A federal district court, relying on the Sixth Circuit’s decision in Mann Construction, has vacated the IRS notice identifying microcaptive insurance arrangements as “listed” transactions and ordered the IRS to return all documents and information that taxpayers and material advisers produced pursuant to the notice.

Background. The Code requires certain taxpayers to provide the IRS with information regarding “listed transactions.” A listed transaction is “any transaction that the IRS determines as having potential for tax avoidance or evasion.”

Under this authority, the IRS has issued regs specifying that taxpayers and material advisers must provide the IRS with information about transactions that are “the same as or substantially similar to” one that the IRS has identified as a listed transaction by notice, regulation, or other form of published guidance.

Note. Listed transactions are also called reportable transactions because once the transaction is “listed” taxpayers and material advisers must provide the IRS with (or “report”) information about the transaction.

While the above framework gives the IRS the authority to request information from taxpayers regarding “listed transactions,” the Administrative Procedures Act (APA) requires the IRS to “examine the relevant data” and “articulate a satisfactory explanation” for its decision to designate a transaction as a “listed transaction” based on its potential for tax avoidance or evasion.

Mann Construction Inc. In Mann Construction, the Sixth Circuit decided that the IRS violated the APA when it promulgated another listed-transaction notice. The notice identified various listed transactions, which triggered reporting requirements for them. As a result, the appeals court said it wouldn’t enforce the listed transaction penalties the IRS assessed against Mann Construction.

District Court invalidates 2016 listed transaction notice. According to the district court, it was required by the Sixth Circuit’s decision in Mann Construction to invalidate the notice, which identified microcaptive insurance arrangements as “listed” transactions. The district court found that the IRS didn’t support its decision to designate microcaptive arrangements as listed transactions and, therefore, reportable transactions as required by the APA. Because the IRS didn’t comply with the APA’s procedures, the notice was void.

The court also determined that there were no facts to support leaving “the notice in place while [the IRS] takes the actions necessary to comply with the APA or vacating the notice as to CIC only.”

Finally, the court ordered the IRS to return all documents and information taxpayers and material advisers produced to the IRS. The IRS wasn’t entitled to keep the information because that notice was invalid, the court said.

However, the court wouldn’t issue an injunction barring the IRS from using information produced in response to the notice in judicial or administrative proceedings. The court reasoned that granting such relief would prevent the IRS from using the information even if it was acquired lawfully.

 

Source:  Checkpoint Newsstand March 25, 2022

 

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