District Court Holds Listed Transaction Notice Exempt from Administrative Procedures Act by ROBERT HORWITZ
On May 13, 2021, the Supreme Court in CIC Services, Inc. v. Internal Revenue Service held that the Anti-Injunction Act did not bar an action to enjoin an IRS listed transaction notice because it allegedly failed to comply with the Administrative Procedures Act (“APA”) notice and comment provisions. See, https://www.taxlitigator.com/and-now-for-something-completely-different-supreme-court-holds-suit-to-enjoin-irs-notice-not-barred-by-the-anti-injunction-act-by-robert-s-horwitz/. On the same day, a district court issued an opinion in Mann Construction v. United States, Docket No. 1:20-cv-11307 (ED Mich. 5/13/2021), holding that the APA did not apply to listed transaction notices. Given the Supreme Court’s decision in CIC Services, Inc., Mann Construction received little attention. Since the district courts in both cases are in the Sixth Circuit, if Mann Construction is appealed and affirmed, it could result in a dismissal of CIC Services when it is remanded back to district court.
First, the facts: In 2007 the IRS issued Notice 2007-83. The Notice designated as listed transactions certain trust arrangements claiming to be welfare benefit funds that involved cash value life insurance and purported to result in federal income and employment tax benefits. Persons required to disclose or register such transactions, who failed to do so, were subject to penalties under IRC sec. 6707A.
Six years after the Notice was issued, Mann Construction set up a Death Benefit Trust. With its S corporation return for 2013, the company attached a Form 8275 disclosure statement describing the Death Benefit Trust and the rationale for its claiming deductions with respect to the trust on its return. It did not file a Form 8886, the reportable transaction disclosure statement. The IRS audited Mann Construction, disallowed the deductions, which resulted in increased tax liabilities for its two shareholders, and assessed 6707A penalties against the company and its shareholders. They paid the penalties, filed claims for refund and six months later filed a refund action in district court.
The complaint alleged four causes of action, three of which were for violation of the APA: (a) that the Notice was unauthorized agency action; (b) that the Notice was arbitrary and capricious; and (c) that it was issued in violation of the APA’s notice and comment procedures. The fourth cause of action was that Mann Construction’s Death Benefit Trust was not a listed transaction. The Government moved to dismiss for failure to state a claim. The Court granted the motion as to all but the claim that the Notice was issued in violation of APA notice and comment procedures, since plaintiffs “plausibly alleged that the Notice is a legislative rule that should be set aside for failure to comply with notice and comment.” The parties then filed cross-motions for summary judgment.
The Court framed the issue as “whether the IRS was required to provide public notice and an opportunity for comment before promulgating the Notice.”
The APA sets up a three-step procedure for notice and comment rulemaking: (a) issued a general notice of proposed rulemaking; (b) allow interested parties an opportunity to participate; and (c) include in the final rule a “concise general statement of [its] basis and purpose.” Not all rulemaking is subject to these procedures if Congress exempts them from the procedures. In its summary judgment motion, the Government argued that Congress authorized the IRS to promulgate listed transaction notices without a notice and comment period. The taxpayers argued that they were not exempted from APA’s notice and comment rulemaking procedures.
Sec. 6707A defines “listed transaction” by reference to transactions identified by the Secretary for purposes of sec. 6011 and defines “reportable transaction” by reference to the regulations promulgated under sec. 6011. Treas. Reg. sec. 6011-4 states that reportable transactions are ones the IRS has “identified by notice, regulation, or other form of published guidance as a listed transaction.” The Government argued that by incorporating the regulation into the statute, Congress intended the IRS to continue following the regulation, including identifying listed transactions via notice. Although neither sec. 6707A nor the regulations mention the APA, in Marcello v Bonds, 349 U.S. 302 (1955), the Court held that the Immigration & Naturalization Act (“INA”), rather than the APA, governed deportation proceedings even though the INA did not have any clause expressly superseding the APA, because the legislative history of the INA made it clear the INA was to be the sole source for deportation procedures. In subsequent cases the courts had looked to the statutory text and structure and legislative history to determine whether the APA applied.
The taxpayers argued that the APA is to apply unless the statutory procedure could not be reconciled with it. The Court acknowledged that listed transaction notices could be issued after a notice and comment period, but that doing so would undermine a principal purpose of the 6707A regime: to allow the IRS to identify questionable transactions as early as possible. In incorporating the regulations, Congress “endorsed the flexible reporting regime that the IRS had already developed.” The Court held that listed transaction notices under sec. 6707A can be issued without following APA notice and comment rulemaking procedures. It therefore granted the Government’s motion, denied the taxpayers’ motion, and ordered the case dismissed.
The case probably gives us a preview of what the IRS will argue on remand in CIC Services: that the notice and comment rulemaking provisions of the APA do not apply to listed transaction notices under sec. 6707A, such as the captive insurance listed transaction notice. The Court made clear, however, that whether the APA applies to a particular IRS notice or rule depends on an examination of the language of the statute, the statutory scheme and the legislative history. And since this is a district court decision, it is not binding precedent on other courts and at best has persuasive value.
Robert S. Horwitz is a Principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions.