GBX Assocs. v. United States
| Decision Date | 14 November 2022 |
| Docket Number | 1:22cv401 |
| Parties | GBX Associates, LLC, Plaintiff, v. United States of America, et al., Defendants |
| Court | U.S. District Court — Northern District of Ohio |
Currently pending are the cross Motions for Summary Judgment filed by Plaintiff GBX Associates, LLC and Defendants United States of America, the United States Department of the Treasury, and the Internal Revenue Service. (Doc. Nos. 17, 18.) Plaintiff GBX Associates, LLC filed a combined Response in Opposition to Defendants' Motion for Summary Judgment and Reply in support of its own Motion for Summary Judgment on July 1 2022. (Doc. No. 19.) Defendants filed a Reply in Support of their Motion for Summary Judgment on July 8, 2022. (Doc. No 20.)
For the following reasons, Plaintiff's Motion for Summary Judgment (Doc. No. 17) is DENIED and Defendants' Motion for Summary Judgment (Doc. No. 18) is GRANTED, as set forth herein.
The material facts are not in dispute.[1] Plaintiff GBX Associates, LLC (“Plaintiff” or “GBX”) is a real estate investment and development firm that focuses on the acquisition, preservation, and rehabilitation of historic buildings in urban centers. (Doc. No. 1 at ¶ 13.) GBX uses a variety of federal, state, and local tax incentives, including Historic Preservation Easements. (Id. at ¶¶ 14, 15.) According to GBX, a Historic Preservation Easement is a “qualified real property interest” pursuant to 26 U.S.C. § 170(h). (Id. at ¶ 17.) The Internal Revenue Code allows a deduction for a qualified conservation contribution, which is a contribution of a “qualified real property interest” to a qualified organization exclusively for conservation purposes. See Doc. No. 1-1 at p. 1 (citing 26 U.S.C. §§ 170(f)(3)(B)(iii), 170(h)(1) through (5)). To utilize this incentive to generate the capital necessary to acquire, preserve, and rehabilitate historic buildings, GBX establishes funds through which investors invest in real estate projects and receive, as part of their return on investment, allocations of deductions. (Doc. No. 1 at ¶ 19.)
On December 23, 2016, the United States Department of the Treasury and the Internal Revenue Service (“IRS”) released Notice 2017-10, entitled “Listing Notice- Syndicated Conservation Easement Transactions.” See Doc. No. 1-1. This Notice provides, in part, as follows:
The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are aware that some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested. This notice alerts taxpayers and their representatives that the transaction described in section 2 of this notice is a tax avoidance transaction and identifies this transaction, and substantially similar transactions, as listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations (Regulations) and §§ 6111 and 6112 of the Internal Revenue Code (Code). This notice also alerts persons involved with these transactions that certain responsibilities may arise from their involvement.
(Doc. No. 1-1 at p. 1.) The designation of the transactions covered by the Notice as “listed transactions” imposes certain reporting and recordkeeping requirements on taxpayers who “participate” in those transactions as well as on “material advisors.”[2] (Id. at p. 4-5.) The Notice advises that participants and material advisors that fail to comply with these reporting and recordkeeping requirements may be subject to penalties under 26 U.S.C. §§ 6707, 6707A, 6708.[3] (Id. at p. 6.) It is undisputed that the United States issued Notice 2017-10 without first providing any notice to the public or soliciting comments. See Doc. No. 15 at ¶ 20; Doc. No. 15 at ¶ 20.
GBX is a material advisor with respect to Historic Preservation Easement transactions that the IRS allegedly considers substantially similar to the listed transactions described in Notice 2017 10. (Doc. No. 1 at ¶ 39.) Although it believes that the investment funds it forms and manages are distinguishable from the listed transaction described in Notice 2017-10, GBX works to comply on a protective basis with the reporting and list maintenance requirements arising from the Notice. (Id. at ¶ 40.) Specifically, GBX asserts (and Defendants do not dispute for purposes of the instant Motions) that GBX spends “significant time and money” complying with the record-keeping and reporting requirements that Notice 2017-10 imposes on GBX as a material advisor and on the funds and project partnerships it manages. (Id. at ¶ 41.) GBX also asserts (and Defendants do not dispute for purposes of the instant Motion) that it spends significant time and money providing information regarding the reporting and list maintenance requirements to other material advisors, the investors who participate in the funds, and tax professionals who work with those material advisors and investors. (Id. at ¶ 42.)
On March 11, 2022, GBX filed a Verified Complaint for Injunctive and Declaratory Relief in this Court against Defendants United States of America, the United States Department of the Treasury, and the Internal Revenue Service. (Doc. No. 1.) In its sole claim, GBX asserts that Defendants violated the Administrative Procedure Act (“APA”) when the IRS issued Notice 201710 without first providing notice and an opportunity for public comment. (Id. at ¶¶ 47-64.) GBX alleges that Notice 2017-10 constitutes a “substantive” or “legislative-type” rule that is subject to the APA's notice and comment procedures as a matter of law. (Id. at ¶ 57) (citing 5 U.S.C. § 553). GBX alleges that “Notice 2017-10 is unlawful because the IRS and Treasury failed to comply with the notice-and-comment procedures and there is no applicable exception to those requirements.” (Id. at ¶ 63.)
GBX alleges that it is likely to succeed in challenging the lawfulness of Notice 2017-10 under the APA in light of the Sixth Circuit's recent decision in Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. March 3, 2022), which upheld an APA challenge to a similar IRS listing notice.[4] (Id. at ¶ 6.) GBX further alleges that compliance with the Notice “has and will continue to injure Plaintiff, subjecting it to onerous reporting and recordkeeping requirements as well as reputational harm.” (Id. at ¶ 64.) GBX seeks an Order (1) declaring that Notice 2017-10 is unlawful and setting it aside; (2) permanently enjoining enforcement of Notice 2017-10; and (3) awarding attorney's fees and costs. (Doc. No. 1 at p. 10.)
Shortly after filing its Verified Complaint, on March 21, 2022, GBX filed a Motion for Speedy Hearing and Expedited Declaratory Judgment, in which it asked the Court to “enter a scheduling order that allows the court to decide this case and grant the relief requested in Plaintiff's Verified Complaint by June 15, 2022.” (Doc. No. 7 at p. 6.) Defendants opposed the Motion. (Doc. No. 8.) On April 5, 2022, the Court issued a Memorandum Opinion & Order denying the Motion. (Doc. No. 12.)
Defendants filed their Answer on May 20, 2022. (Doc. No. 15.) Notably, therein, Defendants admit that “Mann Construction is now controlling law within the Sixth Circuit and .. the analysis in that decision ... appears to apply with equal force to IRS Notice 2017-10.” (Id. at p. 3.) Defendants "request that the Court enter a final judgment that IRS Notice 2017-10 is declared unlawful as to plaintiff GBX only and setting IRS Notice 2017-10 aside as to plaintiff GBX only, with the understandings that (1) this relief does not apply to any parties not presently before the Court, and (2) the United States retains the right to argue that this is not the correct result in cases outside the Sixth Circuit." (Id. at p. 16.) Defendants further state that "[b]efore the Court enters a judgment providing for any relief that exceeds, in nature or in scope, the relief that is described in the preceding sentence, the United States requests leave to file a brief explaining its position that the nature and scope of relief available in this action should be so limited." (Id.)
The Court conducted a telephonic status conference with counsel on May 23, 2022, during which counsel for GBX indicated that GBX did not agree to the limited scope of relief proposed by Defendants in their Answer. See Minute Order dated May 23, 2022. The Court ordered the parties to meet and confer to determine whether they could reach agreement regarding the scope of relief in a proposed final judgment and order of dismissal. (Id.)
On May 27, 2022, the parties advised the Court that they were unable to reach agreement regarding the scope of relief in a proposed final judgment and order of dismissal. See Minute Order dated May 31, 2022. The parties agreed that discovery was not necessary and requested that the Court allow the parties to file briefs regarding the nature and scope of the relief available under the APA. Id. The Court set a briefing schedule. Id.
GBX thereafter filed a Motion for Summary Judgment on June 10, 2022. (Doc. No. 17.) Defendants filed a combined Cross Motion for Summary Judgment and Response in Opposition to GBX's Motion for Summary Judgment on June 24, 2022. (Doc. No. 18.) GBX filed a combined Brief in Opposition to Defendants' Motion for Summary Judgment and Reply in support of its own Motion on July 1, 2022. (Doc. No. 19.) Defendants filed a Reply in support of their Motion for Summary Judgment on July 8, 2022. (Doc. No. 20.)
“The APA establishes the procedures federal administrative agencies use for ‘rule making,' defined as the process of ...
To continue reading
Request your trial