Invalid IRS Notices – the APA – and the 6th Circuit (+Southern District of California, Federal Court in Aroeste v. United States)

Posted on December 12, 2023 Updated on December 12, 2023

The 6th circuit found in 2022 that IRS Notice 2007-83 was not valid. In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), the court concluded that the Notice failed to comply with the APA’s notice-and-comment procedure. Specifically, the Court stated:

Several taxpayers complain about the Internal Revenue Service’s enforcement of an administrative regulation that requires them to report transactions involving cash-value life insurance policies connected to employee-benefit plans. The taxpayers claim that the IRS failed to meet a reporting requirement of its own by skipping the notice-and-comment process before promulgating this legislative rule. If individuals “must turn square corners when they deal with the government,” the taxpayers insist, “it cannot be too much to expect the government to turn square corners when it deals with them.” Niz-Chavez v. Garland , ––– U.S. ––––, 141 S. Ct. 1474, 1486, 209 L.Ed.2d 433 (2021). We agree with the taxpayers and reverse the district court’s contrary decision.

Mann Constr., Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022)

The IRS Notice referenced in the  Aroeste v. United States case was about a different federal tax issue, i.e., “tax expatriation” matters –  IRS Notice 2009-85.

See, Federal Court Determines IRS “Guidance for Expatriates Under Section 877A” – IRS Notice 2009-85: “Is Not Binding Authority”

On the same day of the Aroeste decision, the 6th Circuit issued a follow-on decision –Mann Construction, Inc. v. United States, No. 23-1138 (6th Cir. 2023)  The appellate court’s Chief Judge. Sutton, noted:

When the Internal Revenue Service levied tax penalties against Mann Construction and its owners under one of its regulations, technically a Notice, the taxpayers replied that the IRS violated the Administrative Procedure Act. In a prior opinion, we held that the Notice violated the APA. The IRS voluntarily refunded the penalties to the plaintiffs and agreed not to apply the Notice to the taxpayers in the future. Even so, the district court on remand proceeded to invalidate the regulation nationwide. Because the dispute is moot, we vacate the district court’s decision.

Importantly, in the Mann decision – The IRS refunded the past penalties with interest, abated the unpaid penalties, and agreed not to apply the Notice to these taxpayers or anyone else within the Sixth Circuit. See I.R.S. Announcement 2022-28, 2022-52 I.R.B. 659 (Dec. 27, 2022).

How the IRS will respond to the Notice issue in Aroeste remains to be written:

Aroeste v United States – Order Nov 2023Download

Federal Court Determines IRS “Guidance for Expatriates Under Section 877A” – IRS Notice 2009-85: “Is Not Binding Authority”

Posted on December 1, 2023 Updated on December 2, 2023

The Federal District Court made numerous key legal findings in its Order on November 20, 2023; in Aroeste v. United States, Case No. 22-cv-00682-AJB-KSC. One of the more significant findings was that IRS Notice 2009-85 is not binding authority. This blog is dedicated to tax expatriation related matters under U.S. law.

• IRS Notice 2009-85 is Not Binding Authority per the Court

See, Federal District Court Rules in Favor of Mexican Citizen – Aroeste vs. United States (LPR) – Tax Treaty Applies: Government’s Motion for Summary Judgment is Denied. Please read through the case in detail.

The author along with his Chamberlain Hrdlicka, Attorneys at Law colleagues have been representing Mr. Aroeste throughout this District Court case. The author of tax-

expatriation.com has represented him for several years throughout the IRS audits and the on-going U.S. Tax Court cases along with his wife.

While many may consider this case to be a Title 31/FBAR case (which it is), it has greater ramifications under the tax expatriation laws in the author’s view. The finding by this Court regarding IRS Notice 2009-85 is significant with far reaching implications. The IRS Notice 2009-85 is broad in its scope and is more than 60 pages in length. It notes that, “Section 877A(i) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 877A.” (p.4)

• No Treasury Regulations Ever Issued – After 15 Years of IRS Notice 2009-85

The Treasury Department never issued regulations under 877A, which is now 15 years old. The notice provides the historical background as follows:

Notice 2009-85 PURPOSE Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “Act”) added new sections 877A and 2801 to the Internal Revenue Code (“Code”), amended sections 6039G and 7701(a), made conforming amendments to sections 877(e) and 7701(b), and repealed section 7701(n) with respect to individuals who on or after June 17, 2008, relinquish U.S. citizenship or cease to be lawful permanent residents of the United States. This notice provides guidance for individuals who are subject to section 877A.

IRS Notice 2009-85., p. 1.

The Court in Aroeste concluded that Mr. Aroeste ceased to be a lawful permanent resident.

Specifically, the Court finds Aroeste . . . ceased to be treated as a lawful permanent resident of the United States because he commenced to be treated as a resident of Mexico under the Treaty, did not waive the benefits of such Treaty, and notified the Secretary of the commencement of such treatment.

Aroeste v. United States, p. 17.

• Case Law from – Aroeste v. United States_- Clarifies Key Concepts in the Law

• IRS Notice 2009-85

Many practitioners have questioned the accuracy and validity of many of the conclusions asserted in the 2009 notice; such as the timing of when someone becomes a “covered expatriate”. How and why they become a “covered expatriate” by the concepts introduced in the 2009 notice. The multiple examples presented, reflecting various tax outcomes according to the IRS, were never commented on by the public.

Another question many have raised is the effectiveness of IRS Form 8854? Throughout the notice, the IRS uses the word “must” some 88 times regarding the individual who ceased to be a U.S. citizen or a “lawful permanent resident” (or in some instances references to third parties). Does the IRS imply that if any of these “must”/conditions imposed under the notice are not satisfied, the individual is necessarily a “covered expatriate” with the adverse tax consequences that might follow?

Are their other adverse tax consequences that might follow? For instance, can the IRS repeatedly assert international information penalties regarding the individual’s

• companies in her own country,
• beneficiary rights of a trust or an estate in her own country, or
• other investment assets or financial accounts in her country of residence that might be deemed a “specified foreign financial asset” if the individual is a United States person”?

Can the IRS in perpetuity assert such information penalties regarding other code sections such as 6038D, 6038, 6039F, 6048, etc.? See, Three Precedent Setting Cases in International Information Reporting (“IIR”) in 6 Weeks:  * Aroeste, * Bittner, and * Farhy: all Interconnected via Title 26, Title 31 and U.S. Income Tax Treaties

For instance, the 2009 notice provides that a “covered expatriate” must file a “dual status return” and file a Form 1040NR with a 1040 attached as a schedule for the “year of expatriation”. See, IRS Notice 2009-85, p. 49.

The IRS goes on to say in that notice that individuals “must file Form 8854 in order to certify, under penalties of perjury, that they have been in compliance with all federal tax laws during the five years preceding the year of expatriation.” Id., p. 50. The government asserts that if this condition is not satisfied, the individual will necessarily be treated as ” . . . covered expatriates within the meaning of section 877A(g) whether or not they also meet the tax liability test or the net worth test.“

These would be pretty damning consequences to an individual, if they otherwise met the statutory test of certifying compliance with the tax laws for the preceding five years.

Importantly, the Court in Aroeste v. United States concluded as a matter of law that 2009-85 is not binding authority as it fails to comply with the Administrative Procedures Act (“APA”). It concluded Mr. Aroeste did not need to file Form 8854 with his amended returns. He had filed Form 8833 – treaty based reporting.

The court cited to ” . . . Green Valley Investors, LLC v. Comm’r of Internal Revenue, 159 T.C. No. 5, at *4 (Nov. 9, 2022)) (under the APA, agencies must follow a three-step procedure for “notice-and-comment” rulemaking, but this requirement does not apply to “interpretive rules, general statements of policy, or rules of agency organization, procedure, or practice.”).) The Court agrees. In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), the court found that Notice 2007-83 failed to comply with the APA’s notice-and-comment procedure. Similarly here, because Notice 2009-85 has not been subject to a notice-and-comment procedure, it does not comply with the APA and thus is not binding. As such, Aroeste was not required to file Form 8854 with his amended returns.”

None of these comments represent legal advice. Complex laws applied to specific facts require a legal expert to opine on the consequences and recommended courses of action. It is worth noting that individuals who have a “green card” and who have not previously articulated the application of a U.S. income tax treaty, should consider taking proactive steps to protect their rights under the law. Also, United States citizens who formally renounced their citizenship, who may never have taken specific tax reporting positions should consider taking proactive steps to help avoid the risk the IRS might assert substantial penalties or conclude the individual became a “covered expatriate”.