27 F.4th 1138
6th Cir.2022Background
- In 2007 the IRS issued Notice 2007-83, identifying certain employee-benefit trusts that purchase cash-value life insurance as "listed transactions" subject to reporting and penalties under 26 U.S.C. § 6707A.
- Mann Construction (owners Brook Wood and Lee Coughlin) used an employee-benefit trust to pay premiums on a cash-value life policy (2013–2017) and did not report the arrangement as a listed transaction.
- The IRS assessed reporting-penalty notices against the company and its two shareholders for 2013; the taxpayers paid the penalties, sought administrative refunds, and sued in federal court after denial.
- The taxpayers challenged Notice 2007-83 as (1) violating the APA notice-and-comment requirement, (2) exceeding agency authority, (3) arbitrary and capricious, and (4) inapplicable to their arrangement; the district court upheld the IRS on all grounds.
- The Sixth Circuit reversed solely on APA notice-and-comment grounds, holding Notice 2007-83 is a legislative rule that must have been promulgated through notice-and-comment and that Congress did not clearly exempt the IRS from those APA procedures.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Notice 2007-83 required APA notice-and-comment | Notice imposes new reporting duties and penalties without APA procedures; it is invalid. | The Notice is interpretive guidance or otherwise not subject to notice-and-comment. | Court: Notice is a legislative rule imposing new duties and therefore required notice-and-comment; IRS did not comply, so Notice must be set aside. |
| Whether Notice is legislative or interpretive | It creates new, binding obligations and penalties rather than merely interpreting existing statute. | It merely interprets the statutory term "tax avoidance transaction" and informs taxpayers of IRS enforcement priorities. | Court: Notice has the force of law, changes legal duties, and implements a congressional delegation — it is legislative. |
| Whether Congress expressly exempted IRS from APA procedures | No express statutory exemption; normal APA procedures apply. | The cross-reference to regulations and past IRS practice permits using notice or other guidance instead of notice-and-comment. | Court: No clear, express congressional intent to displace APA §553; cross-references and congressional inaction do not suffice. |
| Whether the court needed to address remaining challenges (unauthorized action, arbitrary and capricious, scope) | These claims alleged additional defects in the Notice and its application. | Government defended Notice on merits. | Court: Did not decide merits of these claims because it vacated the Notice on APA procedural grounds. |
Key Cases Cited
- CIC Servs., LLC v. IRS, 141 S. Ct. 1582 (2021) (agency identification of reportable transactions can carry force of law)
- Perez v. Mortgage Bankers Ass'n, 575 U.S. 92 (2015) (distinguishing legislative and interpretive rules; notice-and-comment required for rules with force of law)
- Marcello v. Bonds, 349 U.S. 302 (1955) (congressional exemptions from APA not lightly presumed)
- Azar v. Allina Health Servs., 139 S. Ct. 1804 (2019) (purpose of notice-and-comment for fairness and informed agency decisionmaking)
- Dickinson v. Zurko, 527 U.S. 150 (1999) (limits on judicial deference and preserving APA norms)
- Lockhart v. United States, 546 U.S. 142 (2005) (requiring clear statutory indication to depart from standard procedural rules)