The Administrative Procedures Act (APA) continues to be a distraction for the IRS as it maintains its aggressive offensive against abusive tax transactions. In Green Valley Investors v. the Tax Court held Notice 2017-10 (making certain syndicated conservation easements listed transactions) was improperly issued and set the Notice aside. By doing so, the Tax Court joins the Sixth Circuit in finding procedural defects with the way the IRS designated listed transactions and transactions of interest. Specifically, the courts are holding that Notices identifying these types of reportable transactions are “legislative” rules. These legislative rules trigger APA rulemaking requirements that—according to the Tax Court and Sixth Circuit—Congress did not intend to override when it enacted the American Jobs Creation Act and Sections 6707A, 6662A and 6501(c)(10). Consequently, the courts are finding the IRS was required to provide notice and an opportunity for public comment prior to designating a category transaction (listed or “transaction of interest”) as reportable. This has caused some to question whether they should report their participation in certain transactions.
The APA and Reportable Transactions
The IRS’s reportable transaction penalty woes recently started with the Supreme Court’s decision in CIC Services, LLC v.where the Supreme Court upheld a material advisor’s right to challenge Notice 2016-66 (making certain micro-captives transactions of interest). Shortly thereafter, the Sixth Circuit in Mann Construction, Inc. v. United found Notice 2007-83 (making certain transactions using trust arrangements involving cash value life insurance policies listed transactions) improperly issued for lack of APA compliance.
Once a transaction becomes reportable, certain parties are required to report their participation in the transaction. Failure to report a transaction can result in penalties. In Green Valley, the penalties at stake were those imposed under Section 6662A. Under 6662A, if a taxpayer has a “reportable transaction understatement” for any taxable year, a penalty of 20% applies to the understatement. The penalty is increased from 20% to 30% if the transaction was not disclosed. In CIC Services, the advisors successfully challenged their reporting obligations as material advisors to certain micro-captive transactions. Material advisors who fail to provide a required list are subject to a list maintenance penalty under Section 6708, which is in addition to any otherCIC subsequently obtained an injunction prohibiting the IRS from enforcing the disclosure requirements set forth in Notice
Disregarding Disclosure Requirements Due to APA Non-compliance
With the flurry of rulings finding identification of certain transactions as reportable improperly determined, some might consider not reporting those particular transactions. If the IRS cannot enforce the penalty for certain reportable transactions, why file? Before deciding not to file, one must consider whether the reporting form protects against the imposition of another penalty, the cost-benefit analysis associated with contesting the reporting requirement given the IRS’s announcement that it intends to continue the fight, and the IRS’s strategy to deal with the APA “speedbump” via proposed regulations.
Protection from Other Penalties
Chief Counsel Advice was recently issued wherein Chief Counsel acknowledged that Form 8886 should obviate the necessity of filing Form 8275 or 8275-R.
Therefore, where Form 8886 is timely filed with a return or a qualified amended return and provides a complete description of the relevant facts of a noneconomic substance transaction, taxpayers have a strong argument that they have adequately informed the IRS of the transaction consistent with the requirements of section
This means that Form 8886 could protect a client from the imposition of a penalty under SectionAlthough there is scant case law involving this penalty, the recent surge of docketed cases involving syndicated conservation easements and micro-captives could result in this penalty’s case law development.
Cost to Challenge Versus Cost to Report
Whereas the cost to prepare Form 8886 for procedurally defective reportable transactions might seem bothersome, one must consider that the IRS may seek to enforce compliance outside the Sixth Circuit. The cost to challenge the IRS would be far more expensive than preparing the form, especially if the forum to challenge the IRS excludes the potentially more cost-efficient Tax Court. In another case the court explained the limits of Tax Court jurisdiction over the section 6707 penalties.
Here respondent issued a deficiency notice, which is a condition precedent to Tax Court jurisdiction. The notice, however, did not determine the section 6707A penalties. Respondent assessed penalties based on his determinations that petitioners failed to report a listed transaction as required by section 6011. Sec. 6707A(a). The section 6707A penalty is not within our deficiency jurisdiction. See sec. 7442. Respondent may therefore assess and collect the penalty without issuing a deficiency notice. We accordingly conclude that we lack jurisdiction to redetermine the section 6707A penalties and shall grant respondent’s motion to dismiss and to strike as to the section 6707A