539 F.Supp.3d 745
E.D. Mich.2021Background
- Plaintiffs (Mann Construction and its principals Wood and Coughlin) participated in a benefits arrangement (Death Benefit Trust / Restricted Property Trust) that used whole‑life (cash‑value) insurance and claimed deductions; the IRS classified such arrangements as abusive.
- In 2007 the IRS issued Revenue Notice 2007‑83 identifying trust arrangements using cash‑value life insurance as listed transactions under the reportable‑transaction regime and warning of mandatory disclosure and penalties under I.R.C. § 6707A.
- Mann included a Form 8275 disclosure for tax year 2013; the IRS later disallowed deductions and assessed § 6707A penalties for 2013–2017; plaintiffs paid the 2013 penalty and sought a refund and declaratory relief.
- Plaintiffs sued claiming the Notice was a legislative rule issued without required APA notice‑and‑comment (Count III) and other APA and refund claims; earlier, the court dismissed several counts but allowed the notice‑and‑comment claim to proceed.
- On cross‑motions for summary judgment the sole issue was whether Congress authorized the IRS to issue Revenue Notice 2007‑83 without APA notice and comment by incorporating the § 1.6011‑4 regulatory framework into § 6707A.
- The court held that Congress, by statute and legislative practice, authorized the IRS to identify listed transactions by notice (and thus to issue Revenue Notice 2007‑83 without notice‑and‑comment), granted defendant summary judgment, denied plaintiffs’ motion, and dismissed the complaint.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Revenue Notice 2007‑83 is a legislative rule requiring APA notice and comment | Notice changes taxpayers’ rights/obligations; must follow § 553 notice‑and‑comment | Even if legislative, Congress authorized the IRS to identify listed transactions by notice | Court recognized Notice alters rights but held Congressional scheme authorized issuance without APA notice and comment |
| Whether § 6707A (and incorporation of 26 C.F.R. § 1.6011‑4) displaces APA procedures | § 559 forbids implied amendment of APA; no explicit APA‑superseding clause so APA applies | § 6707A defines “listed transaction” by reference to regs that permit identification by notice; Congress intended a flexible, notice‑driven reporting regime | Court held Congress, through § 6707A and the regulatory framework, authorized identification of listed transactions by notice, displacing APA notice‑and‑comment in this context |
| Whether legislative history or silence compels APA compliance | Statements in legislative history (e.g., concern about IRS overreach) show Congress intended safeguards and not to bypass APA | Congressional enactment, subsequent expansions, and oversight reflect adoption of IRS practice, not mere acquiescence | Court found legislative history consistent with Congress endorsing the IRS’s notice‑based regime; plaintiffs’ history arguments unpersuasive |
| Remedy — whether penalties and refund claim must be set aside because Notice was procedurally invalid | Penalties invalid if Notice unlawfully issued; refund owed | Penalties valid because Notice lawfully issued under Congress’s scheme | Court granted summary judgment for defendant, denied plaintiffs’ motion, and dismissed the complaint (refund claim denied) |
Key Cases Cited
- Perez v. Mortg. Bankers Ass'n, 575 U.S. 92 (2015) (describing APA notice‑and‑comment categories and rulemaking framework)
- Marcello v. Bonds, 349 U.S. 302 (1955) (statute can displace APA procedures where Congress’s intent is clear from statutory scheme)
- Asiana Airlines v. F.A.A., 134 F.3d 393 (D.C. Cir. 1998) (Congress may prescribe alternative procedures that displace APA notice‑and‑comment)
- Cohen v. United States, 578 F.3d 1 (D.C. Cir. 2009) (revenue notices may be legislative rules when they change rights and obligations)
- Lorillard v. Pons, 434 U.S. 575 (1978) (Congress presumed aware of agency interpretations when reenacting statutes)
- Boeing Co. v. United States, 537 U.S. 437 (2003) (congressional silence about overturning a regulatory interpretation is persuasive evidence of adoption)
- Sebelius (District Court) v. HHS, 709 F. Supp. 2d 10 (D.D.C. 2010) (contrast where permissive statutory language did not justify bypassing APA notice and comment)