Green Rock LLC v. Internal Revenue ServiceGreen Rock LLC v. Internal Revenue Service
MEMORANDUM OPINION
The Internal Revenue Code allows taxpayers to deduct certain charitable contributions from their taxes.
The Internal Revenue Code also permits the Secretary of the Treasury to make regulations about information a taxpayer or “material advisor” must disclose to the Internal Revenue Service in connection with a tax return.
Concerned about abuse of the conservation easement deduction, the IRS issued Notice 2017-10, defining certain “syndicated conservation easement transactions” as listed transactions that must be disclosed to the IRS. (Doc. 1-1). A “syndicated conservation easement transaction” is one in which promoters offer potential investors an opportunity to purchase an interest in a pass-through entity that contributes a conservation easement on real property to a tax-exempt entity; the pass-through entity then allocates the tax deduction to its investors. (Id. at 3-4). If the promotional materials given to the potential investors offer “the possibility of a charitable contribution deduction that equals or exceeds an amount that is two and one-half times the amount of the investor‘s investment,” the transaction that follows is a listed transaction—that is, one the Secretary has identified as a tax avoidance transaction. (Id. at 4-5).
Green Rock is a “material advisor” to transactions falling under Notice 2017-10. (Doc. 21 at 5 ¶ 5). It filed this lawsuit seeking to set aside Notice 2017-10 for violating the Administrative Procedure Act‘s notice-and-comment requirement and for being “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” (Doc. 1 at 12-16). The IRS1 concedes that it did not follow the notice-and-comment procedure but contends that it was not required to do so and that Notice 2017-10 is not arbitrary or capricious. (Doc. 30). Green Rock and the government each move for summary judgment. (Docs. 20, 30). Because notice and comment procedures were required before issuance of Notice 2017-10, the IRS‘s failure to follow those procedures requires the court to set aside the notice. As a result, the court WILL GRANT Green Rock‘s motion, WILL DENY the government‘s motion, and WILL SET ASIDE Notice 2017-10.
I. JURISDICTION
As an initial matter, the court finds that it has subject matter jurisdiction over this case because it is not barred by the Anti-Injunction Act,
II. DISCUSSION
Green Rock seeks an order setting aside Notice 2017-10 because: (1) the IRS issued it without using notice-and-comment rulemaking, as required by the Administrative Procedure Act,
1. Issuance of Notice 2017-10 Required Notice-And-Comment Rulemaking
The Administrative Procedure Act requires that an agency issuing a rule follow a three-step process called “notice-and-comment rulemaking,” under which the agency issues a notice of the proposed rule, gives interested persons the opportunity to submit comments on the proposed rule, and then issues the final rule with a statement of the rule‘s basis and purpose.
While certainly preferable, the language of a statute does not have to explicitly state that it “supersedes” or “modifies” the Administrative Procedure Act to constitute an exemption from the Act. In the absence of these “magical passwords,” a court may find a deviation from the Act‘s notice requirement if it is clear that Congress intended to permit a deviation from the Act. Marcello v. Bonds, 349 U.S. 302, 310 (1955); see also Lockhart v. United States, 546 U.S. 142, 147-48 (2005) (Scalia, J., concurring) (explaining that because “[o]ne legislature ... cannot abridge the powers of a succeeding legislature ... an express-reference or express-statement provision cannot nullify the unambiguous import of a subsequent statute” if the later statute shows by “fair implication” that it supersedes or modifies the earlier statute) (quotation marks omitted). But “[e]xemptions from the terms of the Administrative Procedure Act are not lightly to be presumed.” Marcello, 349 U.S. at 310; see Lockhart, 546 U.S. at 149 (Scalia, J., concurring) (“[R]epeals by implication are not favored. An implied repeal will only be found where provisions in two statutes are in irreconcilable conflict, or where the latter Act covers the whole subject of the earlier one and is clearly intended as a substitute.“) (quotation marks omitted).
Here the IRS contends that the text and history of
Treasury Regulation § 1.6011-4 permits the IRS to identify a listed transaction “by notice” as well as by “regulation, or other form of published guidance.” Id. But the “notice” the Treasury Regulation refers to is IRS guidance published in the Internal Revenue Bulletin, not the notice required under the notice-and-comment requirement of the Administrative Procedure Act. See Green Valley Ranch Invs., LLC v. Comm‘r of Internal Revenue, 159 T.C. 5, 29 n.3 (2022) (Pugh, J., concurring in the result). The IRS calls the notices identifying listed transactions, issued under Treasury Regulation § 1.6011-4, “listing notices.” (See doc. 31 at 27).
Treasury Regulation § 1.6011-4 predates the enactment of
The Eleventh Circuit has not addressed this issue. The Sixth Circuit and the Tax Court, however, have both rejected the IRS‘s position. Green Valley Ranch Invs., LLC, 159 T.C. at 23; Mann Construction, Inc. v. United States, 27 F.4th 1138, 1141 (6th Cir. 2022). In Mann Construction, the Sixth Circuit held that a different listing notice had to be set aside for failure to comply with the notice-and-comment requirement. 27 F.4th at 1141. In a well-reasoned opinion, the Sixth Circuit explored various cases in which Congress had or had not made exemptions from the notice-and-rulemaking requirement. Id. at 1144-45. The Sixth Circuit determined that
Section 6707A‘s cross-reference to
The court is also persuaded by Judges Pugh and Toro‘s reasoning in Green Valley that the language in Treasury Regulation § 1.6011-4 permitting issuance of listing notices “by notice” does not irreconcilably conflict with the Administrative Procedure Act‘s notice-and-comment requirement. Green Valley Invs., LLC, 159 T.C. at 26, 32 (Pugh, J., concurring); id. at 34 (Toro, J., concurring). The Administrative Procedure Act expressly exempts an agency from notice-and-comment rulemaking when it “for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”
The IRS‘s next argument is that enactment of other statutory tax provisions against the backdrop of Treasury Regulation § 1.6011-4 shows that Congress ratified the IRS‘s practice of issuing listing notices without notice-and-comment rulemaking. (Doc. 31 at 28-34). Specifically, the IRS points to two other statutory provisions: (1)
Taking as true the IRS‘s representation that the Secretary has never identified a reportable or listed transaction by regulation (see id. at 31-32; but see doc. 34 at 8 (identifying two regulations in existence in 2004 that identified listed transactions);
The court agrees with the Sixth Circuit and the Tax Court‘s position that nothing in
2. The Proper Remedy
Green Rock seeks an order setting aside Notice 2017-10. (Doc. 1 at 16). The IRS asks that, if the court finds Notice 2017-10 to be improper, the court permit “additional briefings on the scope of any remedy Green Rock may have.” (Doc. 31 at 12 n.1). The IRS argues that an order setting aside the notice would be a nationwide injunction, a drastic form of relief that courts generally disfavor. (Doc. 35 at 10-11).
The court denies the IRS‘s request for additional briefing. The Administrative Procedure Act speaks clearly: “The reviewing court shall . . . hold unlawful and set aside agency action, findings, and conclusions found to be . . . without observance of procedure required by law.”
But even if the mandate were not clear, briefing is still unnecessary because the issue the IRS wishes to brief is foreclosed by the relief Green Rock seeks. A district court‘s decision is binding only on the parties to this case. See Dep‘t of Homeland Sec. v. New York, 140 S. Ct. 599, 600 (2020) (Gorsuch, J., concurring in the grant of a stay) (“Equitable remedies, like remedies in general, are meant to redress the injuries sustained by a particular plaintiff in a particular lawsuit. When a district court orders the government not to enforce a rule against the plaintiffs in the case before it, the court redresses the injury that gives rise to its jurisdiction in the first place.“); see also McGinley v. Houston, 361 F.3d 1328, 1331 (11th Cir. 2004) (“The general rule is that a district judge‘s decision neither binds another district judge nor binds him.“). And Green Rock has not requested issuance of an injunction prohibiting the IRS from enforcing Notice 2017-10 elsewhere or against any other party. (See doc. 1 at 16; doc. 20 at 1; doc. 22 at 3); cf. Alabama v. United States, 304 F.2d 583, (5th Cir. 1962) (describing an injunction as either “affirmatively compelling the doing of some act” or “negatively forbidding continuation of a course of conduct“).2
III. CONCLUSION
The court WILL GRANT Green Rock‘s motion for summary judgment, WILL DENY the IRS‘s motion for summary judgment, and WILL SET ASIDE Notice 2017-10 for violating the Administrative Procedure Act‘s notice-and-comment requirement.
The court will enter a separate final judgment consistent with this opinion.
DONE and ORDERED this February 2, 2023.
ANNEMARIE CARNEY AXON
UNITED STATES DISTRICT JUDGE