Court Opinion

ID: 5141473
Source: CourtListenerOpinion
Date Created: 2021-12-29 21:00:42.731013+00
Date Added: 2024-06-11T08:24:29.283544
License: Public Domain

USCA11 Case: 20-13700     Date Filed: 12/29/2021       Page: 1 of 36

                                                        [PUBLISH]
                            In the
         United States Court of Appeals
                 For the Eleventh Circuit

                  ____________________

                         No. 20-13700
                  ____________________

DAVID F. HEWITT,
TAMMY K. HEWITT,
                                          Petitioners-Appellants,
versus
COMMISSIONER OF IRS,

                                           Respondent-Appellee.

                  ____________________

            Petition for Review of a Decision of the
                         U.S. Tax Court
                      Agency No. 23809-17
                   ____________________
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2                       Opinion of the Court                20-13700

Before WILSON, LAGOA, Circuit Judges, and MARTINEZ, District
Judge.
LAGOA, Circuit Judge:
       David and Tammy Hewitt seek review of the Tax Court’s
order determining that they were not entitled to carryover a char-
itable contribution deduction for the donation of a conservation
easement (the “Easement”). The Tax Court concluded that the
Easement did not satisfy the “protected-in-perpetuity” require-
ment, see I.R.C. § 170(h)(5), because the Easement deed violated
the judicial extinguishment proceeds formula set forth in Treas.
Reg. § 1.170A-14(g)(6)(ii). Specifically, in the event of judicial ex-
tinguishment, the Easement deed subtracts the value of post-dona-
tion improvements to the property from the extinguishment pro-
ceeds before determining the donee’s share of the proceeds, which
the Commissioner asserts violated § 1.170A-14(g)(6)(ii) and, thus,
§ 170(h)(5)’s protected-in-perpetuity requirement.
       On appeal, the Hewitts make several arguments as to why
the Tax Court erred. They contend that the Commissioner’s inter-
pretation of § 1.170A-14(g)(6)(ii) is incorrect, as subtraction of the
value of post-donation improvements from the proceeds allocated
to the donee is the “better reading” of the regulation. As to this
interpretation argument, we recently determined, in TOT Prop-
erty Holdings, LLC v. Commissioner, that § 1.170A-14(g)(6)(ii)
“does not indicate that any amount, including that attributable to
improvements, may be subtracted out.” 1 F.4th 1354, 1363 (11th
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20-13700                  Opinion of the Court                             3

Cir. 2021) (quoting PBBM-Rose Hill, Ltd. v. Comm’r, 900 F.3d 193,
208 (5th Cir. 2018)).
        But, based on the taxpayers’ concession in TOT, id. at 1362
& n.13, we did not address whether § 1.170A-14(g)(6)(ii) was pro-
cedurally valid under the Administrative Procedures Act (“APA”)
or substantively valid under the framework in Chevron, U.S.A.,
Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). Unlike the
taxpayers in TOT, the Hewitts challenge the regulation’s validity
on appeal. Specifically, the Hewitts argue that the Commissioner’s
interpretation of § 1.170A-14(g)(6)(ii)—prohibiting the subtraction
of the value of post-donation improvements to the property on
which a conservation easement exists from the proceeds in the
event of judicial extinguishment—is arbitrary and capricious for vi-
olating the procedural requirements of the APA, see 5 U.S.C. § 706,
because the U.S. Treasury Department failed to respond to signifi-
cant comments as to the improvements issue in promulgating the
regulation. The Hewitts further argue that the regulation is sub-
stantively invalid under Chevron as an unreasonable interpretation
of the statute.
       After careful review, and for the reasons explained below,
we conclude that the Commissioner’s interpretation of § 1.170A-
14(g)(6)(ii) is arbitrary and capricious and violates the APA’s proce-
dural requirements. 1 And because we find the Commissioner’s

1Because we conclude that § 1.170A-14(g)(6)(ii) is procedurally invalid under
the APA, we do not reach the Hewitts’ Chevron-related arguments.
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4                            Opinion of the Court                     20-13700

interpretation of § 1.170A-14(g)(6)(ii) to be invalid under the APA,
the Easement deed’s subtraction of the value of post-donation im-
provements from the extinguishment proceeds allocated to the do-
nee does not violate § 170(h)(5)’s protected-in-perpetuity require-
ment. Accordingly, we reverse the Tax Court’s order disallowing
the Hewitts’ carryover deduction for the conservation easement
and remand for further proceedings.
       I.      FACTUAL AND PROCEDURAL BACKGROUND
        David and Tammy Hewitt 2 reside in Randolph County, Al-
abama, near Alabama’s border with Georgia. David’s father
moved to Alabama in the early 1950s, acquiring land there to raise
cattle, farm, and harvest timber. In the early 1990s, his father trans-
ferred a portion of this land to David’s sister.
        David subsequently acquired 257.2 acres of land in Ran-
dolph County (the “Property”) in four transactions. His sister
transferred approximately 232 acres to David through a series of
three warranty deeds dated January 27, 1997, January 23, 1998, and
July 1, 1998. In 2001, David purchased 25 more acres of adjected
land and bought out the interest of two unrelated persons who co-
owned a 400-acre parcel with his father. By 2012, David and his
sister owned approximately 1,325 acres in Randolph and Cleburne
Counties, Alabama. The cumulative property owned between the
two siblings had no zoning ordinances at the time of the

2   We refer to the Hewitts individually by their first names where relevant.
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20-13700               Opinion of the Court                       5

Easement’s grant and consisted of pastureland along a county road
and wooded areas with steep topography, rough terrain, and lim-
ited road access. David has used, and continues to use, portions of
the Property as a cattle ranch.
       On December 28, 2012, David donated the Easement on the
Property to and for the benefit of Pelican Coast Conservancy, Inc.,
a wholly owned subsidiary of the Atlantic Coast Conservancy, Inc.
(collectively, “the Conservancy”), through a document entitled
Deed of Conservation Easement, which was recorded with the
Probate Judge for Randolph County the same day. The Easement
deed provides that the Easement’s purpose is “to assure that the
Property will be retained forever predominately in its natural con-
dition and to prevent any use of the Property that will impair or
interfere with the Conservation Values as set forth in this Ease-
ment.” The Easement deed sets forth a list of “prohibited uses”
and permits the Conservancy the right to enter upon the Property
at reasonable times to preserve and protect the conservation fea-
tures. The deed also contains a “permitted uses” section, which
reserved to the Hewitts the right to build certain types of improve-
ments on certain areas of the Property.
      Additionally, section 15 of the deed governs judicial extin-
guishment of the Easement. Subsection 15.1 provides:
      Extinguishment. If circumstances arise in the future
      such as render the purpose of this Easement impossi-
      ble to accomplish, this Easement can only be termi-
      nated or extinguished, whether in whole or in part,
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6                      Opinion of the Court                   20-13700

      by judicial proceedings in a court of competent juris-
      diction, and the amount of the proceeds to which
      Conservancy shall be entitled, after the satisfaction or
      prior claims, from any sale, exchange, or involuntary
      conversion of all or any portion of the Property sub-
      sequent to such termination or extinguishment
      (herein collectively “Extinguishment”) shall be deter-
      mined to be at least equal to the perpetual conserva-
      tion restriction’s proportionate value unless other-
      wise provided by Alabama law at the time, in accord-
      ance with Subsection 15.2 . . . .
In turn, subsection 15.2 provides:
      Proceeds. This Easement constitutes a real property
      interest immediately vested in Conservancy. For the
      purposes of this Subsection, the parties stipulate that
      this Easement shall have at the time of Extinguish-
      ment a fair market value determined by multiplying
      the then fair market value of the Property unencum-
      bered by the Easement (minus any increase in value
      after the date of this grant attributable to improve-
      ments) by the ratio of the value of the Easement at
      the time of this grant to the value of the Property,
      without deduction for the value of the Easement, at
      the time of this grant. . . . For the purposes of this par-
      agraph, the ratio of the value of the Easement to the
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20-13700               Opinion of the Court                        7

      value of the Property unencumbered by the Ease-
      ment shall remain constant.
(emphasis added).
       As stipulated by the parties, the Conservancy provided Da-
vid with a contemporaneous written acknowledgement within the
meaning of I.R.C. § 170(f)(8), and the Conservancy was a “qualified
organization” within the meaning of I.R.C. § 170(h)(3) at the time
of the Easement donation. The Commissioner also does not con-
test that the Property complied with the requirements of I.R.C.
§ 170(h)(4)(A)(ii)–(iii).
       While David is the sole owner of the Property, the Hewitts
jointly filed their tax returns for the relevant tax years at issue—
2012, 2013, and 2014. For the 2012 tax year, the Hewitts reported
a noncash, charitable contribution for the donation of the Ease-
ment in the amount of $2,788,000. An appraisal of the Easement
was attached to their 2012 return, which the Commissioner—only
for the purposes of this appeal—does not contest was a qualified
appraisal prepared by a qualified appraiser as required by I.R.C. §
170(f)(11)(E). However, the Hewitts and the Commissioner do not
stipulate to the appraisal’s contents. Due to limitations on charita-
ble contribution deductions, the deduction for the Easement con-
tribution was $57,738.
       The Hewitts timely filed their federal income tax returns for
the 2013 and 2014 tax years. The 2013 return claimed a noncash,
charitable contribution carryforward deduction from the 2012
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8                      Opinion of the Court                20-13700

charitable contribution deduction for the Easement in the amount
of $1,868,782, and the 2014 return carried the same deduction in
the amount of $861,480.
       On August 16, 2017, the Commissioner timely mailed a stat-
utory notice of deficiency (“NOD”) for the 2013 and 2014 taxable
years to the Hewitts. The NOD provided that the Hewitts owed:
(1) a $336,894 tax deficiency and an I.R.C. § 6662 penalty of
$134,757.60 for the 2013 year; and (2) a $347,878 tax deficiency and
$136,458.40 penalty for the 2014 year. The NOD disallowed
$2,730,262 of the charitable contribution carryover deduction from
2012 for 2013 and 2014.
       On November 14, 2017, the Hewitts timely filed a petition
for redetermination with the Tax Court, challenging the disallow-
ances for the carryover deductions related to the Easement in the
NOD. In a pretrial memorandum, the Commissioner argued that
the Easement deed failed to comply with Treas. Reg. § 1.170A-
14(g)(6) due to an “improvements clause” included therein. The
case proceeded to trial. In their post-trial brief, the Hewitts con-
tended, among other things, that § 1.170A-14(g)(6)(ii), as inter-
preted by the Commissioner, was not a valid exercise of Treasury’s
rulemaking authority.
      On June 17, 2020, the Tax Court issued a memorandum
opinion determining that the Hewitts were not entitled to carryo-
ver the charitable contribution deduction for the donation of the
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20-13700                 Opinion of the Court                             9

Easement. 3 The Tax Court explained that section 15 of the deed
“subtracts the value of posteasement improvements before deter-
mining the Conservancy’s share of the extinguishment proceeds
and fails to allocate the extinguishment proceeds in accordance
with” § 1.170A-14(g)(6), as that regulation “does not permit the
value of posteasement improvements to be subtracted from the
proceeds before determining the donee’s share.” The Tax Court
rejected the Hewitts’ argument that an easement donee’s right to
any extinguishment proceeds is limited to those from the property
as it existed at the time of the grant as contrary to the regulation’s
text. Therefore, the Tax Court explained that “[f]or purposes of
the extinguishment provisions, the subject property may change,
but the donee’s property right to the extinguishment proceeds may
not.” The Tax Court also rejected the Hewitts’ challenge to §
1.170A-14(g)(6)(ii)’s procedural and substantive validity based on
its decision in Oakbrook Land Holdings, LLC v. Comm’r, 154 T.C.
180 (2020).
       This appeal ensued.
                  II.     STANDARD OF REVIEW
        We review the Tax Court’s legal conclusions de novo and
its factual findings for clear error. Kardash v. Comm’r, 866 F.3d
1249, 1252 (11th Cir. 2017).

3 The Tax Court found the Hewitts were not liable for the penalties assessed
against them in the NOD, and the Commissioner does not challenge this rul-
ing on appeal.
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10                      Opinion of the Court                  20-13700

                          III.      ANALYSIS
         Under the APA, a “reviewing court shall . . . hold unlawful
and set aside agency action, findings, and conclusions found to
be . . . arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.” 5 U.S.C. § 706(2)(A). Our review stand-
ard is “narrow,” and we “will not substitute [our] judgment for that
of the agency.” Lloyd Noland Hosp. & Clinic v. Heckler, 762 F.2d
1561, 1565 (11th Cir. 1985). However, “[i]n employing this defer-
ential standard of review,” we do “not rubber stamp the action of
the agency.” Port of Jacksonville Mar. Ad Hoc Comm., Inc. v. U.S.
Coast Guard, 788 F.2d 705, 708 (11th Cir. 1986). Rather, “[w]e must
determine whether the decision was based on a consideration of
the relevant factors and whether there was a clear judgment error.”
Lloyd Noland, 762 F.2d at 1565 (citing Motor Vehicles Mfrs. Ass’n
v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). Further-
more, “[w]e may not supply a reasoned basis for the agency’s ac-
tion that the agency itself has not given,” although we will “uphold
a decision of less than ideal clarity if the agency’s path may reason-
ably be discerned.” State Farm, 463 U.S. at 43 (first quoting SEC v.
Chenery Corp., 332 U.S. 194, 196 (1974), then quoting Bowman
Transp. Inc. v. Ark.-Best Freight Sys., 419 U.S. 281, 286 (1974)); ac-
cord Judulang v. Holder, 565 U.S. 42, 52–55 (2011). And “courts
may not accept . . . counsel’s post hoc rationalizations for agency
actions,” as “an agency’s action must be upheld, if at all, on the ba-
sis articulated by the agency itself.” State Farm, 565 U.S. at 50.
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20-13700               Opinion of the Court                        11

       The APA “prescribes a three-step procedure for so-called
‘notice-and-comment rulemaking.’” Perez v. Mortg. Bankers
Ass’n, 575 U.S. 92, 96 (2015); accord 5 U.S.C. § 553. First, an agency
“must issue a ‘[g]eneral notice of proposed rulemaking,’ ordinarily
by publication in the Federal Register.” Perez, 575 U.S. at 96 (alter-
ation in original) (quoting § 553(b)). Second, “if ‘notice [is] re-
quired,’ the agency must ‘give interested persons an opportunity
to participate in the rule making through submission of written
data, views, or arguments,’” and the agency “must consider and
respond to significant comments received during the period for
public comment.” Id. (alteration in original) (quoting § 553(c)).
Third, in promulgating the final rule, the agency “must include in
the rule’s text ‘a concise general statement of [its] basis and pur-
pose.’” Id. (alteration in original) (quoting § 553(c)). As the Su-
preme Court has explained, “Rules issued through the notice-and-
comment process are often referred to as ‘legislative rules’ because
they have the ‘force and effect of law.’” Id. (quoting Chrysler Corp.
v. Brown, 441 U.S. 281, 302–03 (1979)).
        Thus, “[t]he APA requires the agency to incorporate into a
new rule a concise general statement of its basis and purpose.”
Lloyd Noland, 762 F.2d at 1566. As we have explained, “state-
ment[s] may vary, but should fully explain the factual and legal ba-
sis for the rule.” Id. Indeed, “[b]asis and purpose statements must
enable the reviewing court to see the objections and why the
agency reacted to them as it did,” id., as “[o]ne of the basic proce-
dural requirements of administrative rulemaking is that an agency
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12                     Opinion of the Court                 20-13700

must give adequate reasons for its decisions,” Encino Motorcars,
LLC v. Navarro, 579 U.S. 211, 221 (2016). And, in the statement,
the agency must rebut “vital relevant” or significant comments.
See Lloyd Noland, 762 F.2d at 1567; Hussion v. Madigan, 950 F.2d
1546, 1554 (11th Cir. 1992) (“Under the ‘arbitrary and capricious'
standard of review, an agency is . . . required to respond to signifi-
cant comments that cast doubt on the reasonableness of the rule
the agency adopts.” (quoting Balt. Gas & Elec. Co. v. United States,
817 F.2d 108, 116 (D.C. Cir. 1987))). The purpose of notice-and-
comment rulemaking is to “give[] affected parties fair warning of
potential changes in the law and an opportunity to be heard on
those changes” while “afford[ing] the agency a chance to avoid er-
rors and make a more informed decision.” Azar v. Allina Health
Servs., 139 S. Ct. 1804, 1816 (2019).
       Turning to the statutory and regulatory tax provisions at
hand, I.R.C. § 170(a) generally allows taxpayers to deduct certain
charitable contributions. While a taxpayer normally is not entitled
to deduct the donation of “an interest in property which consists of
less than the taxpayer’s entire interest in such property,” id.
§ 170(f)(3)(A), an exception is made for a “qualified conservation
contribution,” id. § 170(f)(3)(B)(iii), (h); accord TOT, 1 F.4th at
1361. Congress created this exception, codified at I.R.C.
§ 170(f)(3)(B)(iii), (h), in 1980. Tax Treatment Extension Act of
1980, Pub. L. No. 96-541, § 6, 94 Stat. 3204, 3206; Oakbrook, 154
T.C. at 185. Under § 170(h), for a contribution to be a “qualified
conservation contribution,” the contribution must be “(A) of a
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20-13700               Opinion of the Court                        13

qualified real property interest, (B) to a qualified organization, (C)
exclusively for conservation purposes.” § 170(h)(1). A “qualified
real property interest” includes “a restriction (granted in perpetu-
ity) on the use which may be made of the real property.”
170(h)(2)(C). Additionally, § 170(h)(5)(A) provides that, for pur-
poses of subsection (h), “[a] contribution shall not be treated as ex-
clusively for conservation purposes unless the conservation pur-
pose is protected in perpetuity.” The statute, however, does not
define the “protected in perpetuity” requirement. TOT, 1 F.4th at
1362.
       On May 23, 1983, Treasury issued a notice of proposed rule-
making with “proposed regulations relating to contributions of
partial interests in property for conservation purposes.” Qualified
Conservation Contribution; Proposed Rulemaking, 48 Fed. Reg.
22,940, 22,940 (May 23, 1983). Then, on January 14, 1986, Treasury
issued final regulations, including the regulation at issue in this
case—Treas. Reg. § 1.170A-14(g)(6)—governing the allocation of
proceeds between the donor and donee in the event of judicial ex-
tinguishment of a donated conservation easement. Income Taxes;
Qualified Conservation Contributions, 51 Fed. Reg. 1496 (Jan. 14,
1986). Section 1.170A-14(g)(6), titled “Extinguishment,” provides:
      (i) In general. If a subsequent unexpected change in
      the conditions surrounding the property that is the
      subject of a donation under this paragraph can make
      impossible or impractical the continued use of the
      property for conservation purposes, the conservation
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14                    Opinion of the Court                 20-13700

      purpose can nonetheless be treated as protected in
      perpetuity if the restrictions are extinguished by judi-
      cial proceeding and all of the donee’s proceeds (deter-
      mined under paragraph (g)(6)(ii) of this section) from
      a subsequent sale or exchange of the property are
      used by the donee organization in a manner con-
      sistent with the conservation purposes of the original
      contribution.
      (ii) Proceeds. . . . [F]or a deduction to be allowed un-
      der this section, at the time of the gift the donor must
      agree that the donation of the perpetual conservation
      restriction gives rise to a property right, immediately
      vested in the donee organization, with a fair market
      value that is at least equal to the proportionate value
      that the perpetual conservation restriction at the time
      of the gift, bears to the value of the property as a
      whole at that time. . . . For purposes of this para-
      graph (g)(6)(ii), that proportionate value of the do-
      nee’s property rights shall remain constant. Accord-
      ingly, when a change in conditions give rise to the ex-
      tinguishment of a perpetual conservation restriction
      under paragraph (g)(6)(i) of this section, the donee or-
      ganization, on a subsequent sale, exchange, or invol-
      untary conversion of the subject property, must be
      entitled to a portion of the proceeds at least equal to
      that proportionate value of the perpetual
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20-13700               Opinion of the Court                        15

      conservation restriction, unless state law provides
      that the donor is entitled to the full proceeds from the
      conversion without regard to the terms of the prior
      perpetual conservation restriction.
        To summarize, “the regulations require that the donee of an
easement be granted a vested right to the value of judicial sale pro-
ceeds (e.g. in condemnation) multiplied by ‘a fraction equal to the
value of the conservation easement at the time of the gift, divided
by the value of the property as a whole at that time.’” TOT, 1 F.4th
at 1362 (quoting PBBM-Rose Hill, 900 F.3d at 207). And, in TOT,
we found that § 1.170A-14(g)(6)(ii)’s proceeds formula “does not al-
low for ‘any increase in value after the date of th[e] grant attribut-
able to improvements’ to be subtracted from the extinguish-
ment . . . proceeds before the fraction is applied to the proceeds.”
Id. at 1363 (alteration in original). But while we agreed with the
Commissioner’s interpretation of the proceeds regulation in TOT,
we expressly did not consider the validity of the regulation under
the APA, as the taxpayers there did not make such a challenge. Id.
at 1362 n.13; see also PBBM-Rose Hill, 900 F.3d at 209 n.8 (declining
to address a challenge to § 1.170A-14(g)(6)(ii)’s validity as the tax-
payer failed to make the argument below).
       Unlike TOT, the Hewitts assert that Treasury failed to com-
ply with the procedural requirements of the APA in promulgating
Treas. Reg. § 1.170A-14(g)(6)(ii). Specifically, the Hewitts contend
that the administrative record demonstrates that comments raising
concerns with § 1.170A-14(g)(6)(ii) were filed during the
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16                     Opinion of the Court                20-13700

rulemaking process, that those comments were “significant” such
that they required a response from Treasury, and that Treasury
failed to adequately respond to those significant comments in the
final regulation’s “basis and purpose” statement, in violation of the
APA’s procedural requirements. As such, the Hewitts contend that
§ 1.170A-14(g)(6)(ii), as interpreted by the Commissioner to pro-
hibit the subtraction of the value of post-donation improvements
to the easement property in the proceeds allocated to the donee in
the event of judicial extinguishment, is arbitrary and capricious un-
der the APA.
       As previously noted, Treasury issued a notice of proposed
rulemaking following Congress’s enaction of § 170(h) for “pro-
posed regulations relating to contributions of partial interests in
property for conservation purposes” and to clarify “the statutory
rules in effect under [the Tax Treatment Extension Act of 1980].”
48 Fed. Reg. at 22,940. One of the subparagraphs in the proposed
regulations ultimately became § 1.170A-14(g)(6). Id. at 22,946–47.
Of relevance here, the preamble to the proposed rulemaking ex-
plained that section 6 of that act “made extensive changes in the
existing statute, eliminated the expiration date, and incorporated
the relevant language into a new section 170(h).” Id. at 22,940. It
further provided that “[t]he regulations reflect[ed] the major policy
decisions made by the Congress and expressed in . . . committee
reports.” Id. And Treasury stated that it would consider any writ-
ten comments submitted before adopting the proposed regula-
tions. Id. at 22,941.
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20-13700               Opinion of the Court                       17

        Following Treasury’s request for public comments, it re-
ceived more than 700 pages of commentary from ninety organiza-
tions and individuals. Of the ninety commenters, thirteen offered
comments as to the proposed extinguishment proceeds regulation.
Oakbrook, 154 T.C. at 186. The Hewitts contend that seven of
those thirteen commenters “expressed concern that allocation of
post-extinguishment proceeds under the proposed Proceeds Regu-
lation was unworkable, did not reflect the reality of the donee’s in-
terest, or could result in an unfair loss to the property owner and a
corresponding windfall for the donee.”
        Turning to the most detailed comment, the New York Land-
marks Conservancy (“NYLC”) urged Treasury to delete the pro-
posed proceeds regulation because it contained pervasive “prob-
lems of policy and practical application.” NYLC stated that while
Congress enacted the statute “to encourage the protection of [the]
. . . environment through the donation of conservation re-
strictions,” the proposed regulation “would thwart the purpose of
the statute by deterring prospective donors,” as those donors
would “likely . . . be discouraged from making a donation which
may tie themselves or future owners to share proceeds of a sale or
exchange with the charitable organization [donee] under circum-
stances which cannot possibly be foreseen.” NYLC explained that
prospective donors frequently were concerned about “perpetuity”
issues, which were “mollified upon the donor’s recognition that
common law permits the extinguishment of restrictions when they
no longer serve the original intended purposes.” But NYLC
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18                     Opinion of the Court                 20-13700

believed “[t]he prospect of extinguishment would no longer mol-
lify these fears if a split of proceeds under unknown circumstances
would be required.” As such, and because “the possibility of extin-
guishment is relatively remote,” NYLC stated it was “unnecessary”
for Treasury “to provide for allocation of proceeds after extinguish-
ment.”
       NYLC also specifically commented on the issue of whether
the value of post-donation improvements to the easement prop-
erty should be included or excluded from the extinguishment pro-
ceeds formula contained in the regulation. NYLC stated that the
regulation’s structure “contemplates that a ratio of value of the
conservation restriction to value of the fee will be fixed at the time
of the donation and will remain in effect forever thereafter.” But
NYLC asserted that the formula “fail[ed] to take into account that
improvements may be made thereafter by the owner which should
properly alter the ratio.” In support of its concern, NYLC pre-
sented a mathematical example, which was based on a fact pattern
in the proposed regulations, see 48 Fed. Reg. at 22,945, to show
that requiring the prospective donor to turn over extinguishment
proceeds attributable to post-donation improvements to the donee
“would obviously be undesirable to the prospective donor and
would constitute a windfall to the donee organization.” See Oak-
brook, 154 T.C. at 224 (Toro, J., concurring in result). Thus, “in
light of the potential inequities,” NYLC recommended “that the
proposed proceeds formula be revised to prevent such inequities
should the . . . Treasury decide to retain the provision” but
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20-13700               Opinion of the Court                       19

“strongly recommend[ed] deletion of the entire extinguishment
provision.” (emphasis added).
        While NYLC offered the most extensive comments on the
proposed proceeds regulation—including being the only com-
menter that addressed the allocation of the value of proceeds at-
tributable to future improvements by the donor—other comment-
ers expressed criticism or urged caution as to the proposed extin-
guishment regulations. The Landmarks Preservation Council of
Illinois, for example, “urge[d] caution in the treatment of the con-
cept of ‘extinguishment’ in the regulations,” as “[t]he discussion in
the regulations of the conditions under which that binding agree-
ment may be abrogated lends an undesirable air of legitimacy to
the concept of ‘extinguishment.’” It also warned that the regula-
tions could “create a potential disincentive to the donation of ease-
ments,” noting that “[t]he obligation imposed on the donor or sub-
sequent owner to pay to the donee organization an amount at least
equal to the original proportionate value of the easement” could
place “the donor at risk for an amount of money”—e.g., payments
to a third party lender—“for which he may not be compensated by
the disposition of the proceeds of sale.” The Land Trust Exchange
stated that the proposed proceeds regulation “may result in donors
or donees having to pay real estate transfer taxes” and that it was
“unnecessary.” The Trust for Public Land stated that it had “seri-
ous doubts whether the provision . . . could be enforced against
anyone other than the original donor of the easement” and that
“the tax benefit rule is a satisfactory means of meeting any concern
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20                         Opinion of the Court                       20-13700

the IRS may have that a donor might receive the double benefit of
an easement deduction followed by later recovery of the value do-
nated.” The Brandywine Conservancy cautioned that the regula-
tion “may unnecessarily restrict the amount, payable to the holder
of an easement, if changes in surrounding territory have made the
easement proportionately more valuable than the retained inter-
est” and that “[t]he donee should be entitled to proceeds equal to
the greater of its original proportionate value or its proportionate
value at the time of the extinguishment.” And the Nature Conserv-
ancy and the Maine Coast Heritage Trust both mentioned that the
regulation should be “clear” that the original proportionate value
is the minimum that a donee will receive in extinguishment pro-
ceeds. 4
       After a public hearing, Treasury adopted the proposed reg-
ulations with revisions. 51 Fed. Reg. at 1496. In the preamble to
the final rulemaking, Treasury stated that “[t]hese regulations

4 As to the comments from the Brandywine Conservancy, the Nature Con-
servancy, and the Maine Coast Heritage Trust, the Tax Court in Oakbrook
presumed that Treasury responded to those organizations’ comments by
changing the language of the regulation from the donee of the easement being
vested with a property right having a fair market value “that is a minimum
ascertainable proportion of the fair market value to the entire property” to a
fair market value “that is at least equal to the proportionate value that the
perpetual conservation restriction at the time of the gift, bears to the value of
the property as a whole at that time.” 154 T.C. at 188 (first quoting 48 Fed.
Reg. at 22,946, then quoting § 1.170A-14(g)(6)(ii)). But Treasury did not spe-
cifically explain in the final regulation that its change in the language was in
response to those organizations’ comments.
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20-13700               Opinion of the Court                      21

provide necessary guidance to the public for compliance with the
law and affect donors and donees of qualified conservation contri-
butions” and that it had “consider[ed] . . . all comments regarding
the proposed amendments.” Id. In the subsequent “Summary of
Comments” section, however, Treasury did not discuss or respond
to the comments made by NYLC or the other six commenters con-
cerning the extinguishment proceeds regulation. See id. at 1497–
98; Oakbrook, 154 T.C. at 188 (“The ‘judicial extinguishment’ pro-
vision is not among the amendments specifically addressed in the
‘Summary of Comments.’”). And Treasury stated that “[a]lthough
a notice of proposed rulemaking which solicited public comments
was issued, the Internal Revenue Service concluded when the no-
tice was issued that the regulations are interpretative and that the
notice and public comment procedure requirement of 5 U.S.C.
[§] 553 [of the APA] did not apply.” 51 Fed. Reg. at 1498.
       The Hewitts assert that these seven comments—in particu-
lar, NYLC’s comment—were significant such that they warranted
a response from Treasury in promulgating the final extinguish-
ment proceeds regulation. In response, the Commissioner asserts
that none of the thirteen comments were significant to require a
response from Treasury because they did not raise any point cast-
ing doubt on the regulation’s reasonableness.
      Thus, the issue before us is whether Treasury’s failure to re-
spond to NYLC’s and the other commenters’ concerns about the
extinguishment proceeds regulation was in violation of the proce-
dural requirements of the APA. Phrased differently, we must
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22                     Opinion of the Court               20-13700

determine whether § 1.170A-14(g)(6)(ii), as interpreted by the
Commissioner to prohibit the subtraction of any amount of pro-
ceeds attributable to post-donation improvements to the easement
property in the event of judicial extinguishment, is procedurally
valid under the APA where: (1) one commenter—NYLC—made
specific comments raising the improvements issue as it relates to
extinguishment proceeds and recommended deletion of the provi-
sion; (2) six other organizations submitted comments criticizing or
urging caution as to the regulation; and (3) Treasury failed to spe-
cifically respond to any of those comments, instead simply stating
that it had considered “all comments.”
        Below, the Tax Court found that the regulation was proce-
durally valid under the APA, relying on its decision in Oakbrook.
In Oakbrook, the Tax Court considered the comments Treasury
received as to “the fact that the ‘proportionate share’ formula [in
§ 1.170A-14(g)(6)(ii)] does not account for the possibility of donor
improvements.” 154 T.C. at 192. The Tax Court concluded that
the proceeds regulation as to the post-donation improvements was
procedurally valid under the APA. Id. at 195. The court first noted
that it had found the statement “[a]fter consideration of all com-
ments,” coupled with an administrative record, to be “sufficient to
find that Treasury had considered the relevant matter presented to
it.” Id. at 191–92 (alteration in original) (citing Wing v. Comm’r,
81 T.C. 17, 31–32 (1983)). The Tax Court stated that “[t]he APA
‘has never been interpreted to require the agency to respond to
every comment, or to analy[z]e every issue or alternative raised by
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20-13700                Opinion of the Court                        23

the comments, no matter how insubstantial.’” Id. at 192 (quoting
Thompson v. Clark, 741 F.2d 401, 408 (D.C. Cir. 1984)). The Tax
Court further noted that “[o]nly one of the 90 commenters”—
NYLC—“mentioned donor improvements, and it devoted exactly
one paragraph to this subject.” Id. The Tax Court stated that
NYLC’s point that donors “are likely to be discouraged from mak-
ing a donation” was “a supposition that Treasury may reasonably
have discounted.” Id. And it stated that, as to the improvements
issue, “[t]he administrative record reflects that no substantive alter-
natives to the final rules were presented for Treasury’s considera-
tion.” Id. at 193 (alteration in original) (quoting SIH Partners LLLP
v. Comm’r, 150 T.C. 28, 44 (2018)). The Tax Court found that
“NYLC offered no suggestion about how the subject of donor im-
provements might be handled; it simply recommended ‘deletion of
the entire extinguishment provision.’” Id.
       As to the final regulations’ preamble, the Tax Court rejected
the argument that Treasury did not comply with the APA because
the preamble “did not discuss the ‘basis and purpose’ of the judicial
extinguishment provision specifically.” Id. at 193–94. The court
explained that “[e]ven where a regulation contains no statement of
basis and purpose whatsoever, it may be upheld ‘where the basis
and purpose . . . [are] considered obvious.’” Id. at 194 (quoting Cal-
Almond, Inc. v. U.S. Dep’t of Agric., 14 F.3d 429, 443 (9th Cir.
1993)). The court noted the final regulations’ preamble “explains
that they were being promulgated to ‘provide necessary guidance
to the public for compliance with the law,’ as recently amended by
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24                      Opinion of the Court                  20-13700

Congress, ‘relating to contributions . . . of partial interests in prop-
erty for conservation purposes,’” with the proposed regulations’
preamble stating, “the requirement that conservation easements
‘be perpetual in order to qualify for a deduction.’” Id. (first quoting
51 Fed. Reg. at 1496, then quoting 48 Fed. Reg. at 22,940). And it
found that “[t]he purpose of the ‘judicial extinguishment’ rule is
plain on its face—to provide a mechanism to ensure that the con-
servation purpose can be deemed ‘protected in perpetuity’ not-
withstanding the possibility that the easement might later be extin-
guished.” Id. (quoting § 1.170A-14(g)(6)(i)). Finally, the Tax Court
minimized the importance of the extinguishment proceeds provi-
sion in the context of the final regulations—“one subparagraph of
a regulation project consisting of 10 paragraphs, 23 subparagraphs,
30 subdivisions, and 21 examples”—as the APA did not “mandate
that an agency explain the basis and purpose of each individual
component of a regulation separately.” Id. Thus, the court con-
cluded that “[t]he broad statements of purpose contained in the
preambles to the final and proposed regulations, coupled with ob-
vious inferences drawn from the regulations themselves, [were]
more than adequate.” Id.
      The Oakbrook decision was not unanimous. Judge Toro, in
a concurring in result opinion, found that, if the proceeds regula-
tion was read in the way proposed by the Commissioner, i.e., to
bar subtraction of the value of post-donation improvements from
the extinguishment proceeds, it failed to comply with the APA’s
procedural requirements. See id. at 216 (Toro, J., concurring).
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20-13700               Opinion of the Court                       25

Judge Toro explained that the “Treasury received more than 700
pages of comments” during the comment period and that, in the
final regulations, Treasury responded to those comments and
other administrative matters in just two of the twelve pages—“six
columns in the Federal Register”—consisting of the final regula-
tions. Id. at 221. In his view, it was likely that Treasury “was
simply following its historical position that the APA’s procedural
requirements did not apply to these types of regulations,” noting
that the final regulations referenced Treasury’s belief that they did
not require notice and comment and that this belief was mistaken.
Id. at 222.
       Judge Toro then found that the “Treasury failed to ‘respond
to “significant points” and consider “all relevant factors” raised by
the public comments.’” Id. at 223 (quoting Carlson v. Postal Regul.
Comm’n, 938 F.3d 337, 334 (D.C. Cir. 2019)). Pointing specifically
to NYLC’s comment, Judge Toro explained that NYLC “made
clear that, in its view, it would be inappropriate to condition the
availability of the deduction for a conservation easement on the
donor’s agreement to turn over to the donee proceeds attributable
to improvements on the real property interest that the Code per-
mitted the donor to retain.” Id. at 224. He further noted that
NYLC: (1) “expressly tied its comments” to a specific rule and a
specific fact pattern in the proposed regulations; (2) explained that
the proposed proceeds regulation would “thwart the purpose of
the statute,” which NYLC stated was to “encourage the protection
of our significant natural and built environment through the
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26                       Opinion of the Court                    20-13700

donation of conservation restrictions”; and (3) recommended the
deletion of the provision “or, at the very least, ‘be revised to pre-
vent . . . [the] inequities’ it had identified.” Id. (alterations in origi-
nal). As such, Judge Toro explained that the administrative record
left “no doubt” that NYLC’s comment “‘can be thought to chal-
lenge a fundamental premise’ underlying the proposed agency de-
cision.” Id. (quoting Carlson, 938 F.3d at 344). The proposed reg-
ulations’ preamble explained that they reflected Congress’s “major
policy decisions,” and NYLC “in effect countered that the proposed
rule on future donor improvements was contrary to those policy
decisions, would lead to inequitable results that were inconsistent
with the statute, and would deter future contributions.” Id. at 225
(quoting 48 Fed. Reg. at 22,940). In other words, Judge Toro found
that NYLC “offered comments that, ‘if adopted, would require a
change in an agency’s proposed rule,’” and that “were both ‘rele-
vant and significant,’ [as to] require[e] a response.” Id. (first quot-
ing Home Box Office, Inc. v. FCC, 567 F.2d 9, 35 n.58 (D.C. Cir.
1977), then quoting Grand Canyon Air Tour Coal. v. FAA, 154 F.3d
455, 468 (D.C. Cir. 1998)).
       Because Treasury did not provide a response to NYLC’s
comments, Judge Toro concluded that its actions failed to provide
“an explanation [that] is clear enough that its ‘path may reasonably
be discerned’” or “provide any insight on ‘what major issues of pol-
icy were ventilated . . . and why the agency reacted to them as it
did’ on this point.” Id. at 225–26 (alterations in original) (first quot-
ing Encino Motorcars, 579 U.S. at 221, then quoting Carlson, 938
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20-13700               Opinion of the Court                       27

F.3d at 344). And it was “not the role of the courts to speculate on
reasons that might have supported” Treasury’s decision. Id. at 226
(quoting Encino Motorcars, 579 U.S. at 224). Judge Toro also ex-
plained that the Oakbrook majority’s reasoning as to the issue was
flawed for several reasons. He explained that courts were “not re-
quired to ‘take the agency’s word that it considered all relevant
matters,’” as the majority asserted. Id. at 226–27 (quoting PPG In-
dus., Inc. v. Costle, 630 F.2d 462, 466 (6th Cir. 1980)). He further
noted that “[a] ‘relevant and significant comment’ requires a re-
sponse, regardless of whether the point is made by many, a few, or
even a single commenter,” and “a comment does not lose its sig-
nificance because it is presented succinctly.” Id. at 227 (quoting
Carlson, 938 F.3d at 347). And, if the scope of the project “was too
large to permit an appropriate response to all ‘relevant and signifi-
cant comments,’ then Treasury could have broken the project
down into smaller parts.” Id.
       In his dissenting opinion, Judge Holmes reached a similar
conclusion to Judge Toro on the regulation’s procedural invalidity
under the APA. He concluded that comments from NYLC and
other organizations “were significant and [were] entitled to an
agency response.” See id. at 245 (Holmes, J., dissenting). Judge
Holmes explained that Treasury’s statement that it considered “all
comments” was not sufficient under the APA, noting that the Fed-
eral Circuit, in Dominion Resources, Inc. v. United States, 681 F.3d
1313, 1319 (Fed. Cir. 2012), found a Treasury regulation procedur-
ally invalid even though Treasury explicitly stated that “it rejected
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28                         Opinion of the Court                       20-13700

the commentators’ recommendation and brief explanation in gen-
eral terms of how one of the provisions worked.” 5 Oakbrook, 154
T.C. at 245–46 (Holmes, J., dissenting). He further explained that
the final regulations at issue provided even less explanation than
those in Dominion Resources, as Treasury failed to “even
acknowledge the relevant comments or expressly state its disagree-
ment with them” such that there was not even “a minimal level of
analysis.” Id. at 248 (quoting Encino Motorcars, 579 U.S. at 2120).
       After careful consideration of the agency record before us,
the several opinions in Oakbrook and precedent from the Supreme
Court, and this Court’s interpretation of procedural validity under
the APA, we conclude that § 1.170A-14(g)(6)(ii)—as read by the
Commissioner to prohibit subtracting the value of post-donation
improvements to the easement property from the proceeds allo-
cated to the donor and donee in the event of judicial extinguish-
ment—is arbitrary and capricious under the APA for failing to com-
ply with the APA’s procedural requirements and is thus invalid.
See §§ 553(c), 706(2)(A).

5Specifically, the preamble to the regulation at issue in Dominion Resources
provided that “[c]ommentators suggested that the regulations provide that
property is taken out of service only if the property is taken out of service for
depreciation purposes” and that “[t]he final regulations do not adopt the sug-
gestion concerning when property should be considered taken out of service.”
See Dominion Res., Inc. v. United States, 97 Fed. Cl. 239, 256 (2011) (quoting
59 Fed. Reg. 67,187, 67,192–93 (Dec. 29, 1994)), rev’d, 681 F.3d 1313 (Fed. Cir.
2012).
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20-13700                Opinion of the Court                        29

        Our decision in Lloyd Noland is instructive. In that case, the
plaintiffs challenged a malpractice insurance rule related to Medi-
care reimbursements that was promulgated by the Secretary of
Health and Human Services. 762 F.2d at 1563. In addressing the
plaintiffs’ challenge, we concluded that the malpractice insurance
rule was procedurally inadequate under the APA; specifically, it vi-
olated § 553(c), which we explained requires an agency “to incor-
porate into a new rule a concise general statement of its basis and
purpose.” Id. at 1566. The Secretary had failed to respond to com-
ments that a study the agency relied on, which contained limited
data that the authors cautioned against generalizing, was unrelia-
ble. Id. While the Secretary asserted that the objections were ir-
relevant, we concluded otherwise, such that those comments
formed the basis of our holding that the malpractice insurance rule
was arbitrary. Id. at 1566, 1568. We also rejected the Secretary’s
argument that she addressed certain hospitals’ comments based on
the rule’s preamble, stating that “[w]e are aware that insurance
companies generally do not determine insurance rates for malprac-
tice insurance based upon the financial status of the patients,” and
that “premiums are ‘incurred primarily for the benefit of the total
overall patient population and for the protection of facility assets.’”
Id. at 1566. While the Secretary suggested “that drawing a conclu-
sion contrary to the comments does not mean they were not con-
sidered,” we explained that “[b]asis and purpose statements must
enable the reviewing court to see the objections and why the
agency reacted to them as it did” and that agencies should rebut
relevant comments. Id. at 1566–67. Because the Secretary’s
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30                      Opinion of the Court                  20-13700

response to the rule’s comments were inadequate, we affirmed the
district courts’ invalidation of the rule. Id. at 1567, 1569; cf. Encino
Motorcars, 579 U.S. at 2126–27 (“The [agency] said that, in reach-
ing its decision, it had ‘carefully considered all of the comments,
analyses, and arguments made for and against the proposed
changes.’ . . . But when it came to explaining the ‘good reasons for
the new policy,’ the [agency] said almost nothing. . . . [T]he
[agency’s] conclusory statements do not suffice to explain its deci-
sion.” (first quoting 76 Fed. Reg. 18,832, 18,832 (Apr. 5, 2011), then
quoting FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515
(2009))).
       The Commissioner argues that Lloyd Noland should be dis-
tinguished because, in that case, we reviewed “a factual, evidence-
based rule,” while the extinguishment proceeds regulation is based
on Treasury’s interpretation of § 170(h)(5)’s statutory protected-in-
perpetuity requirement. But, in Lloyd Noland, we did not hold
that the requirement that “[b]asis and purpose statements must en-
able the reviewing court to see the objections and why the agency
reacted to them as it did”—including responding to significant
comments—only applies when there is “erroneous data or fact
finding” underlying the proposed regulation, as the Commissioner
suggests, and we decline to do so here.
      As in Lloyd Noland, in promulgating the final extinguish-
ment proceeds regulation, Treasury failed to respond to the rele-
vant and significant comment from NYLC as to the post-donation
improvements issue. In the proposed regulations’ preamble,
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20-13700               Opinion of the Court                      31

Treasury stated that the “regulations reflect the major policy deci-
sions made by the Congress and expressed in the[] committee re-
ports” to the Tax Treatment Extension Act of 1980. 48 Fed. Reg.
at 22,940. One of the policy decisions reflected in those “commit-
tee reports,” expressly referenced by Treasury, provided that “the
preservation of our country’s natural resources and cultural herit-
age is important,” that “conservation easements now play an im-
portant role in preservation efforts,” and that “provisions allowing
deductions for conservation easements should be directed at the
preservation of unique or otherwise significant land areas or struc-
tures.” S. Rep. No. 96-1007, at 9 (1980). NYLC’s comment recog-
nized as much, stating that “[t]he statute was enacted by Congress
to encourage the protection of our significant natural and built en-
vironment through the donation of conservation restrictions.”
       As to the proposed regulation overall, NYLC stated that the
proposed regulation “would thwart the purpose of the statute by
deterring prospective donors” concerned about tying themselves
to share proceeds of a sale with the donee “under circumstances
which cannot possibly be foreseen.” Additionally, NYLC specifi-
cally commented that the regulation’s proceeds formula: (1) “con-
templates that a ratio of value of the conservation restriction to
value of the fee will be fixed at the time of the donation and will
remain in effect forever thereafter”; and (2) “fail[ed] to take into
account that improvements may be made thereafter by the owner
which should properly alter the ratio.” And NYLC warned that this
outcome “would obviously be undesirable to the prospective
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32                     Opinion of the Court                20-13700

donor and would constitute a windfall to the donee organization”
and “strongly recommend[ed] deletion of the entire extinguish-
ment provision,” or at least revised “to prevent such inequities.” In
other words, NYLC challenged a fundamental premise underlying
Treasury’s proposed regulations by “in effect counter[ing] that the
proposed rule on future donor improvements was contrary to
those policy decisions [mentioned in the proposed regulations],
would lead to inequitable results that were inconsistent with the
statute, and would deter future contributions.” See Oakbrook, 154
T.C. at 225 (Toro, J., concurring).
         Simply put, NYLC’s comment was significant and required
a response by Treasury to satisfy the APA’s procedural require-
ments. And the fact that Treasury stated that it had considered “all
comments,” without more discussion, does not change our analy-
sis, as it does not “enable [us] to see [NYLC’s] objections and why
[Treasury] reacted to them as it did.” Lloyd Noland, 762 F.2d at
1566.
       But the Commissioner contends that the APA only required
Treasury “to respond to significant comments that cast doubt on
the reasonableness of the rule” it adopted. See Hussion, 950 F.2d
at 1554 (quoting Balt. Gas, 817 F.2d at 116); see also Vt. Yankee
Nuclear Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519,
553 (1978) (“[C]omments must be significant enough to step over
a threshold requirement of materiality before any lack of agency
response or consideration becomes of concern. The comment can-
not merely state that a particular mistake was made . . . ; it must
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20-13700               Opinion of the Court                      33

show why the mistake was of possible significance.” (alteration in
original) (quoting Portland Cement Ass’n v. Ruckelhaus, 486 F.2d
375, 394 (D.C. Cir. 1973))). And the Commissioner claims that
Treasury’s “primary (if not exclusive) consideration in crafting the
proceeds regulation was the meaning of the statutory perpetuity
requirement” and that, as such, NYLC was required “to explain
why the rule would not further the goal of ensuring that the con-
servation purpose embodied in the perpetual use restriction would
be protected in perpetuity as required by the statute.” The Com-
missioner argues that NYLC’s comment as to post-donation im-
provements did not address this consideration, and therefore was
not a significant comment, because the comment was limited to (1)
the “observation that the regulation would require the donee to
receive a proportionate amount of the full proceeds,” including any
proceeds attributable to the donor’s improvements, and (2)
NYLC’s belief that this situation would be “‘undesirable’ to the do-
nor” and would result in a “windfall” for the donee.
       While we agree with the Commissioner that Treasury was
only required to respond to significant comments to comply with
the APA’s procedural requirements, we disagree with the Commis-
sioner’s argument that NYLC’s comment was not significant. The
Commissioner’s claim that the “primary (if not exclusive)” purpose
in crafting the proceeds regulation was only to interpret
§ 170(h)(5)’s “protected-in-perpetuity” requirement is inconsistent
with the committee reports Treasury purportedly relied on. As
identified by NYLC, one of the purported purposes set forth in the
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34                         Opinion of the Court                       20-13700

committee reports, was to allow deductions for the donation of
conservation easements to encourage donation for such ease-
ments. See S. Rep. No. 96-1007, at 9. And NYLC raised the post-
donation improvements issue, as to extinguishment proceeds, and
warned that its exclusion in the regulatory scheme would discour-
age prospective donors from donating conservation easements. In
other words, NYLC’s comment was specific to, and casted doubt
on, the reasonableness of the proceeds regulation in light of one of
Congress’s committee reports which, according to Treasury, was
“reflected” in the final regulations. 48 Fed. Reg. at 22,940 (“The
regulations reflect the major policy decisions made by the Con-
gress and expressed in the[] committee reports.”). Furthermore,
the final regulations did not limit the purpose of the proceeds reg-
ulation in the way the Commissioner suggests. We thus decline to
classify NYLC’s comment as insignificant based on the Commis-
sioner’s interpretation of Treasury’s primary purpose in crafting
the proceeds regulation. 6 See State Farm, 463 U.S. at 43, 50 (“‘[W]e

6 The Commissioner also points to Treasury’s statements, in discussing dona-
tions of mortgaged property in the final regulations, that § 170(h)(5) “provides
that the conservation purposes of the donation must be protected in perpetu-
ity” and that “[i]n response to comments received, . . . the mortgagee must
subordinate its rights under the mortgage to the right of the qualified organi-
zation to enforce the conservation purposes of the gift in perpetuity.” 51 Fed.
Reg. at 1498. The Commissioner argues that these statements show that
Treasury viewed “the protected-in-perpetuity requirement as requiring ex-
press protection of the full value of the donee’s interest in order to adequately
protect the easement’s conservation purposes,” which is “the approach taken
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20-13700                  Opinion of the Court                            35

may not supply a reasoned basis for the agency’s action that the
agency itself has not given.’ . . . [C]ourts may not accept appellate
counsel’s post hoc rationalizations for agency action.” (quoting
Chenery, 332 U.S. at 196)).
        The Commissioner additionally asserts that Treasury’s revi-
sions to the proposed proceeds regulation in the final regulation
support Treasury’s representation that it considered “all com-
ments” in the final regulations’ preamble. But, as the Commis-
sioner concedes, the revisions were simply “clarifications” in re-
sponse to other comments “expressing uncertainty” about the reg-
ulation’s meaning “rather than substantive changes.” Indeed, the
proceeds regulation was revised from vesting the donee with a
property right having a fair market value “that is a minimum ascer-
tainable proportion of the fair market value to the entire property”
to a fair market value “that is at least equal to the proportionate
value that the perpetual conservation restriction at the time of the
gift, bears to the value of the property as a whole at that time.” See
Oakbrook, 154 T.C. at 188 (comparing the proposed and final pro-
ceeds regulations). But this revision does not provide any indica-
tion that Treasury was responding to NYLC’s significant comment

in the proceeds regulation.” But Treasury’s discussion of donations of mort-
gaged property in the final regulations does not reference the proceeds regu-
lation nor give any indication that Treasury considered the post-donation im-
provements issue raised by NYLC. We thus find this argument, which specu-
lates as to the reason of Treasury’s actions, without merit. See State Farm,
463 U.S. at 43.
USCA11 Case: 20-13700       Date Filed: 12/29/2021   Page: 36 of 36

36                    Opinion of the Court                20-13700

about the post-donation improvements issue. See Lloyd Noland,
762 F.2d at 1567; Hussion, 950 F.2d at 1554. We therefore reject
this argument.
                      IV.    CONCLUSION
        Because Treasury, in promulgating the extinguishment pro-
ceeds regulation, failed to respond to NYLC’s significant comment
concerning the post-donation improvements issue as to proceeds,
it violated the APA’s procedural requirements. See Lloyd Noland,
762 F.2d at 1566; see also Oakbrook, 154 T.C. at 225–27 (Toro, J.,
concurring). We thus conclude that the Commissioner’s interpre-
tation of § 1.170A-14(g)(6)(ii), to disallow the subtraction of the
value of post-donation improvements to the easement property in
the extinguishment proceeds allocated to the done, is arbitrary and
capricious and therefore invalid under the APA’s procedural re-
quirements. Accordingly, we reverse the Tax Court’s order disal-
lowing the Hewitts’ carryover charitable deductions as to the do-
nation of the conservation easement and remand for further pro-
ceedings.
      REVERSED AND REMANDED.