In the heyday of its enforcement efforts against the “technical” tax shelters that began to proliferate in the nineties, the IRS issued, under the authority of I.R.C. § 6011(a), more than thirty notices identifying various transactions as suspect. (The landscape in those days was, after all, a target-rich environment.) These notices described the notorious “listed transactions.” And upon the enactment of the American Jobs Creation Act in 2004, the failure to disclose “reportable transactions” (which included those listed transactions) meant serious penalties and sanctions for taxpayers and their material advisors. See I.R.C. §§ 6662A, 6707, 6707A, and 6708. (That last code section imposed upon noncompliant material advisors a penalty of $10,000 a day, a pronouncement of doom that caused even some revenue agents to blanche.)
With CIC Services, LLC v. IRS, 141 S. Ct. 1582 (2021), though, we learned that the Anti-Injunction Act, a venerable defense in the Government’s toolkit, did not bar, for example, a pre-enforcement challenge to a listing notice, thus allowing a taxpayer to proceed with its argument that such a notice, in that case addressing micro-captive insurance arrangements, violated the Administrative Procedure Act for failure to follow the notice-and-comment rulemaking process as required by the APA.
Now most recently, the Eleventh Circuit, as did the Sixth Circuit previously in Mann Construction, Inc. v. United States, 24 F.4th 1138 (6th Cir. 2022), has moved on to the merits of whether the IRS need follow APA notice-and-comment procedures. In Green Rock, LLC v. Internal Revenue Service, 2024-1 U.S. Tax Cas. (CCH) P 50,159, dealing with Notice 2017-10 as to certain conservation easements, the circuit court found that the IRS did need to so follow the APA.
The opinion explained that no express language could be found in the Internal Revenue Code providing an exemption from the APA. And resort to the reportable transaction regime established by the Treasury regulations under section 6011 was unavailing as an agency regulation could not displace a provision of the APA. The IRS had argued that through section 6707A, Congress must have been cognizant of the whole existing listing-notice process and thereby blessed it as an exception to the APA’s requirements. The circuit court found this too oblique; Congress must exempt “expressly.” Finally, the IRS had also argued that Congress could not have intended all the listing notices to be done away with. The circuit court noted that when most of the notices were issued, they did not entail penalties for non-disclosure of the transactions, but in any event, only Notice 2017-10 was before the circuit court.
But whether we see this trend of litigation continuing is questionable as the IRS appears to have partaken at Belshazzar’s feast and has begun to identify listed transactions in proposed regulations. See Announcements 2022-28 (syndicated conservation easement transactions); 2023-11 (micro-captive insurance transactions); and Policy Statement on the Tax Regulatory Process (March 5, 2019) (“The best practice for agency rulemaking is the notice-and-comment process established by the Administrative Procedure Act (APA).”)