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Tax Court Denies Reconsideration in Green Valley and More District Courts Invalidate Listing Notices

Posted on Feb. 7, 2023

There are some updates in the ongoing battles concerning the validity of IRS listing notices. As I discussed in December in IRS Asks Tax Court To Reconsider Green Valley v Commissioner, the IRS did not concede following its loss in Green Valley v Commissioner and asked the Tax Court to reconsider its opinion. To be sure, a litigant who leads a reconsideration motion with a suggestion that the Tax Court failed to read some of its filings and address its arguments is facing steep odds. Not surprisingly, in late January, the Tax Court denied the IRS’s motion for reconsideration, noting that it is “irrelevant whether the Opinion does or does not specifically address respondent’s Supplement since we are under no obligation to address each and every argument raised by a party.”

In denying the motion, the Tax Court did, however, address a substantive point IRS had made in its reconsideration motion.

Recall that according to the motion, the IRS stated that the Tax Court failed “to appreciate the existence and implications of the dozens of listed-transaction notices that had already been issued without notice-and-comment when the American Jobs Creation Act [ACJA] of 2004.”

In denying the motion the Tax Court stated that it was offering “no opinion on whether identifying a transaction as a listed transaction was substantive rulemaking before the enactment of the AJCA or whether Congress expressed its intent to exempt from the standard notice-and-comment procedures transactions that were already listed as of the enactment of the AJCA.”

Shortly following that loss, the courts handed the IRS another loss in Green Rock v IRS, with a federal district court in Alabama also finding that the IRS’s issuance of Notice 2017-10 without going through notice and comment rulemaking violated the APA.

The district court in Green Rock stated that it was  “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.” Judges Pugh and Toro had noted that a “listing notice issued without notice-and-comment under Treasury Regulation § 1.6011-4 could still comply with the Administrative Procedure Act if the IRS set outs its good-cause finding in the listing notice. Green Valley Invs., LLC, 159 T.C. at 25, 30 (Pugh, J., concurring); id. at 34 (Toro, J., concurring)

The district court in Green Rock also dispensed with the IRS’s other arguments that relied on context to supposedly show that Congress intended to preempt the APA’s notice and comment regime:

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) 26 U.S.C. §6501(c)(10), which extends the statute of limitations for assessing a tax relating to a taxpayer’s failure to disclose a listed transaction; and (2) 26 U.S.C. §6404(g)(2)(E), which permits accrual of interest on amounts owed with respect to reportable transactions even if the Secretary does not provide the taxpayer a notice within a specific period of time.

By noting the SOL and interest statutory amendments referred to the IRS practice of identifying listed transactions in IRB guidance rather than issuing regs after notice and comment, the IRS emphasized that those provisions signaled Congress’s decision to override the APA’s general rule that notice and comment was required for IRS to issue a legislative rule in the form of identifying listed transaction:

Voiding listing notices issued without notice-and-comment rulemaking would nullify these two provisions because no valid listing notices would have been in effect when the statutory provisions were enacted…. In other words, the IRS asserts, “the effective date provisions for . . . §§6501 and 6404 . . . are predicated on the validity of the IRS’s regulation and listing notices.”

In discounting the effect of these related provisions, the district court in Green Rock stated that more was needed to prove that Congress blessed an exemption from the APA’s notice and comment requirements:

The sections may have become effective before any enforceable reportable transactions or listed transactions were identified, but they were and they remain effective. In any event, as the Sixth Circuit said in addressing a slightly different ratification argument made by the IRS, “Congress presumably is equally aware of the [Administrative Procedure Act]’s requirement that it must ‘expressly’ override the normal notice-and-comment rules. It takes far more than the clanging silence we have here to infer that Congress has expressly altered the prerequisites for creating a rule that imposes financial and criminal penalties.” Mann Constr., Inc., 27 F.4th at 1147 (citation omitted).

One final important point about Green Rock: in fashioning a remedy, the district court set aside the Notice only with respect to the plaintiff and emphasized that Green Rock “has not requested issuance of an injunction prohibiting the IRS from enforcing Notice 2017-10 elsewhere or against any other party.” It distinguished Green Rock’s equitable relief requested with that of an injunction which is premised on either “affirmatively compelling the doing of some act” or “negatively forbidding continuation of a course of conduct.” As the relief requested did not meet that definition, the court noted that it was not fashioning a nationwide injunction.

Green Rock’s approach to the issue of remedy was similar to another district court case that invalidated the same notice, GBX v IRS (ND Ohio 2022). In GBX, the district court, in a case appealable to the Sixth Circuit, where Mann Construction was decided, said Mann was controlling as to the merits. As to the remedy, the district court questioned whether it had the power to issue a nationwide injunction. As such it invalidated the Notice only with respect to the particular taxpayer.

As this post reflects, there is lots of litigation around these issues. I suspect that the IRS will look to appeal Green Valley, and as I have discussed previously, the issue concerning the scope of the court’s power to fashion a remedy is one that has generated considerable discussion in broader administrative law circles. See CIC Services: Now that AIA Issue Resolved, On to Some Meaty Administrative Law Issues, discussing Professor Mila Sohoni’s article The Power to Vacate a Rule, 88 Geo. Wash. L. Rev. 1121 (2020).

Stay tuned.

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