Tax Court Memo Opinion Denying Refund under § 6512 Offers Excellent Examination Question for Tax Procedure Class (12/13/24)

In Applegarth v. Commissioner, T.C. Memo. 2024-107, GS here and T.C. Dkt Sheet here at entry # 68, the Court decided that although Applegarth overpaid his tax liabilities for the years, the Tax Court could not order the refund under its authority for ordering refunds, § 6512, because applicable time limits were not met and there is no equitable tolling for these time limits. These are familiar issues in tax procedure, with varying results depending upon the particular time limits involved. Readers of this blog and fans of tax procedure already know the issues involved, although the results may vary. More importantly, from my perspective as an old tax procedure professor, the case presents the classic type of case that would frame the examinations I liked to give tax procedure students. I will address the teaching “lessons” at the end of the blog entry, but first I will go through the facts and resolution of the issues as presented in the case.

The facts are simple, at least relatively so for tax procedure cases. I copy and paste the FINDINGS OF FACT section (Slip Op. 3-4, footnote omitted): 

          Applegarth resided in Florida when he filed the Petitions in these cases.

          On April 15, 2015, the IRS granted Applegarth an extension to file his 2014 income tax return until October 15, 2015.

          On April 15, 2016, the IRS granted Applegarth an extension to file his 2015 income tax return until October 15, 2016.

          Over several years, beginning in 2014, Applegarth made payments towards his 2014 and 2015 tax obligations. He made all the payments either on or before the extended filing deadlines for the respective tax years.

          On June 24, 2019, Applegarth filed his 2014 tax return.

          On November 21, 2019, the IRS mailed the Notice of Deficiency to Applegarth.

          In March 2022 Applegarth sent an unsigned 2015 Form 1040, U.S. Individual Income Tax Return, to IRS counsel.

[*4]

Timeline of Events — 2014 Tax Year

Date	Description
Apr. 15, 2014	Applegarth made a payment of $49,000 for the 2014 tax year.
Apr. 19, 2014	Applegarth made a payment of $4,500 for the 2014 tax year.
Jan. 17, 2015	Applegarth made a payment of $19,500 for the 2014 tax year.
Oct. 15, 2015	Extended deadline for Applegarth to file 2014 tax return.
June 24, 2019	Applegarth filed his 2014 tax return alleging an overpayment for the year.
Nov. 21, 2019	IRS issued Notice of Deficiency for tax years 2014 and 2015.
Feb. 18, 2020	Applegarth timely filed Petition with Tax Court.

Guest Blog: Professors McGovern and Brewer on APA Status of Listed Transactions (12/12/24)

I offer the second of two guest blogs from Bruce McGovern, Professor teaching tax law at the South Texas College of Law Houston (school resume here) and Professor Cassady V. (“Cass”) Brewer teaching tax law at the Georgia State University College of Law (school resume here). The first offering, titled Guest Blog: Professors McGovern and Brewer on Developments in Hewitt Holding Regulation Procedurally Invalid (12/8/24) is here. I will do a shorter lead in and will cut to the chase. This offering deals with the APA status of IRS Notices:

           2. Yet another Green decision under the APA regarding listed transaction notices has the IRS and Treasury seeing red, but proposed and final regulations provide a blackletter law counterpunch. We previously have written about successful taxpayer challenges to the IRS process of issuing administrative notices identifying “listed transactions” (a subset of “reportable transactions”) under Reg. § 1.6011-4(b)(2), thereby potentially triggering enhanced penalties for noncompliance. Generally, taxpayers participating in such listed transactions must file special disclosures with the IRS under § 6011(a). See Form 8886, Reportable Transaction Disclosure Statement. Material advisors (as defined) to such participating taxpayers are also subject to special disclosure and list maintenance requirements under § 6112(a). See Form 8918, Material Advisor Disclosure Statement. In addition, taxpayers and their material advisors may be subject to enhanced penalties and criminal sanctions for failing to properly disclose, and for participating in, such transactions. See §§ 6662A; 6707; 6707A; 6708. At least three courts have held that the IRS violated the Administrative Procedure Act (“APA”) by issuing certain listed transaction notices. Specifically, the Sixth Circuit, the U.S. District Court for the Eastern District of Tennessee, and the U.S. Tax Court have determined that the three distinct listed transaction notices at issue in those cases were “legislative rules” subject to the notice-and-comment procedures of the APA. Further, because the IRS did not publish an advanced notice of proposed rulemaking inviting public comment before issuing the notices, the courts invalidated them. See Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) (invalidating Notice 2007-83, 2007-2 C.B. 960, which identified certain business trust arrangements utilizing cash value life insurance purportedly to provide welfare benefits as listed transactions); CIC Services, LLC v. Internal Revenue Service, 592 F. Supp. 3d 677 (E.D. Tenn. 2022), as modified by unpublished opinion, 2022 WL 2078036 (2022) (invalidating Notice 2016-66, 2016-47 I.R.B. 745, as modified by Notice 2017-8, 2017-3 I.R.B. 423, which identified certain micro-captive insurance arrangements as listed transactions); Green Valley Investors, LLC v. Commissioner, 159 T.C. 80 (2022) (invalidating Notice 2017-10, 2017-4 I.R.B. 544, which identified post-2009 syndicated conservation easements as listed transactions). After initially contesting the application of the APA to the listed transaction notices at issue in Mann Construction, CIC Services, and Green Valley Investors, the IRS and Treasury practically have conceded, responding in at least two instances with proposed APA-compliant listed transaction regulations in place of invalidated notices. See REG-109309-22, Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest, 88 FR 21547 (4/11/23) and REG-106134-22, Syndicated Conservation Easements as Listed Transactions, 87 F.R. 75185 (12/8/22). The latter proposed regulations regarding syndicated conservation easements have been finalized and are discussed further below. For additional background, see Announcement 2023-11, 2023-17 I.R.B. 798. The recent developments summarized immediately below are another installment in the APA tug-of-war between taxpayers and the IRS concerning listed transaction notices under Reg. § 1.6011-4(b)(2) that may implicate enhanced penalties under §§ 6662A; 6707; 6707A; 6708.

                   a. IRS and Treasury see red after Green(s). Green Rock LLC v. Internal Revenue Service, 104 F.4th 220 (11th Cir. 6/4/24), aff’g 654 F. Supp. 3d 1249 (2023). The taxpayer in this case was a promoter/material advisor of syndicated conservation easements. As such, the taxpayer was subject to Notice 2017-10, 2017-4 I.R.B. 544, which identified post-2009 syndicated conservation easements as one type of listed transaction under Reg. § 1.6011-4(b)(2). [*13] Further, as a promoter/material advisor to a listed transaction, the taxpayer potentially was subject to enhanced penalties under § 6707A. The taxpayer complied with Notice 2017-10 and the reportable transaction regime throughout the relevant years, including filing Form 8886, Reportable Transaction Disclosure Statement, and Form 8918, Material Advisor Disclosure Statement. Nevertheless, the taxpayer filed suit in the U.S. District Court for the Northern District of Alabama in 2021, alleging that Notice 2017-10 was invalid under the APA. Like taxpayers in previous similar cases, the taxpayer argued that the IRS had failed to comply with the APA by issuing Notice 2017-10 without providing a formal notice of proposed rulemaking inviting public comment. The district court agreed, setting aside Notice 2017-10 as applied to the taxpayer. See Green Rock LLC v. Internal Revenue Service, 654 F. Supp. 3d 1249 (2023). The taxpayer undoubtedly was emboldened by the Tax Court’s 2022 decision against the IRS in another “Green” case, Green Valley Investors (cited above). By an 11-4-2 vote, the Tax Court invalidated Notice 2017-10 under the APA in that case.

CFC Rejects Government Interpretation of Canada Double Tax Treaty (12/12/24)

Tax treaty cases in U.S. courts are not that common. I am interested in tax treaty cases because, years ago, I wrote an article on tax treaty interpretation: Tax Treaty Interpretation, 55 Tax Law. 219 (2001), here, and have retained my interest since.

Bruyea v. United States (CFC 12/5/24), CFC here and GS here, is a tax treaty case with significant discussion of tax treaty interpretation. (Slip Op. pp. 4-7 under the outline heading “Principles of Treaty Interpretation.”) Bottom-line, the Court held that Bruyea is entitled to a refund arising from a credit to avoid double taxation under the U.S and Canada tax treaty (“Canada Tax Treaty”). The Canada Tax Treaty is titled the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital; the treaty and relevant documents may be viewed or downloaded here. This type of treaty is often called a double tax treaty because a primary goal is to avoid the treaty partners’ double taxing the same quantum of income. The U.S. has similar double tax treaties with many other countries.

I report on Bruyea because the court throws out some glittering generalities about tax treaty interpretation.

First, of course are the relevant facts, which the court summarizes succinctly (Slip Op. p. 2, cleaned up and footnotes omitted):

          On November 7, 2016, Mr. Bruyea filed an amended tax return (Form 1040X) with the Internal Revenue Service claiming a refund of $263,523 by virtue of a foreign tax credit that offsets the NIIT [Net Investment Income Tax] In particular, Mr. Bruyea asserts he is entitled to a foreign tax credit based on the provisions of Article XXIV of the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital. The IRS rejected the refund claim, concluding that the Canada Tax Treaty did not provide an independent basis for a foreign tax credit to offset the NIIT and that such a foreign tax credit is not allowed under U.S. statutory foreign tax credit rules.

          When Mr. Bruyea failed to convince the IRS, he invoked the Simultaneous Appeal Procedure pursuant to which he sought the opinions of the U.S. and Canadian competent authorities to resolve a situation in which double taxation is present (i.e.Canadian income tax and U.S. NIIT on the same items of income and gain with no foreign tax credit offset available). The Canadian tax authority agrees with Mr. Bruyea. ECF No. 18-6 (“The position of the Canadian competent authority in this regard is that Canada, as the country of source, has the right to tax the gain, while the US, [*3] as the country which has residual taxation rights, must provide relief in accordance with Article XXIV of the Convention.”). Following the IRS’s denial of his tax refund claim, Mr. Bruyea filed his complaint in this court, asserting that he is entitled to a refund of the NIIT that he paid in the amount of $263,523 for the 2015 tax year.

          On February 14, 2024, Mr. Bruyea moved for partial summary judgment, arguing that he is entitled to a foreign tax credit for his 2015 tax year under the terms of the Canada Tax Treaty. The government filed a cross-motion for summary judgment and response in opposition to plaintiff’s motion. Each party filed a reply brief.

Can a Taxpayer Obtain Relief in the Tax Court if the President’s Limited Power to Dismiss Tax Court Judges is Unconstitutional? (12/11/24)

I picked up some articles on a recently filed appellate brief in Myers v. Commissioner, T.C. # 2181-15W), from the Tax Court Order of Dismissal dated 5//24/24, here, (The Tax Court docket sheet is here.) The appeal is docketed as Myers v. Commissioner (D.C. Cir. No. 2181-15W) and Myers’ corrected opening brief is here. One of the articles is Anna Scott Farrell, Whistleblower Asks DC Circ. To Strike Tax Court Judge Shield, 2024 Law360 340-53 (12/5/24).

In Myers, the relevant events are:

1.   Myers, a whistleblower, filed his Tax Court petition late.

2.   The Tax Court dismissed the case due to the untimely filing.

3.   The D.C. Circuit reversed, ruling that the timing period was not jurisdictional and thus could be subject to equitable tolling.

4.   On remand, the Tax Court dismissed again, stating Myers did not demonstrate entitlement to equitable tolling.

Predicate Constitutional Claim: As his predicate argument on appeal, Myers urges that § 7443(f)’s requirement of “for cause” dismissal of Tax Court Judges violates the President’s Article II executive powers to dismiss without cause. The Tax Court rejected the argument, and now Myers raises it in the D.C. Circuit.

I focus on the Constitutional Claim. The substance of the argument turns upon the unsettled location of the Tax Court in the Constitutional structure. Is the Tax Court located in the legislative branch (§ 7441 says that it is “established, under article I of the Constitution of the United States”) or is it in the executive branch? (And my question below is does it matter in this case?) 

Guest Blog: Professors McGovern and Brewer on Developments in Hewitt Holding Regulation Procedurally Invalid (12/8/24)

This morning I offer a guest blog from Professors Bruce McGovern, teaching tax law at the South Texas College of Law Houston (school resume here) and Cassady V. (“Cass”) Brewer teaching tax law at the Georgia State University College of Law (school resume here). Professor McGovern authors many articles, including an annual article co-authored with Professor Brewer titled Recent Developments in Federal Income Taxation: The Year 2023, 77 Tax Law. 805 (2024). Professor McGovern makes monthly presentations of material included in that annual offering to the Wednesday Tax Forum (“WTF”) in Houston. In the most recent offering on December 13, 2024, Professors McGovern and Brewer had significant items on tax procedure that I thought readers of this blog might find interesting and enlightening. With their permission, I am offering a copy and paste of the two items in two separate blogs (because they are two separate subjects). I offer some comments after that copy and paste.

The first involves the saga of cases starting with Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021) here, which held IRS proceeds regulation for conservation easements adopted in 1986 invalid under the APA for failure to respond to significant comment in adopting the final regulation. There have been significant developments since Hewitt that Professors McGovern and Brewer cover quite nicely.

IX. EXEMPT ORGANIZATIONS AND CHARITABLE GIVING Exempt Organizations Charitable Giving

          With more than 750 conservation easement cases on the docket, the Tax Court’s flip-flop on the validity of the extinguishment proceeds regulation is not going to help matters. Valley Park Ranch, LLC v. Commissioner, 162 T.C. No. 6 (3/28/24). In a reviewed opinion (7-2-4) by Judge Jones, the Tax Court refused to follow its prior decision in a conservation easement case decided just four years earlier Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. 180 (2020), aff’d, 28 F.4th 700 (6th Cir. 2022). Instead, rejecting Oakbrook, a majority of the Tax Court in this case appealable to the Tenth Circuit determined that Reg. § 1.170A-14(g)(6)(ii), one of the chief weapons the IRS has used to combat conservation easements, is procedurally invalid under the Administrative Procedure Act (“APA”). It is fair to say that the Tax Court’s decision in Valley Park Ranch will have a significant impact on current and future conservation easement litigation between the taxpayers and the IRS.

          Background. Other than challenging valuations, the IRS’s most successful strategy in combating syndicated conservation easements generally has centered around the “protected in perpetuity” requirement of § 170(h)(2)(C) and (h)(5)(A). The IRS has argued in the Tax Court that the “protected in perpetuity” requirement is not met where the taxpayer’s easement deed fails to meet the strict requirements of the “extinguishment regulation.” See Reg. § 1.170A-14(g)(6)(ii). The extinguishment regulation ensures that conservation easement property is protected in perpetuity because, upon destruction or condemnation of the property and collection of any proceeds therefrom, the charitable donee must proportionately benefit. According to the IRS’s reading of the extinguishment regulation, the charitable donee’s proportionate benefit must be determined by a fraction determined at the time of the gift as follows: the value of the conservation easement as compared to the total value of the property subject to the conservation easement (hereinafter the “proportionate benefit fraction”). See Coal Property Holdings, LLC v. Commissioner, 153 T.C. 126 (10/28/19). Thus, upon extinguishment of a conservation easement due to an unforeseen event such as condemnation, the charitable donee must be entitled to receive an amount equal to the product of the proportionate benefit fraction multiplied by the proceeds realized from the disposition of the property.

          Facts. The taxpayer partnership in this case claimed a $14.8 million charitable contribution deduction for its 2016 tax year after granting to a charity a conservation easement over 45.76 acres of Oklahoma land it acquired in 1998 for $91,610. The easement deed recited in part that the contributed property was to be held “forever predominantly in its natural, scenic, and open space condition” and that “the duration of the Easement shall be in perpetuity.” 162 T.C. at ___. The easement deed further provided in relevant part that if the land was taken by eminent domain, the taxpayer and the charity would, “after the satisfaction of prior claims,” share in the condemnation proceeds “as determined by a Qualified Appraisal meeting standards established by the United States Department of Treasury.” 162 T.C. at _____. Upon audit, the IRS took the position, as it has in many prior cases, that the taxpayer’s deduction should be disallowed for failing to meet the proportionate benefit fraction requirement of the extinguishment proceeds regulation, Reg. [*9] § 1.170A-14(g)(6)(ii). The IRS’s litigating position is that the proportionate benefit fraction must be fixed and unalterable as of the date of the donation according to the following ratio: the value of the conservation easement as compared to the total value of the property subject to the conservation easement. Thus, according to the IRS, leaving the proportionate benefit upon condemnation to be determined later by a qualified appraisal meeting certain standards is insufficient. (Note: Section 4.01 of Notice 2023-30, 2023-17 I.R.B. 766 (4/10/23), sets forth what the IRS considers acceptable language regarding the proportionate benefit fraction as it relates to extinguishment clauses in conservation easement deeds.) After petitioning the Tax Court, the taxpayer argued alternatively that either (i) the easement deed met the requirements of Reg. § 1.170A-14(g)(6)(ii) by “explicit incorporation,” or (ii) the regulation is procedurally invalid under the APA, in which case the easement deed need not strictly comply with the regulation as long as it meets the more general requirements of the applicable subsections of the statute, § 170(h) (qualified conservation contribution). The case was heard by the Tax Court on cross-motions for summary judgment.

          The Tax Court’s Majority Opinion. In a reviewed opinion (7-2-4) by Judge Jones (joined by Judges Foley, Urda, Toro, Greaves, Marshall, and Weiler), the court began its analysis by reviewing the conflicting decisions of the Sixth and Eleventh Circuits concerning the procedural validity of Reg. § 1.170A-14(g)(6)(ii) under the APA. See Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021) (concluding that the regulation is invalid under the APA); Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022) (concluding that the regulation satisfies the APA). The majority emphasized that a divided (2-1) Sixth Circuit panel decided Oakbrook, whereas a unanimous (3-0) Eleventh Circuit panel decided Hewitt. Thus, in a footnote, Judge Jones pointed out that of the six appellate court judges who have considered the issue, four decided that Reg. § 1.170A-14(g)(6)(ii) is invalid under the APA while only two upheld the regulation. Noting that the case is appealable to the Tenth Circuit, which has not taken a position on the validity of Reg. § 1.170A-14(g)(6)(ii), Judge Jones concluded for the majority that “after careful consideration of the Eleventh Circuit’s reasoning in Hewitt, we find it appropriate to change our position.” 162 T.C. at ____. The majority gave a nod to the principle of stare decisis—following established precedent—but reasoned that its holding in Oakbrook, even though affirmed by the Sixth Circuit, is not “entrenched precedent,” thereby allowing the Tax Court to strike down Reg. § 1.170A-14(g)(6)(ii) as procedurally invalid under the APA in line with Hewitt. 162 T.C. at ____.

Texas District Court Enjoins the Corporate Transparency Act Nationwide (12/5/24; 1/6/25)

On 12/31/24, the Solicitor General filed for the United States an Emergency Application for a stay of injunction issued by the United States District Court pending appeal. See paragraph 8 below.

In Texas Top Cop Shop, Inc. v. Garland, ___ F.Supp.4th ___, 2024 U.S. Dist. LEXIS 218294 (ED TX 12/3/24), GS here [here] and CL here, the Court ordered a preliminary nationwide (or universal) injunction enjoining enforcement of the Corporate Transparency Act, codified at 31 U.S. C. § 5336. (The relief is sometimes called vacatur under the APA which has the same effect of a nationwide injunction, see Slip Op. p. 77.)

Four courts have spoken on the issue, with two granting preliminary injunctions (with different scopes as noted) and two denying preliminary injunction.

Granting preliminary injunction:

• Nat'l Small Business United v. Yellen, ___ F. Supp.4th ___, 2024 WL 899372 , 2024 U.S. Dist. LEXIS 36205  (N. D. Ala. 2024), GS here and CL here; and
• Texas Top Cop Shop, Inc. v. Garland, ___ F.Supp.4th ___, 2024 U.S. Dist. LEXIS 218294  (W.D. TX 12/3/24), GS here [to come] and CL here.

Denying preliminary injunction

• Community Assocs. Inst. v. Janet Yellen, 2024 U.S. Dist. LEXIS 193958 (E.D. Va. 10/25/24), GS here and CL here; and
• Firestone v. Yellen, 2024 WL 4250192, 2024 U.S. Dist. LEXIS 170085 (D. Or. Sep. 20, 2024), GS here and CL here

 All of the cases are on appeal, with the Alabama case being fully briefed.

The difference between the two sets of cases is the courts’ respective assessments of the likelihood of prevailing on the merits. Those cases granting the preliminary injunctive relief held that the CTA was unconstitutional, thus satisfying the preliminary injunction requirement that the plaintiffs be likely to prevail. Those cases denying the preliminary injunctive relief held that the CTA was likely constitutional, thus plaintiffs had not satisfied the requirement that they would likely prevail,

In any event, the Texas Top Cop Shop injunction until changed means that the CTA cannot be enforced. Of course, I am sure that there has been significant filings by now. The injunction should prevent FinCEN from using the data or making it available to persons who, under the CTA, could have access.

Finally, I said before in blogging on the Alabama case: “This opinion is dumb, stupid.” The Texas case is wrapped in a greater fog of words, but alas in my view, is also dumb, stupid. For context in assessing my assessment, I am not a constitutional law scholar. But, I don’t think the Constitution should be interpreted so rigidly that reasonable accommodations to the world we live in now (rather than over 200 years ago) cannot be made in governing doctrines. Constitutional text cannot be ignored but it can be interpreted reasonably. I think the Courts in the Virginia and Oregon cases made those accommodations.

Other JAT Comments: