IRS Notice 2007-83 Declared Unlawful Under the Administrative Procedure Act

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

The Administrative Procedure Act

The Internal Revenue Code (the “Code”) contains over one hundred different civil penalties for various acts or failures to act.  For example, Section 6707A requires taxpayers, in certain instances, to report certain transactions that they have entered into, particularly those that the IRS has determined have the potential for tax avoidance or evasion.

These “reportable transactions” can generally be broken down in more subsets, one of which includes “listed transactions.”  For these purposes, a “listed transaction” is one that is the same or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction identified by notice, regulation, or other form of published guidance as a listed transaction.  Generally, listed transactions are reported on IRS Form 8886, Reportable Transaction Disclosure Statement.

In 2007, the IRS issued Notice 2007-83, entitled “Abusive Trust Arrangements Utilizing Cash Value Life Insurance Policies Purportedly to Provide Welfare Benefits” (the “Notice”) in its Cumulative Bulletin.  The Notice indicated that the IRS identified certain employee trust arrangements with cash-value life insurance policies—where employers were claiming tax deductions and not including certain corresponding benefits in income—as listed transactions.  Although the Notice has been around some time, no taxpayer had successfully challenged the Notice under the Administrative Procedure Act (the “APA”).  That is, until a construction company successfully challenged the Notice as void under the APA in Mann Const. Inc. v. U.S., No. 21-1500 (6th Cir. March 3, 2022).

The Facts in Mann Construction

Mann Construction (the “Company”) was owned by two shareholders.  From 2013 through 2017, the Company established an employee-benefit trust that paid the premiums on a cash-value life insurance policy benefitting the two shareholders.  The Company deducted those expenses, and the two shareholders reported part of the insurance policy’s value as income.  Neither the Company nor the two shareholders reported the transaction as a listed transaction to the IRS under the Notice.

The transaction caught the attention of the IRS, which concluded that it was subject to the listed transaction requirements of the Notice.  The IRS eventually imposed civil penalties against the Company and the two shareholders.  The three taxpayers paid the civil penalties and filed a claim for refund.  When their refund claim was denied, the taxpayers brought suit against the United States in a federal district court.  The federal district court held in favor of the United States, and the taxpayers appealed the decision to the Sixth Circuit Court of Appeals.  Among the contested issues was whether the Notice complied with the notice-and-comment procedures of the APA.


The APA requires government agencies to follow certain administrative procedures prior to issuing certain rules and regulations.  Generally, the government agency must publish a notice regarding the proposed rule and permit the public sufficient time to comment on the proposed rule.  Thereafter, the government agency must consider the comments and make appropriate changes and include in the final rule a “concise general statement” of its contents.  See 5 U.S.C. § 553.

Federal courts have held government agencies to task on following the APA’s notice-and-comment procedures.  Indeed, courts have recognized the benefits from the APA flow both ways in that the notice-and-comment procedures “give[ ] affected parties fair warning of potential changes in the law and an opportunity to be heard on those changes—and it affords the agency a chance to avoid errors and make a more informed decision.”  Azar v. Allina Health Servs., 139 S. Ct. 1804, 1816 (2019).  If a government agency fails to follow the APA’s notice-and-comment procedures when it is otherwise required to do so, federal courts may “set aside” the agency action against an aggrieved party.  See 5 U.S.C. § 706(2)(D).

The Sixth Circuit’s Analysis

On brief, the IRS conceded that it failed to follow the notice-and-comment procedures when it issued the Notice.  But the IRS argued that it was not required to do so under two exceptions:  first, the IRS contended that the Notice was an “interpretative rule,” which was not subject to the APA.  Second, the IRS contended that even if the Notice was an interpretative rule, Congress had expressly exempted the IRS from the APA’s notice-and-comment procedures.

The Sixth Circuit disagreed with the IRS on both points.  On the first, the Sixth Circuit reasoned that interpretative rules were merely those that articulate what an agency thinks of a particular statute.  Conversely, the Sixth Circuit recognized that “legislative rules”—which are subject to the APA—are those that impose new rights or duties and change the legal status of the parties.  Here, the court concluded that the Notice was a legislative rule because it defined the set of transactions that the taxpayers were required to report—and such new requirements were outside any statute or former rule.  The Sixth Circuit also acknowledged the Supreme Court’s recent decision in CIC Services, which had held that legislative rules generally come with the risk of penalties and criminal sanctions, similar to those imposed by the Notice.

On the second point, the Sixth Circuit noted that the IRS’s argument could only carry the day if there was evidence that Congress “expressly” exempted the IRS from the APA’s requirements.  The Sixth Circuit concluded that Congress had not expressly exempted the IRS from the general notice-and-comment rules under the APA, stating:

The statutes [i.e., Section 6707A and Section 6011] do not say anything, expressly or otherwise, that modifies the baseline procedure for rulemaking established by the APA.  Nor did Congress expressly displace those requirements by creating a new procedure for these regulations.  The statutes do not provide any express direction to the agency regarding its procedure for identifying reportable and listed transactions, let alone procedures that cannot be reconciled with notice-and-comment requirements or any other indication within the statutory text that plainly expresses a congressional intent to depart from the normal APA procedures.  The statutes merely establish a disclosure and penalty regime for the IRS to administer.  As to the statutory text, Congress did not change the background procedural requirements of the APA or otherwise indicate an exemption from those requirements in a clear or plain way that would make the APA’s procedures inapplicable to the IRS.

Given the IRS’s failure to comply with the APA, the Sixth Circuit set the Notice aside, resulting in no Section 6707A civil penalties for the taxpayer.

The Takeaway

Only recently, the Supreme Court held that if 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.”  Niz-Chavez v. Garland, 141 S. Ct. 1474, 1486 (2021).  The Sixth Circuit’s recent decision in Mann Construction follows this same rationale in concluding that the civil penalties at issue could not be imposed against the taxpayers due to the IRS’s failure to comply with the APA’s notice-and-comment procedures.  After the decision in Mann Construction, taxpayers can expect more challenges to IRS notices, guidance, and regulations that have failed to comply with the strict requirements of the APA.


Expert Penalty Defense Attorneys

Need assistance with IRS penalty defense? Each individual civil penalty has different penalty defenses. It is important to raise the proper penalty defenses with the IRS at the appropriate time. Freeman Law can help you navigate these complex issues. We handle all types of cases including civil, failure-to-file and failure-to-pay, accuracy-related, fraud, tax shelters, international tax, employment tax, and trust fund recovery penalties. Schedule a consultation or call (214) 984-3000 to discuss your tax concerns.