On December 6, 2022, less than a month after its historic loss in the Tax Court in Green Valley Investors LLC v. Commissioner, 159 T.C. 5 (2022), the IRS released Announcement 2022-28, IRB 2022-52, proclaiming the agency's intent to identify certain syndicated conservation easement ("SCE") transactions as listed transactions. The Announcement serves as the precursor to a Notice of Proposed Rulemaking ("NPRM") - REG-106134-22, Syndicated Conservation Easement Transactions as Listed Transactions - to be published in the Federal Register on December 8, 2022. The Announcement and NPRM left many wondering "wait, haven't we been here before?"
Six years ago, in December 2016, the IRS issued Notice 2017-10, which first identified SCEs as a "listed transaction" for the purposes of Code sections 6011 and 6111. For years, the IRS has relied on the Notice to require the reporting of SCEs on Forms 8886 (for SCE participants) and 8918 (for "material advisors"), imposing draconian penalties for non-compliance.
Around the same time as Notice 2017-10 was issued, taxpayers and their advisors raised concerns that the Administrative Procedure Act ("APA") required the IRS to designate reportable transactions (including, but not limited to, listed transactions) using the notice-and-comment process followed by virtually every other government agency in issuing similar rules. While the IRS generally followed the APA with respect to issuing regulations, the agency steadfastly maintained that it was not subject to the law when it came to so-called "listing notices." In other words, the IRS believed it had the authority to require reporting of any transactions it deemed suspect without having to justify such reporting or seek and consider public comment.
Beginning in March of this year, the IRS began to lose case after case, as courts unanimously agreed with taxpayers and their advisors that the IRS was, in fact, required to follow the APA in designating reportable transactions. Most notably, the Sixth Circuit in Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), vacated IRS Notice 2007-83, which identified certain employee benefit plans with cash-value life insurance policies as listed transactions. Soon thereafter, the district court in CIC Services, LLC v. Commissioner, No. 3:17-cv-110, slip op. (E.D. Tenn. Mar. 21, 2022), set aside Notice 2016-66, which identified certain captive insurance arrangements as transactions of interest (a type of reportable transaction). Sensing imminent defeat, in May of this year, the government conceded its case in GBX Associates v. United States, No. 1:22-cv-401, in the district court for the Northern District of Ohio, admitting that it could not enforce Notice 2017-10 against the taxpayer.
The final nail in the coffin came last month when the Tax Court issued its opinion in Green Valley Investors, LLC v. Commissioner, with fifteen of the court's judges concurring (and only two dissenting) that Notice 2017-10 was invalid due to the IRS's failure to comply with the APA. The court noted that while its opinion only applied to the taxpayer in that case, it would "apply th[e] decision setting aside Notice 2017-10 to the benefit of all similarly situated taxpayers who come before us."
Although the IRS purports to disagree with the holdings in these cases, it is now issuing proposed regulations - as required under the APA - designating SCEs as a listed transaction "to eliminate any confusion and ensure consistent enforcement of the tax laws throughout the nation." The Announcement promises that the IRS will issue the final regulations in 2023, "after due consideration of public comments," and that proposed regulations identifying other listed transactions are on the way.
The NPRM provides for a 60-day public comment period (ending February 6, 2023) on the proposed regulations regarding SCEs, to be followed by a public hearing on March 1, 2023. The proposed regulations - once finalized - will require reporting of all SCEs (as defined in the regulations) reflected on returns for which the statute of limitations on assessment remains open. Taxpayers who previously reported transactions pursuant to Notice 2017-10 will be deemed to have met their reporting requirements under the regulations for those previously reported transactions. Material advisors will similarly be required to report SCE transactions with respect to which they made a "tax statement" within the 6 years prior to the effective date of the final regulations.
While the courts continue to mull the appropriate scope of their decisions and remedies for the IRS's non-compliance with the APA, one thing remains clear: the IRS cannot impose penalties for the failure to file Forms 8886 and 8918 to comply with a notice that was not valid in the first place.
Taxpayers who have paid penalties for failure to file Forms 8886 or 8918 to report listed transactions (or reportable transactions more generally) should consider filing protective claims for refund to recoup those payments on the basis that the original listing notices were invalidly issued.
Caplin & Drysdale has significant experience filing administrative refund claims with the IRS, as well as filing suit in federal court to challenge the denial of or lack of IRS action with respect to such refund claims. Please contact one of the attorneys listed below should you wish to discuss your options.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.