In a major victory before a 17-judge panel of the U.S. Tax Court, a Fox Rothschild litigation team led a successful challenge to an IRS rule and secured the reversal of certain penalties imposed in four consolidated cases involving a combined $90 million in conservation easement deductions.
Vivian D. Hoard led the Fox Rothschild team, assisted by Kip D. Nelson, Richard A. Coughlin, Brian C. Bernhardt and Elizabeth K. Blickley. Fox represented lead challenger Green Valley Investors and three other partnerships in the four cases.
As a ruling of the full Tax Court, the holdings in the case will impact hundreds of pending cases throughout the country.
The Tax Court ruled in its 15-2 decision that the IRS had improperly enacted a rule that would label syndicated conservation easements as potentially abusive and require taxpayers to report them. The agency’s process in adopting the rule violated the Administrative Procedures Act (APA), the court found, because it never invited public comment.
“We remain unconvinced that Congress expressly authorized the IRS to identify a syndicated conservation easement transaction as a listed transaction without the APA’s notice-and-comment procedures, as it did in Notice 2017-10,” the opinion said.
Government lawyers urged the court to uphold the rule on the grounds the IRS has the power to set notice rules that reflect the agency’s interpretation of existing law.
But the court rejected that argument, finding instead the challenged notice requirement must be treated as a “legislative rule” because it purported to impose obligations on taxpayers and their advisors, as well as the threat of penalties.