Eleventh Circuit Finds Regulation Invalid Under the APA

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One of the most significant tax cases of 2020 was Oakbrook Land Holdings, a case involving a challenge to regulations in a conservation easement deduction dispute. In Oakbrook, the Tax Court held that the regulation was properly promulgated under the Administrative Procedure Act. In today’s guest post Monte Jackel of Leo Berwick discusses  Hewitt, an important case out of the 11th Circuit, where the appellate court reached a different conclusion. Les

In a prior post on May 15, 2020 “Conservation Easement Donation and the Validity of Tax Regulations”, I wrote about the Oakbrook Land Holdings Tax Court case (154 T.C. 180 (2020), decided a few days earlier.

The Oakbrook court dealt with the same regulation as the Hewitt case (No. 20-13700, 11th Cir. 2021) that is the subject of this follow up commentary.


The issue presented is whether, as required by the Administrative Procedure Act (APA), the IRS considered and responded in the final regulations to all “significant” comments to the proposed regulations relating to the extinguishment rule under the conservation easement deduction regulation that requires a proportion of the extinguishment proceeds to include donor improvements to the property. The IRS and Treasury in the final regulations did not address comments that addressed this rule in its “concise general statement of its [the regulation’s] basis and purpose”. This concise general statement is supposed to allow one to see the objections made to the proposed rule and why the agency, in this case the IRS, reacted to those comments as it did. The IRS, just like any other federal agencies, is required to give adequate reasons for its decisions and it is required to rebut vital relevant or significant comments. All the IRS is to state in the final regulation preamble that it “considered all comments” but the IRS did not respond specifically to the comment.

The Tax Court in Oakbrook Land Holdings ruled that either the comment not specifically responded to was not significant or, if it was significant, it was adequately responded to by the general statement that it considered all comments and by taking into account the administrative record. The Tax Court in that case gave the IRS the benefit of the doubt. However, the Eleventh Circuit Court of Appeals in Hewitt required a specific response to the comments made on the issue and put the burden on the IRS to show that it had adequately responded. Since the latter court held that the response was not adequate, the court held that the regulation was arbitrary, capricious, and/or an abuse of discretion under APA 706(2)(A) and was thus invalid.

And so, what does this all mean? There appear to be two choices. Either the taxpayer has the burden to establish that the comment made was significant and that it was not adequately addressed and the administrative record can be used to justify the IRS action. That is Oakbrook Land Holdings. The other approach is that the IRS must establish why the comment was not significant and why its response was adequate. That is Hewitt. And the reviewing court has the last word on whether the comments made were or were not significant-a huge dose of second-guessing.

What does this all mean for the future? The Hewitt case was an Eleventh Circuit opinion and so, under the Golsen rule, the Tax Court does not have to follow that case for taxpayers not within that circuit. But given the circuit court opinion, will this opinion effectively require the IRS to respond to almost every comment made and give a reason directed to that comment or otherwise risk invalidation of the regulation? That seems to be the risk the IRS will be taking if it does not act conservatively and respond to everything. The very recent foreign tax credit regulations seem to have taken the respond to everything approach and that does add pages and pages onto the regulation and become repetitive in a number of cases.

To make matters worse, the reviewing court will have the final say on what was significant and whether it was adequately responded to. Trying to avoid this issue by saying that a regulation was not a legislative rule does not seem to be a favored position in the courts. Can the OIRA review process help avoid mis-steps by the IRS in this area? That also remains to be seen but as I understand it that is where the burden of compliance should be in the current regulation process.

Will this process eat up precious IRS resources better spent elsewhere? Yes it will. Is it good for the tax system? That remains to be seen. The door is now wide open for taxpayers to step in and test the waters.


  1. Jack Townsend says

    The limits of the Hewitt decision should be recognized. I bullet point the limits (in paragraph numbers rather than real bullet points):

    1 The Hewitt Court held only that the regulation was procedurally invalid.

    2 The Court Hewitt did not hold that the interpretation in the regulation was an invalid interpretation of the statutory text.

    3 Indeed, if the interpretation in the regulation is the best or, possibly, even in equipoise with other reasonable interpretations, the Treasury interpretation should not still control even if the regulation is invalid.

    4 In any event, Treasury can now adopt the same interpretation with Notice and Comment and apply that interpretation retroactively to the enactment of the statute in 1980, although prudence might require that Treasury adopt the interpretation effective 1986 when Treasury notified the public of the interpretation through a procedurally invalid regulation.

    5 There is no unfairness or inequity to a new regulation effective from 1986 because there were no settled expectations of any other interpretation and the public was on notice as to Treasury’s interpretation.

    6 The new regulation should be entitled to Chevron deference whatever that may mean. I argue in an article that Chevron deference in reality is marginal, although much noised about (in much the same way that burden of proof is noised about in tax cases when burden of proof rarely affects outcomes).

    7 Bottom line, Chevron has been abused for political reasons rather than its real outcome determinative effect or the use of deference in a way that comports with long and solid history.

    I present my arguments in two blogs (presented in the order that anyone interested should read them):

    11th Cir. Invalidates Proportionate Sharing Regulations As Procedurally Arbitrary and Capricious for Failing to Address a Significant Comment (Federal Tax Procedure Blog 12/30/21; 12/31/21)

    Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (Federal Tax Procedure Blog 1/6/22; 1/7/22)

    WARNING, my blogs deal with administrative law (particularly the Administrative Procedure Act). Justice Scalia famously said that administrative law is not for sissies. If you are a sissy, don’t bother looking at my postings. And if you are not a sissy and do engage with my blogs and the underlying article, please let me know by comments or by emails to me at jack@tjtaxlaw.com.

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