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

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No. 20-13700 ____________________ DAVID F. HEWITT, TAMMY K. HEWITT, Petitioners-Appellants, versus COMMISSIONER OF IRS,

Respondent-Appellee.

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Petition for Review of a Decision of the U.S. Tax Court Agency No. 23809-17 ____________________ USCA11 Case: 20-13700 Date Filed: 12/29/2021 Page: 2 of 36

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 USCA11 Case: 20-13700 Date Filed: 12/29/2021 Page: 3 of 36

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 in