SUIT TO ENJOIN ENFORCEMENT OF TAX REG BARRED BY ANTI-INJUNCTION ACT.

ORDERED that [3] Plaintiffs' Motion for Temporary Restraining Order and/or Preliminary Injunction and Request for Expedited Hearing is DENIED; it is also

ORDERED that Defendants' [6, 8] Motion to Dismiss is GRANTED.

To recoup a portion of its lost investment, an originating lender may sell a charged-off consumer loan to a Debt Buyer, usually as part of a portfolio of delinquent consumer loans, for a fraction of the total amount owed to the originating lender. Pl.'s Mem. at 5. Once a Debt Buyer has purchased a portfolio of defaulted consumer loans, it may engage in collection efforts (or hire a third-party to do so), which may include locating borrowers, determining whether borrowers are in bankruptcy, commencing legal proceedings, or "otherwise encouraging" payment of all or a portion of the delinquency. Id. at 6.

Relevant to the present case is that, as a matter of practice, Debt Buyers generally have received only the aggregate amount of the charge-off from the originating lender for a particular debtor and consequently do not know the component amounts of stated principal, unpaid accrued interest, late fees, and other charges. Pl.'s Mem. at 6-7. Plaintiff cites to no legal impediment to the transfer of this information from originating lenders to Debt Buyers in its Complaint, Motion for Preliminary Injunction, Supplement, or Response. See Def.s' Mot. Dismiss at 25.

Treasury Regulation 1§ 6050P-1 clarifies the form in which applicable entities must fulfill the reporting requirement mandated by 26 U.S.C. § 6050P(a). 26 C.F.R. § 1.6050P-1. Pursuant to Treas. Reg. 1§ 6050P-1(a), an applicable entity that discharges a debt of at least $600 of any person must file a Form 1099-C with the IRS. The trigger for the reporting requirement is described as follows:

Treas. Reg. 1 § 6050P-2, the regulation at issue in the instant case, was passed on October 25, 2004, effective for discharges occurring on or after January 1, 2005. 26 C.F.R. § 1.6050P-2. The regulation further clarifies what is "an organization a significant trade or business of which is the lending of money" under 26 U.S.C. § 6050P(c)(2)(D). Pursuant to Treas. Reg. 1 § 6050P-2(e), "lending money includes acquiring an indebtedness not only from the debtor at origination but also from a prior holder of the indebtedness." Debt Buyers are encompassed by this definition and hence required to submit 1099-C Forms to the IRS by February 28, 2006 (or March 31, 2006, if filed electronically) as well as informational reports to debtors by January 31, 2006, for identifiable events that occurred in the year 2005.

In its Motion, Plaintiff first claims that Defendants have issued an interpretive regulation in the form of Treas. Reg. § 1.6050P-2(e) that surpasses the statutory authority under which it was enacted in expanding the definition of "any organization a significant trade or business of which is the lending of money" as set forth in 26 U.S.C. § 6050P(c)(2)(d) to include Debt Buyers. Pl.'s Mem. at 2.

Second, Plaintiff claims that Treas. Reg. § 1.6050P-2(e) "invades" the FDCPA, which was purportedly "expressly created by Congress to be the primarily regulatory force governing the debt buying industry." Pl.'s Mem. at 2. Plaintiff alleges that Debt Buyers lack sufficient information to distinguish between the stated principal and interest of the loans they purchase from originating lenders and therefore will be forced to make misrepresentations on 1099-C Forms and the corresponding statements issued to debtors. As a result, Plaintiff contends that Debt Buyers will violate the FDCPA, because inaccurately completed 1099-C Forms would effectively constitute misrepresentations to debtors for which liability can be imposed, in addition to violating Treas. Reg. § 1.6050P-2(e) itself. Pl.'s Mem. at 6-7. Plaintiff further alleges that it faces the "promised" threat of class action lawsuits under the FDCPA based upon inaccurate Forms 1099-C. Pl.'s Mem. at 7.

Third, Plaintiff claims that Treas. Reg. § 1.6050P-2(e) displaces state common and statutory laws "that have traditionally bestowed certain entitlements upon the members of the debt buying industry." Pl.'s Mem. at 2. Plaintiff alleges that because an "identifiable event" prompting the mandatory filing of a Form 1099-C with the IRS and the corresponding issuance of statements to debtors includes the 36-month "non-payment" rule delineated above in Treas. Reg. 1 § 6050P-1(b)(2)(H)(iv), Debt Buyers will be denied the opportunity to collect debt after this three-year period-an opportunity which is permitted under some applicable state statutes of limitations. Pl.'s Mem. at 7-8. Citing only one case, In re Crosby, 261 B.R. 470 (Bankr. Ct. D. Ka. 2001), Plaintiff states that "case law suggests that courts are willing to find debt, including judgment debts, unenforceable if the creditor (here, a Debt Buyer), has issued to the debtor a Form 1099-C reporting discharge of indebtedness income." Id.

Finally, presumably for the same reason alleged in its third claim, Plaintiff claims that Treas. Reg. § 1.6050P-2(e) "results in the forcible deprivation of Debt Buyers' legal and economic rights in desecration of the Fifth Amendment Due Process Clause." Pl.'s Mem. at 2.

In both its Complaint and its Motion for Preliminary Injunction, Plaintiff requests injunctive and/or declaratory relief from the Court. Defendants, in their Motion to Dismiss, argue that this Court does not have jurisdiction over Plaintiff's claims under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), and the Anti- Injunction Act, 26 U.S.C. § 7421.³ Def.s' Mot. Dismiss at 1, 4.

To eliminate any possible confusion regarding the respective burdens of the Parties considering the present posture of the case (in which both a motion for imminent injunctive relief and a motion to dismiss are before the Court), the Court notes that a motion to dismiss for lack of subject matter jurisdiction places on the plaintiff the "burden of establishing that jurisdiction is proper," unlike a motion to dismiss for failure to state a claim, in which the Court must construe all reasonable inferences in the plaintiff's favor. District of Columbia Ret. Bd. v. United States, 657 F. Supp. 428, 431 (D.D.C. 1987). See also KVOS, Inc. v. Associated Press, 299 U.S. 269 (1936); McNutt v. Gen. Motors Acceptance Corp. of Indiana, 298 U.S. 178, 188-89 (1936) ("If [a party's] allegations of jurisdictional facts are challenged by his adversary in any appropriate manner, he must support them by competent proof). Hence, Plaintiff in this case clearly bears the burden of demonstrating that this Court has jurisdiction to hear its claims, both in the context of its own Motion for Preliminary Injunction and to survive Defendants' Motion to Dismiss.

Although the Supreme Court has commented that the language of the AIA "could scarcely be more explicit," Bob Jones, 416 U.S. at 736 (quoting § 7421(a)), two judicially created exceptions have been recognized, see Nat'l Taxpayers, 68 F.3d at 1436. First, under South Carolina v. Regan, 465 U.S. 367 (1984), a suit otherwise prohibited by the AIA may be brought if the plaintiff has no recourse to alternative legal remedies. See Nat'l Taxpayers, 68 F.3d at 1436. Second, under Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962), a suit may be brought notwithstanding the AIA if it is clear that under no circumstances could the government prevail and equity jurisdiction otherwise exists. See Nat'l Taxpayers, 68 F.3d at 1436.

Plaintiff construes the "for the purpose" language of the AIA as creating an express intent requirement. However, as read by the D.C. Circuit, the AIA should not be construed so narrowly. In Foodservice and Lodging Institute v. Regan, the D.C. Circuit considered whether the contested regulations "plainly concern[ed] the assessment or collection of federal taxes" in determining whether the Anti-Injunction Act and the Declaratory Judgment Act should bar appellant's challenges. Foodservice & Lodging Inst. v. Regan, 809 F.2d 842, 844 (D.C. Cir. 1987) (emphasis added). See also Bob Jones, 416 U.S. at 740 ("[W]e cannot say that [the IRS's] position has no legal basis or is unrelated to the protection of the revenues. The [AIA] is therefore applicable.") (emphasis added); Jericho Painting & Special Coating, Inc. v. Richardson, 838 F. Supp. 626, 629 (D.D.C. 1993) ("A court must look to the effect the requested relief would have on the assessment or collection of taxes."). Even Plaintiff admits that the AIA "has been interpreted to apply also to 'activities which are intended to or may culminate in the assessment or collection of taxes.'" Pl.'s Mem. at 17 n.5 (citing Kemlon Prod. & Dev. Co. v. United States, 638 F.2d 1315, 1320 (5th Cir. 1981) (quoting United States v. Dema, 544 F.2d 1373, 1376 (7th Cir. 1976), cert, denied, 429 U.S. 1093 (1977))).

Here, Plaintiff seeks to enjoin Defendants from enforcing Treas. Reg. § 1.6050P-2(e), which requires Debt Buyers to file 1099-C Forms with the IRS. The information reporting requirement imposed by this treasury regulation will be used to enable the IRS to compare the amount of discharged debt as defined by the regulation reported by lending institutions to the amount of discharged debt reported as income by individuals, since under 26 U.S.C. § 61(a)(12), gross income to be reported by individuals to the IRS includes "[i]ncome from discharge of indebtedness." Since such gross reported income is in fact taxed by the IRS, any action that hinders the IRS in determining the accuracy of such income will in fact hinder the assessment and collection of taxes from debtors and thus fall within the auspices of the AIA.

Furthermore, in asking the Court to enjoin Defendants from enforcing Treas. Reg. § 1.6050P-2(e), Plaintiff is effectively asking the Court to enjoin Defendants from assessing any penalties related to Plaintiff's non-compliance with the regulation. Since the IRS enforces penalty provisions as a means of ensuring compliance with regulations intended to aid the agency in the collection and assessment of taxes, asking the Court to prevent the IRS from assessing penalties would clearly contravene the purpose of the collection and assessment of taxes. See also 26 U.S.C. § 6724(b) ("Any penalty imposed by this part shall be paid on notice and demand by the Secretary and in the same manner as tax.").

Finally, momentarily putting aside whether or not Plaintiff can actually provide support for the existence of a constitutional violation (which it cannot, as will be addressed below), Plaintiff's allegation of a constitutional violation does not place its claims outside of the reach of the AIA. See Alexander v. 'Americans United 'Inc., 416 U.S. 752, 759 (1974) ("[D]ecisions of this Court make it unmistakably clear that the constitutional nature of a taxpayer's claim, as distinct from its probability of success, is of no consequence under the Anti-Injunction Act.").

Thus, the AIA clearly applies to Plaintiff's claims. In order to determine if this Court has jurisdiction, the Court must analyze whether Plaintiff's claims fall within one of the two judicially created exceptions to the AIA's jurisdictional bar. In doing so, the Court finds that neither of the exceptions applies, as explained via the following analysis.

In this case, an alternate legal remedy exists such that the South Carolina exception does not apply. Debt Buyers who have not yet obtained separate principal and interest information from originating lenders, as well as Debt Buyers who retain concerns (despite the lack of supporting legal evidence) that submitting 1099- C Forms will disinvest them of the "right" to continue to pursue collection activities (see infra 20-21), can simply choose not to fill out and submit 1099-C Forms to the IRS. If Debt Buyers choose not to submit 1099-C Forms, they would not face the alleged risks of violating the FDCPA or allegedly undermine their ability to collect and enforce debts after thirty-six (36) months of no collection activity. If the IRS consequently chooses not to assess penalties for such non-compliance with Treas. Reg. § 1.6050P-2(e), Debt Buyers will have suffered no harm, irreparable or otherwise, and thus would have no basis for injunctive relief. If the IRS actually pursues penalty assessment for such noncompliance with Treas. Reg. § 1.6050P-2(e), Debt Buyers will have a legal forum in the form of penalty-refund litigation to raise the arguments it brings to the Court today and petition for relief from the actual harm of the penalty imposed. Similarly, in Foodservice, the D.C. Circuit considered an alternate remedy to be available such that the "narrow exception" created in South Carolina could not be invoked where the plaintiff could refuse to comply with a tip reporting requirement, pay the statutory fine, and sue for a refund of the fine. See Foodservice, 809 F.2d at 844-45. This Court takes note of the Supreme Court's assessment in Bob Jones that an alternate avenue of review need not be "the best that can be devised" and may include various inconveniences (such as delay) to the party petitioning for relief. See Bob Jones, 416 U.S. at 747.

Secondly, the face of the statute itself does not evince evidence of a desire to exclude institutions such as Debt Buyers from its scope. While the Court agrees that interpretive rules that overreach their statutory authority may be invalidated, such overreaching is not exhibited in this case. The cases relied upon by Plaintiff either demonstrate examples of an agency not "overreaching" in its issuance of an interpretive rule, see Nat'l Rest. Ass'n v. Simon, 411 F. Supp. 993, 999 (D.D.C. 1976), or are otherwise distinguishable. See United States v. Calamaro, 354 U.S. 351, 358-59 (1957) (holding that a pick-up man who literally "picked-up" wagers for a salary of $40 a week but had no interest in the numbers enterprise was not meant to pay a special tax for receiving wagers, despite a treasury regulation stating otherwise); Beneficial Corp. & Subsidiaries v. United States, 814 F.2d 1570 (Fed. Cir. 1987) (statute upon which "overreaching" interpretation rested was repealed prior to issuance of judgment). In this case, interpreting "any organization a significant trade or business of which is the lending of money," to include entities which acquire debt from originating lenders is a reasonable interpretation of the statutory provision. Because this phrase is general enough to require definition by an interpretive regulation, a reasonable interpretation necessary to implement congressional mandate should be deferred to by the Court. See Nat'l Muffler Dealers Ass'n v. United States, 440 U.S. 472, 476-77 (1979). This deference is given because " 'Congress has delegated to the [Secretary of the Treasury and his delegate, the] Commissioner [of Internal Revenue], not to the courts, the task of prescribing "all needful rules and regulations for the enforcement" of the Internal Revenue Code. 26 U.S.C. § 7805(a)'" Id. at 477 (quoting United States v. Correll, 389 U.S. 299, 307 (1967)). Including Debt Buyers within the definition of "any organization a significant trade or business of which is the lending of money" is logically reasonable, particularly when reviewed under "the most liberal view of the law and the facts" standard required when applying the Williams Packing exception, because "the business of lending money necessarily includes collecting what has been lent plus interest and fees and, if the circumstances arise, determining when the debt is uncollectible." Def.s' Mot. Dismiss at 18. Plaintiff clearly cannot show that the government would not prevail under any circumstances in demonstrating that it operated within its statutory authority in interpreting 26 U.S.C. 6050P(c)(2)(D), "any organization a significant trade or business of which is the lending of money," as applicable to entities which purchase loans from originating lenders and acquire indebtedness, thus assuming the position of lenders themselves.

However, Plaintiff's second and third arguments are based on an inaccurate factual premise -- that Debt Buyers are somehow prohibited from obtaining the component principal and interest information from lenders upon acquiring defaulted loans and will be required to falsely report information. While Plaintiff consistently alleges that Debt Buyers "generally," "often," "usually," "typically," or "customarily" do not receive such component information, Plaintiff points to no evidence of any legal impediment preventing Debt Buyers from insisting on receiving such information upon acquiring portfolios of defaulted loans. See Pl.'s Mem. at 2, 6, 7. Plaintiff's use of such non-definitive terms also indicates the likelihood that some Debt Buyers presently receive such component information.

Furthermore, even if some Debt Buyers were completely unable to obtain a breakdown of the principal and interest components of debt already acquired from lenders (presumably of loans acquired before 2005, as the Court assumes that Debt Buyers would have insisted on receiving component information from lenders once § 1.6050P-2(e) was implemented),⁴ Debt Buyers are not forced to provide false information of any kind to debtors that would potentially subject Debt Buyers to liability under the FDCPA and thus face "punishment" under the Act. Nor does Debt Buyers' furnishing of even an accurate copy of a 1099-C to a debtor have to create a false presumption that the Debt Buyer agrees not to pursue further collection activities or be subject to liability under the FDCPA. Notably, Plaintiff does not in its Response contest Defendants' assertion that Debt Buyers are free to include in their statement to a debtor text noting "(1) that they are issuing a 1099 because one or more of the circumstances in Treasury Regulation § 1.6050P-1 have been met, (2) that the business intends to, or may, continue collecting the debt until barred by state or federal law governing debt collection, and (3) that the recipient should consult with a tax advisor if he or she does not know whether income arises under 26 U.S.C. §§ 61(a)(12) and 108 in his or her particular circumstances." Def.s' Mot. Dismiss at 20. As explained by Defendants, issuance of a 1099 is not a declaration by the issuer that the recipient debtor actually has received taxable income, since under 26 C.F.R. § 1.6050P-1, "discharged indebtedness must be reported regardless of whether the debtor is subject to tax on the discharged debt under sections 61 and 108." See Def.s' Mot. Dismiss at 21.

Finally, the goal of the FDCPA is to eliminate abusive debt collection practices, while the goal of 26 U.S.C. § 6050P is to provide information to the IRS regarding discharged debt, which the IRS then uses to match to individual tax forms for the purposes of verifying reported income. The differing aims of these statutes suggests that differing definitions as to what entities these statutes regulate would be expected. Furthermore, Plaintiff does not point to any evidence that Congress does or should consistently frame how parties governed by statutes are defined across the breadth of legislation that is promulgated year after year on a variety of topics created to address different ends.

In order for equity jurisdiction to exist, Plaintiff must demonstrate that it will suffer irreparable harm because no alternate forum exists in which it can effectively vindicate its claims. Relying on its analysis under South Carolina in Section III(B) of this Memorandum Opinion, the Court maintains that an alternate forum exists in which Plaintiff can effectively vindicate its claims. Moreover, Plaintiff has not established that it will suffer irreparable harm in the absence of the issuance of injunctive relief by this Court. As stated above, Plaintiff has not provided persuasive evidence that submitting 1099-C Forms to the IRS and corresponding informational statements to affected debtors will deprive Debt Buyers of their ability to collect debt in states with longer statute of limitations periods after such an issuance. Nor has Plaintiff provided any evidence that meeting the requirements set forth in Treas. Reg. § 1.6050P-2(e) will subject Debt Buyers to liability under the FDCPA so long as Debt Buyers do not make any false representations on said forms (leaving blank the interest portion of the form if it is unknown), and, as an extra precaution, include information statements in their submission to debtors that the issuance of 1099-C Forms correlates with the occurrence of an identifiable event and does not necessarily indicate that actual debt has been discharged. Despite protestations to the contrary, Plaintiff has not demonstrated proof of any "promised" threat of litigation,⁶ nor would the Court consider such speculative harm. Finally, the only real threat of irreparable harm faced by Debt Buyers is the possible assessment of penalties by the IRS, for which an alternate and exclusive forum has been shown to exist to contest such harm. Furthermore, there already exists an indication in the form of a public letter to a trade group that the IRS may be sympathetic to certain Debt Buyers who have been unable to obtain component information to report on 1099-C Forms who then report using the best available information and henceforth can contest penalty assessments under the "reasonable cause" exception. See BNA Daily Tax Reporter, INFO 2005-0208 at Q&A 3 (January 10, 2006). The "reasonable cause" exception in 26 U.S.C. § 6724(a) states that "[n]o penalty shall be imposed under this part with respect to any failure if it is shown that such failure is due to reasonable cause and not to willful neglect." Id.

Plaintiff clearly has not met the prerequisites for equity jurisdiction required for this Court to exercise jurisdiction over its claims in the event that Plaintiff had actually shown definitive success on the merits. Thus, Plaintiff has not shown either that the government cannot prevail on the merits under any circumstances, nor that equity jurisdiction may be invoked, and as such this Court does not have jurisdiction over Plaintiff's claims under the Williams Packing exception to the AIA.

Date: January 30, 2006

² Defendants do not challenge DBA's standing to bring this suit on behalf of its members. See Pl.'s Mem. at 14 n.2 (not contested by Defendants).

³ While Defendants also argue that unfair delay by Plaintiff in commencing this action on January 19, 2006, and requesting immediate injunctive relief regarding a regulation that was passed on October 25, 2004, has prejudiced Defendants such that an injunction should not issue, Def.s Mot. Dismiss at 27, the Court need not address this argument since the Court, as noted by Defendants, must have jurisdiction to consider the injunctive relief requested.

⁴ The Court also notes that while the regulation at issue was passed on October 25, 2004, Debt Buyers have been on notice regarding the promulgation of Treas. Reg. § 1.6050P-2(e) and its corresponding principal and interest reporting requirements since the regulation was published for comment in June 2002. See Def.s' Mot. Dismiss at 27. The Court fails to understand, perhaps because Plaintiff has failed to make clear, why Debt Buyers have not as a matter of practice insisted upon receiving component information from originating lenders since mid-2002.

⁵Williams Packing, 370 U.S. at 7.

⁶ During the conference call held on January 20, 2006, Plaintiff represented to the Court and to Defendants that a suit had been filed in the Northern District of Illinois demonstrating the realized threat of litigation regarding violations of the FDCPA by debt buying entities based on the issuance of 1099-C Forms and corresponding statements to debtors. Plaintiff volunteered to include the referenced complaint to the Court and Defendants, which Plaintiff included in its Supplement. See Pl.'s Suppl. at Exh. 1. Upon examination of the attached "Amended Complaint-Class Action" in Johnston v. Arrow Fin. Services, LLC, No. 06cv13 (N.D. III.), the referenced case on its face does not appear to implicate the reporting requirements as applied by Treas. Reg. § 1.6050P-2(e).

⁷ Additionally, since the Court does not have jurisdiction to review the regulation at issue under the APA, the complete record pertaining to Treas. Reg. § 1.6050P-2(e) shall not be reviewed by the Court.