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Federal Appeals Court Sides With Taxpayers Against IRS

March 8, 2022

A federal appellate court has sided with taxpayers who alleged the Internal Revenue Service (IRS) violated its rules when it created a regulation requiring reporting of cash-value life insurance policies connected to employee-benefit plans.

In a published opinion Thursday, U.S. Sixth Circuit Court of Appeals Chief Judge Jeffrey S. Sutton wrote that the IRS’ process for issuing Notice 2007-83 – which defines a set of transactions taxpayers must report – did not “satisfy the notice-and-comment procedures” for promulgating legislative rules under the Administrative Procedures Act and must be set aside.

Brook Wood and Lee Coughlin, owners of Mann Construction which provides general contracting, construction management and similar services, established an employee-benefit trust that paid premiums on a cash-value life insurance policy benefiting the owners.

The company deducted the expenses and Wood and Coughlin reported part of the insurance policy’s value as income, but neither the company nor the owners reported the arrangement to the IRS, which concluded in 2019 that structure fit the 2007 rule and the IRS imposed a penalty of $10,000.

Wood, Coughlin and Mann Construction sued to recoup the penalty they paid.

Circuit Judges Jane Branstetter Stranch and John K. Bush concurred.

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