The Tax Court set aside the IRS notice identifying as “listed transactions” all syndicated conservation easement and similarly similar transactions. The Tax Court found that the notice was a “legislative rule,” which was improperly issued by the IRS without notice and comment as required by the Administrative Procedures Act (APA). (Green Valley Investors, LLC)
Listed transaction notice.
Generally, Code Sec. 6662A imposes a 20% penalty on a taxpayer who has a reportable transaction understatement (“reportable transaction penalty”). The penalty increases to 30% if the taxpayer fails to make the disclosures required under Code Sec. 6011.
Code Sec. 6011 imposes a penalty on any person who fails to include information about a “reportable transaction” on a return. Under Reg §1.6011-4(b)(2), a reportable transaction is a transaction that is the same as or “substantially similar to” a tax avoidance transaction (“listed transaction”) the IRS has identified by notice, reg, or other form of published guidance.
In 2017, the IRS issued Notice 2017-10, 2017-4 IRB 544, that identified all syndicated conservation easement transactions going back to January 1, 2010, including all substantially similar transactions, as “listed transactions” for purposes of the Code Sec. 6011 penalty.
How we got here.
The taxpayer, Green Valley Investors, LLC, claimed charitable contribution deductions for several syndicated conservation easement transactions. The IRS denied the claimed deductions and imposed various reportable transaction penalties. The taxpayer then timely filed a petition for review in the Tax Court.
The taxpayer argued that the reportable transaction penalties couldn’t be imposed because the IRS didn’t comply with the notice-and-comment rulemaking procedures of the Administrative Procedure Act (APA) when it issued Notice 2017-10. The IRS argued that Notice 2017-10 was properly issued with out notice-and-comment rulemaking.
Notice violated APA.
The Tax Court held that the IRS improperly issued Notice 2017-10 because it failed to comply with the notice-and-comment requirements in the APA. The Court set aside the notice and prohibited the IRS from imposing Code Sec. 6662A penalties on the taxpayer.
The Court found that Notice 2017-10 is a legislative rule because the IRS’s act of identifying a transaction as a listed transaction did not merely provide the IRS’s interpretation of the law or remind taxpayers of preexisting duties. Rather it imposed new duties in the form of reporting and recordkeeping obligations on both taxpayers and their advisors.
Creating new substantive duties and exposing taxpayers to penalties for noncompliance “are hallmarks of a legislative, not an interpretive, rule.” Since Notice 2017-10 is a legislative rule, it was required to go through notice-and-comment rulemaking under the APA.
For listed transaction and other tax shelter reporting requirements, see Checkpoint’s Federal Tax Coordinator ¶S-4400 et seq.
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