Today’s guest post is from Jonathan Black, a senior associate in the Washington DC office of Caplin & Drysdale. Jon discusses the IRS’s latest efforts to address conservation easements, a topic that has generated considerable litigation and discussion on the blog. As Jon notes, the implications of the IRS’s actions this week may have significance in areas beyond listed transactions. Les
On December 6, 2022, less than a month after its prognosticated loss in the Tax Court case of Green Valley Investors LLC v. Commissioner, 159 T.C. No. 5 (2022), the IRS released Announcement 2022-28, IRB 2022-52, identifying certain syndicated conservation easement (“SCE”) transactions as listed transactions. Is anyone having Déjà vu?
If the IRS had just issued an announcement, we would simply be seeing Notice 2017-10 all over again. That is not the case, however. Instead of merely issuing an Announcement, IRB Notice, News Release, Post-it note, table-napkin scrawling, or other “sub-regulatory” guidance, the IRS also filed for publication with the Federal Register a Notice of Proposed Rulemaking (“NPRM”) – REG-106134-22, Syndicated Conservation Easement Transactions as Listed Transactions – formally designating SCEs as listed transactions in proposed regulations. The NPRM announced a 60-day public comment period, to be followed by a public hearing, after which the government promises to issue final regulations in 2023. Surprisingly, the NPRM was not accompanied by a temporary regulation purporting to have immediate efficacy. As an early holiday gift to taxpayers and practitioners, the IRS also announced that it would soon be publishing more notices of proposed rulemaking to identify other listed transactions.
In other words, the IRS is actually going to follow the law.
As background, the Administrative Procedure Act (“APA”) generally requires that, for a government agency to issue Rules, the agency must first publish an NPRM in the Federal Register and provide the public an opportunity to comment. The agency must then consider the public comments and publish a short explanation of whether it agrees with those comments when it publishes the final Rule. Unless the agency publishes with the Rule a statement of good cause for why the rule must be effective sooner, a Rule that can be enforced against the public (as opposed to one that relieves a restriction or merely states the agency’s position) cannot be effective until at least 30 days after its publication in the Federal Register. In the case of Treasury Regulations, I.R.C. section 7805 contains additional restrictions on when a regulation may be effective. The IRS has traditionally relied on section 7805(e) as authority for publishing immediately effective temporary regulations simultaneously with its NPRMs without complying with the APA, and continued to do so even after it lost Chamber of Commerce v. Commissioner, No. 1:16-CV-944-LY, 2017 WL 4682050 (W.D. Tex. Sept. 29, 2017). The IRS is a sizable organization, and it has built up some inertia; it changes its position about as readily as the fabled political uncle at the Thanksgiving table. Since at least as early as CIC
Services, LLC brought its original suit against the IRS seeking to set aside Notice 2016-66 in December of 2016, the IRS has been on notice that its preferred method of identifying reportable transactions (and, by extension, listed transactions)—publishing IRB Notices—does not comply with the APA. Yet the IRS resolutely refused to change its procedures, lest tax practitioners take note and treat its “protective” use of Federal Register publication, statements of good cause, and the opportunity for public comment as an admission that it had been doing things wrong all along.
The proverbial chickens have come home to roost. This year, the IRS lost a slew of APA cases, including CIC Services, LLC v. Commissioner, No. 3:17-cv-110, slip op. (E.D. Tenn. Mar. 21, 2022) (setting aside Notice 2016-66, which identified certain captive insurance arrangements as transactions of interest (a type of reportable transaction)), Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) (setting aside Notice 2007-83, which identifies certain employee benefit plans with cash-value life insurance policies as listed transactions); Green Valley Investors, LLC v. Commissioner (setting aside Notice 2017-10, which identified certain SCEs as listed transactions); and GBX Associates, LLC v. United States, No. 1:22-cv-401, slip op. (N.D. Ohio Nov. 14, 2022) (same). Finally, although the IRS purports to disagree with the holdings in these cases, it is issuing proposed regulations “to eliminate any confusion and ensure consistent enforcement of the tax laws throughout the nation.”
Certainly, taxpayers who have paid penalties for failure to file the myriad reports required for participation in various reportable transactions should consider filing protective claims for refund, because the period of limitations on refund may be running. But the same reasoning that is causing the courts to reject reportable transactions and their associated penalties may also apply in other situations. For example, taxpayers who receive gifts from foreign persons or distributions from trusts, and taxpayers treated as the United States owners of foreign trusts, but who were unaware of the existence of Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, may have found themselves subject to astronomical penalties as the IRS has taken a hard line on information reporting penalties in recent years. As the IRS recognizes that that it is not above the law where reportable transactions are concerned, it may reevaluate the hazards posed by its reliance on Notice 97-34, Information Reporting on Transactions With Foreign Trusts and on Large Foreign Gifts, which has served as its basis for requiring taxpayers to file these forms.
May the magic of the holiday season continue to inspire you and yours (and the IRS) to comply with the law!