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Coronavirus Stimulus Payment Challenge Proceeds Under APA

Posted on Aug. 10, 2020

A Maryland federal court denied the government’s motion to dismiss a challenge to the denial of economic impact payments to citizens filing joint tax returns with undocumented spouses.

An August 5 ruling rejected the government’s assertion of sovereign immunity, found the plaintiffs had standing, and held that most of their constitutional claims could proceed.

The case involves 16 U.S. citizens suing the government — specifically, Treasury and the IRS along with the agency heads — over a rule restricting payment of the economic impact payments from the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). The plaintiffs want to make their case a class action.

The plaintiffs are citizens married to undocumented immigrants who are denied the stimulus payments because of section 6428(g). That provision disallows payments if someone on the return has to use an individual taxpayer identification number rather than a Social Security number. The only exception that would allow taxpayers like the plaintiffs to submit tax returns under the married, filing jointly status and still entitle them to stimulus payments would be if the citizen spouse is a member of the military.

A separate suit on behalf of children of undocumented immigrants has already survived a government motion to dismiss.

In the spousal case, the plaintiffs are asserting violations of their Fifth Amendment rights to due process and equal protection as well as their First Amendment rights to freedom of speech and association.

First Hurdle

Judge Ellen L. Hollander of the U.S. District Court for the District of Maryland noted that the plaintiffs didn’t try to get around the general bar of suing the government — sovereign immunity — using the CARES Act. Instead, they claimed the Administrative Procedure Act (APA) provided the relevant waiver of sovereign immunity.

Hollander wrote that the APA challenge wouldn’t allow direct money damages but merely an injunction or declaration, but the plaintiffs have fit their claims to that requirement — they want section 6428(g) declared invalid and an injunction issued against its enforcement. Even though the secondary effect of that relief would be money in the plaintiffs’ pockets, that doesn’t transform their equitable request to monetary relief, she wrote.

The government responded by pointing to the limitations on APA suits, especially when another avenue of relief exists. According to the government, the plaintiffs should wait to file their 2020 tax returns in 2021, and then submit an administrative claim for refund and sue under section 7422 when that claim fails. The stimulus payments at issue are constructed as tax credits that are payable in advance, the government noted.

The problem with that argument, according to Hollander, is that it rests on the conclusion that the refund suit is an adequate alternative to an upfront APA challenge. A remedy might be an inadequate alternative if it involves a substantial risk of civil or criminal penalties or requires a long, arduous administrative process, she said.

Requiring the plaintiffs to wait until next year to file their returns, and then for the IRS to deny their refund claims, and then for the plaintiffs to submit administrative claims, and then for the IRS to deny those claims, would be an exercise in futility, according to Hollander. “Forcing plaintiffs to exhaust their administrative remedies would be an ‘arduous, expensive, and long’ process . . . that serves none of the goals underlying section 7422,” she concluded.

“This Kafkaesque scenario is at odds with the very purpose of the impact payments — to assist Americans grappling with the economic fallout of a public health catastrophe,” Hollander added.

Hollander also questioned how relevant section 7422 should be to refundable credits like the stimulus payments, because challenges to the limits on those payments don’t involve IRS collection or assessment actions. “Instead, they challenge the discriminatory effect of a refundable tax credit under the First and Fifth Amendments,” she wrote.

Leslie Book of Villanova University School of Law highlighted Hollander’s discussion of sovereign immunity in an August 7 blog post on Procedurally Taxing. “It reflects a growing judicial recognition that the mere placement of a benefit in the tax code does not mean that procedures ill-designed to accommodate the financial reality of Americans and the actual nature of the Code-based emergency benefits should serve to bar a court’s review of good faith constitutional challenges,” he wrote. Suspect legislation shouldn’t be protected from judicial review by the traditional avenues for tax challenges, he added.

Book is representing the children of undocumented immigrants in the earlier suit that survived the government’s attempt to dismiss. That suit is also in the District of Maryland.

Second Step

After concluding that the plaintiffs had appropriately invoked the APA as a sovereign immunity waiver for their suit, Hollander turned to the government’s assertion that they lacked standing to pursue the case.

“The only dispute regarding plaintiffs’ standing centers on the first element, that is, whether they have sufficiently alleged a cognizable injury,” Hollander wrote. The plaintiffs easily cleared this step in two ways, she found.

First, not getting the stimulus money is a clear injury, according to Hollander. Second, the directly experienced discrimination from similarly situated couples based on immigration status would also be a sufficient injury on its own, she wrote.

Almost All Clear

After addressing the suit’s procedural requirements, Hollander turned to the merits of the plaintiffs’ assertions — that is, whether they stated claims on which relief could be granted.

Hollander found that the plaintiffs asserted sufficient substantive due process injury for their first Fifth Amendment claim by noting the Supreme Court’s recent case law on the right to marry. Cases like Obergefell v. Hodges, 135 S. Ct. 2584 (2015), and United States v. Windsor, 570 U.S. 744 (2013), show that the fundamental right to marriage continues after the ceremony and includes the right to file joint income tax returns, she concluded.

Both of the plaintiffs’ Fifth Amendment claims, due process and equal protection, subject the relevant government actions to strict scrutiny when the subject is marriage, Hollander concluded.

While the plaintiffs aren’t completely cut off from the CARES Act stimulus payments because they could file separately or enlist in the military, “these options are not without significant costs. For instance, filing jointly is generally preferable to filing separately because, among other reasons, joint filers are taxed according to a more favorable tax rate,” according to Hollander. She also pointed to the financial harm mentioned in the children-of-immigrants-challenge case.

Even if the provision was only subject to the much lower rational basis review, it would fail, Hollander found. The government asserted that the restriction preventing plaintiffs from receiving even their own stimulus payments if they file joint returns was meant to prevent ineligible individuals from receiving the credit.

“But, it would appear that depriving plaintiffs of the credit is an unnecessary prophylactic given that section 6428(g)(1)(A) limits receipt of the impact payment to individuals with a SSN,” Hollander noted.

Hollander found the plaintiffs’ First Amendment claims to be a mixed bag. On the one hand, their freedom of speech claim rested on the dubious propositions that they wanted to express themselves about marriage in their joint returns to the IRS and that section 6428(g) places a burden on those opinions, she noted. But on the other hand, marriage is an intimate association, she wrote.

Hollander refused to dismiss the plaintiffs’ First and Fifth Amendment claims but noted that they only stated a claim for violation of the right to free association.

The plaintiffs in Amador v. Mnuchin, No. 1:20-cv-01102 (D. Md. 2020), are represented by the Law Office of Robert P. Newman PC and the Mexican American Legal Defense and Educational Fund.

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