Conservation Easement Disputes

Syndicated Conservation-Easement Litigation: Proceeds-Regulation Challenges and Valuation Penalties

A charitable contribution deduction for a conservation easement under 26 U.S.C. § 170 requires that the conservation purpose be protected in perpetuity, and the regulation implementing that requirement — Treasury Regulation § 1.170A-14(g)(6)(ii), the proceeds regulation — prescribes how sale proceeds must be divided between donor and donee if the easement is later extinguished in a judicial proceeding. The courts of appeals have divided over whether Treasury validly promulgated that regulation. Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021) held that the regulation, "as read by the Commissioner to prohibit subtracting the value of post-donation improvements to the easement property from the proceeds allocated to the donor and donee in the event of judicial extinguishment," "is arbitrary and capricious under the APA for failing to comply with the APA’s procedural requirements and is thus invalid," because a comment submitted during the 1986 rulemaking "was significant and required a response by Treasury to satisfy the APA’s procedural requirements"; it followed that "the Easement deed’s subtraction of the value of post-donation improvements from the extinguishment proceeds allocated to the donee does not violate § 170(h)(5)’s protected-in-perpetuity requirement." Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022) reached the opposite conclusion and stated that "we find that decision’s reasoning to be unpersuasive": an agency need only "give reasoned responses to all significant comments in a rulemaking proceeding," meaning comments "that can be thought to challenge a fundamental premise" of the proposed rule, and the comments concerning the proceeds formula did not meet that standard. The Sixth Circuit also sustained the regulation on the merits as "a reasonable interpretation of the section" under the then-governing Chevron framework.

The Tax Court has since abandoned its own precedent sustaining the regulation. Valley Park Ranch, LLC v. Commissioner, 162 T.C. 6 (2024) held that "Treas. Reg. § 1.170A-14(g)(6)(ii) is procedurally invalid under the Administrative Procedure Act and that the deed therefore need not comply with its requirements," and announced that "To the extent Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), aff’d, 28 F.4th 700 (6th Cir. 2022), holds otherwise, we will no longer follow it." Applying the statute directly rather than the regulation, the court reasoned that the perpetuity language of section 170(h) "denotes only that the granted property won’t automatically revert to the grantor, his heirs, or assigns," and it construed the deed’s judicial-extinguishment and prior-claims provisions against that statutory standard alone, concluding that a "prior" claim payable ahead of the donee’s share means a claim that preceded the date of the grant. The court expressly declined to reach the regulation’s substantive validity, so extinguishment-clause disputes now turn on the statutory text in the Tax Court, while the regulation remains enforceable in the Sixth Circuit under Oakbrook.

A parallel administrative-law challenge eliminated the reportable-transaction penalties that accompanied many syndicated-easement cases. Green Valley Investors, LLC v. Commissioner, 159 T.C. No. 5 (2022) held that "Notice 2017-10 is a legislative rule, improperly issued by the IRS without notice and comment as required under the APA," reasoning that "identifying a transaction as a listed transaction imposes new duties in the form of reporting obligations and recordkeeping requirements on both taxpayers and their advisors"; the court set the notice aside and granted summary judgment "prohibiting the imposition of I.R.C. § 6662A penalties in these consolidated cases." The Eleventh Circuit reached the same result in a suit brought by a material advisor: Green Rock LLC v. Internal Revenue Service, 104 F.4th 220 (11th Cir. 2024) concluded that "Because the notice was a legislative rule and Congress did not expressly exempt the Service from notice-and-comment rulemaking, Notice 2017-10 is not binding on Green Rock," while observing that "we do not purport to rule on the validity of any listed transaction not before us." The practical consequence is that the accuracy-related penalty on reportable-transaction understatements under 26 U.S.C. § 6662A has dropped out of the syndicated-easement docket where it depended on Notice 2017-10, although the deduction disputes themselves were unaffected.

With the eligibility questions largely resolved, the litigation now centers on valuation, and the decisions follow a consistent pattern: the deduction survives in a sharply reduced amount, and the 40% gross-valuation-misstatement penalty under 26 U.S.C. § 6662 attaches to the difference. In a precedential opinion, Ranch Springs, LLC v. Commissioner, 164 T.C. 6 (2025) held that the income method the taxpayer’s experts used was "erroneous as a matter of law because it equates the value of raw land with the net present value of a hypothetical limestone business conducted on the land," explaining that "A knowledgeable willing buyer would not pay, for one of the assets needed to conduct a business, the entire projected value of the business"; the court valued an easement claimed at $25,814,000 at $335,500, observed that "The claimed value thus exceeded the correct value by $25,478,500 or 7,694%," and sustained the 40% penalty, for which the reasonable-cause defense of section 6664(c)(3) is unavailable. Long Branch Investments, LLC v. Commissioner, T.C. Memo. 2024-111 applied the same framework to consolidated cases, reducing claimed deductions of roughly $37 million to approximately $2.7 million on a comparable-sales valuation of $7,000 per acre and concluding that "These findings trigger application of 40% gross valuation misstatement penalties under section 6662(e)(1)(A) and (h) to those portions of the underpayments attributable to values claimed that exceed the values determined here." The pattern has continued into 2026: North Donald LA Property, LLC v. Commissioner, T.C. Memo. 2026-19 valued an easement claimed at $115,391,000 at $175,824, concluded that "Because the claimed value exceeded the correct value by $115,215,176, more than 200% of the correct amount, the valuation misstatement was ‘gross,’" and sustained the 40% penalty while rejecting the 75% civil fraud penalty because the partnership’s return disclosed the gap between its $804,232 cost basis and the claimed value.

The doctrinal state of the litigation therefore divides along three lines. The proceeds regulation cannot be enforced in the Tax Court or in cases appealable to the Eleventh Circuit, remains enforceable in the Sixth Circuit, and has never been definitively sustained or invalidated on substantive grounds, so a deed’s extinguishment and prior-claims clauses are now tested against the statutory perpetuity requirement rather than the regulatory proceeds formula in most fora. Penalties under section 6662A that depended on Notice 2017-10 cannot be imposed where the notice has been set aside, though the rulings are confined to that notice and do not disturb other listed-transaction designations. And the dispositive battleground is valuation: the Tax Court anchors fair market value to comparable sales and to recent arm’s-length purchases of the property or of partnership interests, rejects discounted-cash-flow valuations of hypothetical mining operations as a matter of law, and, because claimed values in the syndicated transactions routinely exceed twice the determined values, imposes the 40% gross-valuation-misstatement penalty without any reasonable-cause defense — so the partnerships keep a fraction of the claimed deduction and absorb the penalty on the remainder.