I have previously written about IRS Notice 2017-10 relating to syndicated conservation easements in my article, The IRS Leaves A Lump Of Coal For Syndicated Conservation Easements In Notice 2017-10 (Dec. 27, 2016). That article explains what a conservation easement is in some detail, and suffice to say here that it is a pretty abusive tax shelter where a promoter acquires a piece of land inside an LLC, sells (syndicates) interests in the LLC to folks needing a tax deduction, and then “donates” a conservation easement on the land such that the deduction for the donation flows to the LLC members. In Notice 2017-10, the IRS declared these deals to be a “listed transaction”, which can basically be interpreted to mean a presumed abusive tax shelter.
The IRS’s publication of Notice 2017-10 was right at the end of the year, i.e., the closing time for most tax shelters, and it created a great deal of havoc for all involved. Folks looking to get into syndicated conservation easements got cold feet (and promoters lost revenue), and those already in such deals had to made a spate of disclosures to the IRS that would of course lead to them being audited and their deals challenged before the U.S. Tax Court. Indeed, Notice 2017-10 threw a bucket of ice cold water on the syndicated conservation easement business and would kill most of the sales of those tax shelters for years to come.
There was just one problem: The IRS in promulgating Notice 2017-10 failed to fully comply with the rules of the Administrative Procedures Act (APA
In the case of Green Valley Investors, LLC v Commissioner, 159 T.C. 5 (Nov. 9, 2022), the U.S. Tax Court held that Notice 2017-10 was issued in violation of the notice and comment requirements of the APA, set aside Notice 2017-10 as invalid, and vacated the imposition of § 6662A penalties (tax shelter penalties for non-reporting) with respect to the syndicated conservation easement transactions identified in Notice 2017-10. I’m not going to spend time on the lengthy majority opinion, the two concurring opinions, and the two dissenting opinions in the case, all of which you can read for yourself here. Suffice it to say that the IRS contended that it did not have to comply with the APA because Congress in 2004 passed the American Jobs Creation Act (AJCA) which empowered the IRA to take down tax shelters more quickly, and ― the IRS argued ― the AJCA superseded the APA, but the U.S. Tax Court did not agree.
As with Notice 2016-66 relating to microcaptives, the practical effect of this ruling is probably minimal since the IRS has already splashed its bucket of ice water over syndicated conservation easement deals, and this ruling has no effect on the penalties for an abusive transaction, such as those lacking economic substance. So in many ways, having Notice 2017-10 invalidated is much ado about nothing.
But not really. The invalidation of Notice 2016-66 and Notice 2017-10, both for non-compliance with the APA, demonstrates that the IRS either needs to start complying with the notice and comment requirements of the APA, or else the IRS needs to go back to Congress and have it make clear that the AJCA overrules the APA. Frankly, complying with the APA is not rocket science: With few exceptions, every federal agency regularly complies with these requirements in the mountain of new regulations they promulgate each and every year. While the IRS may think that it needs to move more quickly in shutting down abusive transactions, the hard truth is that just publishing a proposed Notice and asking for comments is probably going to throw the bucket of ice water on the future marketing of the abusive shelter, and the IRS can pick up any interim transactions (if any) later when the reporting requirements do go into effect.
Without any inside information, I can only guess that somebody in the IRS General Counsel’s office made a bad bet when they thought that the courts would bail them out on their APA non-compliance. That bad bet has resulted in egg on their faces as to two of their most important Notices in the last 20 years. Hopefully, somebody has learned their lesson: Aggressive enforcement action against tax shelters is very important, but so is complying with the rules.