Eleventh Circuit Invalidates IRS Designation of Listed Transaction by Notice; Designation Must be by Notice and Comment Regulation (6/16/24)

In Green Rock LLC v. IRS, ___ F.4th ___ (11th Cir. 6/4/24), CA11 here and GS here, the Court held invalid IRS use of subregulatory guidance—Notices—to designate listed transactions subject to reporting obligations and penalties. The statute says that reportable transactions are those “determined under regulations prescribed under section 6011.” The regulations define a “listed transaction” to include (Reg. § 1.6011-4(b)(2)):

 a transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction. 

The Court said, in effect, that the § 6011 regulations authorizing the determination by subregulatory guidance was invalid because, as it read the statute, the listed transaction determination must be made  only in a notice and comment regulation and not, as the § 6011 regulations state, by “notice, regulation, or another form of published guidance.”

In APA-speak, the crux of the Court’s holding was a syllogism:

• Major Premise: Legislative rules must be promulgated by notice and comment regulation
• Minor Premise: The requirements of reporting and penalty imposed for listed transactions make the designation a legislative rule.
• Conclusion: the designation of a listed transaction must be made by notice and comment regulation; hence designation by Notice is invalid.

I think this is yet another hypertechnical textual holding because, in my view, the statute could be read another to support Treasury’s approving notice in the § 6011 regulations by subregulatory guidance. The Court quibbles to avoid a practical interpretation of the statutory word “under.” (Slip op. 15-17.) 

JAT Comments:

1. Let’s set aside any consideration of Chevron, which the Court does not mention, although I think Chevron if substantially sustained in the pending Supreme Court cases could support the § 6011 Regulations.

2. Still, the statute seems to me not as clear or clear enough on the issue, as the majority claims. In effect, the Court held that there is no ambiguity in the statute to permit determination by subregulatory guidance. (In Chevron-speak, that is a Step One holding or even a Step Zero holding). For that reason, I suspect that, depending upon the resolution of pending Supreme Court cases questioning Chevron, the Government might seek rehearing en banc or Supreme Court review to address the issue of whether the statute was ambiguous on the issue and, if so, whether the § 6011 regulations properly authorized determination by notice.

3. The problem, of course, is that the market for tax abusive schemes is dynamic and fast-moving, a classic whack-a-mole phenomenon. Notice and comment regulations are hardly the type of procedure lending itself to quick agency action after it learns of such schemes. Requiring reporting subject to heavy penalties is a good tool to police such transactions, but it must be implemented promptly for maximum effect. Obviously, notice and comment regulations do not permit timely action.

4. Having said that, Treasury could achieve a prompt response by using Temporary Regulations (called interim final rules in administrative law) that are effective immediately with a ”good cause” statement. 5 U.S.C. § 553(b)(B). The current requirements for Temporary Regulations and Proposed Regulations will have to be loosened substantially in order to achieve the same timely benefits. But, timeliness can be achieved virtually the same as subregulatory guidance.

5. The holding that the designation be in notice and comment regulation could invalidate the many designations in notices and penalties applied for failure to report those listed transactions. I would expect that every penalty assessed that is still open for contest (e.g. by timely refund suit, etc.) will bring challenges (at least for the well-informed).

 6. The Court spent considerable portion of the opinion discussing the requirements for deviation for the APA requirements, in this case notice and comment regulations for legislative rules. Basically, the requirement for deviation is that the deviation be expressly stated (not as strict as one might interpret expressly) in a statute. 5 U.S.C. § 559. I encountered and discussed that requirement in discussing the issue of whether § 7805(a) is properly read as authorizing legislative regulations. See John A. Townsend. The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN Last Revised 4/8/22), here. at pp. 54-56, see particularly p. 55 at n. 223 (arguing that § 7805(a) is interpretive authority only but that, if § 7805(a) were legislative rule authority, then § 7805(b) and (e) would be invalid because not having the requisite “express” statement of authority to deviate from the requirement of notice and comment regulation). Note in this regard that the § 6011 regulations interpretation to permit determination by subregulatory guidance is an interpretive rule.