Overview
On March 3, 2022, the Sixth Circuit reversed the district court in Mann Construction, Inc. v. United States1 in a striking affirmation of the requirements of the Administrative Procedure Act (APA) to IRS regulatory guidance. The district court had held that Congress excused the IRS from the APA rulemaking requirements for issuing a listed transaction notice. In its reversal, the Sixth Circuit ruled that the IRS’s issuance of Notice 2007-83 violated the APA because the IRS issued the notice without providing notice or an opportunity for comment.2 Recently, the IRS suffered a similar defeat in Hewitt v. Commissioner,3 in which the Eleventh Circuit held that the IRS violated the APA by failing to address significant comments before issuing Treasury Regulation § 1.170A-14(g)(6).
IRS's Arguments
The IRS had offered two explanations for why it was not required to follow the APA's notice-and-comment procedures in issuing Notice 2007-83: (1) Notice 2007-83 is an interpretive rule, which does not require notice, and (2) even if Notice 2007-83 amounts to a legislative rule, Congress exempted the IRS from the APA's requirements with respect to rules for listing abusive tax shelters. The Sixth Circuit rejected both arguments.
Legislative Rule
The Sixth Circuit concluded that Notice 2007-83 is a legislative rule because it creates new substantive duties and subjects noncompliant taxpayers to financial penalties and criminal sanctions, which are "hallmarks of a legislative, not an interpretive, rule."4 It also found that the relevant statutory terms in sections 6011 and 6707A are not self-defining, which explains why Congress delegated to the IRS authority to "determine" and "identif[y]" which transactions need to be reported. "That feature of the Notice, once again, represents a quality of a quintessential legislative rule."5
No Express Exception
The circuit court also concluded that Congress did not "expressly" exempt the IRS from complying with APA rulemaking, as required by 5 U.S.C. § 559. It explained that there is a general assumption that any agency action that will have the force and effect of law must go through notice and comment. To overcome this assumption, the agency must show that lawmakers expressly carved out an exception in a "clear" and "plain" way.6 "The driving inquiry is whether Congress 'clearly' departed from the APA's baseline rule."7 "Potential inferences layered on top of conjectural implications do not suffice." Sections 6011 and 6707A do not contain any explicit exceptions from APA rulemaking. Moreover, the court found that the legislative history of the reportable transaction regime failed to reveal any congressional intent for the IRS to proceed without notice and comment.
Lastly, the Sixth Circuit rejected the IRS' argument that Congress had implicitly approved the IRS's noncompliance with the APA for reportable transaction notices. The court stated that "[i]naction may, but does not always, mean ratification."8 Here, Congressional silence was not enough to supplant the APA's notice and comment requirement. "Any exceptions to the sturdy protections established by the APA's notice-and-comment requirements must come from Congress, not us and not the IRS."9
The Mann Construction decision is an invitation for Congress to enact legislation to except IRS Notices from the APA notice and comment requirements. Lawrence Hill of Steptoe observes that unless Congress creates an exception, "IRS Notices will be subject to lengthy notice and comment procedures before they can take effect. This would diminish the efficacy and efficiency of Notices, which have been an important preemptive weapon in the IRS’s arsenal."
Endnotes
1 __F.4th __ (6th Cir. March 3, 2022), 2022 U.S. App. LEXIS 5668.
2 2007-45 IRB 960. The October 2007 notice designated cash value life insurance trusts as listed transactions requiring disclosure by transaction participants.
3 21 F.4th 1336 (9th Cir. 2021).
4 2022 U.S. App. LEXIS 5668, at *9.
5 Id.
6 Id.
7 Id.
8 Id. at *10.
9 Id. at *11.