The December 8 Federal Register includes a rare taxpayer win, of a sort. The U.S. Treasury Department and the IRS will conduct a notice-and-comment procedure for a proposed set of regulations. The regulations are whether a certain type of transaction - what the IRS calls a “syndicated” conservation easement - should be a “listed transaction” and thereby punished with extraordinary record-keeping and compliance burdens.
Is it really a big win for taxpayers that the IRS is agreeing to hold a hearing and accept public comments? Unfortunately, yes. Treasury and the IRS have long held that the federal law that mandates notice-and-comment procedures for all federal agencies, the Administrative Procedure Act (APA), does not apply to most of what they do. Only formally defined regulations have to go through that process they say, and then they say most of what they do are not regulations but instead revenue rulings, procedures, memoranda, notices, announcements, interpretations, or letters. So while the EPA and the SEC and the FAA all have to post their proposals in the Federal Register, hold hearings, and respond to submitted comments, the IRS ignores all that and skips straight to implementation on matters binding on all taxpayers and backed up by their enforcement.
There’s a reason this process is important. Professor Kristin Hickman says the APA law was passed in 1946 because “fairness and informed administrative decision making require that agency decisions be made only after affording interested persons notice and an opportunity to comment.” An agency that does not follow this APA procedure risks a court striking down the regulation as, to quote the APA law, “arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with the law.”
That’s what happened here. On November 9, the Tax Court held 15 to 2 that the “IRS Notice” at issue surrounding conservation easements was actually a regulation and was invalid because the IRS did not follow APA procedures. (The underlying facts of this particular case, Green Valley Investors, LLC v. Commissioner, are outrageous: the IRS is trying to apply its 2017 notice retroactively to void transactions that occurred in 2014-15.) Only two Tax Court judges sided with the IRS’s argument that notice-and-comment shouldn’t apply to them. One persuasive part of the majority’s opinion are signs that the U.S. Supreme Court is fed up with the IRS’s claims.
President Biden recently nominated Daniel Werfel to be the next IRS Commissioner. It would be great if Mr. Werfel would promise that the IRS will follow the APA law on all IRS pronouncements, and not just when taxpayers beat them in court. (Among other ideas.) Meanwhile, we now have testimony to prepare for a March 1 hearing!