Tax Court in Brief | Green Valley Investors v. Comm’r (consolidated) | Notice 2017-10 Deemed Improperly Issued; Syndicated Conservation Easements

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The Tax Court in Brief – November 7th – November 11th, 2022

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Tax Litigation:  The Week of November 7th, 2022, through November 11th, 2022

Green Valley Investors, LLC v. Comm’r, 159 T.C. No. 5 | November 9, 2022 | Weiler, J. | Dkt. Nos. 17379-19, 17380-19, 17381-19, 17382-19 (consolidated)


Short SummaryOn December 23, 2016, the IRS issued Notice 2017-10, which identified all syndicated conservation easement transactions beginning January 1, 2010, including all substantially similar transactions, as “listed transactions” for purposes of Treas. Reg. § 1.6011-4(b)(2).  In 2019, the IRS examined several limited liability companies (collectively, the “taxpayers”).  After the taxpayer challenged the IRS’s determinations in its final partnership administrative adjustments (“FPAAs”) through the filing of a Tax Court petition, the IRS answered and asserted an additional penalty against the taxpayers under I.R.C. § 6662A.  The parties filed cross-motions for summary judgment on the I.R.C. § 6662A penalty issue with the taxpayers contending, among other things, that the IRS’s issuance of Notice 2017-10 failed to comply with the notice-and-comment provisions of the Administrative Procedure Act (the “APA”).

Key Issues

Whether Notice 2017-10 is a legislative or interpretative rule under the APA?

Whether Notice 2017-10 must be set aside as in violation of the notice-and-comment procedures of the APA?

Primary Holdings: Notice 2017-10 is a legislative rule that was improperly issued by the IRS without notice and comment as required under the APA. Notice 2017-10 must be set aside under the APA, rendering the I.R.C. 6662A penalties unlawful.

Key Points of Law:

A party may move for summary judgment regarding all or any part of the legal issues in controversy.  Rule 121(a); Wachter v. Comm’r, 142 T.C. 140, 145 (2014).  The Tax Court may grant summary judgment if the pleadings, stipulations and exhibits, and any other acceptable materials show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law.  See Rule 121(a) and (b); Elec. Arts, Inc. & Subs. v. Comm’r, 118 T.C. 226, 238 (2002).  When a motion for summary judgment has been filed, the Tax Court construes the facts and draws all inferences in the light most favorable to the nonmoving party to decide whether summary judgment is appropriate.  Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).

Section 6662A(a) provides:  “If a taxpayer has a reportable transaction understatement for any taxable year, there shall be added to the tax an amount equal to 20 percent of the amount of such understatement.”  In addition, this penalty may be increased from 20 percent to 30 percent of the amount of the understatement if the disclosure requirements of section 6664(d)(3)(A), requiring disclosure in accordance with the regulations prescribed under section 6011, are not met.  I.R.C. § 6662A(c).  Section 6662A penalties apply to any item which is attributable to any “listed transaction.”  I.R.C. § 6662A(b)(2)(A).

Temp. Treas. Reg. § 1.6011-4T(b)(2) defines the term “listed transaction” to include those types of transactions which the IRS has determined to be tax avoidance transactions and identified by notice, regulation, or other form of published guidance.

Notice 2017-10 states that taxpayers who have entered into a listed transaction or transactions of interest “must disclose transactions as described in [Treasury Regulation §] 6011-4 for each taxable year in which the taxpayer participated in the transactions, provided that the period of limitations for assessment of tax has not ended on or before December 23, 2016.”

The APA provides a three-step procedure for “notice-and-comment rulemaking” whereby agencies are required to: (i) issue a general notice of proposed rulemaking; (ii) allow interested persons an opportunity to participate; and (iii) include in the final rule a “concise general statement of [its] basis and purpose.”  Perez v. Morg. Bankers Ass’n, 575 U.S. 92, 96 (2015).  However, not all rules are subject to this notice-and-comment process—specifically, the notice-and-comment requirement does not apply to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice.  Id.  “The APA also recognizes that Congress may modify these requirements, but provides that a subsequent statute may not be held to supersede or modify this subchapter . . . except to the extent that it does so expressly.”  Asiana Airlines v. FAA, 134 F.3d 393, 396 (D.C. Cir. 1998) (quotes omitted).

Legislative rules impose new rights or duties and change the legal status of regulated parties.  Chen Zhou Chai v. Carroll, 48 F.3d 1331, 1340 (4th Cir. 1995); see also Tenn. Hosp. Ass’n v. Azar, 908 F.3d 1029, 1042 (6th Cir. 2018) (explaining that legislative rules impose new rights or duties and change the legal status of the parties, whereas interpretative rules articulate what an agency thinks a statute means or remind parties of pre-existing duties).  On the other hand, interpretative rules merely advise the public of an agency’s construction of the statutes that it administers.  Morg. Bankers Ass’n, 575 U.S. at 97.  Unlike interpretative rules, legislative rules have the force and effect of law.  Id. at 96.

The act of identifying a transaction as a listed transaction by the IRS, by its very nature, is the creation of a substantive (i.e., legislative) rule and not merely an interpretative rule.  See 5 U.S.C. § 553.

As part of their obligation to file a tax return, taxpayers must disclose their participation in any reportable transaction.  Treas. Reg. § 1.6011-4(a).  And a listed transaction is a type of reportable transaction.  Id. -4(b)(2).  In addition, listed transactions require various other reporting obligations, such as the filing of an IRS Form 8886 with the tax return and with the Office of Tax Shelter Analysis.  See Treas. Reg. § 1.6011-4(e)(1).  Also, identifying a listed transaction results in enhanced penalties if the taxpayer’s treatment of the transaction is not upheld.  See I.R.C. § 6662A.

Under the APA, a government agency may depart from normal notice-and-comment procedures for good cause.  See 5 U.S.C. § 553(b)(B).

The APA limits the ability of a subsequent statute to modify or supersede its procedures “except to the extent that it does so expressly.”  5 U.S.C. § 559.  Consistent with this limiting text, appellate courts have held that 5 U.S.C. § 559 “forbids amendment of the APA by implication.”  Lane v. USDA, 120 F.3d 106, 110 (8th Cir. 1997).  “Exemptions from the terms of the Administrative Procedure Act are not lightly to be presumed in view of the statement in [5 U.S.C. § 559] that modifications must be express.”  Marcello v. Bonds, 349 U.S. 302, 310 (1955).

Insight:  The majority opinion in Green Valley Investors LLC is a significant blow to the IRS.  Indeed, since the Supreme Court’s decision in CIC Services LLC, federal courts have not shied away from holding the IRS to task under the notice-and-comment requirements of the APA.  In light of these decisions, taxpayers should expect to see continued APA arguments from tax professionals for the foreseeable future.