Page 112 - TaxAdviser_Jan_Apr23_Neat

as the LLCs argued, the IRS could
not impose Sec. 6662A penalties ‘Inaction may, but does not always, mean
against them. ratification’ and ‘rarely suffices to show
APA notice-and-comment rule-
making: As the Supreme Court has express modification.’
described, the APA provides a three-step
procedure for “notice-and-comment
rulemaking.” Under the APA, agen- merely an interpretative rule.” According indication that Congress was exempt-
cies are required to (1) issue a general to the court, identifying a transaction as ing the IRS from the standard APA
notice of proposed rulemaking; (2) allow a listed transaction did not, as an inter- notice-and-comment rulemaking and
interested persons an opportunity to pretative rule would do, merely provide that Sec. 6011, referred to in Sec. 6707A,
participate; and (3) include in the final the IRS’s interpretation of the law or likewise was silent on any congressional
rule a “concise general statement of [its] remind taxpayers of preexisting duties. intent to provide such an exemption.
basis and purpose.” Rather, as the court discussed in some The court noted that the Sixth Circuit
However, notice-and-comment rule- detail, it imposes new duties in the form in Mann Construction had come to the
making is only required for legislative of reporting obligations and recordkeep- same conclusion.
rules and not for interpretative rules. ing requirements on both taxpayers and The IRS also argued that Regs. Sec.
Legislative rules, which have the force their advisers. Consequently, Notice 1.6011-4(b)(2) expressed Congress’s in-
and effect of law, are rules that impose 2017-10 exposes taxpayers and advisers tent regarding listed transactions, because
new rights or duties and change the legal to additional reporting obligations and that regulation subsection, which was is-
status of parties. Interpretative rules are penalties to which they would not oth- sued before Sec. 6707A was enacted, de-
rules that merely advise the public of an erwise be exposed but for the notice. As fined a listed transaction as a transaction
agency’s construction of the statutes it the Sixth Circuit stated in Mann Con- “identified by notice, regulation, or other
administers, articulating what an agency struction, Inc., 27 F.4th 1138, 1144 (6th form of published guidance.” This lan-
believes a statute means or reminding Cir. 2022), in which the court addressed guage, in the IRS’s view, informed Con-
parties of preexisting duties. whether Notice 2007-83 was a legisla- gress that the IRS would operate outside
As the APA recognizes, Congress tive rule: “Creating new substantive du- of APA rulemaking by identifying listed
may modify the APA notice-and- ties and exposing taxpayers to penalties transactions in the future in notices issued
comment rulemaking procedures in a for noncompliance ‘are hallmarks of a without notice and comment (such as
statute. However, a statute will not be legislative, not an interpretive, rule.’ ” Notice 2017-10). Therefore, when Con-
held to modify the procedures unless it Authorization of identification of gress later defined “reportable transaction”
does so expressly. listed transactions without notice in Sec. 6707A(c)(1), it incorporated this
The IRS’s arguments: The IRS and comment: The IRS pointed to the procedure from Regs. Sec. 1.6011-4.
argued that notice-and-comment pro- text of Sec. 6707A, Regs. Sec. 1.6011-4, The Tax Court was not swayed
cedures were not required for Notice and the history of Sec. 6707A as proof by this argument, stating it was “less
2017-10 because it was an interpretative, that Congress had knowingly authorized confident [than the IRS] that Congress
rather than a legislative, rule. In addi- the IRS to identify listed transactions understood that the IRS’s reference to
tion, the IRS contended that, even if the through subregulatory guidance. The the term ‘notice’ within [Regs. Sec.]
notice was a legislative rule, Congress Tax Court, however, determined that 1.6011-4 was a clearly defined proce-
has authorized its issuance by procedure this was not the case. dure for identifying listed transactions
other than the notice-and-comment Sec. 6707A imposes a penalty on separate from traditional APA proce-
requirements under the APA. “any person who fails to include on any dures.” The court instead concluded that
Interpretative rather than legisla- return or statement any information Congress expects that administrative
tive rule: Regarding whether Notice with respect to a reportable transac- agencies follow the APA notice-and-
2017-10 was a legislative rather than an tion which is required under section comment rulemaking procedures except
interpretative rule, the Tax Court found 6011 to be included with such return when it expressly chooses different pro-
that “[t]he act of identifying a transac- or statement.” The Tax Court found cedures for them to use.
tion as a listed transaction by the IRS, that the statute had no effect on the The Tax Court also rejected the IRS’s
by its very nature, is the creation of a application of notice-and-comment argument that Congress had approved
substantive (i.e., legislative) rule and not rulemaking because it offered no express the IRS’s use of notices to identify listed

www.thetaxadviser.com February 2023 57