So says Judge Christian N. (“Speedy”) Weiler in Green Valley Investors, LLC, et al., Bobby A. Branch, Tax Matters Partner, 159 T. C. 5, filed 11/9/22. In Judge Speedy Weiler’s crosshairs is Notice 2017-10, 2017-4, I.R.B. 544. Bobby’s boys want partial summary J that said notice is invalid for want of notice-and-comment, hence the Section 6662A reportability chops on top of the understatement, underpayment, overvaluation, and whatever else IRS can think of are a no-go.

Of course, this is more Dixieland syndicated boondockery. And Bobby’s boys are represented by The Golden Hoard, the Peach State’s answer to The Jersey Boys.

The issue is whether Notice 2017-10, requiring highlighting of syndicated conservation easements, is legislative or interpretative.

“Legislative rules impose new rights or duties and change the legal status of regulated parties.” 159 T. C. 5, at p. 8. (Citations omitted).

OTOH, “Interpretative rules merely advise the public of an agency’s construction of the statutes it administers. Unlike interpretative rules, legislative rules have the force and effect of law.” 159 T. C. 5, at p. 9. (Citations omitted).

In the case of Bobby’s boys’ tax dodges, their returns were already filed for years at issue when the notice was issued. But Judge Speedy Weiler isn’t going to decide retroactivity here.

So which is it?

Spoiler alert, it’s legislative.

“The act of identifying a transaction as a listed transaction by the IRS, by its very nature, is the creation of a substantive (i.e., legislative)  rule and not merely an interpretative rule. See 5 USC §533. Identifying a transaction as a listed transaction does not merely provide the IRS’s interpretation of the law or remind taxpayers of preexisting duties. Rather, and as we will detail below, identifying a transaction as a listed transaction imposes new duties in the form of reporting obligations and recordkeeping requirements on both taxpayers and their advisors. Notice 2017-10 exposes these individuals to additional reporting obligations and penalties to which they would not otherwise be exposed but for the notice. Creating new substantive duties and exposing taxpayers to penalties for noncompliance ‘are hallmarks of a legislative, not an interpretive, rule.’” 159 T. C. 5, at pp. 9-10 (Citations and footnote omitted).

My diligent readers can, if they wish, read the remaining 14 (count ’em, 14) pages of Judge Speedy Weiler’s opinion. Judges Foley, Gustafson, Morrison, Buch, Ashford, Urda, Copeland, Jones, Greaves, and Marshall did, and they agree.

Judge Pugh agrees with the result, but digs into whether the enactment of Section 6707A, where Congress tried to hit the moving target of the ever-more-inventive manœuvres  of ever-more-inventive dodgefloggers, repealed or otherwise suppressed 5 USC §533. And she finds it doesn’t; and anyway, if IRS needs further weapons, there’s the “good cause” exception (5 USC §553(b) among others.

There’s always an exception somewhere, guys. Once again, IRS must decompose a little more brain tissue before taking a quick-and-easy approach. Judges Paris, Ashford, Copeland, and Ch J Kerrigan agree.

Judge Toro also concurs in result, going back over the American Jobs Creation Act, whence spring Section 6707A. Notice-and-comment is an attempt to democratize an otherwise autocratic and bureaucratic ipse dixit. And Judge Copeland agrees with this, too; she’s becoming the Tax Court bench’s successor to Tevye the Dairyman.

Judge Gale thinks that noticed dodgery is exempt from the APA, because Section 6707A says “by notice,” tout court.

Judge Nega says this kind of highroller dodgery damages the core of our voluntary compliance system, beyond the loss of revenue. Congress, he says, knew that, and adopted a rapid response régime.

“I disagree that Congress failed to ‘expressly’ override the application of the APA to the IRS process incorporated into law by the AJCA. The nature of the legislation as well as the legislative history associated with it that the opinion of the Court finds unpersuasive leads me to the conclusion that Congress did not intend to enact the AJCA penalty regime subject to the time-consuming notice-and-comment procedures of the APA. In the light of congressional knowledge of the existence of the APA when enacting the AJCA, I cannot agree that Congress added a penalty regime to enforce the existing IRS rulemaking without addressing an obvious APA vulnerability, at least, to the then-listed transactions.” 159 T. C. 5, at p. 46.

Lest I be misunderstood, I am not saying that IRS can ride roughshod over due process. There is still judicial review of the transaction itself. There has yet to be a trial, wherein confrontation, rules of evidence, cross-examination, appellate review, and representation of the parties by able counsel of their sole choice, play their full and essential roles. Justice must be done, and be seen to be done.

Click to access n-17-10.pdf