Mann Construction Archives - TAX CONTROVERSY 360

District Court Vacates, Sets Aside IRS Reportable Transaction Notice

The fallout from taxpayer challenges to the Internal Revenue Service’s (IRS) “reportable transaction” regime continues. On March 21, 2022, the district court in CIC Servs., LLC v. IRS ruled in favor of the taxpayer, vacating Notice 2016-66 and ordering the IRS to return all documents and information produced pursuant to Notice 2016-66 to taxpayers and material advisors.

We previously posted about the Supreme Court of the United States’ decision in CIC Servs., LLC v. IRS, which allowed a pre-enforcement challenge to the IRS’s reportable transaction regime. On remand, the parties filed cross-motions for summary judgment. The district court, relying on Mann Construction, Inc. v. United States, explained that the “Sixth Circuit’s analysis in Mann Construction is binding on this Court and applies equally to the arguments advanced by the IRS regarding Notice 2016-66 in this case.” The court dealt the IRS another blow, holding that Notice 2016-66 had to also be set aside as an agency action that was arbitrary and capricious: “[s]imply including cases in the administrative record that suggest certain tax structures could be abusively employed is not synonymous with examining relevant facts and data in connection with issuing the Notice.” In determining the appropriate relief, the court rejected the IRS’s request to limit vacatur of the Notice to CIC, explaining that “vacating the Notice in its entirety is appropriate” and citing the US Court of Appeals for the Sixth Circuit’s prior statement that the IRS “do[es] not have a great history of complying with APA procedures, having claimed for several decades that their rules and regulations are exempt from those requirements” (See CIC Servs., LLC v. IRS, 925 F.3d 247, 258 (6th Cir. 2019) quoting Kristin E. Hickman & Gerald Kersa, Restoring the Lost Anti-Injunction Act, 103 Va. L. Rev. 1683, 1712-13 (2017)).

Practice Point: The assault on the IRS’s reportable transaction regime is far from over. We recently posted about the Sixth Circuit’s opinion in Mann Construction in which it held that Notice 2007-83, which required disclosure of listed transactions relating to certain employee benefit plans, violated the Administrative Procedure Act (APA). APA challenges continue to expand to other IRS notices that bypassed the notice-and-comment requirement, including Notice 2017-10, which identifies certain syndicated conservation easement transactions as listed transactions subject to disclosure to the IRS. These developments will certainly have a significant impact on taxpayers and material advisors’ responsibilities as we move into the tax filing season.

Sixth Circuit Sides with Taxpayer in APA Challenge to Reportable Transaction Regime

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.