On December 29, 2021, in Hewitt v. Commissioner, the Court of Appeals for the 11th Circuit reversed the U.S. Tax Court’s decision regarding the proceeds clause set forth in Treas. Reg. Sec. 1.170A-14(g)(6)(ii). Numerous cases decided by the Tax Court have determined that the proceeds clause in a conservation easement may not allow the donee’s proceeds in the case of condemnation or extinguishment to be reduced by the increase in value of any improvements constructed after the date of the conservation easement.
The circuit court found that the Treasury Department did not properly follow the procedures outlined in the Administrative Procedures Act (APA) at the time of adoption of the final regulations for conservation easements. Specifically, in the final regulations, Treasury did not address significant comments related to the proceeds clause made by the public after the notice of proposed rulemaking. Therefore, the court concluded the Commissioner’s interpretation of Treas. Reg. Sec. 1.170A-14(g)(6)(ii) to disallow the taxpayer’s deduction was arbitrary and capricious and invalid under the APA’s procedural requirements.