Evidentiary Basis for IRS Notice 2017-10's Unilateral, Retroactive, Procedurally Deficient Issuance
The Gist
The IRS issued a notice in late 2016 that labeled a category of conservation-easement deals as tax-avoidance schemes and applied this label to deals made years earlier, and courts later confirmed the IRS skipped the normal public rulemaking process required for such actions.
Conclusion
In 2016, the IRS unilaterally issued Notice 2017-10, retroactively (to 2010) branding a broad category of these legal transactions as 'presumptively abusive' without a formal rule, public comment, or accountable vote.
Premises
- IRS Notice 2017-10 was issued by Treasury/IRS in December 2016 and published in early 2017 as subregulatory guidance under Internal Revenue Code Section 6011, rather than through the formal rulemaking process outlined in the Administrative Procedure Act (APA).
- The notice designated certain syndicated conservation-easement transactions as 'listed transactions,' a formal IRS category reserved for arrangements the agency deems tax-avoidance schemes, thereby publicly branding participants' transactions as presumptively abusive and subjecting them to onerous disclosure obligations and steep penalties for noncompliance.
- Multiple federal courts, including the Eleventh Circuit in Hewitt v. Commissioner and district courts in Green Valley Investors, LLC v. Commissioner and Green Rock LLC v. IRS, held that the IRS violated the APA by failing to provide notice-and-comment rulemaking before issuing Notice 2017-10, confirming it was promulgated without the procedural safeguards required for binding legal rules.
- Because the listed-transaction designation applied to any transaction meeting its criteria regardless of when it was entered into—and because the IRS's six-year extended statute of limitations for listed transactions reached back to previously filed returns—the notice effectively imposed new compliance and penalty exposure on conservation-easement transactions completed years earlier, including those dating to around 2010.
- As a Treasury/IRS notice rather than a statute or formal regulation, Notice 2017-10 was issued solely by agency officials without a vote by Congress, without publication for public comment under 5 U.S.C. § 553, and without the accountability mechanisms attached to legislative or formal regulatory action.
Assumptions
- The APA's notice-and-comment requirements were legally applicable to this type of IRS guidance, as later confirmed by reviewing courts.
- Extending listed-transaction reporting and penalty exposure to past open tax years constitutes meaningful 'retroactive' application in the ordinary legal and political sense.
- Labeling a transaction category as a 'listed transaction' associated with tax avoidance is fairly characterized as branding it 'presumptively abusive' in practical and reputational effect.