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