Wednesday September 27, 2023
Conservation Easement Penalty Rejected
Seabrook Property LLC et al. v. Commissioner; No. 5071-21
SEABROOK PROPERTY, LLC, SEABROOK MANAGER, LLC, TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
Washington, DC 20217
This case is currently calendared for trial during the Court's March 6, 2023, Atlanta, Georgia, trial session. On January 5, 2023, petitioner Seabrook Manager, LLC (Seabrook), filed a Motion for Partial Summary Judgment (Doc. 20), together with a Memorandum in Support of Petitioner's Motion for Partial Summary Judgment (Doc. 21), and a Declaration of Michelle Levin in Support of Petitioner's Motion for Partial Summary Judgment (Doc. 22). On January 30, 2023, the Commissioner filed a Response to Petitioner's Motion for Partial Summary Judgment (Doc. 25). Seabrook filed a Reply on February 6, 2023 (Doc. 27).
In its Motion, Seabrook moves the Court to determine that the contribution of a conservation easement made by Seabrook Property, LLC to the Southern Conservation Trust, Inc., is (1) a contribution of a "qualified real property interest" that satisfies section 170(h)(1)(A),1 and (2) a contribution to a qualified organization that satisfies section 170(h)(1)(B). Citing this Court's decision in Green Valley Investors, LLC v. Commissioner, No. 17379-19, 159 T.C. (Nov. 9, 2022), Seabrook further moves the Court to determine that penalties under section 6662A may not be imposed on Seabrook Property, LLC or its members because I.R.S. Notice 2017-10, 2017-4 I.R.B. 544, "is an invalid agency action." Pet'r's Mot. for Partial Summ. J. 1-2.
In his Response, the Commissioner agrees that Seabrook Property, LLC contributed a qualified real property interest, as defined in section 170(h)(1)(A), to a qualified organization, as defined in section 170(h)(1)(B). But he disagrees with Seabrook regarding the penalties under section 6662A, arguing that the Court's decision in Green Valley was erroneous. For the reasons described below, we agree with Seabrook and will grant its Motion.
The parties are in agreement on the first two issues, and we have no reason to discuss them further. So we turn our attention to the third issue ? the potential application of section 6662A.
Section 6662A was enacted as part of the American Jobs Creation Act of 2004 (AJCA), Pub. L. No. 108-357, §812(a), 118 Stat. 1418, 1577. In relevant part, it establishes special penalties with respect to reportable and listed transactions. In Notice 2017-10, the Internal Revenue Service (IRS) identified conservation easement transactions like the one in this case as listed transactions, making them subject (at least potentially) to section 6662A penalties.
In Green Valley, the IRS relied on Notice 2017-10 to impose a section 6662A penalty on taxpayers that had engaged in conservation easement transactions. The taxpayers petitioned our Court, and we held that Notice 2017-10 was invalid under the Administrative Procedure Act (APA), 5 U.S.C. §§551-559, 701-706, because it failed to comply with the APA's notice and comment procedures. Green Valley, 159 T.C., slip op. at 23. As a result, we concluded that the penalty under section 6662A could not apply. And the Court further stated that it would "apply th[e] decision setting aside Notice 2017-10 to the benefit of all similarly situated taxpayers who come before us." Id. at 23 n.22.
In arguing that the Court decided Green Valley incorrectly, the Commissioner restates the same arguments he made before the Court in that case, including in his Motion for Reconsideration of December 9, 2022, which the Court denied on January 23, 2023. We do not address most of those arguments further here, but we pause briefly to discuss two provisions that, along with the section 6662A, were enacted as part of the AJCA: (1) section 6501(c)(10), a statute of limitations provision on assessment that applies when listed transactions are not timely disclosed, and (2) section 6404(g)(2)(E), a provision excluding reportable and listed transactions from the suspension of interest that would otherwise apply under section 6404(g).
The Commissioner's argument with respect to these two provisions proceeds as follows:
(1) Congress made both section 6501(c)(10) and section 6404(g)(2)(E) effective for years prior to their enactment.
(2) Congress's choice in this regard demonstrates an understanding that, before Congress enacted the AJCA, the IRS had already identified certain reportable and listed transactions.
(3) It further demonstrates Congress's intent that the AJCA's new rules would apply to the already-identified reportable and listed transactions.
(4) The IRS did not use notice and comment procedures when it identified reportable and listed transactions before the AJCA's enactment.
(5) The Court's decision in Green Valley requires the IRS to use notice and comment procedures when it identifies reportable and listed transactions, and, therefore, the decision invalidates the IRS's actions in identifying such transactions before the AJCA.
(6) Invalidating all IRS identifications of reportable and listed transactions before the AJCA renders the retroactivity of section 6501(c)(10) and section 6404(g)(2)(E) inoperative, contrary to Congress's intent.
(7) Because Green Valley's holding renders an aspect of the AJCA inoperative, it must be erroneous. See Hibbs v. Winn, 542 U.S. 88, 101 (2004) (a statute should be construed so that no part will be inoperative, superfluous, void, or insignificant).
While much could be said about several of the steps in the Commissioner's argument, we will assume (but only for the sake of analysis) that he is correct about the first four. But see Green Rock, LLC v. IRS, No. 2:21-cv-01320, slip. op. at 11 (N.D. Ala. Feb. 2, 2023) (noting the parties' disagreement about whether some of the listed transactions pre-AJCA were identified in regulations). But, as we discuss further below, we do not agree with the Commissioner's fifth step. And addressing the fifth step suffices to rebut the Commissioner's overall argument (and also shows that steps six and seven would, at a minimum, be based on an incorrect premise).
We begin by noting our holding in Green Valley says nothing about transactions the IRS had identified before the AJCA, nor does its reasoning require the invalidation of any IRS actions in this regard. The majority opinion and the side opinions specifically make this point. See Green Valley, 159 T.C., slip op. at 9-10 n.8 ("This report offers 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."); id. at 19, 20, 21, 22 (discussing "future notices" and "future reportable transactions"); id. at 32 n.5 (Pugh, J., concurring in the result) ("Our holding does not invalidate notices that had been issued before Congress enacted penalties. Those notices are not before us today and the circumstances surrounding their issuance are distinguishable. And Congress would be presumed to know about and adopt pre-existing notices when it adopted pre-existing procedures for identifying listed transactions."); id. at 34 (Toro, J., concurring in the result) (focusing on the process for "identifying listed transactions after the enactment of the AJCA" (emphasis added)); id. at 35 ("I am not persuaded that Congress, when instituting this penalty regime, intended to strip away the protections of the APA for future listed transactions." (Emphasis added.)).
Further, the Court's analysis in Green Valley was premised on our determination that Notice 2017-10 was a legislative rule. See Green Valley, 159 T.C., slip op. at 8-15. (Legislative rules, unlike interpretive rules, are subject to the APA's notice and comment procedures.) This conclusion in turn relied on provisions (like section 6662A) that changed the import of designating a transaction as reportable or listed, imposing significant consequences based on that designation. See, e.g., id. at 5 (summarizing penalties under section 6662A). Many of these provisions were enacted or modified by the AJCA and did not previously appear in the Code. See id. at 9-10 n.8; see also id. at 36 (Toro, J., concurring in the result) ("When it adopted the AJCA in 2004, Congress established new penalties. . . ."). As a result, although the Court has not had occasion to decide this point, the notices issued to identify reportable and listed transactions before the AJCA might be viewed as interpretive rules not subject to the APA's notice and comment procedures.
Moreover, regardless of whether pre-AJCA notices are considered legislative or interpretive, when Congress enacted section 6707A(c) (the AJCA provision that defines reportable and listed transactions), it specifically referred to determinations made "under regulations prescribed under section 6011," I.R.C. §6707A(c)(1), and "transaction[s] specifically identified by the Secretary as . . . tax avoidance transaction[s] for purposes of section 6011," I.R.C. §6707A(c)(2). The IRS's pre-AJCA notices identifying reportable and listed transactions generally were issued pursuant to regulations under section 6011. See, e.g., I.R.S. Notice 2000-60, 2000-49 I.R.B. 569 (citing Temp. Treas. Reg. § 1.6011-4T(b)(2)). And so, while the Court has not had reason to rule on this issue, one could interpret the statutory references and the AJCA provisions as a whole as blessing and incorporating the notices the IRS had already issued before the effective date of the AJCA. This reading of the statute would give full effect to the effective date provisions the Commissioner cites, while still requiring the Commissioner to comply with the APA after the effective date of the AJCA, as the Court concluded in Green Valley.
In short, as we already noted, our holding in Green Valley is expressly focused on listed transactions the IRS identified after the AJCA and does not speak to transactions the IRS had identified before the AJCA. Nor does its reasoning require the invalidation of any pre-AJCA listed transactions. Thus, nothing in the Commissioner's Response offers a persuasive reason for departing from the Court's holding in Green Valley, and we decline to do so.
In view of the foregoing and upon due consideration, it is hereby
ORDERED that petitioner's Motion for Partial Summary Judgment, filed January 5, 2023, is granted.
(Signed) Emin Toro
1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times and all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times.
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