Green Rock LLC v. Internal Revenue Serv.

104 F.4th 220

GREEN ROCK LLC, Plaintiff-Appellee, v. INTERNAL REVENUE SERVICE, U.S. Department of Treasury,United States of America, Defendants-Appellants.

No. 23-11041

United States Court of Appeals, Eleventh Circuit

Filed: June 4, 2024

Appeal from the United States District Court for the Northern District of Alabama, D.C. Docket No. 2:21-cv-01320-ACA

Frank H. Chang, Cameron Thomas Norris, Consovoy McCarthy, PLLC, Arlington, VA, John C. Neiman, Jr., Maynard Nexsen, PC, Birmingham, AL, Patrick Strawbridge, Consovoy McCarthy, PLLC, Boston, MA, for Plaintiff-Appellee.

Geoffrey Klimas, Ellen Page DelSole, Francesca Ugolini, Tax Division, Appellate Section, Washington, DC, Daniel B. Causey, IV, Laura M. Conner, Tax Division, Washington, DC, Prim F. Escalona, Alabama Attorney General's Office, Montgomery, AL, for Defendants-Appellants.

Before William Pryor, Chief Judge, and Jordan and Brasher, Circuit Judges.

William Pryor, Chief Judge:

This appeal requires us to decide whether the Internal Revenue Service violated the Administrative Procedure Act by issuing Notice 2017-10 without public notice and comment. Notice 2017-10 requires taxpayers and their advisors to comply with reporting requirements when claiming deductions for donations of conservation easements. Green Rock, LLC, solicited taxpayers to invest in arrangements promising conservation-easement deductions, and it coordinated with legal and accounting professionals to satisfy the reporting requirements triggered by those deductions. After Green Rock sued the Service to challenge Notice 2017-10, the district court granted summary judgment for Green Rock. It ruled that the Service promulgated Notice 2017-10 unlawfully because Congress did not expressly authorize its issuance without notice and comment. The district court set Notice 2017-10 aside for Green Rock. We affirm.

I. BACKGROUND

Our federal tax system "is based on a system of self-reporting." United States v. Bisceglia, 420 U.S. 141, 145, 95 S.Ct. 915, 43 L.Ed.2d 88 (1975). Congress delegated to the Secretary of the Treasury—acting through the Internal Revenue Service—the authority to collect information and prescribe regulations as necessary to assess and collect federal taxes. See 26 U.S.C. § 6011(a); CIC Servs., LLC v. IRS, 593 U.S. 209, 141 S. Ct. 1582, 1586-87, 209 L.Ed.2d 615 (2021). In response to the proliferation of certain corporate tax sheltering strategies, the Secretary designed a comprehensive disclosure regime—a "reportable transaction" regime—to target those shelters and ferret out improper tax-avoidance transactions. See U.S. DEP'T OF THE TREAS., THE PROBLEM OF CORPORATE TAX SHELTERS, 59-64 (July 1999), https://perma.cc/9G3Q-TVZN. In 2000, relying on the authority Congress delegated through section 6011(a), the Secretary promulgated preliminary reportable transaction regulations. See Temp. Treas. Reg. § 1.6011-4T, 65 Fed. Reg. 11,205 (Mar. 2, 2000) (proposed regulation); 65 Fed. Reg. 11,269 (Mar. 2, 2000) (notice of public hearing).

In 2003, the Secretary published a final regulation enacting the reportable transaction regime. See Treas. Reg. § 1.6011-4, 68 Fed. Reg. 10,161 (Mar. 4, 2003). And in 2004, Congress passed section 6707A of the Revenue Code to provide civil penalties for violators. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, 1575 (codified in part at 26 U.S.C. § 6707A); see also S. REP. NO. 108-192, at 90 (2003) (recognizing the Secretary's disclosure framework and the need for penalties to strengthen its efficacy). The 2003 Treasury regulation and the 2004 Act remain in effect and serve as the backbone of today's reportable transaction regime.

Taxpayers must disclose their participation in "reportable transactions"—that is, transactions that the Service has determined have "a potential for tax avoidance or evasion." 26 U.S.C. § 6707A(c)(1). Although taxpayers remain free to participate in those transactions, the failure to disclose them triggers sanctions and monetary penalties. See id. §§ 6707A(b), 6011. And a taxpayer's "material advisor"—one who provides "material aid, assistance, or advice"—is also subject to penalties for disclosure violations. Id. § 6111(a), (b)(1)(A)(i); see id. §§ 6707(b), 6708(a), 6112. Disclosure is central to the Service's enforcement efforts. See Tax Shelters: Who's Buying, Who's Selling, and What's the Government Doing About It?: Hearing Before the S. Comm. on Fin., 108th Cong. 196 (2003), https://perma.cc/RU7A-AX5C.

This appeal concerns a "listed transaction"—a kind of reportable transaction that the Service has "specifically identified" as a tax-avoidance transaction. See 26 U.S.C. § 6707A(c)(2). Listed transactions are potentially the most abusive transactions. Listing is intended to provide taxpayers with a "bright line" and "clear and objective" definition of the specific conduct that the Service considers presumptively suspicious and subject to heightened disclosure. See Elaine Church & Corina Trainer, Reportable Transactions: A Comprehensive Disclosure Regime to Combat Tax Shelters, 57 MAJOR TAX PLAN. 12-1, 12-8 (2005).

The designation of a listed transaction triggers significant reporting and recordkeeping requirements. See 26 U.S.C. §§ 6011, 6111. For each listed transaction, a taxpayer must file a Form 8886. See id. § 6011(a); Treas. Reg. § 1.6011-4(d). And a material advisor must file a Form 8918. See 26 U.S.C. § 6111(a); Treas. Reg. § 301.6111-3(d) (2011). Material advisors also must keep detailed records for each listed transaction. See 26 U.S.C. § 6112(a). The Service estimates that completing Form 8886 and Form 8918 take 21.5 and 14.5 hours respectively.

Taxpayers and material advisors who violate reporting requirements face stiff monetary penalties. A taxpayer who fails to disclose information about a listed transaction faces a penalty of at least $10,000 (or $5,000 if the taxpayer is a natural person), and up to $200,000 (or $100,000 if a natural person). Id. § 6707A(a)-(b). And a material advisor to a listed transaction that fails to disclose faces a penalty of at least $200,000 and up to 50 percent of the gross income the advisor receives for its advice or assistance. Id. § 6707(b)(2). If the disclosure violation is willful, a material advisor faces a penalty of up to 75 percent of its gross income and possible criminal sanctions. Id. §§ 6707(b)(2), 7203.

To date, the Service has identified 36 listed transactions—28 through revenue "notice" and others through revenue "ruling." See Recognized Abusive and Listed Transactions, IRS, https://perma.cc/G647-GQAZ (last updated May 3, 2024) (34 active listed transactions and 2 de-listed transactions). A revenue notice is a form of official Service guidance published in the Internal Revenue Bulletin, the "authoritative instrument for announcing official rulings and procedures of the [Service]." See Internal Revenue Bulletins, IRS, https://perma.cc/PT6B-36T8 (last updated Aug. 14, 2023). Revenue notices are not published in the Federal Register and do not undergo public notice and comment. See Stephanie Hunter McMahon, Classifying Tax Guidance According to End Users, 73 TAX LAW. 245, 256-59 (2020). A revenue ruling is the Service's interpretation of an existing statute or regulation, and it is also published exclusively in the Bulletin without undergoing notice and comment. Id. So, for over two decades, the Service has listed transactions without notice-and-comment procedures. And 28 of the 34 existing listings took effect before the American Job Creation Act created civil penalties for the reportable transaction regime. See Recognized Abusive and Listed Transactions, supra. (28 listed transactions designated before October 2004).

Litigants had long believed that administrative challenges to the Service's listing procedures were barred by the Anti-Injunction Act, which bars lawsuits "for the purpose of restraining the assessment or collection of any tax." 26 U.S.C. § 7421(a); see, e.g., CIC Servs., LLC v. IRS, 925 F.3d 247, 251-57 (6th Cir. 2019) (discussing the application of Anti-Injunction Act to pre-enforcement challenges to revenue notices), rev'd and remanded, 593 U.S. 209, 141 S. Ct. 1582, 209 L.Ed.2d 615 (2021). But the legal landscape changed in 2021. The Supreme Court held, in CIC Services, that a material advisor could seek a preliminary injunction against the enforcement of revenue notice because to challenge the reporting requirements of a notice is not to oppose the collection of a tax. See 141 S. Ct. at 1592. In the wake of CIC Services, several litigants have successfully challenged listing notices as unlawfully promulgated without notice and comment. E.g., Mann Constr., Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) (holding Notice 2007-83 unlawful for lack of notice and comment); Green Valley Invs., LLC v. Comm'r of Internal Revenue, Nos. 17379-19, 17380-19, 17381-19, & 17382-19, 2022 WL 16834499 (T.C. Nov. 9, 2022) (holding Notice 2017-10 unlawful for lack of notice and comment).

Green Rock is a limited liability company based in Birmingham, Alabama. It raises money from investors and serves as a "material advisor," see 26 U.S.C. § 6111(b)(1)(A), for syndicated conservation-easement arrangements. In those arrangements, an investor buys into a pass-through entity that holds real property; the pass-through entity donates a conservation easement that agrees to restrict land uses associated with the property; and the investor claims a tax deduction for the value of the donation. See Notice 2017-10, Listing Notice—Syndicated Conservation Easement Transactions, 2017-4 I.R.B. 522, 544-45 (Jan. 23, 2017).

Conservation-easement arrangements rely on a statutory tax deduction—codified in section 170(h) of the Revenue Code—that Congress enacted to encourage conservation-related donations. See 26 U.S.C § 170(h). As Green Rock puts it, "Land conservation is a good thing." So Congress provided a tax deduction for persons who donate real...