Good tax attorneys will do whatever it ethically takes to win on behalf of their clients.  Often, this means the attorney must not only have a good understanding of the substantive provisions at play, but also relevant procedural rules.  And, there are many.

Take for example the recent Eleventh Circuit decision in Hewitt.  In that case, the taxpayers had donated a conservation easement on property.  However, they ran afoul of a Treasury Regulation, which places limitations on the amount of proceeds the Hewitts could receive in the event the conservation easement was later nullified through judicial extinguishment.  Rather than simply arguing that the operative regulation did not apply to the transaction at issue, the tax attorney also contended that the regulation was void as violative of the Administrative Procedure Act (the “APA”).  The taxpayer won!  The Hewitt decision is discussed more fully below.

Facts.

            The Property and the Deed of Conservation Easement.

David Hewitt (“David”) acquired approximately 1,300 acres in Alabama from his family and other third parties (the “Property”).  He used the Property for cattle ranching.

However, on December 28, 2012, David executed a Deed of Conservation Easement (the “Deed”) in favor of a conservancy.  The Deed was properly recorded in the county records in Alabama.

Among other provisions, the Deed contained its purpose, prohibited uses of the Property, and permitted uses of the Property.  First, it specified that David had executed the Deed to retain the Property in its natural condition.  Second, the Deed limited the usage of the Property—to advance its natural state—and permitted the conservancy to enter the Property to preserve and protect the easement.  Third, it contained a “permitted uses” provision, which reserved to the Hewitts the right to build certain types of improvements on the Property.

In many cases, there is an issue of which party shares in the improvement value of land when an easement is extinguished. For example, here is it David or is it the conservancy?  To address this issue, the parties agreed that the Deed should contain a judicial extinguishment clause.  Thus, subsection 15.1 of the Deed stated:

Extinguishment.  If circumstances arise in the future such as render the purpose of this Easement impossible to accomplish, this Easement can only be terminated or extinguished, whether in whole or in part, by judicial proceedings in a court of competent jurisdiction, 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 subsequent to such termination or extinguishment (herein collectively “Extinguishment”) shall be determined to be at least equal to the perpetual conservation restriction’s proportionate value unless otherwise provided by Alabama law at the time, in accordance with subsection 15.2 . . .

Read More