Obtaining Refunds of Section 6707A and Section 6707 Penalties Paid for Not Properly Reporting Listed Transactions or Transactions of Interest (Including Notice 2007-83 and Notice 2016-66)
On March 3, 2022, in a unanimous opinion authored by its Chief Judge, the U.S. Court of Appeals for the Sixth Circuit invalidated an IRS listing notice on the basis that the agency had not complied with the Administrative Procedure Act (“APA”) in issuing the notice. In so holding, the court called into question the validity of the 36 current IRS notices identifying so-called “listed transactions,” as well as the 6 notices by which the IRS has identified “transactions of interest” required to be reported to the agency.
In Mann Construction v. U.S., the court was asked to consider whether the IRS could enforce Notice 2007-83, which purported to require taxpayers to file Form 8886 (participants) or Form 8918 (material advisors) to report certain transactions involving the use of employee benefit trusts to hold cash value life insurance policies. While the IRS admitted it had not followed the “notice and comment” requirements of the APA, it claimed it was exempt from those requirements on the basis that (i) the notice at issue was an interpretative versus a legislative rule; and/or (ii) Congress had implicitly approved the IRS’s notice procedure as a valid replacement for the APA procedures. The court agreed with the taxpayers on both counts, noting that “[i]f individuals ‘must turn square corners when they deal with the government,’… ‘it cannot be too much to expect the government to turn square corners when it deals with them.’”
The Mann Construction opinion represents an important setback to the IRS in its on-going fight against collateral attacks on its enforcement procedures. In May of last year, the Supreme Court held that the plaintiffs in CIC Services v. IRS should be permitted to advance their APA challenges against Notice 2016-66 (identifying "so-called" micro-captives as transactions of interest), notwithstanding the federal Anti-Injunction Act. On remand, in September 2021, the U.S. District Court for the Eastern District of Tennessee granted CIC Services’s request for an injunction against enforcement of the notice on the basis that the plaintiff was likely to prevail on the merits of its APA challenge. On March 21, 2022, as was widely expected, the district court granted CIC Service’s motion for summary judgment and invalidated Notice 2016-66, relying on the Sixth Circuit’s Mann Construction opinion. For good measure, the court also held that the IRS’s designation of micro-captive insurance companies as transactions of interest was “arbitrary and capricious,” thereby invalidating Notice 2016-66 on a second ground.
In light of these events, taxpayers who have paid penalties for the failure to file Form 8886, or material advisors who have paid penalties for the failure to file Form 8918, to report listed transactions or transactions of interest should strongly consider whether to file a claim for refund of such penalties, especially if they are resident in the Sixth Circuit. Under Internal Revenue Code section 6511(a), such claims may generally be filed within 2 years of the penalty payment, or 3 years from the time the relevant tax return was filed, whichever is later. Furthermore, in light of the litigation trend, it makes sense to file a protective administrative refund claim with the IRS as soon as possible to protect against the statute of limitations on refund claims.
Caplin & Drysdale has significant experience filing administrative refund claims with the IRS, as well as filing suit in federal court to challenge the denial of or lack of IRS action with respect to such refund claims. Please contact one of the attorneys listed below should you wish to discuss your options.