December 2022

Saving the Planet With Admin Law: Another Blow to Tax Exceptionalism

Caroline Moriarty, MJLST Staffer

Earlier this month, the U.S. Tax Court struck down an administrative notice issued by the IRS regarding conservation easements in Green Valley Investors, LLC v. Commissioner. While the ruling itself may be minor, the court may be signaling a shift away from tax exceptionalism to administrative law under the Administrative Procedures Act (“APA”), which could have major implications for the way the IRS operates. In this post, I will explain what conservation easements are, what the ruling was, and what the ruling may mean for IRS administrative actions going forward. 

Conservation Easements

Conservation easements are used by wealthy taxpayers to get tax deductions. Under Section 170(h) of the Internal Revenue Code (“IRC”), taxpayers who purchase development rights for land, then donate those rights to a charitable organization that pledges not to develop or use the land, get a deduction proportional to the value of the land donated. The public gets the benefit of preserved land, which could be used as a park or nature reserve, and the donor gets a tax break.

However, this deduction led to the creation of “syndicated conservation easements.” In this tax scheme, intermediaries purchase vacant land worth little, hire an appraiser to declare its value to be much higher, then sell stakes in the donation of the land to investors, who get a tax deduction that is four to five times higher than what they paid. In exchange, the intermediaries are paid large fees. 

Conservation easements can be used to protect the environment, and proponents of the deduction argue that the easements are a critical tool in keeping land safe from development pressures. However, the IRS and other critics argue that these deductions are abused and cost the government between $1.3 billion and $2.4 billion in lost tax revenue. Some appraisers in these schemes have been indicted for “fraudulent” and “grossly inflated” land appraisals. Both Congress and the IRS have published research about the potential for abuse. In 2022, the IRS declared the schemes one of their “Dirty Dozen” for the year, writing that “these abusive arrangements do nothing more than game the tax system with grossly inflated tax deductions and generate high fees for promoters.”

Notice 2017-10 and the Tax Court’s Green Valley Ruling

To combat the abuse of conservation easements, the IRS released an administrative notice (the “Notice”) that required taxpayers to disclose any syndicated conservation easements on their tax returns as a “listed transaction.” The notice didn’t go through notice-and-comment procedures from the APA. Then, in 2019, the IRS disallowed over $22 million in charitable deductions on Green Valley and the other petitioners’ taxes for 2014 and 2015 and assessed a variety of penalties.  

While the substantive tax law is complex, Green Valley and the other petitioners challenged the penalties, arguing that the Notice justifying the penalties didn’t go through notice and comment procedures. In response, the IRS argued that Congress had exempted the agency from notice-and-comment procedures. Specifically, the IRS argued that they issued a Treasury Regulation that defined a “listed transaction” as one “identified by notice, regulation, or other form of published guidance,” which should have indicated to Congress that the IRS would be operating outside of APA requirements when issuing notices. 

The Tax Court disagreed, writing “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.” Essentially, the statutes that Congress wrote allowing for IRS penalties did not determine the criteria for how taxpayers would incur the penalties, so the IRS decided with non-APA reviewed rules. If Congress would have expressly authorized the IRS to determine the requirements for penalties without APA procedures in the penalty statutes, then the Notice would have been valid. 

In invalidating the notice, the Tax Court decided that Notice 2017-10 was a legislative rule requiring notice-and-comment procedures because it imposed substantive reporting obligations on taxpayers with the threat of penalties. Since the decision, the IRS has issued proposed regulations on the same topic that will go through notice and comment procedures, while continuing to defend the validity of the Notice in other circuits (the Tax Court adopted reasoning from a Sixth Circuit decision).

The Future of Administrative Law and the IRS 

The decision follows other recent cases where courts have pushed the IRS to follow APA rules. However, following the APA is a departure from the past understanding of administrative law’s role in tax law. In the past, “tax exceptionalism” described the misperception that tax law is so complex and different from other regulatory regimes that the rules of administrative law don’t apply. This understanding has allowed the IRS to make multiple levels of regulatory guidance, some binding and some not, all without effective oversight from the courts. Further, judicial review is limited for IRS actions by statute, and even if there’s review, it may be ineffective if the judges are not tax experts. 

This movement towards administrative law has implications for both taxpayers and the IRS. For taxpayers, administrative law principles could provide additional avenues to challenge IRS actions and allow for more remedies. For the IRS, the APA may be an additional barrier to their job of collecting tax revenue. At the end of the day, syndicated conservation easements can be used to defraud the government, and the IRS should do something to curtail their potential for abuse. Following notice-and-comment procedures could delay effective tax administration. However, the IRS is an administrative agency, and it doesn’t make sense to think they can make their own rules or act like they’re not subject to the APA. Either way, administrative law will likely continue to prevail in both federal courts and Tax Court, and it will continue to influence tax law as we know it.


Charged Up! the Inflation Reduction Act of 2022 and Its Impacts on Energy Storage Capacity in the U.S.

Quinn Milligan, MJLST Staffer

The Inflation Reduction Act of 2022 (the IRA) is one of the most significant steps the U.S. government has ever taken towards fighting climate change. Over a decade, the IRA dedicates nearly $400 billion to clean energy tax incentives with the aim of reducing carbon emissions and aiding the U.S. energy economy in speeding up its transition away from fossil fuel based energy generation.[1] One of the most interesting features of the IRA’s emphasis on clean energy is the energy storage industry. The IRA extends the coverage of the 30% Investment Tax Credit (ITC) to standalone energy storage projects, and creates a system by which standalone battery projects can earn up to 70% in tax credits, with additional incentives linked to involvement in low-income housing and other projects.[2]

Why is that such a big deal? At a high level, one of the main obstacles to reliance on renewable energy sources, other than nuclear power, is the variability of their supply generation. Variability is easy to understand at a cursory level: You can’t rely on solar power when it’s not sunny out or wind energy when there’s no wind. So, variability of energy production from renewable sources has long been an obstacle to the increased dispatch of renewable sources.[3] Increased transmission capacity and energy storage capacity provide a solution to the variability in generation of renewable energy sources.[4]

The manner in which the Federal Energy Regulatory Committee (FERC) regulates the Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) accentuates the impact of generation variability on the ability of renewable resources to be widely utilized. These ISOs and RTOs operate independently of the federal government to ensure that U.S. citizens have reliable access to affordable energy.[5] In essence, for huge swaths of the country, ISOs and RTOs oversee the markets wherein energy is purchased from generators and resold to retail suppliers, which provide energy to end consumers.[6] The ISOs and RTOs both forecast and plan for the energy needs of their areas of oversight, and then coordinate the purchase and sale of those contracts to fulfill the energy needs. These purchases happen at multiple different time scales, ranging from forward contracts, to day-ahead markets, and even minutes before requirement.[7] Because planning and forecasting make up such an important part of how energy is purchased, the variability of generation from renewables has historically made it very hard for ISOs and RTOs to rely on renewably sourced energy to fulfill any sort of energy need other than minutes-ahead contracts. However, that is the very problem many of the incentives in the IRA may help to solve.

The huge tax incentives given out to standalone energy storage projects are critical policy achievements that will go very far in aiding the U.S. to accomplish its lofty goal of reducing carbon emissions up to 40% below 2005 levels by 2035, as the Biden Administration claims will be accomplished with help of the IRA.[8] One huge change the IRA made to climate policies enacted under the Obama Administration was to remove the solar charging of battery storage in order to receive tax credits. Under the IRA, as opposed to prior legislation, investment in projects to create better storage will receive the IRA’s ITC regardless of what source of energy is used to fill that battery capacity.[9] This ITC for energy storage capacity pairs hand-in-hand with the tax credits extended under the IRA to renewables; for example, the IRA extends the current tax breaks for solar and wind generation for another 10 years.

The emphasis on energy storage capacity increases means ISOs, RTOs and other energy utilities will have less need to rely on fossil fuel energy sources to power their grids, as cleanly produced energy can be stored and dispatched on a longer-term basis to store power and make up for variability in generation. The other important aspect of increases in electricity storage capacity is that ISOs and RTOs can more comfortably rely on renewable energy sources to respond to fluctuations in peak demand periods than ever before.[10] Responding to changes in demand during peak demand hours has long been one of the main challenges for utilities, and one of the reasons our grid has continued to rely on fossil-fuel-based energy for so long. Its generation is reliable, cheap, established and abundant.[11] The increase in energy storage capacity resulting from the IRA’s incentive structure will help ISOs and RTOs transition more fully toward reliance on renewable energy in short-term markets, as well as the long-term capacity markets, by minimizing reliability concerns previously raised by generation variability.

The real genius of the IRA’s focus on the energy storage capacity from a policy standpoint is that all battery projects put into service after December 31, 2022, receive the ITC, even if they are powered by fossil fuels.[12] Unlike many climate change policies before it, this approach means the entire U.S. energy grid, and not just the renewables sector, will be incentivized to address a critical constraint on the deployment of renewably generated electricity and subsequently ease the transition of the grid away from fossil-fuel-generated electricity.

As time goes forward, the price of renewable energy continues to go down as compared to fossil-fuel-generated energy; in fact, renewable energy today is generally cheaper than fossil fuel energy.[13] That begs the question of why most of our electricity is sourced from fossil fuels when FERC directs the ISOs and RTOs to power the grid affordably. The reliability of renewable energy generation has long been one of the obstacles standing in the way of a transition to renewable energy generation, and the IRA’s electricity storage incentives go far in setting up the U.S. to successfully build the storage capacity needed to finally make a transition away from carbon reliance.

Notes

[1] https://www.mossadams.com/articles/2022/08/inflation-reduction-act-clean-energy-credits

[2] https://www.utilitydive.com/spons/ira-sets-the-stage-for-us-energy-storage-to-thrive/635665/#:~:text=The%20Inflation%20Reduction%20Act%20(IRA,70%20percent%20with%20additional%20incentives.

[3] https://www.rff.org/publications/explainers/renewables-101-integrating-renewables/

[4] https://climatechangeresources.org/storage/

[5] https://www.ferc.gov/power-sales-and-markets/rtos-and-isos

[6] https://bestpracticeenergy.com/2020/05/21/energy101-electricity-iso/#:~:text=What%20exactly%20do%20ISOs%20and,actions%20are%20unbiased%20and%20neutral.

[7] https://www.iso-ne.com/markets-operations/markets/da-rt-energy-markets/

[8]https://crsreports.congress.gov/product/pdf/R/R47262#:~:text=The%20same%20analyses%20estimated%20that,prices%2C%20among%20other%20uncertain%20factors

[9] https://www.ny-engineers.com/blog/energy-storage-tax-credit-before-and-after-the-inflation-reduction-act

[10] https://www.ncsl.org/research/energy/energy-storage-for-a-modern-electric-grid-technology-trends-and-state-policy-options.aspx

[11] https://www.solarreviews.com/blog/fossil-fuels-pros-and-cons#fossil-fuel-pros-and-cons

[12]https://www.mossadams.com/articles/2022/08/inflation-reduction-act-clean-energy-credits “Standalone battery storage. “If placed in service after December 31, 2022, standalone battery storage qualifies for the ITC, regardless of whether it’s charged by a renewable source.”

[13] https://www.weforum.org/agenda/2021/07/renewables-cheapest-energy-source/


DNA Testing and Death: How Decades-Long Procedural Battles Determine Who Has to Die

Alexa Johnson-Gomez, MJLST Staffer

When individuals convicted of murder claim actual innocence, crime-scene DNA testing has, many times over, been dispositive in proving such innocence. Intuitively, we assume that if someone has been wrongfully convicted, DNA will be the bringer of truth. But what happens when a defendant cannot get their requested DNA testing because the State argues their claim is procedurally defaulted or barred by the statute of limitations?

Reed v. Goertz is a case in the current U.S. Supreme Court term. Petitioner Rodney Reed argues that his due process rights were violated by a refusal to complete DNA testing after he filed post conviction petitions for relief. While the facts are fairly case-specific and relate to Texas criminal procedure, the Court’s holding in this case could have important implications for when the clock starts to run on petitions for crime-scene DNA testing, as well as for death-row claims of actual innocence more generally.

Back in 1998, a Texas court convicted Rodney Reed of the murder of Stacey Stites; the evidentiary basis for this conviction was solely the presence of his sperm.[1] Reed has maintained his innocence since trial, explaining that his sperm was present because he was having a secret, long-standing affair with Stites.[2] At trial, Reed theorized that the murderer might have been the man Stites was engaged to, who was perhaps retaliating against Stites, a white woman, for having an affair with Reed, a Black man.

In 2014, Reed sought post conviction DNA testing under Chapter 64 of the Texas Code of Criminal Procedure. This provision allows a convicted person to obtain post conviction DNA testing of biological material if the court finds that certain conditions are met.[3] The state trial court denied this motion in November 2014, on the grounds that Reed failed to prove by a preponderance of the evidence that he would not have been convicted but for exculpatory results. Reed appealed the denial, and the appellate court remanded for additional fact finding. Then in September 2016, after additional fact finding was done, the state trial court denied the post conviction DNA testing yet again. The appellate court affirmed the denial in April 2017 and denied rehearing in October 2017.

At this stage, Reed filed a 42 U.S.C. § 1983 complaint against the prosecuting attorney, challenging the constitutionality of Chapter 64 both on its face and as applied to his case.[4] The district court dismissed all of Reed’s claims for failure to state a claim; the Fifth Circuit affirmed in April 2021, stating that Reed’s claim was untimely and that Reed knew or should have known of his injury in November 2014. Generally, time bars in post conviction follow a common principle: if a defendant did know or should have known of a claim, that is the point at which the clock starts running. Defense counsel argues that the clock began to run in October 2017, after Reed exhausted his post conviction appeals fully.

At oral argument on October 11, 2022, the state argued that the clock started prior to the rehearing date in October 2017. Justice Kagan reasoned that it would be simpler to acknowledge we do not know what the authoritative construction of a court of appeals is until appeals are concluded. Justice Jackson agreed, noting that if the federal clock starts while the state appeals process is still ongoing, then the federal courts would have to pause consideration to allow state courts to weigh in first. This would be untenable and overly chaotic. Defense counsel reminded the court of the mounting evidence that points at Reed’s innocence, evidence which is still under review.

While not the hottest topic of this Supreme Court term, this case could still have important implications. While the use of DNA testing to prove actual innocence has been a practice in the world of litigation for the past few decades, cases that have yet to get their post conviction DNA testing done, like Reed’s, often stand in such perilous status because of procedural bars.

A haunting example—the recent execution of Murray Hooper in Arizona. 76 years old at the time of his death, Hooper maintained his innocence until his day of execution.[5] There was never any forensic testing in Hooper’s case that proved he conclusively committed the murders. Hooper’s lawyers filed appeals to get newly discovered evidence considered and forensic testing completed,[6] yet these petitions were all denied.

In theory, post conviction and habeas relief are meant to be reserved for the most deserving of defendants. The courts do not want to allow convicted murderers chance after chance at getting a conviction or sentence overturned, and there is, of course, the presumption that any conviction was right the first time. Yet the high procedural barrier to bringing such claims is not in line with the reality of wrongful convictions. Since 1973, 190 death-row inmates have been exonerated.[7]Post conviction DNA testing is not merely allowing defendants to draw out their appeals process and stave off execution, but is an important scientific tool that can check if the trial court got it right. Preventing petitioners from accessing DNA testing just because of procedural barriers is an injustice, and hopefully the Supreme Court rules as such in Reed v. Goertz.

Notes

[1] Innocence Staff, 10 Facts About Rodney Reed’s Case You Need to Know, Innocence Project (Oct. 11, 2019), https://innocenceproject.org/10-facts-you-need-to-know-about-rodney-reed-who-is-scheduled-for-execution-on-november-20/.

[2] Amy Howe, Justices Wrestle with Statute of Limitations in Rodney Reed’s Effort to Revive DNA Lawsuit, SCOTUSblog (Oct. 11, 2022), https://www.scotusblog.com/2022/10/justices-wrestle-with-statute-of-limitations-in-rodney-reeds-effort-to-revive-dna-lawsuit/.

[3] See Tex. Code Crim. Proc. Ann. § 64.03.

[4] Reed v. Goertz, 995 F.3d 425, 428 (5th Cir. 2021).

[5] Liliana Segura, Out of Time, The Intercept (Nov. 15, 2022), https://theintercept.com/2022/11/15/murray-hooper-arizona-execution/.

[6] Associated Press, Lawyers for Murray Hooper File New Appeal as Execution Date Nears, Fox 10 (Nov. 1, 2022),https://www.fox10phoenix.com/news/lawyers-for-murray-hooper-file-new-appeal-as-execution-date-nears.

[7] Innocence, Death Penalty Information Center, https://deathpenaltyinfo.org/policy-issues/innocence (last visited Nov. 27, 2022).