We previously posted about the US Supreme Court’s opinion in CIC Servs., LLC v. IRS, which allowed a pre-enforcement challenge to the Internal Revenue Service’s (IRS) “reportable transaction” regime. In that post, we noted the district court opinion in Mann Construction, Inc. v. United States, No. 1:20-cv-11307 (E.D. Mich. 2021), holding that an IRS Notice requiring disclosure of listed transactions was not subject to the Administrative Procedure Act’s (APA) notice-and-comment requirement, and identified unanswered questions and potential future disputes over IRS enforcement strategies.
The US Court of Appeals for the Sixth Circuit has now reversed the district court in Mann Construction, holding that the IRS’s process for issuing Notice 2007-83—which designates certain employee-benefit plans featuring cash-value life insurance policies as listed transactions—violated the APA. Specifically, the court found that Notice 2007-83 was a legislative rule under the APA because it had the force and effect of law. The Sixth Circuit relied on CIC Services, explaining that Notice 2007-83 “defines a set of transactions that taxpayers must report, and that duty did not arise from a statute or a notice-and-comment rule…failure to comply comes with the risk of penalties and criminal sanctions, all characteristics of legislative rules.” The court further found that Congress did not expressly exempt the IRS from the APA’s notice-and-comment requirements with respect to the reportable transaction regime. The Sixth Circuit explained that there was an absence of any express deviation from the APA’s notice-and-comment procedures, and “any exceptions to the sturdy protections established by the APA’s notice-and-comment requirements must come from Congress, not us and not the IRS.”
What now? Mann Construction is a heavy blow to the IRS’s reportable transaction regime, and similar APA attacks are underway against other Notices imposing non-statutory reporting obligations. One example is Notice 2017-10, which identifies certain syndicated conservation easement transactions as listed transactions subject to disclosure to the IRS.
Practice Point: In 2011, the Supreme Court announced in Mayo Found. for Med. Educ. & Rsch. v. United States, that “we are not inclined to carve out an approach to administrative review good for tax law only.” The last 10 years have seen numerous APA challenges in the tax world, some successful and others unsuccessful. CIC Services and Mann Construction are two important cases for taxpayers subject to non-statutory reporting obligations. Taxpayers and practitioners should carefully consider the impact of these cases in similar reporting situations in determining whether to initiate APA challenges.