When a federal agency wishes to promulgate a new "legislative rule," the Administrative Procedure Act generally requires the agency to publish a notice of proposed rulemaking in the Federal Register at least 30 days before the rule's effective date, and interested persons must be provided the opportunity to submit comments before the rule becomes effective (5 U.S.C. §553). The government has suffered defeat in two recent cases—one involving temporary Treasury Regulations, and the other an IRS notice—where it short-circuited this procedure and then failed to persuade a court that the "notice-and-comment" requirement did not apply.

'Mann Construction'

In Mann Construction v. United States, 129 AFTR 2d 2022-885 (6th Cir.), rev'g 127 AFTR 2d 2021-2000, an S corporation (Mann Construction) had established in 2013 two trusts (collectively, the "benefits trust") as part of a complex arrangement. The benefits trust used funds provided by Mann Construction to pay premiums on whole life insurance policies on the lives of employees who were also the shareholders of the corporation. Contributions by Mann Construction under the arrangement to fund the insurance premiums were purportedly deductible.

Years earlier, the IRS had issued Notice 2007-83 (the Notice) to identify arrangements of this nature as "listed transactions" for purposes of §§6111 and 6112 of the Internal Revenue Code (IRC or Code) and Reg. §1.6011-4. That regulation requires that "listed transactions" be disclosed on Form 8886, "Reportable Transaction Disclosure Statement," to be completed and attached to tax returns and otherwise filed in the manner required by the regulation. The Notice further provided that persons who failed to disclose these transactions as required under the regulation would be subject to penalty under IRC §6707A.