A district court granted a permanent injunction against the IRS's position that incarcerated individuals are ineligible for an economic impact payment under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and ordered the IRS to reconsider its earlier denial of payments to prisoners.
Facts: In response to the coronavirus pandemic, Congress enacted the CARES Act on March 27, 2020. Among other provisions, it created a 2020 refundable tax credit for eligible individuals. Advance refunds of these credits (economic impact payments) were made available to eligible individuals. The amount of the credit is equal to $1,200 per eligible individual ($2,400 in the case of individuals filing a joint return), plus $500 per qualifying child. Three days after the CARES Act was enacted, the IRS announced it would automatically issue economic impact payments to eligible individuals.
On May 6, the IRS posted among its frequently asked questions (FAQs) on its website concerning the economic impact payment a question and answer indicating that incarcerated individuals do not qualify for these advance refunds and should repay them or return the checks uncashed. The IRS also moved on April 10 to stop sending payments to prisoners after it had initially sent them checks totaling approximately $100 million, according to a Treasury Inspector General for Tax Administration report (Rep't No. 2020-46-041).
On Aug. 1, 2020, certain incarcerated individuals filed a class action complaint in district court and moved for class certification and a preliminary injunction, arguing that the FAQ was a final agency action that violated the Administrative Procedure Act (APA). The government responded to the motion, arguing that the plaintiffs' claim was unripe, that they lacked standing, and that the government's sovereign immunity was not waived because there was no final agency action without an adequate remedy.
On Sept. 24, 2020, the district court issued an order that tentatively certified a nationwide class of incarcerated individuals denied economic impact payments and issued a preliminary injunction requiring the IRS and Treasury to stop denying them to prisoners and to make previously denied payments.
The plaintiffs moved for summary judgment on two claims: (1) that the IRS and Treasury unlawfully or unreasonably withheld the payments to them, thereby violating the APA (5 U.S.C. §706(1)); and (2) the policy of denying payments to incarcerated individuals violated the APA (5 U.S.C. §706(2)) because it is contrary to law, exceeds statutory authority, and is arbitrary and capricious. The plaintiffs also requested that the court convert its preliminary injunction into a permanent injunction.
The government moved to stay the preliminary injunction pending an appeal to the Ninth Circuit.
Issues: Sec. 6428(f)(3) provides that Treasury shall make the refund "as rapidly as possible," but that no refund or credit is allowed after Dec. 31, 2020. The government argued that this provision applies only to the timeliness of the refunds, not its scope to all taxpayers eligible for the credit.
Holding: After holding for the plaintiffs on the questions of standing, ripeness, and sovereign immunity, the court rejected the IRS's argument that the Sec. 6428(f)(3) mandate is limited to the speed with which the advance refunds are to be made. The court stated this reading would conflict with a holding of a case that arose concerning a similar economic stimulus advance refund in 2007 or 2008 (Sarmiento, 678 F.3d 147 (2d Cir. 2012)), and the CARES Act's broader economic stimulus goals.
The court granted a permanent injunction and class certification and denied the government a stay of the injunction pending appeal. The court also granted summary judgment on the plaintiffs' second claim while denying it as to the first claim, stating that although the IRS's policy was arbitrary and capricious, it was not a failure to act as contemplated by the APA under 5 U.S.C. Section 706(1).
Meanwhile, the IRS on Oct. 8, 2020, revised its FAQs and opened to incarcerated individuals its paper filing procedures through Nov. 4, 2020, for 2019 returns establishing eligibility and its online application portal through Nov. 21, 2020.
- Scholl v. Mnuchin, No. 20-cv-05309 (N.D. Cal. 10/14/20)
— By Maria M. Pirrone, CPA, LL.M., associate professor of taxation, St. John's University, Queens, N.Y.