Two more victories have come in for incarcerated individuals in the short time since our last post on this subject. Rarely does a case move so fast and so favorably. It helps that the IRS took a position unsupported by the statute and that it inexplicably reached this position after reversing itself. Still, it’s been a swift road to justice, up to this point, for incarcerated individuals. You can access our prior posts on this case here and here. You can access our initial post on this issue expressing incredulity at the flipped position of the IRS regarding the ability of incarcerated individuals to receive the EIP here.
Yesterday, the district court for the Northern District of California granted summary judgment in Scholl v. Mnuchin and made the preliminary injunction permanent. For a case initially filed on August 1, 2020, getting summary judgment in 75 days can make your head spin if you are primarily a Tax Court practitioner but even if you regularly practice in district court. You can access the decision here.
On Friday the 9th Circuit ruled in an emergency appeal brought by the IRS that the IRS needed to follow an earlier order from the district court and send out notice to the incarcerated individuals. You can find that opinion here.
Yesterday’s district court opinion follows the path set out by the order granting the preliminary injunction. First, it addressed standing and ripeness.
In both their stay motion and opposition to plaintiffs’ motion for summary judgment, defendants explain at length why the court’s analysis of title 26 U.S.C. § 6428 was in error and incarcerated individuals are not entitled to an advance refund. See Mtn. at 3–7; Dkt. 70 at 8–11. From that premise, defendants argue that if their interpretation of section 6428 is correct, so too are their arguments regarding ripeness and standing. Mtn. at 7. In other words, if plaintiffs’ interpretation of the CARES Act is correct, then standing would exist. If, however, defendants’ interpretation of the CARES Act is correct, then standing would not exist because if no advance refund is presently owed, then any harm was not actual or imminent.
The court finds again that the failure to disburse the advance refund to the incarcerated individuals created an actual economic injury to them. While it says that the incarcerated individuals did not need to establish that they were in fact entitled to the injury on the merits to move forward on the standing issue it determines that “they have established a legally cognizable right in the payments that defendants issued and then either intercepted or required to be repaid.”
With respect to ripeness the IRS again argued that the FAQ stating that the incarcerated individuals were not entitled to advance credit in 2020 did not create a reviewable agency act, because the plaintiffs can file their 2020 returns in 2021 seeking the credit. The IRS also argued that the FAQs were not sufficiently formal administrative action, even though high level officials had stated that these would be the only pronunciations on the CARES Act. Because the IRS has “already taken concrete action applying their determination to incarcerated individuals,” the court found ripeness satisfied.
It again finds a waiver of sovereign immunity in the APA, that the IRS had taken final agency action regarding the incarcerated individuals, and that no adequate alternative remedy exists, because filing the 2020 return, having the credit denied and suing for refund is quite different than getting a quick injection of cash during an economic crisis. The court finds staying the action would create irreparable harm. Because it is granting the motion for summary judgment, the court finds it appropriate to make the injunction permanent.
The court denied the first basis for summary judgment which plaintiffs requested under section 706(1) of the APA. It did so because it finds that the IRS acted on the CARES Act as a whole. Based on case law, even if it acted arbitrarily and incorrectly the fact that it acted is sufficient to satisfy the requirements of this provision:
Here, the IRS carried out its statutory responsibility by issuing advance refund payments to millions of Americans. It also acted with regard to incarcerated individuals; the agency initially issued EIPs to incarcerated individuals then changed its decision. Purposefully excluding incarcerated individuals from receiving advance refund payments is akin to drawing a boundary. That boundary might be arbitrary and capricious or contrary to law, but at the very least the agency acted.
The second APA claim involves section 706(2)(A) and whether the IRS acted contrary to the law and in excess of statutory authority. Here, the plaintiffs win. The court addresses the “novel” statutory argument advanced by the IRS. In doing so it looks back to litigation under the stimulus payment enacted by Congress during the great recession upon which the current stimulus legislation is based. It finds that the advance refund is a special payment requiring the IRS to send it out as quickly as possible. It rejects several arguments advanced by the IRS regarding the interpretation of the CARES Act legislation and the timing of the payments. Then it rejects any argument the IRS may have regarding coverage of the CARES Act and incarcerated individuals. It finds the action of the IRS to be arbitrary and capricious and reaffirms it prior holding. It also reaffirms the class certification. It orders the following:
For the foregoing reasons, defendants’ motion for stay pending appeal is DENIED. Plaintiffs’ motion for summary judgment of their first claim is DENIED and their motion for summary judgment of their second claim is GRANTED. As discussed herein, the court finds and declares that defendants’ policy violated the APA and is hereby VACATED. The Court also vacates the provisional certification of the class and certifies a litigation class for all purposes. Finally, the court enters the following permanent injunction.
Defendants Steven Mnuchin, in his official capacity as the Secretary of the U.S. Department of Treasury; Charles Rettig, in his official capacity as U.S. Commissioner of Internal Revenue; the U.S. Department of the Treasury; the U.S. Internal Revenue Service; and the United States of America, are hereby enjoined from withholding benefits pursuant to 26 U.S.C. § 6428 from plaintiffs or any class member on the sole basis of their incarcerated status. Within 30 days of the court’s September 24, 2020 order, defendants shall reconsider advance refund payments to those who are entitled to such payment based on information available in the IRS’s records (i.e., 2018 or 2019 tax returns), but from whom benefits have thus far been withheld, intercepted, or returned on the sole basis of their incarcerated status. Within 30 days of the court’s September 24, 2020 order, defendants shall reconsider any claim filed through the “non-filer” online portal or otherwise that was previously denied solely on the basis of the claimant’s incarcerated status. Defendants shall take all necessary steps to effectuate these reconsiderations, including updates to the IRS website and communicating to federal and state correctional facilities. Within 45 days of the court’s September 24, 2020 order, defendants shall file a declaration confirming these steps have been implemented, including data regarding the number and amount of benefits that have been disbursed.
A number of organizations have geared up over the past week to assist incarcerated individuals in filing to get their request for the EIP in before the portal closes. The IRS has not stated what it will do with these requests as they arrive. For a number of reasons, it would be best for the incarcerated individuals to submit their requests this year but they will face significant hurdles in doing so, not taking into account the hurdle of having the IRS approve the payment. This issue is not over yet both for practical and legal reasons. Kudos to the district court for acting so quickly that it is possible for many of the incarcerated individuals to make the requests for the EIP. With over two million incarcerated individuals in the United States, there are a lot of forms to prepare in a short time.