Tax Court Invalidates Notice 2017-10 For APA Violation

• Published date: 02 December 2022
• Subject Matter: Government, Public Sector, Tax, Constitutional & Administrative Law, Tax Authorities
• Law Firm: Steptoe & Johnson
• Author: Richard Nessler

On November 9, 2022, the United States Tax Court in Green Valley Investors v. Commissioner¹, held that the Internal Revenue Service (IRS) violated the Administrative Procedure Act (APA) when it issued Notice 2017-10 without complying with the APA's notice and comment provisions. The Tax Court set aside Notice 2017-10 as invalid and vacated the imposition of section 6662A penalties (tax shelter penalties for non-reporting) with respect to the syndicated conservation easement transactions identified in Notice 2017-10. The opinion falls on the heels of Mann Construction², where another federal court held that the IRS's issuance of a Notice ran afoul of the APA, and is an important decision applying administrative law principles to IRS guidance.

Facts and Procedural History

In 2011, the taxpayers purchased 607 acres of land in North Carolina in two transactions for a total price of $2,237,600. After transferring the land to a single-member limited liability company, 151 acres of the land were donated as a conservation easement to Triangle Land Conservancy (TLC). In 2013, appraisals were prepared (V&W Appraisals) valuing the entire 607-acre tract at $22 million immediately prior to the easement grant and $1,520,000 after the easement grant.

A charitable contribution deduction of approximately $22.5 million was claimed for the easement donation. The IRS disallowed the deductions by Notices of Final Partnership Administrative Adjustment (FPAA). The FPAAs determined that the taxpayers had not complied with the requirements of section 170 and had not established that the value of the transferred conservation easements exceeded $0. The IRS argued that as a matter of law, the V&W Appraisals were not qualified appraisals because the V&W Appraisals (i) do not provide a fair market value for the property contributed and (ii) were not prepared in accordance with the Generally Accepted Appraisal Standards (GAAS). The IRS asserted accuracy-related penalties for gross valuation misstatements, substantial valuation misstatements, substantial understatements of tax, and negligence under section 6662, and a penalty for a reportable transaction understatement under section 6662A.

Motion practice ensued and in December 2021 petitioner filed a cross motion for summary judgment regarding the IRS' assertion of two penalties' sections 6662(h) and 6662A. In the cross-motion for summary judgment petitioner asserted, in part, that the issuance of Notice 2017-10 failed to comply with...