interested
persons an opportunity to participate in the rule making through
submission of written data, views, or arguments with or without
opportunity for oral presentation. After consideration of the relevant
matter presented, the agency shall incorporate in the rules adopted a
concise general statement of their basis and purpose. * * *

-605 U.S.C. sec. 553(c). Section 706 of the APA, which sets the boundaries for
judicial review of agency actions, provides that a "reviewing court shall * * * hold
unlawful and set aside agency action, findings, and conclusions found to be * * *
arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with

law." 5 U.S.C. sec. 706(2)(A) (2018).
The framework for reviewing whether an agency has complied with the
procedural requirements of the APA is well established. As the Supreme Court
has explained with respect to legislative rules such as the ones before us:
One of the basic procedural requirements of administrative
rulemaking is that an agency must give adequate reasons for its
decisions. The agency "must examine the relevant data and articulate
a satisfactory explanation for its action including a rational
connection between the facts found and the choice made." Motor
Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut.

Automobile Ins. Co., 463 U.S. 29, 43 (1983) (internal quotation
marks omitted). That requirement is satisfied when the agency's
explanation is clear enough that its "path may reasonably be
discerned." Bowman Transp., Inc. v. Arkansas-Best Freight System,

Im, 419 U.S. 281, 286 (1974). But where the agency has failed to
provide even that minimal level of analysis, its action is arbitrary and
capricious and so cannot carry the force of law. See 5 U.S.C.
§ 706(2)(A); State Farm, supra, at 42-43.

Encino Motorcars, LLC v. Navarro, 579 U.S. __, __, 136 S. Ct. 2117, 2125
(2016).

-61When the record does not contain "that minimal level of analysis," "[i]t is
not the role of the courts to speculate on reasons that might have supported an
agency's decision. '[W]e may not supply a reasoned basis for the agency's action
that the agency itself has not given.'" R at __, __, 136 S. Ct. at 2125, 2127

(quoting State Farm, 463 U.S. at 43); see also Atrium Med. Ctr., 766 F.3d at 568
("[A]n agency cannot bolster its case with rationales offered post hoc." (citing

Columbus & S. Ohio Elec. Co. v. Costle, 638 F.2d 910, 912 (6th Cir. 1980))).
As the Supreme Court further explained in Judulang v. Holder, 565 U.S. 42,

52-53 (2011),
[t]he scope of * * * [judicial] review under * * * [section 706(2)(A)
of the APA] is "narrow"; as we have often recognized, "a court is not
to substitute its judgment for that of the agency." Motor Vehicle
Mfrs Ass'n of United States, Inc. v. State Farm Mut. Automobile Ins.
CS, 436 U.S. 29, 43 (1983); see Citizens to Preserve Overton Park,
Inc. v. Volpe, 401 U.S. 402, 416 (1971). Agencies * * * have
expertise and experience in administering their statutes that no court
can properly ignore. But courts retain a role, and an important one, in
ensuring that agencies have engaged in reasoned decisionmaking.
When reviewing an agency action, we must assess, among other
matters, " 'whether the decision was based on a consideration of the
relevant factors and whether there has been a clear error of
judgment.' " State Farm, 463 U.S. at 43 (quoting Bowman Transp.
Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285). That
task involves examining the reasons for agency decisions--or, as the
case may be, the absence of such reasons. See FCC v. Fox Television
Stations, Inc., 556 U.S. 502, 515 (2009) (noting "the requirement that
an agency provide reasoned explanation for its action").

-62Accord Atrium Med. Ctr., 766 F.3d at 567 ("At base, arbitrary and capricious
review functions to 'ensur[e] that agencies have engaged in reasoned
decisionmaking.'" (quoting Judulang, 565 U.S. at 53)).

A recent decision by the U.S. Court of Appeals for the District of Columbia
Circuit aptly summarizes the APA's procedural requirements, particularly as they
address the need for an agency to consider comments:
"The APA's arbitrary-and-capricious standard requires that agency
rules be reasonable and reasonably explained." Nat'l Tel. Coop.
Ass'n v. FCC, 563 F.3d 536, 540 (D.C. Cir. 2009). An agency
violates this standard if it "entirely fail[s] to consider an important
aspect of the problem." State Farm, 463 U.S. at 43. An agency also
violates this standard if it fails to respond to "significant points" and
consider "all relevant factors" raised by the public comments. Home
Box Office, Inc. v. FCC, 567 F.2d 9, 35-36 (D.C. Cir. 1977).
Accordingly, an agency must respond to comments "that can be
thought to challenge a fundamental premise" underlying the proposed
agency decision. MCI WorldCom, Inc. v. FCC, 209 F.3d 760, 765
(D.C. Cir. 2000). An agency need not "discuss every item of fact or
opinion included in the submissions made to it." Del. Dep't of Nat.
Res. & Enytl. Control v. EPA, 785 F.3d 1, 17 (D.C. Cir. 2015)
(citation omitted). An agency's response to public comments,
however, must be sufficient to enable the courts "to see what major
issues of policy were ventilated . . . and why the agency reacted to
them as it did." Id. (citation omitted). Even when an agency "has
significant discretion in deciding how much weight to accord each
statutory factor," that does not mean it is "free to ignore any
individual factor entirely." Tex. Oil & Gas Ass'n v. EPA, 161 F.3d

923, 934 (5th Cir. 1998) (citing Weyerhaeuser Co. v. Costle, 590 F.2d
1011, 1045 (D.C. Cir. 1978)) (evaluating agency's consideration of
statutory factors under arbitrary-and-capricious review).

-63-

Carlson v. Postal Regulatory Comm'n, 938 F.3d 337, 343-344 (D.C. Cir. 2019).
Put another way, "[a]n agency is required to provide a meaningful opportunity for
comments, which means that the agency's mind must be open to considering

them." Grand Canyon Air Tour Coal. v. FAA, 154 F.3d 455, 468 (D.C. Cir. 1998)
(citing McLouth Steel Prods. Corp. v. Thomas, 838 F.2d 1317, 1323 (D.C. Cir.
1988)). "An agency must also demonstrate the rationality of its decision-making
process by responding to those comments that are relevant and significant." I_d.

(citing Prof'l Pilots Fed'n v. FAA, 118 F.3d 758, 763 (D.C. Cir. 1997), and Home

Box Office, 567 F.2d at 35);" see also PPG Indus., Inc. v. Costle, 630 F.2d 462,
466 (6th Cir. 1980) (explaining that the APA requires agencies "to give reasoned
responses to all significant comments in a rulemaking proceeding").
The reasons for the procedural requirements of the APA are not difficult to
understand.

"As the Court of Appeals in Home Box Office, Inc. v. FCC, 567 F.2d 9, 35
n.58 (D.C. Cir. 1977), noted:
In determining what points are significant, the "arbitrary and
capricious" standard of review must be kept in mind. Thus only
comments which, if true, raise points relevant to the agency's
decision and which, if adopted, would require a change in an
agency's proposed rule cast doubt on the reasonableness of a position
taken by the agency. * * *

-64[They] are intended to assist judicial review as well as to provide fair
treatment for persons affected by a rule. To this end there must be an
exchange of views, information, and criticism between interested
persons and the agency. Consequently, the notice required by the
APA, or information subsequently supplied to the public, must
disclose in detail the thinking that has animated the form of a
proposed rule and the data upon which that rule is based. Moreover,
a dialogue is a two-way street: the opportunity to comment is
meaningless unless the agency responds to significant points raised
by the public. A response is also mandated by Overton Park, which
requires a reviewing court to assure itself that all relevant factors have
been considered by the agency.
Home Box Office, 567 F.2d at 35-36 (fn. ref. omitted) (citations omitted); see also

Dismas Charities, Inc. v. U.S. Dep't of Justice, 401 F.3d 666, 678 (6th Cir. 2005)
("[0]ne of the central purposes of the * * * [notice-and-comment requirement] is
to give those with interests affected by rules the chance to participate in the
promulgation of the rules * * * [and] ensure fair treatment for persons to be
affected by regulations.").
Notwithstanding the very good reasons for requiring an agency to respond
to comments,
an agency's failure to address a particular comment or category of
comments is not an APA violation per se. See, e.g., Thompson v.

Clark, 741 F.2d 401, 408 (D.C. Cir. 1984) ("[APA § 553] has never
been interpreted to require the agency to respond to every comment,
or to analyze every issue or alternative raised by the comments, no
matter how insubstantial."). We review an agency's response to
comments under the same arbitrary-and-capricious standard to which
we hold the rest of its actions. See Home Box Office, 567 F.2d at 35

-65n.58. Put simply, "The failure to respond to comments is significant
only insofar as it demonstrates that the agency's decision was not
based on a consideration of the relevant factors." Covad Comme'ns
v. FCC, 450 F.3d 528, 550 (D.C. Cir. 2006) (quoting Thompson, 741

F.2d at 409).
Sherley v. Sebelius, 689 F.3d 776, 784 (D.C. Cir. 2012); see also PPG Indus., 630
F.2d at 466.
B.

Application of Framework for Judicial Review

Having outlined above the framework that governs our review of the
regulation at issue here, I turn next to applying that framework.
1.

Treasury's Rulemaking Process

I begin by summarizing what we know about Treasury's rulemaking process
in this case. On May 23, 1983, Treasury and the Internal Revenue Service (the
"IRS")¹²
issued a notice proposing "regulations relating to contributions of partial
interests in property for conservation purposes." 48 Fed. Reg. 22940 (May 23,
1983). The stated purpose of the notice was "to clearify [sic] the statutory rules in
effect under * * * [the Tax Treatment Extension Act of 1980]." Id. The notice
also observed that "[t]he regulations reflect the major policy decisions made by the
Congress and expressed in * * * [the] committee reports" that accompanied the

¹²Forsimplicity, I refer to both Treasury and the IRS as "Treasury."

-66legislation. Id. The notice spanned roughly eight pages of the Federal Register,
including a one-page preamble. The notice also invited public comments and
explained that "[a] public hearing * * * [would] be held upon written request to
the Commissioner by any person who has submitted written comments." Id.
at 22941. The initial deadline for submitting comments was July 22, 1983. Id.
at 22940. That deadline was subsequently extended to September 1, 1983. See 48

Fed. Reg. 33006 (July 20, 1983).
In response to the notice, Treasury received more than 700 pages of
comments during the extended comment period¹³and at least another 130 pages
after the comment period had closed.¹4 A hearing on the proposed regulation was
requested and was held on September 15, 1983. Thirty-seven members of the
public were originally scheduled to speak at the hearing, and 30 actually spoke.
The hearing lasted more than five hours, and the transcript exceeds 200 pages.
¹³Somepublic comments in the administrative record were transmitted after
the close of the extended comment period on September 1, 1983, but before the
public hearing took place on September 15, 1983.
¹4Althoughsome comments cover overlapping issues, they do not appear to
be mass generated by nonexistent commenters. CL James V. Grimaldi, "U.S.
News: FCC Chief Proposes Revamp of Online Comments," Wall St. J., July 12,
2018, at A3; James V. Grimaldi and Paul Overberg, "Fiduciary Rule Draws A Lot
of Fake Critics," Wall St. J., Dec. 28, 2017, at B1; James V. Grimaldi and Paul
Overberg, "Fake Comments Hit Rule Making--Phony Submissions Target Net

Neutrality," Wall St. J., Dec. 13, 2017, at A1.

-67A Treasury Decision adopting final regulations was published in the Federal

Register on January 14, 1986. See T.D. 8069, 1986-1 C.B. 89, 51 Fed. Reg. 1496
(Jan. 14, 1986). The Treasury Decision spanned roughly 12 pages, of which
approximately 10 contained the actual text of the regulations. That left just over
two pages for Treasury's responses to comments and other administrative matters
(for example, the Paperwork Reduction Act notice and drafting information). Put
another way, Treasury used six columns of the Federal Register to address more
than 700 pages of timely comments and more than 200 pages of public testimony.
Those six columns were intended to cover comments on a "regulation project
consisting of 10 paragraphs, 23 subparagraphs, 30 subdivisions, and 21
examples." See op. Ct. p. 24.
One might wonder how an agency familiar with the D.C. Circuit's decision
in Home Box Office, which by 1986 had been on the books for more than eight
years, could have thought that six columns in the Federal Register sufficed to
"respond[] to significant points raised by the public" in more than 700 pages, or
how that response constituted a "dialogue" between the agency and the public
contemplated by the APA as interpreted by Home Box Office and the authorities
on which it relied. Home Box Office, 567 F.2d at 35-36 (fn. ref. omitted); see also
PPG Indus., 630 F.2d at 466 (reiterating that the APA requires agencies "to give

-68reasoned responses to all significant comments in a rulemaking proceeding").
Even for an agency determined to be exceedingly "concise," six columns in the
Federal Register would be a tight amount of space to show "what major issues of
policy were ventilated . . . and why the agency reacted to them as it did." Carlson,
938 F.3d at 344 (alteration in original) (quoting Del. Dep't of Nat. Res. & Enytl.

Control v. EPA, 785 F.3d 1, 17 (D.C. Cir. 2015)).
But, in my view, Treasury did not think it confronted such a Herculean task.
It is more likely that Treasury was simply following its historical position that the
APA's procedural requirements did not apply to these types of regulations.¹5 As
the Treasury Decision explains, Treasury took the view that "[a]lthough a notice of
proposed rulemaking which solicited public comments was issued, the * * * [IRS]
concluded when the notice was issued that the regulations are interpretative and
that the notice and public comment procedure requirement of 5 U.S.C. 553 did not

¹5SeeKristin E. Hickman, "Coloring Outside the Lines: Examining
Treasury's (Lack of) Compliance with Administrative Procedure Act Rulemaking
Requirements," 82 Notre Dame L. Rev. 1727, 1729 (2007) ("Treasury
acknowledges that APA section 553 governs its various regulatory efforts.
Treasury also contends, however, that most Treasury regulations are interpretive in
character and thus exempt from the public notice and comment requirements by
the APA's own terms." (Fn. ref. omitted.)).

-69apply."¹6 T.D. 8069, 1986-1 C.B. at 92. When an agency engaged in a particular
rulemaking exercise believes the APA does not require it to provide notice and
receive comments at all, it is not difficult to see why that agency might think that a
rather brief explanation, offered as it were out of its own generosity, should be
good enough.¹7
The problem with this position, however, is that Treasury's conclusion that
the regulation at issue here did not require notice and comment was mistaken, as
the opinion of the Court correctly makes clear. See op. Ct. pp. 17-18. In light of
that conclusion, at least with respect to the donor improvements interpretation that
the Commissioner advances before us, the six Federal Register columns that

¹60nthis basis, the Treasury Decision concluded that "the final regulations
do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C.

chapter 6)." T.D. 8069, 1986-1 C.B. 89, 92, 51 Fed. Reg. 1498.
¹7Thereis no doubt that Treasury knows how to provide meaningful
responses to comments when it considers itself bound by the notice and comment
requirements of the APA. See, e.g., T.D. 9846, 2019-9 I.R.B. 583, 84 Fed. Reg.
1838 (Feb. 5, 2019) (Treasury Decision concerning regulations under section 965
spanned 78 pages of the Federal Register, including a preamble of more than 36
pages, of which more than 30 pages responded to comments); T.D. 9790, 2016-45
I.R.B. 540, 81 Fed. Reg. 72858 (Oct. 21, 2016) (Treasury Decision concerning
regulations under section 385 spanned 127 pages of the Federal Register,
including a preamble of more than 90 pages, of which more than 80 pages
responded to comments).

-70Treasury offered fail to provide "that minimal level of analysis" required by the

APA. Encino Motorcars, 579 U.S. at

, 136 S. Ct. at 2125.

As explained further below, Treasury failed to "respond to 'significant
points' and consider 'all relevant factors' raised by the public comments." See

Carlson, 938 F.3d at 344 (quoting Home Box Office, 567 F.2d at 35-36); P
Indus., 630 F.2d at 466.
2.

Application of Framework to Treasury's Rulemaking Process

The question of how to treat donor improvements undertaken after the grant
of the easement in the event the property was subsequently sold was put squarely
before Treasury during the comment period. On August 31, 1983, the New York
Landmarks Conservancy ("NYLC") submitted a comment letter ofjust over
four pages. See NYLC Comment Letter, supra. Two of those pages were
dedicated to the extinguishment provisions at issue here, and nearly half of that
discussion focused on the treatment of future improvements made by the donor.
On future improvements, the NYLC Comment Letter explained as follows:
The structure of § 1.170A-13(g)(5)(ii) [the proposed rule for what is
now section 1.170A-14(g)(6)(ii), Income Tax Regs.,] contemplates
that a ratio of value of the conservation restriction to value of the fee
will be fixed at the time of the donation and will remain in effect
forever thereafter. This formula fails to take into account that
improvements may be made thereafter by the owner which should
properly alter the ratio. For example, (using the facts of example 4 in

-71§ 1.170A-13(f) [the proposed rule for what is now section 1.170A14(f), Income Tax Regs.,] at page 22945), suppose the donation of a
scenic easement upon Greenacre providing limited cluster
development in areas generally not visible from a nearby national
park. At the time of the donation, Greenacre was worth $100,000 and
the easement accounts for 10% of the value. Thereafter, the owner
spends $2 million on the construction of housing units to be rented.
If the easement were subsequently extinguished, the donee

organization would be entitled under § 1.170A-13(g)(5)(ii) to 10% of
the sale price of the entire parcel including the improvements. T_his
would obviously be undesirable to the prospective donor and would
constitute a windfall to the donee organization.

*

*

*

*

*

*

*

In light of the potential inequities described above, the * * * [NYLC]
recommends that the proposed proceeds formula be revised to prevent
such inequities should the Department of the Treasury decide to retain
the provision. However, the * * * [NYLC] strongly recommends
deletion of the entire extinguishment provision.
Respondent's Response to Order Dated 02/27/2019, at 374-375 (emphasis added).
The NYLC Comment Letter supported its recommendation as follows:
The provisions for apportionment of proceeds in the case of
extinguishment of a conservation restriction * * * contain problems
of policy and practical application so pervasive as to cause us to
recommend strongly the deletion of these provisions. The statute was
enacted by Congress to encourage the protection of our significant
natural and built environment through the donation of conservation
restrictions and yet, the proposed provisions would thwart the
purpose of the statute by deterring prospective donors.

Id. at 373.

-72As shown above, the NYLC Comment Letter made clear that, in its view, it
would be inappropriate to condition the availability of the deduction for a
conservation easement on the donor's agreement to turn over to the donee
proceeds attributable to improvements on the real property interest that the Code
permitted the donor to retain. The NYLC Comment Letter expressly tied its
comments both to a specific rule included in the proposed regulations--proposed
section 1.170A-13(g)(5)(ii) (which ultimately became current section 1.170A14(g)(6)(ii), Income Tax Regs.)--and to a specific fact pattern contemplated by the
proposed regulations--Example (4) in proposed section 1.170A-13(f) (which
ultimately became Example (4) in section 1.170A-14(f), Income Tax Regs.). The
NYLC Comment Letter also explained that the proposed rule would "thwart the
purpose of the statute," which, according to NYLC, was to "encourage the
protection of our significant natural and built environment through the donation of

conservation restrictions." R at 373. A proposed rule that required a donor to
turn over to the donee proceeds that were properly attributable to the retained
interest of the donor "would obviously be undesirable to the prospective donor and
would constitute a windfall to the donee organization." E at 374. In light of
these concerns, NYLC recommended that this provision be deleted or, at the very
least, "be revised to prevent * * * [the] inequities" it had identified. Id.

-73The record leaves no doubt that NYLC made comments "'that can be
thought to challenge a fundamental premise' underlying the proposed agency

decision." Carlson, 938 F.3d at 344 (quoting MCI WorldCom, Inc., 209 F.3d
at 765). The preamble to the proposed regulations had explained that the proposed
rules "reflect the major policy decisions made by the Congress." 48 Fed. Reg.
22940. The NYLC Comment Letter in effect countered that the proposed rule on
future donor improvements was contrary to those policy decisions, would lead to
inequitable results that were inconsistent with the statute, and would deter future
contributions. In short, the NYLC Comment Letter offered comments that, "if
adopted, would require a change in an agency's proposed rule." Home Box
Office, 567 F.2d at 35 n.58. Those comments were both "relevant and
significant," requiring a response. Grand Canyon, 154 F.3d at 468; accord

Carlson, 938 F.3d at 343-344.
Unfortunately, however, the Treasury Decision finalizing the regulations
contains no such response. The Treasury Decision changed the sentence on which
the Commissioner relies with respect to donor improvements as follows (with the
relevant change underscored):
(1) Proposed Regulation: "For purposes of this paragraph
(g)(5)(ii), that original minimum proportionate value of the donee's
property rights shall remain constant." 48 Fed. Reg. 22946.

-74(2) Final Regulation: "For purposes of this paragraph (g)(6)(ii),
that proportionate value of the donee's property rights shall remain

constant." T.D. 8069, 1986-1 C.B. at 99.
But Treasury gave no explanation as to how the change addressed the concerns
expressed in the NYLC Comment Letter. In short, Treasury's actions did not
provide "an explanation [that] is clear enough that its 'path may reasonably be
discerned.'" Encino Motorcars, 579 U.S. at __, 136 S. Ct. at 2125 (quoting
Bowman Transp., 419 U.S. at 286).¹8 Nor does Treasury's action provide any
insight on "what major issues of policy were ventilated . . . and why the agency
reacted to them as it did" on this point. Carlson, 938 F.3d at 344 (quoting D_e_L
Dep't of Nat. Res. & Enytl. Control, 785 F.3d at 17). Absent any explanation
from Treasury on why the considerations raised by NYLC should not have been
heeded, "[i]t is not the role of the courts to speculate on reasons that might have
¹8InBowman Transportation, the case that gave rise to the "path may
reasonably be discerned" formulation, the Supreme Court observed that the
Interstate Commerce Commission had in fact provided an explanation of how it
had viewed the relevant evidence and proceeded to discuss that explanation.
Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281, 290 (1974)
("The question before the Commission was whether service on the routes at issue
would be enhanced by permitting new entry, and as to this the performance by
prospective entrants on new routes was of limited relevance. The Commission
noted with respect to transit times that different highway conditions might make
experience there a poor indication of the times applicants could provide on the
routes they sought to enter."). The record here fails to provide even "that minimal
level of analysis," Encino Motorcars, LLC v. Navarro, 579 U.S. __, __, 136 S.
Ct. 2117, 2125 (2016), required by Bowman Transportation.

-75supported an agency's decision. '[W]e may not supply a reasoned basis for the
agency's action that the agency itself has not given.'" Encino Motorcars, 579 U.S.

at __, 136 S. Ct. at 2127 (quoting State Farm, 463 U.S. at 43)."
The opinion of the Court's defense of the future donor improvements
portion of the regulation is unpersuasive. The Court observes that "[t]he preamble
to the final regulations states that, '[a]fter consideration of all comments regarding
the proposed amendments * * * , those amendments are adopted as revised by this
Treasury decision,'" see op. Ct. p. 20 (quoting T.D. 8069, 1986-1 C.B. at 90), and
also notes that "[t]his Court has found a similar statement, coupled with the
administrative record, sufficient to find that Treasury had considered the relevant
matter presented to it," see 4 (citing Wing v. Commissioner, 81 T.C. 17, 31-32
(1983)). But as the U.S. Court of Appeals for the Sixth Circuit has observed,

"The opinion of the Court notes that NYLC "offered no suggestion about
how the subject of donor improvements might be handled; it simply recommended
'deletion of the entire extinguishment provision.'" See op. Ct. p. 22. If the Court
means to suggest that a comment may be disregarded unless it proposes specific
text for how the regulation should be changed, that is not required by the APA.
Once a commenter brings a relevant and significant issue to the agency's attention,
it is the agency's responsibility to determine how that comment should be
implemented. The agency cannot rely on the public to do its homework. See
Home Box Office, 567 F.2d at 35-36 ("[T]he opportunity to comment is
meaningless unless the agency responds to significant points raised by the public."
(Emphasis added; fn. ref. omitted.)).

-76"[w]e are not required to 'take the agency's word that it considered all relevant

matters.'" PPG Indus., 630 F.2d at 466 (quoting Asarco, Inc. v. EPA, 616 F.2d
1153, 1160 (9th Cir. 1980)). Moreover, the opinion of the Court's reliance on
Wing is misplaced, as that case was decided before the Supreme Court and the
Courts of Appeals had articulated fully the framework for judicial review of
legislative rules under the procedural requirements of the APA. See supra

Part III.A.
The opinion of the Court also appears to suggest that because "[o]nly one of
the 90 commenters mentioned donor improvements, and it devoted exactly one
paragraph to this subject," see op. Ct. p. 21, Treasury was not required to respond
to it. This is not so. A "relevant and significant comment" requires a response,
regardless of whether the point is made by many, a few, or even a single
commenter. See, e.g., Carlson, 938 F.3d at 342, 345-349 (invalidating an increase
in the price of stamps, in part, on the basis of comments from Douglas Carlson, "a
postal customer and watchdog"). Moreover, a comment does not lose its
significance because it is presented succinctly. After all, the Commissioner can
hardly complain about NYLC's brevity in this case. The Commissioner's own
position with respect to future donor improvements is based on a single sentence,
and NYLC's comments on this issue were certainly longer than a sentence. In

-77addition, the Commissioner's actions belie any claim that the comment did not
raise a significant issue. As Oakbrook observes in its "Reply to Memorandum
Regarding the Validity of Treas. Reg. Section 1.170A-14(g)(6)(ii)," "[i]t is
disingenuous for Respondent to now argue that comments regarding the * * *
[regulation at issue] are not 'significant,' when Respondent has repeatedly denied
taxpayers' deductions for failure to comply with" that regulation.
The opinion of the Court also seems to suggest that the scope of the
project--the fact that it included "10 paragraphs, 23 subparagraphs, 30
subdivisions, and 21 examples," see op. Ct. p. 24--somehow excuses Treasury's
failure to respond to comments on the provision at issue here. But Treasury chose
the scope of the project. If the project was too large to permit an appropriate
response to all "relevant and significant comments," then Treasury could have
broken the project down into smaller parts. What it could not do is avoid the
"dialogue" required by the APA and say nothing about "significant points raised

by the public." Home Box Office, 567 F.2d at 35-36 (fn. ref. omitted). As the
opinion of the Court acknowledges, the "detail required in a statement of basis and
purpose depends on the subject of the regulation and the nature of the comments
received." See op. Ct. p. 24 (quoting Reytblatt v. U.S. Nuclear Regulatory

Comm'n, 105 F.3d 715, 722 (D.C. Cir. 1997)). Although "[t]his statement need

-78only 'contain sufficient information to allow a court to exercise judicial review,'"

s_ee 4 (quoting United States v. Garner, 767 F.2d 104, 117 (5th Cir. 1985)), it
does require some information. And here Treasury offered no response at all.
Finally, I note that this would not be the first case in which a court
invalidated a Treasury regulation on procedural grounds, as the opinion of the
Court acknowledges. See 4 note 4. Oakbrook's "Reply to Memorandum
Regarding the Validity of Treas. Reg. Section 1.170A-14(g)(6)(ii)" cites, at 5
and 6, the U.S. Court of Appeals for the Federal Circuit's decision in Dominion

Res., Inc. v. United States, 681 F.3d 1313, 1319 (Fed. Cir. 2012). That decision
held (in Part V) that "[t]he associated-property rule in Treasury Regulation
§ 1.263A-11(e)(1)(ii)(B) as applied to property temporarily withdrawn from
service also violates the State Farm requirement that Treasury provide a reasoned
explanation for adopting a regulation."2° R; see also 4 at 1320 (Clevenger, J.,
concurring in part and concurring in the result) ("There appears to be no dispute
among the panel that the government has not articulated any rational explanation
for many details of the regulation before us, from the regulation's first proposal in
2°In addition to holding that the regulation at issue failed to satisfy Motor
Vehicle Mfrs Ass'n of United States, Inc. v. State Farm Mut. Automobile Ins. Co.,

436 U.S. 29 (1983), the majority in Dominion Res., Inc. v. United States, 681 F.3d
1313 (Fed. Cir. 2012), held that the regulation failed under step two of the
Chevron analysis, hence the "also" in the quotation above.

-79the mid-'90s up to the current date. Such a failure makes the regulation
procedurally unlawful. I would reverse on the grounds set forth in part V of the
majority opinion[.]"). The opinion of the Court attempts to distinguish Dominion
Resources from this case on the ground that the majority in Dominion Resources
also held that the regulation there failed under step two of Chevron. See op. Ct.
note 4. But that distinction does not carry the day. The procedural holding in the
case was an independent ground for the decision, as the concurring judge made
clear.2¹ See Woods v. Interstate Realty Co., 337 U.S. 535, 537 (1949) ("[W]here a
decision rests on two or more grounds, none can be relegated to the category of

obiter dictum." (citing United States v. Title Ins. & Tr. Co., 265 U.S. 472, 486
(1924), and Massachusetts

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A79bf75b84dc8348c. Public record. Not legal advice.