Amos v. Commissioner: A Challenge to IRS Regulations
An examination of *Amos v. Commissioner*, where a long-standing IRS tax regulation was invalidated based on its procedural history, not its substance.
The case of Hewitt v. Commissioner represents a development in tax law concerning charitable deductions for conservation easements. The dispute, decided by the Eleventh Circuit Court of Appeals, did not center on the environmental value of the donation. Instead, its resolution hinged on the procedural correctness of a Treasury regulation that has been a foundation of IRS enforcement, creating notable legal questions about administrative procedure.
Factual Background of the Case
The case originated with a decision by David and Diana Hewitt to donate a conservation easement on a 415-acre property they owned, which included a private golf course. A conservation easement is a voluntary legal agreement that permanently limits the uses of a piece of land to protect its conservation values. In return for giving up development rights, donors can claim a federal charitable contribution deduction, and the Hewitts claimed one for over $7.8 million.
The core of the legal battle was a clause in the easement deed addressing what would happen if a court ordered the property sold. The deed stipulated that the value of any post-donation improvements made by the Hewitts would be paid back to them from the proceeds. This provision meant their investment in new structures would be recouped before the remaining funds were distributed to the charity.
The IRS Challenge and Tax Court Ruling
The Internal Revenue Service audited the Hewitts’ tax return and disallowed the entire charitable deduction. The IRS’s position was that the clause related to a potential sale violated the “protected in perpetuity” requirement for conservation easements. To qualify for the deduction, the conservation purpose of the easement must be guaranteed to last forever.
The agency’s challenge was based on Treasury Regulation § 1.170A-14. This regulation mandates that upon a judicial extinguishment of an easement, the charity must receive a share of the proceeds at least proportionate to the value of the original donation. The IRS contended that by subtracting the value of the Hewitts’ improvements first, the amount left for the charity could be less than its required proportionate share. The U.S. Tax Court sided with the IRS, finding the deed violated the regulation.
The Eleventh Circuit’s Reversal
On appeal, the Hewitts’ legal strategy shifted to challenging the validity of the Treasury Regulation itself. Their argument before the Eleventh Circuit Court of Appeals was grounded in the Administrative Procedure Act (APA), a federal law that governs how agencies develop and issue regulations. The APA requires agencies to follow a public “notice-and-comment” process for creating new “substantive” rules, which have the force of law.
This process involves publishing a proposed rule and requiring the agency to consider public comments before issuing a final rule. “Interpretive” rules, which merely clarify existing law, are exempt. The Hewitts argued that the regulation dictating the distribution of proceeds was a substantive rule that imposed new obligations, and the Treasury Department had failed to use the required procedure when it was created.
The Eleventh Circuit agreed with this argument. The court determined that the rule imposed a new requirement not explicitly found in the text of the Internal Revenue Code, classifying it as substantive. Because the Treasury Department did not follow the APA’s mandatory rulemaking process, the court held the regulation was procedurally invalid. The Eleventh Circuit reversed the Tax Court’s decision, effectively reinstating the deduction.
Key Takeaways from the Decision
The immediate result of the Hewitt decision is that the Treasury Regulation governing extinguishment proceeds is invalid within the jurisdiction of the Eleventh Circuit, which covers Georgia, Florida, and Alabama. The decision created a “circuit split,” as the Sixth Circuit Court of Appeals had previously upheld the same regulation. The Supreme Court declined to hear an appeal to resolve the circuit split.
The legal landscape has evolved significantly since the ruling. In a 2024 decision, Valley Park Ranch, LLC v. Commissioner, the U.S. Tax Court adopted the Eleventh Circuit’s reasoning from Hewitt. This development means that the IRS can no longer rely on the regulation to deny deductions in the Tax Court, except in cases appealable to the Sixth Circuit, which covers Kentucky, Michigan, Ohio, and Tennessee.
Beyond the specifics of conservation easements, the Hewitt case demonstrates the power of the Administrative Procedure Act in tax law. It shows that taxpayers can successfully challenge the validity of long-standing IRS rules based on procedural flaws in their creation. This places a greater burden on the Treasury Department to ensure it follows proper administrative procedures when issuing regulations.