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.

          IRS’s implicit APA exemption and slippery slope arguments: On appeal before the Eleventh Circuit, the IRS argued, as it had in similar cases, that Notice 2017-10 is exempt from the APA’s notice-and-comment procedures because Congress was aware of the IRS’s practice of identifying listed transactions by administrative notice when it enacted § 6707A (and other such enhanced penalties) in 2004 after the reportable transaction regime of Reg. § 1.6011-4 was finalized in 2003. More precisely, Reg. § 1.6011-4(b)(2) allows the IRS to identify listed transactions “by notice, regulation, or other form of published guidance.” Thus, according to the IRS, Congress implicitly approved the process of identifying listed transactions by administrative notice without requiring the IRS to comply with the APA because Congress enacted § 6707A (and other such enhanced penalties) with the above-quoted language of Reg. § 1.6011-4(b)(2) in mind. Moreover, to bolster its position before the Eleventh Circuit, the IRS also made a classic “slippery slope” argument: upholding the district court’s decision would “eliminate every listed transaction to date” identified by the IRS. (For a complete list, see the IRS website, “Recognized abusive and listed transactions” (last accessed 12/1/2024).)

          Eleventh Circuit Opinion: A three-judge panel of the Eleventh Circuit, in an opinion by Chief Judge Pryor, rejected the IRS’s arguments and affirmed the district court, invalidating Notice 2017-10 under the APA as applied to the taxpayer. First, the Eleventh Circuit was not persuaded by the IRS’s implicit APA exemption argument because, as Chief Judge Pryor wrote, “Congress may choose to exempt an agency from notice and comment if ‘it does so expressly,’” but “[n]o such express language appears in [§ 6707A].” 104 F.4th at 226-27. Further examining § 6707A, Chief Judge Pryor pointed out that the statute expressly defines the terms “reportable transaction” and “listed transaction.” A reportable transaction is defined in § 6707A(c)(1) as “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 which the Secretary determines as having a potential for tax avoidance or evasion.” (Emphasis added.) A listed transaction is defined in § 6707A(c)(2) as “a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.” The Eleventh Circuit was unwilling to accept the IRS’s argument that the phrase “as determined under regulations prescribed under section 6011” in the § 6707A(c)(1) definition of reportable transaction incorporated by reference the above-quoted language in Reg. § 1.6011-4(b)(2) authorizing the IRS to identify listed transactions (a subset of reportable transactions) by administrative notice. Instead, relying in part upon the Sixth Circuit’s decision in Mann Construction (cited above) and the Tax Court’s decision in Green Valley Investors (cited above), the Eleventh Circuit determined that “an indirect series of cross-references hardly suffices as the ‘express’ indication [by Congress] necessary to supplant the baseline procedures of the [APA].” 104 F.4th at 228.

          Second, concerning the IRS’s slippery slope argument, the Eleventh Circuit reasoned that pre-2004 listed transactions—28 out of 34 according to the court based upon the IRS’s website—were [*14] not backed by enhanced statutory penalties and criminal sanctions at the time of their issuance; however, the 2004 enactment of § 6707A (and other related provisions) authorized higher penalties and criminal sanctions. The Eleventh Circuit determined that the IRS’s power beginning in 2004 to impose enhanced penalties and criminal sanctions for noncompliance by agency pronouncement implicated the APA notice-and-comment requirements, notwithstanding the pre-existing administrative notice process contemplated by Reg. § 1.6011-4(b)(2). According to the Eleventh Circuit, the APA notice-and-comment requirements applied because the listed transaction notices issued by the IRS during or after 2004 were “legislative” (not “procedural”) rules due to the potentially applicable enhanced penalties and criminal sanctions that did not exist before 2004. 104 F.4th at 228. Arguably, then, pre-2004 listed transaction notices issued by the IRS need not comply with the APA, whereas IRS listed transaction notices issued in 2004 and thereafter must abide by the APA, presumably not by administrative notice but by the issuance of Treasury regulations subject to the notice-and-comment process. In fact, Chief Judge Pryor read the Tax Court’s opinion in Green Valley Investors (cited above), especially Judge Pugh’s concurrence, to suggest as much because Judge Pugh wrote in a footnote:

Our holding does not invalidate notices that had been issued before Congress enacted penalties. Those notices are not before us today and the circumstances surrounding their issuance are distinguishable. And Congress would be presumed to know about and adopt pre-existing notices when it adopted pre-existing procedures for identifying listed transactions.

159 T.C. at 111 n. 5. Nevertheless, Chief Judge Pryor concluded by clarifying and narrowing the scope of the Eleventh Circuit’s opinion, writing:

[W]e do not purport to rule on the validity of any listed transaction not before us. Our decision is specific to Notice 2017-10. Because the notice was a legislative rule and Congress did not expressly exempt the Service from notice-and-comment rulemaking, Notice 2017-10 is not binding on [the taxpayer].

104 F.4th at 229.

          Concurring Opinion: Judge Jordan concurred in the court’s opinion and judgment affirming the district court, but wrote separately to explain that he would have held for the taxpayer on slightly different grounds. Judge Jordan reasoned that by enacting § 170(h)(7) in 2022 restricting charitable deductions via syndicated conservation easements, n2 Congress “effectively eliminated, on a going-forward basis, the deductions that Notice 2017-10 would have made subject to disclosure.” 104 F.4th at 229. Accordingly, Jordan agreed with Judge Toro’s concurring Tax Court opinion in Green Valley Investors (cited above) that, as the IRS argued, there is little doubt Congress enacted § 6707A in 2004 with the 2003 pre-existing Reg. § 1.6011-4(b)(2) listed transaction notice process in mind. (Chief Judge Pryor’s opinion on behalf of the Eleventh Circuit did not concede this aspect of the IRS’s implicit APA exemption argument.) Nonetheless, Judge Jordan agreed that Congress must have intended the APA to apply to Notice 2017-10 because of the way § 6707A(c)(1)-(2) are written. The phrase “as determined under regulations prescribed under section 6011” used in § 6707A(c)(1)’s definition of a reportable transaction is omitted from [*15] § 6707A(c)(2)’s definition of a listed transaction. Thus, Judge Jordan surmised that Congress must have envisioned the IRS complying with both the APA and Reg. § 1.6011-4 when issuing listed transaction notices. Judge Jordan’s concurring opinion does not elaborate, but presumably he would not confine the listed transaction notice process of Reg. § 1.6011-4(b)(2) to pre-2004 IRS sub-regulatory guidance. Instead, Judge Jordan apparently believes that a future listed transaction notice or other sub-regulatory guidance issued by the IRS (instead of Treasury regulations) is permissible provided the publication of the notice follows the notice-and-comment process mandated by the APA.
   n2 New § 170(h)(7)(A) generally provides that a contribution by a partnership is not treated as a qualified conservation contribution (and therefore no deduction is allowed)—whether via a direct contribution or as an allocable share from a lower-tier partnership—if the amount of the contribution exceeds “2.5 times the sum of each partner’s relevant basis” in the partnership. The term “relevant basis” is defined by new § 170(h)(7)(B)(i) to mean that portion of a partner’s “modified basis” which is allocable (under rules similar to those used under § 755) to the real property comprising the qualified conservation contribution. “Modified basis” (defined in § 170(h)(7)(B)(ii)) essentially refers to a partner’s outside basis exclusive of the partner’s share of partnership liabilities under § 752. Thus, relevant basis appears to equate to an investor’s cash investment (a/k/a initial tax and book capital account) in a syndicated conservation easement partnership.

          Comment: Although not expressly stated in Chief Judge Pryor’s opinion—especially considering his concluding language quoted above—the practical implication of the Eleventh Circuit’s reasoning in Green Rock (along with the Sixth Circuit’s decision in Mann Construction, the U.S. District Court’s decision in CIC Services, and the Tax Court’s decision in Green Valley Investors) appears to be that the IRS’s identification of listed transactions in 2004 and thereafter (i.e., after § 6707A and similar penalties were enacted) must proceed by regulations issued in full compliance with the APA, not merely IRS pronouncements or other sub-regulatory guidance. It is thus understandable, at least in the authors’ view, that the additional burden imposed upon the IRS and Treasury has those agencies seeing red after the decisions in Mann Construction, CIC Services, and Green Valley Investors. See Announcement 2023-11, 2023-17 I.R.B. 798 (cited above and stating, “The Department of the Treasury (Treasury Department) and the IRS disagree with the recent court decisions holding that listed transactions cannot be identified by notice or other subregulatory guidance. However, the Treasury Department and IRS will no longer take the position that transactions of interest can be identified without complying with APA notice-and-comment procedures.”)

                   b. IRS and Treasury’s blackletter law counterpunch for syndicated conservation easement transactions. T.D. 10007, Syndicated Conservation Easement Transactions as Listed Transactions, 89 F.R. 81341 (10/8/2024). As mentioned above, before the Eleventh Circuit’s decision in Green Rock (cited above), but after the Tax Court’s decision in Green Valley Investors (cited above), Treasury and the IRS issued proposed regulations identifying syndicated conservation easements as a listed transaction for purposes of §§ 6111(a); 6012(a); 6662A; 6707; 6707A; and 6708. See REG-106134-22, Syndicated Conservation Easements as Listed Transactions, 87 F.R. 75185 (12/8/22). The required APA notice-and-comment period ensued and passed, resulting in the above-cited final regulations becoming effective as of October 8, 2024, the date of publication in the Federal Register. T.D. 10007 adds new Reg. § 1.6011-9, identifying certain syndicated conservation easements or substantially similar arrangements as listed transactions, a type of reportable transaction subject to enhanced disclosure rules and penalties for noncompliance. Reg. § 1.6011-9(b) defines syndicated conservation easement transactions subject to the new rules, while Reg. § 1.6011-9(c) provides related definitions, including the definition of “substantially similar” transactions. Reg. § 1.6011-9(d)(1) carves out from listed transaction treatment those syndicated conservation easements “for which the promotional materials offer the taxpayer the possibility of being allocated a charitable contribution deduction of only an amount less than 2.5 times the taxpayer’s investment and for which the taxpayer is actually allocated a charitable contribution deduction of an amount less than 2.5 times the taxpayer’s investment.” In other words, syndicated conservation easement transactions that are constrained by new (as of 2022) § 170(h)(7) ordinarily are not a listed transaction. Reg. §1.6011-9(d)(5) provides two examples of listed transactions subject to the new rules: one that is a syndicated conservation easement as defined in Reg. § 1.60119(b) and another that is a “substantially similar” transaction as defined in Reg. § 1.6011-9(c). Finally, the new regulations obsolete Notice 2017-10 for transactions occurring after October 8, 2024.

          Comment: An unaddressed question under new Reg. § 1.6011-9 is the extent to which syndicated conservation easements or substantially similar arrangements can be retroactively identified as listed transactions via the regulations (even though Notice 2017-10 has been held [*16] invalid under the APA). Commenters to the proposed regulations raised this issue, opining that the new regulations cannot or should not retroactively designate syndicated conservation easements as listed transactions. In this regard, the preamble to the final regulations states that the Tax Court has not resolved whether a listed transaction designation can be applied retroactively. Accordingly, at least as far as the IRS is concerned, any commenter’s theory that the regulations cannot be applied retroactively has not been judicially resolved. The preamble states in relevant part:

The reporting rules for listed transactions are outside the scope of these final regulations, which merely identify a listed transaction. The reporting rules for listed transactions are found in § 1.6011-4, which was issued pursuant to notice and comment and finalized most recently in TD 9350 (72 FR 43146), published in 2007 and which is not amended by these final regulations. Section 1.6011-4(e)(2)(i) requires reporting of transactions entered into prior to the publication of guidance identifying a transaction as a listed transaction if the statute of limitations for assessment of tax is still open when the transaction becomes a listed transaction. While the reporting mandated by § 1.6011-4 may be with respect to prior periods, the disclosure obligation is itself not retroactive—it is a current reporting obligation. Thus, the comments regarding an impermissible retroactive burden required by § 1.6011-4 are without merit.

          Furthermore, the preamble continues at length regarding this retroactivity issue and “open” tax years but also provides no crystal clear answers:

          Several commenters requested additional guidance on what constitutes an “open year” for purposes of reporting the listed transaction. These commenters opined that the final regulations should not be able to hold open (or re-open) a statute of limitations for a return that was filed before the relevant transaction became a listed transaction. One commenter stated that such a rule would result in taxpayers currently under audit and disputing penalties based on an expired statute of limitations finding one legal basis of their case evaporated, undoing months or years of analysis and evaluation.

          Guidance on open years for purposes of applying § 1.6011-4 is outside the scope of these final regulations, which merely identify a listed transaction. However, if a taxpayer who is required to disclose a listed transaction for a taxable year for which the statute of limitations has not expired prior to the identification of the listed transaction fails to do so, then the taxpayer’s statute of limitations will continue to stay open for that taxable year as provided in section 6501(c)(10) of the Code. Section 6501(c)(10) provides that, if a taxpayer fails to include on any return or statement for any taxable year any information with respect to a listed transaction (as defined in section 6707A(c)(2) of the Code) which is required under section 6011 to be included with such return or statement, the time for assessment of any tax imposed by the Code with respect to such transaction does not expire before the date that is one year after the earlier of (1) the date the taxpayer provides the required information or (2) the date that a material advisor meets the requirements of section 6112 with respect to a request by the Secretary under section 6112(b) relating to such transaction with respect to such taxpayer. Section 301.6501(c)-1(g)(3)(iii) of the Procedure and Administration Regulations (26 CFR part 301), which was issued pursuant to notice and comment and finalized most recently in TD 9718 (80 FR 16973), published in 2015, and which is not amended by these final regulations, provides (1) that the taxable years to which the failure to disclose relates include each taxable year that the taxpayer participated (as defined under section 6011 and the regulations thereunder) in a transaction that was identified as a listed transaction and for which the taxpayer failed to disclose the listed transaction as required under section 6011, and (2) if the taxable year in which the [*17] taxpayer participated in the listed transaction is different from the taxable year in which the taxpayer is required to disclose the listed transaction under section 6011, the taxable years to which the failure to disclose relates include each taxable year for which the taxpayer participated in the transaction.

          Several commenters asked for guidance as to what constitutes an “open” tax year for taxpayers that took the position they were not required to file a Form 8886, Reportable Transaction Disclosure Statement, because Notice 2017-10 was invalidated. This requested guidance is also outside the scope of these final regulations for the reasons discussed in the prior paragraph.

                             • IRS and Treasury’s pending blackletter law counterpunch for micro-captive insurance arrangements. REG-109309-22, Micro-Captive Listed Transactions and Micro-Captive Transactions of Interest, 88 F.R. 21547 (4/11/23). As noted above, in response to the district court’s decision in CIC Services, LLC, the IRS and Treasury also proposed regulations in 2023 identifying certain micro-captive insurance arrangements as listed transactions and transactions of interest. These proposed regulations are expected to be finalized in 2025. See Department of Treasury, 2024-2025 Priority Guidance Plan (10/3/24) at 13 (last accessed 12/1/2024).

 JAT Comments:

1. I have no meaningful comments (meaning that would be meaningful to readers). I do offer this as a bit of an aside on the legislative rule characterization of listing “listed transactions” by Notice: With the demise of Chevron deference, a lot of the confusion about the APA distinction between legislative and interpretive rules should be taken off the table and the traditional understanding of the distinction can be applied. The cases holding that Notices could not be used to list transactions did not rely upon Chevron deference and applied the traditional distinction—the Notices were legislative because they added something to the statute that was not within the fair interpretive scope of the statutory text. 

Links to Cases Cited in Blog (Alphabetical Order)

• CIC Services, LLC v. Internal Revenue Service, 592 F. Supp. 3d 677 (E.D. Tenn. 2022), GS here, as modified by unpublished opinion, 2022 WL 2078036 (2022) (invalidating Notice 2016-66, 2016-47 I.R.B. 745)
• Green Rock LLC v. Internal Revenue Service, 104 F.4th 220 (11th Cir. 6/4/24), GS here, aff’g 654 F. Supp. 3d 1249 (N.D. Ala. 2023), GS here.
• Green Rock LLC v. Internal Revenue Service, 654 F. Supp. 3d 1249 (N.D. Ala. 2023), GS here.
• Green Valley Investors, LLC v. Commissioner, 159 T.C. 80 (2022), GS here.
• Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), GS here.

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