A new appeal of a court ruling over tax-advantaged land deals is the latest in what is expected to be a growing trend of lawsuits testing whether old tax regulations can survive modern legal scrutiny.
A notice of appeal filed Friday signals that the U.S. Court of Appeals for the Sixth Circuit will be asked to overturn a U.S. Tax Court ruling in Oakbrook Land Holdings, LLC v. Comm’r, in which a divided court upheld 34-year-old regulations under the Administrative Procedure Act. The APA requires federal agencies to give notice and respond to significant comments for certain rules.
The case is one of a growing set of lawsuits challenging the Treasury Department’s older regulations—issued at a time when the department wasn’t doing as much to protect its rules from administrative law scrutiny. Over roughly the last decade, the department has increasingly written extensive preambles alongside its regulations to explain the logic behind regulatory decisions, potentially warding off challenges.
There is an awareness that the preamble to a Treasury regulation “is essentially going to be viewed as a litigation document,” said Leslie Book, a law professor at the University of Villanova who has written on tax procedure and administration. “That is a very different mindset, from the agency’s perspective today, as compared to 20, 30, or 40 years ago.”
Treasury and the IRS didn’t return requests for comment about how they expect courts to respond to lawsuits alleging that older regulations failed to abide by administrative law requirements.
The regulations upheld in the Oakbrook opinion dealt with charitable tax deductions for donating conservation easements—where property owners give up the right to develop their property in order to preserve it. The donation enables a tax deduction if the requirements of tax code Section 170(h) are met—including that the conservation purpose of the donation is protected “in perpetuity.”
A separate conservation easement case already appealed to the U.S. Court of Appeals for the Eleventh Circuit, Hewitt v. Comm’r, will also deal with the regulations.
Although it can be difficult to pinpoint a single moment at which Treasury began to face a heightened threat of administrative law challenges, tax specialists often point to a 2011 U.S. Supreme Court decision in Mayo Found. for Med. Educ. and Research v. United States as a major development. The high court said it wasn’t inclined “to carve out an approach to administrative review good for tax law only” without justification.
“I think that one sentence in Mayo gave the green light for people to start making more APA-type challenges that they’d been reticent to make earlier,” said Gil Rothenberg, a professor at American University’s Washington College of Law and a former head of the Justice Department Tax Division’s Appellate Section.
While Treasury has responded to the growing challenges by beefing up its preambles, it can’t do that with older regulations that have already been issued.
“As a practical matter, if we don’t put a little bit of a finger on the scale for the older regs, I think we create huge problems for the system,” said Stephen Shay, a senior lecturer at Harvard Law School and former Treasury official.
Age in ‘Oakbrook’
In Oakbrook, the Tax Court held that a provision in the easement deed ran afoul of the perpetuity requirement, as interpreted in the 1986 regulations. Dissenting Senior Judge Mark Holmes wrote that the ruling took “an ax to entire forests of these deductions.”
On appeal, Oakbrook is expected to argue that the 1986 regulations weren’t properly issued under the APA. Most of the Tax Court’s judges signed onto an opinion from Senior Judge Albert Lauber upholding the regulations, reasoning in part that the regulations’ age “gives weight to the presumption of reasonableness.”
Holmes objected to that claim in his dissent, writing that age is “no obstacle” to challenging the regulations’ validity.
Michelle Abroms Levin, an attorney at Sirote & Permutt PC who is representing Oakbrook, suggested it would be particularly unfair to take the age of these specific regulations into account.
She said the IRS didn’t start interpreting the regulations in a way that would invalidate the tax deduction at issue in Oakbrook and similar cases until 2016—meaning there was no reason for taxpayers to challenge the regulations’ validity before then.
“If they are trying to bind taxpayers to the regulations, then they need to sufficiently explain what acts are being regulated,” she said.
Treasury and the IRS didn’t return requests for comment about when the IRS began enforcing the interpretation of the regulations at issue in Oakbrook.
Oakbrook isn’t the only recent decision to bring up the age of tax regulations as a reason to uphold them.
In 2018, the Tax Court upheld 1964 regulations in SIH Partners, LLLP v. Comm’r, writing that Congress’s reenactment of the statute underlying the regulations in the years that followed—without expressing concerns about the regulations—"strongly suggests” Congress didn’t view the regulations as “unreasonable or contrary to the law’s purpose.”
When the U.S. Court of Appeals for the Third Circuit affirmed that decision in 2019, it also discussed the regulations’ age.
If courts do choose to explicitly grant Treasury some leeway based on the age of a regulation, they will have to provide legal justification. Lauber did that in Oakbrook, arguing that Congress has amended the statute underlying the challenged regulations many times without voicing issue with the regulations.
Courts aren’t typically persuaded that Congress’s failure to address regulations during reenactment of underlying statutes is evidence that Congress affirmatively approved of the regulations, Rothenberg said. But at the same time, such failure can suggest the regulations were reasonable enough to avoid raising any issues that Congress felt the need to address, he said.
Drawing the Line
If courts do end up granting Treasury extra latitude when it comes to older regulations in at least some cases, a question that arises is: At what age should regulations start getting that boost?
Kristin Hickman, a University of Minnesota law professor whose past scholarship has raised questions about Treasury compliance with the APA, said she is sympathetic to court wariness to overturn longstanding regulations that predate today’s understandings of administrative law requirements.
But Hickman also noted that arguments alleging Treasury was failing to live up to the law were taking place before the Mayo decision.
“I don’t think it’s right to give Treasury a blanket pass prior to 2011 just because the Supreme Court hadn’t put its foot down yet that tax isn’t exceptional,” she said.