Court Should Follow Sixth Circuit and Hold IRS Notice Invalid

CIC SERVICES, LLC
Plaintiff,
v.
INTERNAL REVENUE SERVICE, et al.
Defendants.

UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TENNESSEE
NORTHERN DIVISION (KNOXVILLE)

CHIEF JUDGE TRAVIS R. McDONOUGH

PLAINTIFF'S NOTICE OF SUPPLEMENTAL AUTHORITY PROVIDED BY MANN CONSTRUCTION AND REQUEST FOR IMMEDIATE RELIEF

On March 3, 2022, the Sixth Circuit Court of Appeals decided the case of Mann Construction Inc. v. USA, App. No. 21-1500 (6th Cir. March 3, 2022). Though not yet published, the opinion is “Recommended for Publication.” The Court has invited the parties' comments with respect to the impact of the Sixth Circuit's decision on the case at bar (Doc. 120).

The 3-0 decision authored by Chief Judge Sutton is fully dispositive with respect to the pending cross-motions for summary judgment on the question of whether Notice 2016-66 is void due to the IRS's failure to engage in notice and comment. (Doc. 97 — Plaintiff's Mot. for Partial S/J) (Doc.99 — Defendants' Mot. for S/J). However, it does not dispose of the case entirely.

Impact Regarding Pending Cross-Motions

At issue in Mann Construction was an IRS notice, Notice 2007-83, which identified a particular insurance arrangement that the IRS believed was a “tax avoidance transaction.” Like Notice 2016-66 at issue in this case, Notice 2007-83 was issued by the IRS without notice and comment as required by the Administrative Procedures Act (“APA”).

Much as this Court has already done in this case (Doc. 82 — Memorandum Opinion and Order), the Sixth Circuit proceeded to dismantle the excuses offered by the IRS in Mann Construction (and the case at bar) for its failure to comply with the APA when issuing these notices.

First, citing the Supreme Court's decision in this case and one of the amicus authors who sided with CIC Services on its appellate journey, the Sixth Circuit held that the Notice was a “legislative rule” for purposes of the APA:

The Notice has the force and effect of law. It defines a set of transactions that taxpayers must report, and that duty did not arise from a statute or a notice-and-comment rule. It springs from the IRS's own Notice. Taxpayers like Mann Construction had no obligation to provide information regarding listed transactions like this one to the IRS before the Notice. They have such a duty after the Notice. Obeying these new duties can “involve significant time and expense,” and failure to comply comes with the risk of penalties and criminal sanctions, all characteristics of legislative rules. CIC Servs., LLC v. IRS, 141 S. Ct. 1582, 1591 (2021); see also id. at 1592; Kristin E. Hickman, Unpacking the Force of Law, 66 Vand. L. Rev. 465, 524 (2013)(characterizing penalties as a leading indicator that a regulation is legislative rather than interpretive).

Mann Construction, p. 5. The IRS's identical argument in this case (see, e.g., Doc. 99-1; PageID #1871-73) must now be rejected.This Court's prior ruling is fully consistent with this new controlling authority. See Memorandum Opinion & Order, Doc. 82; PageID #954 (“prior to the Notice, the micro-captive transactions at issue were not considered transactions of interest, and entities like CIC were under no obligation to provide information regarding those transactions to the IRS.”).

Second, the Sixth Circuit held that Congress did not expressly exempt the IRS from the APA when creating the reportable transaction scheme. The Court gave several, independent reasons why this is so. The Sixth Circuit began by noting that Congress explicitly instructed the IRS to identify reportable transactions “under regulations” and “by regulations.” Mann Construction, p. 8-9; citing 28 U.S.C. §6707A and §6011. Next, the Court noted the total absence of any Congressional permission for the IRS to deviate from the APA in the reportable transaction statutory scheme. Id. Then, the Court rejected the IRS's convoluted argument that it could ignore the APA owing to its attempt at self-exemption in 26 C.F.R. § 1.6011-4 and its historical non-compliance with the APA. Id. at 9-10 (“The question is whether Congress amended the APA's prerequisites, not whether the IRS did . . . [These arguments do] not suffice to create an express modification of the APA's background assumption that rulemaking will go through the notice-and-comment requirements.”). Finally, Mann Construction rejected the IRS's policy claim that it cannot and should not be bothered to comply with the APA because it would slow down its tax administration duties. Id. at 12 (“the U.S. Supreme Court has already rejected the idea that tax law deserves special treatment under the APA . . . if the IRS doesn't like Congress's notice-and-comment policy choices, it must take its complaints there.”)(citations and internal quotations omitted).

Again, this Court has already ruled consistent with the Sixth Circuit on these issues. See Memorandum Opinion & Order, Doc. 82; PageID #956, fn.6 (“Congress's delegation of authority appears to expressly contemplate that the Secretary be subject to notice-and-comment requirements when “prescribing regulations” and “such rules” as necessary to carry out the purposes of the Internal Revenue Code.”).

Undaunted, the IRS continues to advance these arguments in this case. See, e.g., Doc. 99-1; Page ID #1861-1870. They must now be rejected. To the extent that the IRS wishes to carry on with its fight against the APA — at least within courts in the Sixth Circuit — it is clear that its recourse now lies elsewhere.

Mann Construction also provides further direction to this Court: it elucidates the remedy CIC Services is now clearly entitled to:

Because the IRS's process for issuing Notice 2007-83 did not satisfy the notice-and-comment procedures for promulgating legislative rules under the APA, we must set it aside. In the absence of this Notice, we need not address the taxpayers' remaining claims.

Mann Construction, p. 12 (emphasis added). Upon the issuance of the decision in Mann Construction, the offending Notice is now “set aside.” It's gone. Vacated. Nullified. Banished. Defunct. Kaput.

As this Court is aware, CIC Services has long argued that the APA's lone statutory remedy of “setting aside” the offending regulation is the only sensible and correct remedy in this case. Mann Construction embraces that remedy, declares that it “must” set the Notice aside, and gives no attention to the IRS's proposed alternatives in this case of limiting the remedy to just CIC Services or to remanding the Notice back to the IRS to cure its defects. (See, e.g., Doc. 112; PageID #2078-84). This Court should fully “set aside” Notice 2016-66 without delay.

Thus, the IRS's pending Cross-Motion for Summary Judgment (Doc. 99) must be denied in its entirety and, at a minimum, CIC Services' Cross Motion for Partial Summary Judgment (Doc. 97) must now be granted so as to provide a universal, nationwide vacatur of IRS Notice 2016-66 nunc pro tunc, barring any enforcement of its provisions against anyone and everyone.

Further Relief Requested

If the Court were to grant summary judgment on Count 1 — “IRS FAILURE TO OBSERVE NOTICE-AND-COMMENT REQUIREMENTS IN VIOLATION OF THE APA” — in CIC Services' Amended Complaint (Doc. 104), this would not fully dispose of this case.

Remaining for the Court's consideration would still be the following matters:

The disposition of these issues could be granted by the Court in its decision on the pending cross-motions, if the Court deems such action appropriate at this time. See Doc. 97.

However, there is some urgency with respect to the Court's decision as the next filing date for compliance with Notice 2016-66 is March 31, 2022. If the Court defers judgment — and only grants partial summary judgment on the notice and comment issue, an alternative route of interim relief should be created, as follows:

The “law of the case” doctrine holds that partial summary judgment rulings are generally controlling but they are not “final” since they do not fully resolve all issues. Liberty Mut. Ins. Co. v. Wetzel, 424 U.S. 737, syllabus (1976)(holding that orders of partial summary judgment are still interlocutory); Frye v. CSX Transp. Inc., 933 F.3d 591, 601 (6th Cir. 2019). Thus, the award of only partial summary judgment here will not, by itself, result in an immediate universal vacatur of IRS Notice 2016-66 so as to relieve taxpayers from compliance with the rapidly upcoming March 31, 2022 deadline for the filing of informational returns by material advisors and other taxpayers pursuant to IRS terms. See Doc. 119.

Plaintiff respectfully requests that, until such time as the Court rules upon all the remaining issues in the case, the existing preliminary injunction should be expanded to provide universal nationwide relief pendent lite. See Doc. 87.

Date: March 8, 2022.

Respectfully submitted,

Kenneth A. Lazarus (admitted pro hac vice)
LAZARUS & ASSOCIATES
1055 Thomas Jefferson St., NW, Suite M-100
Washington, D.C. 20007
Tel: (202) 295-2330 (Direct Line)
E-mail: lazaruslaw@aol.com

— and —

Adam R. Webber (admitted pro hac vice)
4244 Indian Ripple Road, Suite 150
Beavercreek, Ohio 45440
Tel: (937) 797-8500
E-mail: adam@awebberlaw.com

— and —

John M. Kizer (TN Bar No. 029846)
Gentry, Tipton & McLemore, PC
900 South Gay Street, Suite 2300
Knoxville, TN 37902
Tel: (865) 525-5300
E-mail: jmk@tennlaw.com

COUNSEL FOR PLAINTIFF