Not many years ago the government and most practitioners viewed the Anti-Injunction Act as presenting an almost insurmountable barrier to challenges to IRS regulations and rulings. That view began to change with Mayo Foundation for Medical Education & Research v United States, 562 U.S. 44 (2011), which recognized that IRS regulations are subject to review in the same manner as those of any other agency (“we are not inclined to carve out an approach to administrative review good for tax law only”). What this meant for review of IRS rulings and notices became clear in CIC Services, LLC v IRS, 141 S.Ct. 1582 (2021), involving a challenge to IRS Notice 2016-66, which identified certain micro-captive arrangements as listed transactions. The Court held that a person could seek judicial review of an IRS notice to challenge reporting requirements for failure to comply with the Administrative Procedures Act (APA) because to do so was not an attempt to enjoin the assessment or collection of a tax.
Internal Revenue Code §6011(a) authorizes the Secretary of Treasury to issue regulations requiring the filing of returns and statements by “any person.” In 2003, the IRS promulgated Treas. Reg. §1.6011-4, which, for the first time, required taxpayers who participated in “reportable” or “listed” transactions and their material advisors to file reports with the IRS. Treas. Reg. §1.6011-4 (b)(2) defines “listed transaction” as a reportable transaction “determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.” In 2004, Congress enacted IRC §6707A, which imposed civil penalties upon taxpayers and material advisors who fail to report listed transactions. For a taxpayer who fails to report a listed transaction these penalties range from $10,000 ($5,000 for a natural person) to $200,000 ($100,000 for a natural person). A material advisor who violates the disclosure provisions faces a penalty of at least $200,000 and up to 50% of the gross income received for its advice or assistance. If a violation is willful, the maximum civil penalty is 75% of gross income and potential criminal charges.
Presently the IRS has identified 36 listed transactions, 28 through notices and the rest through revenue rulings. All of these notices or rulings were issued without notice and comment procedures. There are currently 34 active listed transactions, 28 of which were identified prior to enactment of §6707A. Notice 2017-10 was issued after enactment of §6707A. It “designates certain conservation easement transactions as presumptively tax-avoidant listed transactions.”
On June 4, 2024, the Eleventh Circuit in Green Rock, LLC v. IRS, Case No. 23-11041, affirmed a district court decision invalidating Notice 2017-10 as to Green Rock. The suit was brought by an entity that was a promoter and material advisor of syndicated conservation easements. After issuance of Notice 2017-10 it complied with the filing requirements imposed for listed transactions. Green Rock nonetheless asserted that Notice 2017-20 was invalid because it was not issued in compliance with the notice and comment requirements of the APA.
As the Court noted in its opinion, this past December Congress amended IRC §170(h) to provide that syndicated conservation easements of the type identified in Notice 2017-10 will no longer be allowed to write off easement donations based on inflated valuations.[1] After enactment of this amendment Green Rock ceased syndicating conservation easements.
The Eleventh Circuit began by discussing how, in response to the proliferation of certain corporate tax shelters, the IRS designed the reportable transaction regime to target those shelters and ferret out improper tax avoidance transactions.
An agency ruling that is meant to have the force of law, and violation of which can expose a person to civil or criminal penalties, is a “legislative ruling” and must be issued in accordance with the APA’s notice and comment procedures. The IRS claimed that listed transaction notices were exempt from APA notice and comment procedures. This argument turned on the definition of “reportable transaction” contained in §6707A(c)(1):
“Reportable Transaction-The term “reportable transaction” means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type the Secretary determines as having a potential for tax avoidance or evasion.”
“Listed transaction” is a reportable transaction “the same as or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.” IRC §6707A(c)(2).
As noted by the Court, there is no language in the Code that exempts listed transactions from APA notice-and-comment requirements either expressly or by implication. An agency is exempt from notice and comment procedures only if Congress expressly exempts it. While there is no magical formula for exemption, it will be implied only where Congress has expressly established procedures that are “so clearly different from those required by [the APA] that it must have intended” them to displace the APA procedures.
According to the IRS, the lack of such language was no impediment to finding that the procedure for designating listed transactions was exempt from the APA. Congress had used part of the language of Treas. Reg. §1.6011-(4)(b) in crafting the definitional provisions of §6707A. As a result, Congress was aware of the regulation and must have endorsed the notice procedure for designating listed transactions.
Not so fast, said the Eleventh Circuit. Congressional awareness of the regulation is not enough to overcome the requirements of the APA. That Congress, in drafting §6707A, omitted the “by notice” language contained in the regulation indicates that Congress did not intend to exempt the IRS from notice and comment requirements when designating listed transactions. The Court agreed with the Sixth Circuit in Mann Construction, Inc. v. United States, 27 F. 4th 1138 (2022)[2], that the language of §6707A “cannot bear the weight of the Service’s argument.” In fact, the definition of “reportable transaction”
“can fairly be read to allow the Service to define the substance of a reportable transaction through regulations issued under the Service’s section 6011 authority …. But an indirect series of cross-references hardly suffices to supplant the base-line procedures of the Administrative Procedures Act.”
Congress’ cross-reference was to §6011, which requires the Secretary to prescribe regulations (not notices) for making returns and statements. Congress had the opportunity to adopt the notice procedures when it enacted §6707A but did not. This silence was “the opposite of an express statement.”
Finally, the IRS argued that the Court’s interpretation would invalidate every listed transaction. The Court pointed out that pre-2004 listed transactions were not legislative when issued since they did not result in the imposition of civil or criminal penalties for noncompliance. Section 6707A can be read as ratifying the existing listed transactions without exempting the IRS from prospective notice and comment procedures. In any event, the Eleventh Circuit stated it was only dealing with Notice 2017-10.
Despite prior rulings by the Sixth Circuit and the Tax Court that notice and comment procedures apply to listed transaction designations issued after the enactment of §6707A, IRS has continued to claim that listed transaction notices are exempt. It is unlikely Green Rock will make the IRS change its position. The case, however, further highlights the IRS’s continued vulnerability to challenges for violations of the APA. Practitioners should remain alert to whether IRS guidance which impacts or is contrary to a position of their clients was issued in compliance with APA notice and comment requirements.
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[1] A taxpayer can claim a charitable contribution deduction for the donation of a “qualified conservation easement.” Congress added subsection (h)(7) that provides that a contribution by a partnership shall not be treated as a qualified conservation easement “if the amount of such contribution exceeds 2.5 times the sum of each partner’s relevant basis in such partnership.”
[2] In Mann Construction, the Sixth Circuit invalidated Notice 2007-66 for failure to comply with notice and comment requirements.
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