Latest Round of Litigation in Mann Construction Another Defeat For The Government

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In the latest round of Mann Construction v IRS a district court in Michigan denied the government’s motion to issue a stay of an earlier order that required the IRS  to set aside a Notice that identified transactions as listing transactions.

We have discussed Mann Construction numerous times. For a quick refresher, the case involves a taxpayer’s successful refund litigation that challenged the IRS’s use of a Notice to identify certain employee-benefit plans featuring cash-value life insurance policies as listed transactions. The Notice triggered penalties for failing to report those transactions. Mann Construction had set up such a plan, failed to report it, and the IRS imposed penalties. Mann Construction paid the penalties and filed a refund claim and suit alleging in part that the IRS failed to comply with the notice and comment provisions of the APA. After losing initially at the district court, the Sixth Circuit held that the Notice implicated a legislative rule that required notice and comment. In addition, the Sixth Circuit held that Congress did not expressly exclude the Notice from the APA’s notice-and-comment requirements.

After the Sixth Circuit opinion, on remand Mann Construction filed a motion with the district court asking that the court set aside the Notice, which the district court granted. The government filed a motion asking that the district court stay the set-aside order pending appeal.


A key issue in this latest challenge relates to the effect that one federal court’s stay order has on other jurisdictions. This is a hot issue in administrative law generally, and one that is getting considerable attention in non tax cases. (For more, see our discussion in CIC Services: Now that AIA Issue Resolved, On to Some Meaty Administrative Law Issues).

When considering a motion for a stay pending appeal such as the one that the government raised in this case, courts must apply Federal Rule of Civil Procedure Rule 62, which requires that courts balance four factors: 

  • (1)  the likelihood that the party seeking the stay will prevail on the merits on appeal; 
  • (2) the likelihood of irreparable harm to the moving party absent a stay; 
  • (3)  the prospect that others will be harmed if the court grants the stay; and 
  • (4)  the public interest in granting the stay.

In discussing the first factor, the likelihood of success, the government argued that it favored a stay, because the meaning of “set aside” is “an unsettled legal issue,”  but the court pushed back noting that uncertainty did not equate to likelihood of success.

And, adding some nuance, the court stated that perhaps the government was suggesting that the district court could not bind other circuits with the effect of its order. The court also disagreed that this amounted to the government proving likelihood of success, especially in the Sixth Circuit:

A thoughtless glance might favor that view, but a steady eye sees that this argument is not one to be made to the Sixth Circuit, as it is not for one circuit court to decide the controlling effect of a court order in any other circuit. This is the argument the Government may make in every other circuit where it hopes to enforce the Notice. But making that argument to the Sixth Circuit will not change the conclusion it already reached: that IRS Notice 2007-83 must be set aside.  (emphasis in original)

The district court acknowledged the unresolved academic debate as to the nature of the relief that a court can grant when it finds that the IRS (or another agency) has failed to comply with the procedural requirements under the APA.  But that did not amount to finding that the merits leaned towards a stay:

Admittedly, there is an unresolved academic debate about how to reconcile the APA’s edict to district courts with the principle of stare decisis .What use is a district court’s order that sets aside an agency action in one circuit yet controls no other circuit? Despite the palpability of that question, its answer must come from Congress or, presumably, the Supreme Court. Until that time, courts must continue to resolve APA challenges as Congress directed: by setting aside or vacating unlawful agency action. Indeed, as this Court previously noted “if an agency action violates the APA, ‘then the court should invalidate the challenged action.’” 

As to the likelihood of irreparable harm to the Government absent a stay, the court noted that the government was litigating the issue in other circuits, suggesting that the government did not find itself limited or materially impacted. The government also asserted that the public had an interest in granting a stay given the IRS’s enforcement efforts, but the court emphasized that the public also had a strong interest in agencies abiding by the laws that govern their existence and operations. Given that the Sixth Circuit found that the IRS overstepped its authority in issuing the Notice without notice and comment, it held that the public interest “disfavors” a stay.


While the court did find that there was no possibility of harming Mann Construction if it ordered a stay, that alone was not enough to carry the day for the government. Case over (for now).

There still is considerable uncertainty surrounding what a court can do when an agency violates a procedural APA mandate. The contours between a court issuing a vacatur and a nationwide injunction are not precisely clear, at least to me. The district court earlier distinguished between an injunction and vacatur, noting that an “injunction  ‘operates on the enjoined officials’ to block them from enforcing a regulation, while a vacatur of a regulation ‘unwinds the challenged agency action’ altogether.”

Administrative law scholars continue to debate a court’s power to fashion a remedy when a court finds agency rules unlawful. See, for example, Professor Ronald Levin’s article from earlier this spring, Vacatur, Nationwide Injunctions, and the Evolving APA, where he pushes back on the government and some scholars who have argued that the courts do not have power to vacate a rule as whole. In the meantime, the IRS is free to continue the fight over this Notice and similar ones in other circuits and perhaps all the way to Supreme Court. It seems unlikely that a dysfunctional Congress would take up this issue, but it probably should, as well as take a fresh look at challenges to tax guidance more generally.

Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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