I’ve beforehand written about IRS Discover 2017-10 referring 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 element, and suffice to say right here that it’s a fairly abusive tax shelter the place a promoter acquires a bit of land inside an LLC, sells (syndicates) pursuits within the LLC to people needing a tax deduction, after which “donates” a conservation easement on the land such that the deduction for the donation flows to the LLC members. In Discover 2017-10, the IRS declared these offers to be a “listed transaction”, which might principally be interpreted to imply a presumed abusive tax shelter.
The IRS’s publication of Discover 2017-10 was proper on the finish of the 12 months, i.e., the closing time for many tax shelters, and it created quite a lot of havoc for all concerned. Of us seeking to get into syndicated conservation easements bought chilly ft (and promoters misplaced income), and people already in such offers needed to made a spate of disclosures to the IRS that might in fact result in them being audited and their offers challenged earlier than the U.S. Tax Court docket. Certainly, Discover 2017-10 threw a bucket of ice chilly water on the syndicated conservation easement enterprise and would kill a lot of the gross sales of these tax shelters for years to return.
There was only one downside: The IRS in promulgating Discover 2017-10 failed to completely adjust to the foundations of the Administrative Procedures Act (APA
Within the case of Green Valley Investors, LLC v Commissioner, 159 T.C. 5 (Nov. 9, 2022), the U.S. Tax Court docket held that Discover 2017-10 was issued in violation of the discover and remark necessities of the APA, put aside Discover 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 recognized in Discover 2017-10. I am not going to spend time on the prolonged majority opinion, the 2 concurring opinions, and the 2 dissenting opinions within the case, all of which you’ll learn for your self here. Suffice it to say that the IRS contended that it didn’t should adjust to the APA as a result of Congress in 2004 handed the American Jobs Creation Act (AJCA) which empowered the IRA to take down tax shelters extra shortly, and ― the IRS argued ― the AJCA outmoded the APA, however the U.S. Tax Court docket didn’t agree.
As with Discover 2016-66 referring to microcaptives, the sensible impact of this ruling might be minimal because the IRS has already splashed its bucket of ice water over syndicated conservation easement offers, and this ruling has no impact on the penalties for an abusive transaction, comparable to these missing financial substance. So in some ways, having Discover 2017-10 invalidated is way ado about nothing.
However not likely. The invalidation of Discover 2016-66 and Discover 2017-10, each for non-compliance with the APA, demonstrates that the IRS both wants to begin complying with the discover and remark necessities of the APA, or else the IRS wants to return to Congress and have it clarify that the AJCA overrules the APA. Frankly, complying with the APA will not be rocket science: With few exceptions, each federal company frequently complies with these necessities within the mountain of latest laws they promulgate every 12 months. Whereas the IRS might imagine that it wants to maneuver extra shortly in shutting down abusive transactions, the laborious fact is that simply publishing a proposed Discover and asking for feedback might be going to throw the bucket of ice water on the longer term advertising and marketing of the abusive shelter, and the IRS can decide up any interim transactions (if any) later when the reporting necessities do go into impact.
With none inside info, I can solely guess that someone within the IRS Basic Counsel’s workplace made a nasty guess after they thought that the courts would bail them out on their APA non-compliance. That unhealthy guess has resulted in egg on their faces as to 2 of their most vital Notices within the final 20 years. Hopefully, someone has realized their lesson: Aggressive enforcement motion in opposition to tax shelters is essential, however so is complying with the foundations.