U.S. District Court Holds IRS ESOP Disqualification Constitutes Adjudication, Not Rulemaking

The U.S. District Court for the Eastern District of Wisconsin dismissed taxpayers’ Administrative Procedure Act (APA) challenge to an IRS enforcement action, holding that the IRS’s determination disqualifying an employee stock ownership plan (ESOP) constituted adjudication rather than legislative rulemaking. Taxpayers argued that the IRS effectively created a new rule—referred to as the “Byers Rule”—requiring qualified ESOP trusts to file Form 1041 returns without notice-and-comment rulemaking. The court held that the IRS’s issuance of an Information Document Request and determination that the ESOP was not qualified merely applied existing law to the taxpayers’ specific facts. The enforcement action did not ...