Menu
Tax Notes logo

McGruder Dismissal Still a Victory, Plaintiffs’ Attorney Says

Posted on Dec. 3, 2020

Plaintiffs who sued for expedited distribution of economic impact payments (EIPs) to nonfilers chalked up a win, even though major issues raised by their lawsuit went unaddressed because it was dismissed, attorneys said.

“The aim of the suit was to bring the IRS’s attention to the circumstances of our plaintiffs, and to get the IRS to recognize and change its approach to the EIPs,” said Christine Speidel, co-counsel in McGruder v. Mnuchin, No. 2:20-cv-03590 (E.D. Pa. 2020), which both sides agreed to dismiss on November 30.

The IRS’s “position evolved over the fall” to the point that the McGruder plaintiffs were satisfied that the tax agency had done its best to get federal beneficiary nonfilers to its EIP portal, Speidel said.

McGruder was filed July 22 in the U.S. District Court for the Eastern District of Pennsylvania. Among other things, it accused the IRS and Treasury of violating the Administrative Procedure Act (APA) by acting in an “arbitrary and capricious” manner when they issued FAQs, press releases, and other nonregulatory guidance denying EIPs for dependents of federal beneficiary nonfilers.

The IRS began distributing $500 EIPs in early August to about 365,000 individuals whose online registration of their dependents was denied because of a software bug. Then the IRS extended its October 15 deadline for nonfilers to use its EIP portal to November 21.

“I think one of the things that McGruder did a good job highlighting was that even informal actions by the IRS have real-life repercussions for many Americans,” said James Creech of the Law Offices of James Creech.

“When McGruder was filed, the requested relief wasn’t a sure thing,” said Creech, referring to the plaintiffs’ call for the IRS to allow prompt EIP payments to the indigent, without having to wait to file a refund request in the 2021 filing season. “The speed at which [relief] happened was phenomenal.” 

Hope From Scholl 

Speidel said litigators are focused on the government’s appeal of Scholl v. Mnuchin, No. 4:20-cv-05309 (N.D. Cal. 2020), to the Ninth Circuit.

Plaintiffs in Scholl are seeking EIPs for prisoners so far denied them by Treasury and IRS policy, even though the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) states that EIPs are to be distributed expeditiously and without regard to an incarcerated person’s status.

The U.S. District Court for the Northern District of California's order denying the IRS’s request for a stay on distributing EIPs to prisoners “recognized that the APA may be an appropriate avenue for review,” Speidel said. She added that the denial is "a positive sign" for the litigation.

Also, “the McGruder complaint and motions are out there as arguments for other litigators” to continue the battle against the IRS’s use of nonbinding regulatory guidance that helped prompt the McGruder lawsuit to begin with, Speidel said.

Nina Olson, executive director of the Center for Taxpayer Rights, said, “Because there is no real record of McGruder — there were no briefs, etc., nor did the judge issue any ruling — it is kind of hard to say it will be binding.”

“That is where Scholl really helps — you have several [court] orders,” Olson said. “I think CIC Services is the next big development in the APA question, and then we just need to see what happens with FAQs in the future.”

Ash Heap of History? 

Because McGruder was dismissed, attorneys noted, the issues that underlie it remain unresolved.

McGruder alleged that the IRS and Treasury exercised arbitrary and capricious power in releasing FAQs, press releases, and other nonregulatory EIP guidance, potentially in violation of the APA’s public notice and comment requirement and other legal standards for binding regulations.

“All the [McGruder] APA claims were speculative because there was not a traditional final agency decision, and it would have been easy for the IRS to drag it out until the point became moot,” Creech said.

CIC Services LLC v. IRS, No. 19-930 (Sup. Ct. 2020) — argued before the Supreme Court December 1 — addresses some of the same APA issues as McGruder and Scholl, the attorneys said.

But without a court ruling in McGruder, Creech said, “I am not sure where it is going to end up in the history books. . . . It is either going to be part of the death of tax exceptionalism by 1,000 cuts, or it is going to be overshadowed by CIC Services, moving tax further into the realm of administrative law.”

Copy RID