May 22, 2022 - Douglas Myser

Eleventh Circuit ruling on formula. In our ongoing coverage of Tax Court cases, we focus on the case of a easement contribution to Pelican Coast Conservancy by David Hewitt, and whether it adhered to rules that would allow the deductions claimed by the Hewitt's as reported in the records of the case. The Eleventh Circuit noted that it had recently rejected arguments that "any amount, including that attributable to improvements, may be subtracted out" from the constant proportionate value of a perpetual conservation restriction under the regulation held in (TOT Property Holdings, LLC, 1 F .4th 1354 (11th Cir. 2021)). However, the court noted, it had not in the earlier case addressed whether Regs. Sec. 1.170A(g)(6)(2) is procedurally valid under the APA. Eleventh Circuit ruling on formula.

Besides arguing that the regulation is procedurally invalid under the APA, the Hewitts contended that the IRS's interpretation of the regulations was arbitrary and capricious. In determining the regulation's validity under the APA, the Eleventh Circuit examined whether the IRS had followed the APA's three step procedure for notice and comment rulemaking, that agencies must: Issue a Notice of proposed rulemaking, Give Interested Parties the opportunity to participate and voice concerns and Consider and respond to comments received. The IRS, before the Court, contended that none of the 13 comments on the regulation were significant to require a response at all.

It was held that the IRS had violated the APA's procedural requirements, finding that the IRS needed to respond to the concerns it had casually dismissed as irrelevant. It then held that the IRS reading of the Regulation was incorrect and gave the appropriate reading.

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