On June 4, 2024, the Eleventh Circuit joined the Sixth Circuit in holding that IRS listing notices are invalid for violating the Administrative Procedure Act's (APA) notice-and-comment rulemaking procedures.1 The decision follows Mann Construction, which held that Notice 2007-83 is unlawful for lack of notice and comment.2
Background
"Listed transactions" are transactions that the IRS has deemed to be abusive tax avoidance transactions. Since 2000, the IRS has identified more than 30 listed transactions and "transactions of interest" in a notice or other subregulatory guidance.3 The IRS issued Notice 2017-10, at issue in Green Rock, to designate certain conservation easement transactions as presumptively tax-avoidant listed transactions.
Congress Did Not Exempt the IRS from the APA
The Eleventh Circuit's decision started from the principle that if an agency is to enact rules having the force of law, it must follow the notice-and-comment procedures prescribed in the APA, 5 USC. § 553(b).4 An agency can only deviate from this requirement if Congress provided the agency an express exemption. Green Rock found no such express exemption in the text of section 6707A.5 While Treas. Reg. § 1.6011-4(b)(2) states the IRS may list transactions "by notice, regulation, or other form of published guidance," the Eleventh Circuit concluded that "an agency regulation alone cannot displace the notice-and-comment requirements of the Administrative Procedure Act."6
Observations and Next Steps
The Eleventh Circuit was careful to note that it was not ruling on the validity of any other listing notice, stating that "our decision is specific to Notice 2017-10."7 Nonetheless, the Green Rock decision arguably applies to any other listing notice that is backed by penalties under section 6707A. Taxpayers who have paid penalties under such notices may have viable refund claims, even outside of the Sixth and Eleventh Circuits.
In light of the IRS's recent losses on listing notices, the IRS has changed tack on its process for imposing reporting requirements. On June 18, 2024, Treasury and the IRS proposed making certain partnership related-party basis shifting transactions reportable transactions of interest via a notice of proposed rulemaking. The NPRM notes that the rules listed therein are not effective until the date they are published in final regulations. In enumerating new reportable transactions, the IRS appears to have assented to the courts' interpretation of the APA requirements. Notwithstanding this, the IRS has not yet acquiesced to the Green Rock decision and will likely continue to assert that still-extant listing notices are valid.
Footnotes
1. Green Rock LLC v. Internal Revenue Serv., No. 23-11041, --- F.4th ----, 2024 WL 2821767 (11th Cir. June 4, 2024).
2. Mann Constr., Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022). See our prior coverage on Mann Construction here.
3. Announcement 2023-11.
4. 2024 WL 2821767, at *4.
5. Id. at *5.
6. Id.
7. Id. at 87.