On Thursday, September 24, 2020, the District Court for the Northern District of California issued an order granting a sweeping victory for incarcerated individuals with regard to the stimulus payments Congress ordered the IRS to issue as quickly as possible. In Scholl v. Mnuchin, Dk. No. 20-cv-05309-PJH the judge agreed with every argument made by attorneys Kelly Dermody, Yaman Salahi, and Jallé Dafa of the San Francisco firm of Lieff Cabraser Heimann & Bernstein,LLP together with Eva Paterson of the Equal Justice Society (see their press release here).
I will discuss each of the decision points in more detail below, but the decision determines first that the court had jurisdiction, going through all of the necessary components, then determines that there was immediate need for action, preliminarily enjoins the IRS from withholding the stimulus payments to incarcerated individuals, and creates a class appointing the attorneys named above as class counsel. We puzzled in a blog post at the IRS flip flop on the prisoner issue when it came out with its FAQ on this subject six weeks after passage of the CARES Act. The court found the flip flop puzzling as well, coupled with the additional flip in the litigation regarding incarcerated individuals released in 2020. It will take a fair amount of effort to put the $1,200 payment into the hands of the over two million individuals incarcerated in the United States but this is a big first step.
The complaint in this case was filed on August 1 and the motion decided here was filed just three days later. The court and the parties were on a fast train. Plaintiffs, individuals injured by the position of the IRS, asserted three causes of action: 1) a violation of the Administrative Procedure Act (APA) 5 USC 706(1); 2) violation of the APA 5 USC 702 and 706(2); and 3) violation of the CARES Act and the Little Tucker Act.
In providing the history of events here the court pointed out that a Treasury Inspector General for Tax Administration report dated June 30 chastised the IRS for sending out checks to incarcerated individuals in the initial wave of payments. In response to that report the IRS said basically that it was required to do so by the CARES Act. Yet, a couple weeks later, for reasons it has never made public and which do not appear anywhere in the statute, the IRS changed its position completely and issued an FAQ stating that incarcerated individuals were not entitled to stimulus payments. It did this at the same time it completely reversed its position on payments to decedents which we discussed here. The court returns to the issue at a later point to discuss the differences between earlier stimulus payment legislation and the 2020 legislation in further support of the broad grant of parties targeted for receipt of stimulus payments in 2020.
As you would expect the government argued that the court lacked jurisdiction to grant a preliminary injunction. It argued the court lacked standing, the case was not ripe and that sovereign immunity barred the requested relief. On the standing issue the government argued that the plaintiffs did not have a right to relief in 2020 but rather needed to wait until they filed their 2020 returns in 2021. No right exists the government said to an advanced refund. The court pointed to the language in the statute directing the IRS to make the payments quickly and observed that “the deprivation of a monetary benefit is precisely the sort of economic injury that normally satisfies the injury in fact requirement.”
The court primarily relied on the findings it made with regard to standing, the immediacy of the monetary benefit promised in the legislation and the economic situation creating that immediacy, to find the case ripe for adjudication. The government argued again that the plaintiffs could seek their money when filing the 2020 return.
The court found a waiver of sovereign immunity in the APA. The government argued that the FAQs did not satisfy the final agency action element necessary but the court looked at the government’s own statements regarding the finality of its decision. It also found that the refund alternative being offered by the government was on which would “entail years of delay to file a tax return, file administrative clams, exhaust those claims, and then file in court.”
Once past the jurisdictional defenses, the court moved on to the defenses to the injunction starting with the likelihood of success on the merits. It started by pointing out that though the statute invited it to do so, the IRS had not issued regulations on the subject that would meet the Chevron test. It’s easy to have some sympathy for the IRS on this point given the timing of its decisions and the events surrounding the decisions, but it loses the opportunity for the leg up that regulations can provide given the deference given to regulations. That leads the court back to the statute and the rather plain language that includes almost everyone in the benefit pool for the stimulus payments.
Next the court discussed whether the decision to exclude prisoners was arbitrary and capricious. Did the IRS give adequate reasons for its decision? In response to this inquiry it found that here “the IRS has put forward virtually no public explanation concerning its decision to withhold payments to incarcerated persons.” The FAQ on this subject “does not describe why or how the IRS arrived at its decision to deny payments to incarcerated persons.” It also noted further that the FAQ reversed its earlier position without explanation. On this point it states that “defendants have not directed the court to any other evidence indicating that the Treasury Department or IRS gave any reason for its decision, much less an adequate one.” (emphasis in original)
On the issue of irreparable harm the court pointed to the loss of funds here by the delay and how in the circumstance of the individuals in this class such a delay could have serious consequences. It detailed the economic situation of incarcerated individuals and their need for funds. Plaintiff’s counsel did an excellent job of document the economic plight of prisoners including the high cost of phone use and the inability to have visitors during the pandemic.
In balancing the equities of the damage to the parties, the court cited back to its irreparable harm discussion regarding the incarcerated individuals and compared that against the administrative difficulties that the IRS will face in making the payments. It found that some facts mitigate the difficulty the IRS will face citing to the already demonstrated ability of the IRS to make payments to this group.
The court determined that this case is appropriate for class certification given the common interest of incarcerated individuals. It went through the factors necessary for class certification and found each present. It then appointed plaintiffs’ counsel as class counsel.
The court required the IRS and Treasury to take the following actions:
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, 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, 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, defendants shall file a declaration confirming these steps have been implemented, including data regarding the number and amount of benefits that have been disbursed.
The case involving the government’s interpretation of how the CARES Act will be implemented with respect to incarcerated individuals is only one of several involving challenges to various aspects of this law. The government suffers a total defeat in this action. That does not mean it will start working on making these payments. The battle is far from over.
The success here may embolden those seeking payments for deceased individuals and for those already engaged in litigation with the government concerning the scope and interpretation of the legislation. This opinion, as well as recent opinions involving payments to US citizens if a parent or spouse is undocumented, illustrate that the normal avenue for challenging IRS determinations relating to refunds do not provide adequate or the exclusive means for court review. The opinions recognize that constitutional challenges to the statute or APA challenges to the manner in which the IRS interprets or administers the CARES Act provisions need not take years to get to court.