About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Padda v Comm’r: Possible Opening in Defending Against Late Filing Penalty When Preparer Fails to E-file Timely

Courts have generally not excused taxpayers from late filing penalties when the taxpayer defense is that that the return preparer was responsible for the delinquency.  Decades ago the Supreme Court in Boyle held that reliance on a third party to file a return does not establish reasonable cause because “[i]t requires no special training or effort to ascertain a deadline and make sure that it is met.”  We have previously discussed how Boyle seems incongruent with e-filing. As I noted last year in Update on Haynes v US: Fifth Circuit Remands and Punts on Whether Boyle Applies in E-Filing Cases “the basic question is whether courts should reconsider the bright line Boyle rule when a taxpayer provides her tax information to her preparer and the preparer purports to e-file the return, but for some reason the IRS rejects the return and the taxpayer arguably has little reason to suspect that the return was not actually filed.”

So far taxpayers have not been successful in arguing that courts should distinguish BoylePadda v Commissioner is the latest case applying Boyle in these circumstances. Like other cases where the taxpayer’s late filing was due to a preparer’s mistake the court did not relieve the taxpayer from penalties. What is unusual though is that in rejecting the defense Padda implicitly acknowledges that differing circumstances might lead to a taxpayer win.

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I will summarize the facts and discuss the slight opening the opinion suggests.

The opinion nicely summarizes what went wrong:

Padda and Kane’s 2012 federal individual income tax return was due October 15, 2013. On October 15, 2013, Padda and Kane signed IRS Form 8879, “IRS e-file Signature Authorization” to authorize Ehrenreich’s accounting firm to electronically file their 2012 Form 1040, “U.S. Individual Income Tax Return”. On October 15, 2013, Ehrenreich’s accounting firm was electronically filing several tax returns just before midnight. Ehrenreich’s accounting firm created an electronic version of Padda and Kane’s return on October 15, 2013, at 11:59 p.m. It transmitted the electronic version to the IRS on October 16, 2013, at 12 a.m. On October 16, 2013, the IRS rejected the return as a duplicate submission. Ehrenreich’s accounting firm electronically resent the return on October 25, 2013, and it was received and accepted by the IRS the same day.

Prior to trial, the IRS and spouses Padda and Kane stipulated that the return was filed on October 25, 2013. The IRS had proposed late filing penalties under Section 6651, which trigger a 5% penalty of the amount required to be shown on the return if the failure to file is under a month, as the case here. In arguing that they had exercised reasonable care and prudence, the taxpayers explained that “1) Ehrenreich’s accounting firm pressed a button only a few seconds late, (2) they relied on Ehrenreich’s accounting firm to timely file the return, and
(3) they themselves could not have pressed the button to timely file the return.”

In rejecting the defense, the Padda opinion cites to Boyle and other cases which provide that taxpayers cannot delegate their filing obligation other than in circumstances where the advice pertains to whether a return needs to be filed at all. 

What I find interesting is that the opinion could have just cited Boyle and stopped there. Instead, it suggested that a relationship with a preparer who had history with the taxpayer of submitting e-filed returns on time might have led to a different outcome:

Even if sometimes it might be reasonable for a taxpayer to rely on his or her accountant to timely file his or her returns (contrary to the caselaw), it was not reasonable in this particular case for Padda and Kane to rely on Ehrenreich’s firm to timely file their return. Padda and Kane have relied on Ehrenreich’s firm to file their returns every year since at least 2006. And every year since then, except for 2011, their return was filed late. Yet they have continued to use Ehrenreich’s firm to file their return year after year. Padda and Kane’s failure to ensure that Ehrenreich’s firm timely filed their 2012 return demonstrates a lack of ordinary business care, particularly in the light of the firm’s history of delinquent filings.

Given the the firm’s delinquent filing history, the opinion concluded that the taxpayers failed to establish that they had reasonable cause for the late filing.

Conclusion

We wait for perhaps better facts for a court to distinguish Boyle. The Boyle-blanket rule seems out of place in today’s world where there may be little way to monitor preparers who taxpayers should be able to expect can meet a deadline. Padda suggests, though does not explicitly embrace, that some reliance may be reasonable, but when there is a long past history of delinquency, even if the taxpayer was not in a position to monitor the particular filing, it will be difficult to find that the taxpayer has a winning reasonable cause defense.

Circuit Court Weighs in on Meaning of Willfulness, Maximum Penalty and SOL Issues in Important FBAR Case

In US v Horowitz  the Fourth Circuit issued a published opinion addressing a number of issues relating to the willful penalty for failing to file an annual Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR. 

The opinion addresses 1) the meaning of willful, holding that willful encompasses recklessness and that the term has different meanings for civil and criminal law purposes, 2) the maximum penalty for willful violations when a 1987 regulation that capped the willful penalty at $100,000 is inconsistent with a 2004 statutory change that boosted the “maximum penalty” for a willful violation to the greater of $100,000, or 50 percent of the account balance, holding that the statutory change effectively abrogated the $100,000 regulatory cap, and 3) the meaning of the term assessment when during the course of a post-assessment administrative appeal of the penalty there was uncertainty as to whether the IRS had abated the assessment.

In this post, I will discuss the third issue, focusing on the SOL argument the taxpayers raised. 

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As background, the Horowitzes had lived and worked in Saudi Arabia since 1984. While there, they initially had a bank account in a Saudi Arabian bank, but they eventually transferred the funds to FOCO, a Swiss bank. When FOCO was bought by an Italian bank, the Horowitzes moved the funds to another Swiss bank, UBS. By the time they moved back to the US in 2001 the account had grown to approximately $1.6 million. All the while they did not report income earned on the account on their US tax returns, and they never provided UBS with their US address.  By 2008, after UBS experienced financial setbacks, Mr. Horowitz traveled to Switzerland and withdrew the funds, depositing the proceeds in Finter Bank, another Swiss bank, this time in his name only. For an additional fee, Finter created the account as a “numbered” account with “hold mail” service, which meant that there was only a number associated with the account and that the bank would hold all correspondence associated with the secret account.

By 2009, there was widespread attention around the IRS crackdown on offshore accounts. The opinion discusses its impact on the Horowitzes:

In January 2010, the Horowitzes submitted a letter to the IRS disclosing the FOCO, UBS, and Finter Bank accounts and requesting that they be accepted into the Department of Treasury’s Offshore Voluntary Disclosure Program. This program provided potential protection from criminal prosecution and reduced penalties in exchange for cooperation. After entering the program, the Horowitzes filed FBARs, as well as amended income tax returns, for 2003 through 2008. As part of that process, they reported additional income of $215,126 and paid more than $100,000 in back taxes. In 2012, however, the Horowitzes opted out of the program.

In May of 2014 IRS sent letters to the Horowitzes proposing FBAR penalties for the undisclosed UBS accounts that they owned in 2007 and 2008. The letters proposed enhanced penalties based on an IRS determination that their conduct was willful and gave them about a month to respond. 

The Horowitzes, through their counsel, did respond to the May letter proposing penalties. In a June 3, 2014 letter they requested an administrative appeal of the still yet to be assessed penalties. The letter included a consent to extend the SOL on assessment of the penalties to December 31, 2015.

While the Horowitzes’ counsel letter began the process of an administrative appeal of the penalties, and had hoped that the extension would put off any possible assessment, on June 13, 2014 the IRS assessed the penalties. The opinion goes into some detail about the assessment process for FBAR penalties, including the work of the FBAR Penalty Coordinator at the Department of Treasury, and how she prepared four Form 13448 Penalty Assessment Certifications that a supervisor signed.

Here is where we get to the SOL issue.  The failure to file the annual FBAR gives the IRS six years to assess penalties, as per 31 USC § 5321(b)(1). At the time the FBAR had to be filed by June 30, so the SOL for assessing the 2007 FBAR penalty was June 30, 2014.  (Note that Title 31 gives the US two-years post-assessment to commence enforcement. 31 USC § 5321(b)(2)). 

There was no dispute that the penalty for 2007 was assessed prior to June 30, 2014, but the Horowitzes contended that the IRS’s actions after they protested the penalty amounted to an abatement of the assessment. 

In October of 2014, the Appeals Officer sent an email to the Appeals FBAR coordinator (with the very cool last name Batman) requesting that the assessments be “removed.” Internal emails between Appeals and the FBAR penalty coordinator suggested that the June 2014 assessment was “assessed prematurely.” In light of the protest and extension, Treasury’s FBAR penalty coordinator “simply deleted “6/13/2014” (the assessment date) from the “date penalty input” field in the assessment database.”

When the appeals process culminated in 2016 with no resolution, the Horowitzes argued that the IRS post-Appeals actions amounted to a reassessment of the penalty—this time beyond the six-year SOL for both 2007 and 2008 as per 31 USC § 5321(b)(1). 

The Fourth Circuit disagreed. In so holding, the opinion discussed the internal IRS procedures that allowed Appeals to hear the matter. Importantly, the opinion notes that the coordinator’s entry in the database was not accompanied by any more formal action:

But she did nothing more. Significantly, she generated no document, and her supervisor, Calamas, did not sign any document reversing the assessment certifications he had executed on June 13, 2014. Moreover, the Horowitzes were never informed that the penalties against them had been placed back into an unassessed status.

As the opinion discusses, the administrative appeals process continued for a couple of years. By May of 2016, Appeals informed the Horowitzes that there was insufficient time to reach resolution, in light of the two-year deadline to commence enforcement action “given that the government’s time for filing suit was set to expire in June 2016 (i.e., two years after the penalties were assessed in June 2014).”

Prior to closing the case at Appeals, the Appeals FBAR coordinator and the Treasury FBAR Penalty coordinator spoke about the legal effect of the database entry. That exchange, as well as its decision to end the Appeals process, highlighted that the government did not believe its actions amounted to an unwinding of the original assessment.

The Fourth Circuit emphasized that even if there were any subjective misunderstanding surrounding the legal effect of its data base deletion it concluded as a “matter of law” that the “mere act of deleting that date did not have the legal effect of reversing the assessments that had been formally certified … on June 13, 2014. Accordingly, the civil penalties against the Horowitzes were timely assessed, and the enforcement action was timely filed.”

Conclusion

The Horowitz opinion highlights the importance of the legal effect of an assessment. The opinion suggests that there were few formal mechanisms in place to allow Appeals to consider a post-assessment challenge to the penalty. The workaround that Appeals facilitated, which temporarily delayed the practical effect of an assessment, did not unwind its legal effect.

UPDATE

There are some excellent discussions in other blogs about the opinion. See Jack Townsend in his Federal Tax Crimes blog, discussing all aspects of the case, as well as Carolyn Kendall of Post & Schell who blogged the case in the firm’s White Collar blog with a focus on the opinion’s discussion of willfulness.

The Record Rule in Tax Court Whistleblower Proceedings

The Tax Court’s memorandum opinion in Neal v Commissioner highlights some of the unique aspects of whistleblower cases, including whether Tax Court should supplement the administrative record when there is a claim that the record is deficient. 

To set the stage, I include the language from the syllabus to the opinion:

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P [the petitioner] was a consultant who worked for target (“T”) and, at T’s request, assembled information to give to an IRS agent who conducted an audit. P left T in 2012, and in 2014 he submitted to R’s Whistleblower Office (“WBO”) a Form 211, “Application for Award for Original Information”, making allegations of tax issues concerning T. The WBO determined that an audit of T’s returns was already underway and that the same issue that P raised in his Form 211 in 2014 had been raised in another individual’s Form 211 that had been previously submitted in 2010 and had been forwarded to the agent. The WBO did not forward P’s Form 211 to the agent and denied P’s claim for an award on the grounds that “the information you provided did not result in the collection of any proceeds”. R made adjustments to T’s liability and collected tax. P filed a petition in the Tax Court seeking review of the WBO’s denial of an award. 

In other words, the WBO denied the award because it found that someone else had beaten Mr. Neal to the punch. Neal appealed the determination in Tax Court. The IRS moved for summary judgment based on the certified administrative record, as it argued that the earlier whistleblowing meant that with respect to Neal “no administrative or judicial action occurred and no proceeds were collected as a result of information provided in the claim.”

Neal disagreed with the facts and information in the record. He alleged that the record 1) omitted information he had provided to the agent and 2) failed to show that the WBO forwarded his Form 211 to the agent. Neal claimed to have played a prominent role with the examining agent and audit of the target even though the record did not corroborate that.

In deficiency cases, the Tax Court generally takes in evidence on a de novo basis. Not so in whistleblower cases.  As a refresher, in Kasper v Commissioner the Tax Court held that the scope of review in whistleblower cases is subject to the record rule and that the standard of review is abuse of discretion. (For my post on Kasper and more on standard and scope of review see Tax Court Decides Scope and Standard of Review in Whistleblower Cases.)

While the Tax Court is generally bound to the record, that does not mean that the Tax Court is obligated to accept what the IRS provides as the certified record. For example in Van Bemmelen v. Commissioner, the Tax Court noted that in a whistleblower case an administrative record may be “supplemented” in one of two ways:

either by (1) including evidence that should have been properly a part of the administrative record but was excluded by the agency, or (2) adding extrajudicial evidence that was not initially before the agency but the party believes should nonetheless be included in the administrative record. [citations omitted]

In Neal, the focus was on the first way, as Neal claimed that the IRS failed to include in the record relevant information pertaining to the audit and Neal’s role in eventually leading to collected proceeds from the target.  The Neal opinion is important as it highlights that an allegation that the record is inadequate is met with a presumption of administrative regularity. That means that “[a]bsent a substantial showing made with clear evidence to the contrary” [as per the Van Bemmelen case] unsupported allegations will not be enough to warrant supplementing the record.

In Neal, the Tax Court held an evidentiary hearing to resolve the challenge to the sufficiency of the administrative record.  The hearing failed to generate the facts needed for Neal to meet the bar of a “substantial showing” with “clear evidence”. For example, the IRS’s examining agent credibly testified that he did  “not ever see Mr. Neal’s Form 211, that he did not recall ever making any information requests of Mr. Neal, that he did not recall ever receiving any documents from Mr. Neal, and that he did not remember ever seeing Mr. Neal before the day of trial.” 

The Neal opinion is also interesting in that it further applies and refines the summary judgment standard in whistleblower cases, and it discusses the distinction in these cases from typical deficiency cases where the parties and the court are not similarly constrained by the record below:

[I]n a “record rule” whistleblower case there will not be a trial on the merits. In such a case involving review of final agency action under the APA, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 

In Neal, the distinction between the rationales for denying the government’s summary judgment motion did not matter:

That distinction (denying the motion where the record shows a dispute of fact versus denying the motion where the record fails to support the conclusion) does not affect the outcome in this case since, as we explain below, the administrative record does not reflect any dispute of fact as to, nor any lack of support for, the WBO’s determination.

Conclusion

In A Legislative History of the Modern Tax Whistleblower Program [$], an article that came out today in Tax Notes, Dean Zerbe argues that the Tax Court’s approach to review in whistleblower cases is wrong as a matter of law. Dean was formerly chief investigative counsel and tax counsel for the Senate Finance Committee. In that capacity he was the lead counsel responsible for drafting section 7623(b), the mandatory whistleblower award provision. He believes that the legislative history supports a finding that the standard of review is de novo (which would allow the Tax Court to conduct a trial and the parties to make their own record in court). In the article Dean states that Chief Counsel and the Tax Court failed to consider that history in Kasper, which, as he notes, involved a pro se taxpayer who failed to fully brief the issue. Keith has suggested that when there are pro se cases that may trigger precedential opinions on issues, the Tax Court should have a process in place to ensure amicus involvement. The issues in those cases deserve full briefing, and there are many important Tax Court opinions involving pro se petitioners.

As the Tax Court hears more whistleblower appeals it will confront many thorny issues surrounding the adequacy of the record.  The record rule, and its exceptions, is a more familiar issue for other courts used to a constrained review of administrative agency actions.  In addition, it is possible that there will be challenges to the standard of review and record rule in circuit courts, as Kasper may not be the last word on that issue. 

TIGTA Report Criticizes TAS’s Approach to Offset Bypass Refunds

Last month TIGTA released a report reviewing the Taxpayer Advocate Service’s role when taxpayers request an offset bypass refund. In the report TIGTA found 1) that TAS offices inconsistently treated taxpayers seeking OBRs, 2) some TAS failures to honor requests as to how taxpayers wished to receive their refunds (paper check, direct deposit to the taxpayer’s account, or direct deposit to a third-party financial institution), 3) some TAS actions that exceeded its delegated authority, especially when a taxpayer seeking an OBR had an open matter with another IRS function, and 4) TAS failed to record fully its processed OBRs. 

In this post I will focus on the first item relating to TIGTA’s findings concerning inconsistencies in the process and standards used to evaluate OBR requests.

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Offset bypass refunds allow taxpayers to receive a refund when the IRS would otherwise apply an overpayment to past due tax liabilities. TAS case advocates are delegated authority to generate an OBR for a taxpayer if the taxpayer has no other debt subject to mandatory offset under Section 6402 and the taxpayer establishes that she is unable to pay reasonable living expenses if the IRS were to offset the overpayment against a past due tax debt.

We have discussed OBRs a few times, including one of our most viewed posts all time, a 2015 post Keith wrote discussing the OBR process. In one of our recent posts on OBRs from this past April, Barbara Heggie discusses challenges that taxpayers face securing the needed documents to prove the financial hardship necessary to get an OBR. In her post, Barbara refers to TAS guidance that allows TAS employees to dispense with third-party documentation: 

Many taxpayers seeking an Offset Bypass Refund will not have access or the ability to secure hardship documentation such as eviction notices, late bills, etc. Determine whether the taxpayer can validate the hardship circumstances through oral testimony or a third-party contact. If so, discuss the case with your LTA to determine if a written statement signed by the LTA confirming that the hardship was validated is appropriate.

The TAS guidance reflects experience that sometimes taxpayers facing hardship have a difficult time providing a full set of documents or record that would prove the hardship.  

In its report, TIGTA found that TAS’s flexibility led to inconsistencies across TAS offices in how TAS case advocates reviewed and decided on OBR requests:

We determined that most OBR cases did not include an analysis of the taxpayer’s income and expenses before an OBR was issued. In addition, we identified cases in which OBRs were provided to taxpayers based on supporting documentation that was not current orreasonable. However, in other cases, TAS case advocatesrequired a full review of the taxpayer’s income and expenses, as well as applied stricter supporting documentation criteria, before determining whether the taxpayer should be issued an OBR. 

The TIGTA report noted specific inconsistencies, including how one office created a detailed processing form to review compliance history and prior OBR requests, while other offices did not consider those factors, and how some offices did not verify supporting documentation. To be sure, TIGTA used only a judgmental sampling approach, which is a non-probability sampling technique, but its auditor observed a pattern of inconsistencies across offices (the report does not discuss why TIGTA did not do a deeper dive). Despite the limits in auditing technique, in TIGTA’s view, the inconsistencies stemmed from a lack of detailed centralized guidance, which led to inconsistent treatment of similarly situated taxpayers. This leads to an increased “risk of abuse by individuals seeking to avoid payment of their outstanding tax liabilities.” 

The report includes are other specific examples of inconsistencies, some of which reflect a lack of use of financial hardship criteria or processes associated with assessing reasonable collection potential that IRS generally requires when considering alternatives to enforced collection. TIGTA makes a number of recommendations, including floating the idea that TAS should create OBR specialists who would have more experience. It also contrasts the TAS OBR process with other more centralized review functions, such as the innocent spouse unit.

TAS’s response to the report reflects a different perspective on its role. In addition to noting that the TIGTA observations only reflected “just a few cases” it noted that centralization could create additional taxpayer burdens. In addition, the lack of detailed process, in TAS view, was by design, and it worried that a too detailed approach in the IRM on OBRs is “unnecessary and that more specific IRM guidance will lead to employees failing to think critically.”

Conclusion

The report reflects very differing perspectives on the OBR process and on tax administration generally.  It reminds me of Gina Ahn’s recent guest post Proving Your Client’s Marital Status, Not as Simple as It Appears but Crucial for EITC where she contrasted Social Security and IRS employees in how they evaluate marital status.  SSA’s perspective is based on ensuring that people receive the maximum benefits they are entitled to receive whereas the IRS perspective is more enforcement based, with a concern that taxpayers may be gaming marital status to generate an improper refund.  TIGTA, consistent with its mission, is primarily concerned with reducing fraud and waste. TAS, consistent with its mission, is attempting to help taxpayers, especially for taxpayers who may be facing financial hardship.

In addition, TAS has offices nationwide. Unlike the post RRA 98 IRS, its employees are meant to work with and assist taxpayers who live and work in the same region as TAS employees.  The lack of centralization within TAS is by design. TAS’s decentralized structure helps ensure that its employees are more likely familiar with the circumstances of people it is charged to assist. 

To be sure, finding the right balance between uniformity and flexibility is a challenge.  Providing relief from an offset or collection action is also a challenge, as we generally accept that while IRS should have extraordinary collection powers those powers should not render taxpayers unable to meet life’s necessities. Within this framework, OBRs exist in a shadowy world of tax procedure, and the report highlights that within the shadows there is a great likelihood of disparate treatment of similarly situated taxpayers. 

What could be done to address the issues TIGTA flagged, while at the same time possibly preserving a role for TAS? In discussing the issue with Keith he raises the important issue as to whether TAS should be the initial point of contact on OBRs. Instead, perhaps IRS could centralize administration of OBRs and local taxpayer advocates could issue a directive if the centralized IRS office failed to 1) take into account the appropriate weighing of a more definitive listing of factors or 2) address unique local circumstances that may create hardships for taxpayers that employees in a centralized location might miss.  Such an approach would take some filing season pressure off of TAS, create standardization, and leave TAS to be creative when needed.  This approach may make additional sense given that during the filing season the IRS typically has additional employees, while TAS typically does not hire up for the filing season and that period creates a lot of extra work for it.

Another District Court Applies The Anti-Injunction Act to Dismiss A Pre-Enforcement Challenge to IRS Notice

Readers of Procedurally Taxing are familiar with the Anti-Injunction Act (AIA) and the CIC Services case that is pending in the Supreme Court. CIC Services raises whether the AIA bars a challenge brought under the Administrative Procedure Act in a pre-enforcement proceeding. It involves the hefty penalties under Section 6707A for failing to comply with information reporting obligations. Last week, in Govig and Associates v US a federal district court in Arizona considered a similar issue. In Govig, the taxpayers claimed that an IRS notice identifying listed transactions violated the APA because it was issued without going through the notice and comment process. In Govig the court concluded that the AIA precluded a pre-enforcement challenge to the IRS notice that triggered the immediately assessable penalty under Section 6707A.

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At issue in Govig is Notice 2007-83. That notice informed taxpayers that tax benefits claimed for a category of trust arrangements were not allowable for federal tax purposes and designated as “listed transactions” trust arrangements that had been “promoted to small businesses and other closely held businesses as a way to provide cash and other property” to owners “on a tax-favored basis.” As the opinion notes, the Notice targeted transactions where businesses used trusts to create welfare benefit funds that included cash-value life insurance policies.

The taxpayers in Govig are participants in trusts that have been designated as “listed transactions” under the Notice.  The plaintiffs in the case paid the penalties that were assessed in 2019 for violations relating to the 2015 year. They then filed a complaint in federal court, alleging that the IRS failed to comply with the notice and comment regime generally required for legislative rules under the APA and asking the court to set aside the notice as arbitrary and capricious.

In granting the government’s motion to dismiss for lack of jurisdiction, the district court explicitly embraced the reasoning of the DC Circuit in the Florida Bankers case. (For prior posts on Florida Bankers, see my discussion here and Patrick’s Smith’s two part post here and here). As the opinion notes, the challenge was framed as one directed to the “information gathering mandated by the Notice’s disclosure requirement and has nothing to do with the assessment or collection of a tax.”  The court reasoned that this is a “distinction without difference”  and agreed with the conclusion reached by then-Judge Kavanaugh in Florida Bankers, that the AIA applies “even if the plaintiff claims to be targeting the regulatory aspect of the regulatory tax . . . because invalidating the regulation would directly prevent collection of the tax.” 799 F.3d at 1070-71.

It also distinguished the Direct Marketing opinion, emphasizing differences in the text between the Tax Injunction Act (TIA) and the AIA at issue in Govig (and CIC Services):

The pertinent part of the TIA provides that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” 28 U.S.C. § 1341 (emphasis added). The AIA in contrast states that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.” 26 U.S.C. § 7421 (emphasis added).

In reasoning that Direct Marketing should not be read to support pre-enforcement challenges to federal information reporting  requirements backstopped by Title 26 penalties the Govig court leaned in on the differences in wording between the TIA and AIA, noting that those differences mattered in the majority Direct Marketing opinion:

There the Court, applying the cannon against surplusages as well as Noscitur a sociis, found that: the words “enjoin” and “suspend” are terms of art . . . referring to different equitable remedies that restrict or stop official action to varying degrees, strongly suggesting that “restrain” does the same. As used in the TIA . . . “restrain” acts on a carefully selected list of technical terms — “assessment, levy, collection” — not on an all-encompassing term, like “taxation.” To give “restrain” the broad meaning selected by the Court of Appeals would be to defeat the precision of that list, as virtually any court action related to any phase of taxation might be said to “hold back” “collection.” Such a broad construction would thus render “assessment [and] levy” — not to mention “enjoin [and] suspend” — mere surplusage, a result we try to avoid.

In Govig, these differences led the district court to conclude that while the TIA and AIA are similar the differences were enough to justify the AIA’s barring of the pre-enforcement challenge:

The AIA is not so limited by “technical” or “precise” language. Instead, it contains a broader restriction on any suit “for the purpose of” restraining the assessment or collection of taxes. 26 U.S.C. § 7421. The Court can only conclude this different wording is intended to carry a different broader meaning; a conclusion supported by the Supreme Court’s prior applications of the AIA

Finally, the district court in Govig held that the case did not implicate exceptions to the AIA, including the South Carolina v. Regan exception when there is no alternative for posing a legal challenge and the Williams Packingexception when “(1) it is ‘clear that under no circumstances could the government ultimately prevail’ and (2) ‘equity jurisdiction’ otherwise exists, i.e., the taxpayer shows that he would otherwise suffer irreparable injury.”Church of Scientology v. United States, 920 F.2d 1481, 1485 (1990) (citing Commissioner v. Shapiro, 424 U.S. 614, 627 (1976) (quoting Williams Packing, 370 U.S. at 7)).

Conclusion

The Govig case itself breaks no new ground.  While it recognizes that the challenge in Govig is to a reporting regime, rather than the underlying tax, its approach in rejecting the challenge closely follows the reasoning in Florida Bankers.  In the next few months we will see whether this approach is the law of the land, as CIC Services tees this issue up directly.

What is not clear to me from reading the opinion (admittedly I did not dig deeper into the pleadings or underlying briefs) is why the taxpayers did not bring their APA challenge in a refund proceeding. The opinion notes that the plaintiffs fully paid the assessed penalties imposed under Section 6707A. In a refund proceeding, the plaintiffs could have raised the same allegations, i.e., that the alleged IRS notice was issued contrary to the APA. In addition, while the plaintiffs asked the court to take judicial notice that violations of the reporting requirements could lead to criminal penalties, the court declined, noting that Section 6707A merely preserves the possibility for other penalties. The issue of potential criminal liability for violating these notices is also raised in CIC Services, where the plaintiff has alleged that the possibility of criminal liability itself makes the traditional refund process inadequate as a forum for raising alleged violations of the APA. 

Death of Taxpayer Extinguishes Claims for Wrongful Collection and Failure to Release Lien

The recent case of Pansier v United States addressed whether a taxpayer’s death extinguishes claims for improper collection and failure to release a lien. In deciding that the taxpayer’s death extinguished the claims, a federal district court focused on the text of Section 7432 and 7433 and the analogous statue applicable to damages for improper IRS disclosures of tax return information, as well as the principle that waivers of sovereign immunity are narrowly construed.

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A summary of the facts tees up the issue in the case. In 2017, the US sued in federal court and sought a judgment for Gary Pansier’s unpaid 1995 through 1998 assessed federal tax liabilities and for Joan and Gary Pansiers’ 1999 through 2006 and 2014 assessed federal tax liabilities. The Pansiers then filed for bankruptcy. The Pansiers then filed a separate lawsuit alleging that the statute of limitations on Gary’s 1996-98 liabilities had expired prior to the government’s collection suit. In that suit they sought approximately $28,000 in damages under Section 7432 for the IRS failure to release a federal tax lien and under Section 7433 for the IRS’s alleged unauthorized collection activities, both of which related to Gary’s separate 96-98 liabilities. 

While the Pansiers’ suit under Sections 7432 and 7433 was pending, Gary passed away. Joan filed a motion to substitute claiming that she as the surviving spouse was the sole representative and proper party in the action. The government filed a motion to dismiss, claiming that she was not the proper party, given that the alleged improper collection actions and failure to release the tax lien only pertained to Gary’s sole tax liabilities, even though some of the collection action reached marital property under Wisconsin law. 

The court agreed with the government. In reaching its decision the court looked to both statutes and their reference to the particular taxpayer:

Section 7432 provides that, when an officer or employee of the IRS “knowingly, or by reason of negligence, fails to release a lien . . . on property of the taxpayer, such taxpayer may bring a civil action for damages against the United States.”  (emphasis added). And Section 7433 states that, when an officer or employee of the IRS recklessly or intentionally, or by reason of negligence, “disregards any provision of [ Title 26], or any regulation promulgated under [ Title 26], such taxpayer may bring a civil action for damages against the United States.”  (emphasis added).

A the court notes, there is longstanding law where courts have routinely dismissed Section 7432 and 7433 claims where a party claims that improper IRS collection activities were undertaken to satisfy a spouse’s tax liability. 

The somewhat more difficult issue was whether Gary’s claims survived his death, and would allow the court under the Federal Rules of Civil Procedure to substitute Joan for Gary.  FRCP 25 provides the following: 

If a party dies and the claim is not extinguished, the court may order substitution of the proper party. A motion for substitution may be made by any party or by the decedent’s successor or representative. If the motion is not made within 90 days after service of a statement noting the death, the action by or against the decedent must be dismissed.

Pointing to the narrow language in 7432 and 7433 that allows claims only for “such taxpayer” the government opposed the motion. In deciding against Joan, the court noted that there were no cases it found that directly addressed the issue, but that courts have applied similar language in 7431 and refused to allow a substitution when the claim involved an alleged improper disclosure of tax return information. That statute also restricts suits for improper disclosure and provides:

If any officer or employee of the United States knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer in violation of any provision of Section 6103 such taxpayer may bring a civil action for damages against the United States in a district court of the United States.

There is case law on the survivability of 7431 claims. For example, in US v Garrity,  a district court case from 2016, the government sought to collect a civil penalty from the estate of a taxpayer (as an aside whether a penalty survives death and can be collected is an important issue, one I discussed years ago in Death, Taxes and Civil Penalties: Does the Taxpayer’s Death End IRS’s Ability to Collect Penalties?, which Stephen Olsen and I discuss further in Saltzman & Book ¶7B. That issue has gotten lots of attention in recent years due in part to FBAR and other potentially large penalties). The estate in Garrity counterclaimed and sought damages under 7431 due to alleged improper IRS disclosure of return information. In deciding against the estate, the court stated that “[g]iven the clear text of the statute and the strict construction of waivers of sovereign immunity,” …”the private cause of action in Section 7431 is limited to claims brought by taxpayers whose return information has been disclosed.”

In deciding against allowing a substitution, the district court in Pansier looked to the case law under Section 7431 as well as the longstanding principle that waivers of sovereign immunity are to be narrowly construed against the government.  As such, the court granted the government’s motion to dismiss. While the government may pursue the estate for any tax liability, and even for possible civil penalties, this case shows that the government enjoys special status and is free from any consequences from alleged misconduct in collecting those taxes when the taxpayer was alive.

US v Sanmina: Attorney Client Privilege and Work Product Protections

US v Sanmina involves a long running discovery dispute. At issue is whether a taxpayer’s disclosing two memoranda created by in house tax counsel led to the waiver of various privilege claims. The Ninth Circuit held that Sanmina did not expressly waive work-product protection merely by providing the memos to outside counsel but it impliedly waived the privilege when it subsequently used the counsel report to support a worthless stock deduction that IRS was reviewing in audit. The important opinion highlights waiver in the context of both attorney client privilege and work-product protection. 

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Facts and Procedural Background

I have previously discussed the discovery dispute here and here. On its 2009 tax return, Sanmina had claimed about a half billion in a worthless stock deduction in one of its subsidiaries. The purportedly worthless subsidiary had two related party receivables with an approximate $113 million book value. Notwithstanding the healthy book value, Sanmina claimed that the FMV of the receivables was zero.

IRS examined Sanmina’s tax return and sent an information document request for documents that supported the deduction. Sanmina gave to IRS a valuation report from DLA Piper (DLA Report), its outside counsel. That report (not surprisingly) supported the taxpayer’s view that the receivables had no fair market value.

Included in the DLA Report was a footnote that referenced but did not describe internal memos that Sanmina’s in house tax counsel had prepared, one in 2006 and the other in 2009.

IRS asked for those two in house memos; Sanmina resisted, leading the IRS to summons them and bring an enforcement action when Sanmina did not comply.

In 2015, the district court held that both in house memos were protected by attorney client and work product privilege and that the “mere mention” of the memos in the DLA Report did not amount to the party’s waiving the privilege.

The government appealed, and in 2017 the 9th Circuit remanded the case “for the district court to review the 2006 and 2009 memos in camera to determine whether the documents requested by the government are privileged to any degree” and “retain[ed] jurisdiction over this appeal.” 

After some more procedural wrangling the 9th Circuit modified its remand, leaving the district court to decide (1) whether the memoranda are privileged in the first instance and (2) whether such privilege was waived. 

On remand the district court reviewed the documents in camera and in a more detailed discussion explained that the memoranda are protected by the attorney-client privilege and attorney work-product doctrine but also found that the privileges were “waived when Sanmina disclosed the memoranda to DLA Piper to obtain an opinion on value, then turned over the valuation report to the IRS.” 

Sanmina appealed that finding, and while both parties for purposes of the appeal agreed that the documents were covered by the attorney client privilege and work product protection they disagreed as to whether Sanmina’s disclosing either the in house memos to DLA Piper or the DLA Report to the IRS resulted in a waiver of either the attorney client privilege or work product doctrine.

Ninth Circuit Agrees With Lower Court on Existence of Privilege But Not on Work Product Waiver

With that by way of background, we can address the main takeaways from the most recent opinion. A starting point to the opinion is the 9th Circuit’s reminder that, because the parties agreed that the memos were subject to both attorney client privilege and work product protection, to order disclosure the court had to find that there was waiver of both privileges. 

The Court Finds that There Was a Waiver of the Attorney Client Privilege When Sanmina Gave the Memos to DLA Piper

This is a key part of the opinion. In reaching its conclusion that there was a waiver, the opinion notes that there are several ways to waive the attorney client privilege, including by express and implied waiver. An express waiver occurs when a party voluntarily discloses documents to third parties. 

Even in the absence of an express waiver, a court can find an implied waiver when a party puts the lawyer’s performance at issue during the course of litigation. As the opinion notes, implied waiver rests on a fairness principle, which

is often expressed in terms of preventing a party from using the privilege as both a shield and a sword. . . . In practical terms, this means that parties in litigation may not abuse the privilege by asserting claims the opposing party cannot adequately dispute unless it has access to the privileged materials. 

Closely related to implied waiver is subject matter waiver, where “voluntary disclosure of the content of a privileged attorney communication constitutes waiver of the privilege as to all other such communications on the same subject.” 

The district court had found that Sanmina’s providing the two in-house memos to DLA Piper amounted to an express waiver, based on its finding that Sanmina had sought non legal advice from DLA as to the valuation of the stock rather than legal advice.  

Whether a party engaging tax counsel is seeking legal advice or non legal advice comes up in a variety of contexts. Even assuming one can cleanly draw a line where tax advice crosses to legal advice, an engagement such as the one with DLA Piper often spans multiple purposes, especially when the tax position is intertwined with valuation issues. The 9th Circuit addressed the subtleties of that inquiry, and noted that courts both within and outside the circuit have approached a “dual-purpose” inquiry differently, with some courts looking to see if the primary purpose of the relationship was for legal advice and others having “transported the ‘because of’ test from the work-product context, and looked to “the totality of the circumstances” to determine “the extent to which the communication solicits or provides legal advice or functions to facilitate the solicitation or provision of legal advice.” 

After acknowledging that there was no decided path in the Ninth Circuit to resolve the issue, the opinion was able to sidestep it, essentially concluding that it could find no clear error with the lower court’s finding that Sanmina’s engagement with DLA had a non legal purpose:

Despite some evidence that Sanmina may have had a “dual purpose” for sharing the Attorney Memos to DLA Piper, the district court’s finding that Sanmina’s purpose was to obtain a non-legal valuation analysis from DLA Piper, rather than legal advice, was not clearly erroneous because it was not “illogical, implausible, or without support in the record.” 

Waiver for Attorney Client Privilege Differs From Waiver of Work Product Protection

After deciding that there was an express waiver for attorney-client privilege purposes, the opinion disagrees with the lower court’s approach that had essentially analyzed waiver with respect to attorney-client privilege and work product in the same way. As the opinion notes, because there was no dispute that the in house memos were both attorney-client communications and protected attorney work product, to order disclosure the court had to find that Sanmina waived both privileges. 

That allowed the panel to discuss how express waiver differs in the context of attorney work-product, with the circumstances warranting an express waiver in the work product context more narrow. The key is that unlike in attorney client privilege waiver analysis, in work product cases it is not sufficient to disclose to a third party; that third party must also be an adversary. The Sanmina opinion explored the distinction: 

[T]he overwhelming majority of our sister circuits have espoused or acknowledged the general principle that the voluntary disclosure of work product waives the protection only when such disclosure is made to an adversary or is otherwise inconsistent with the purpose of work-product doctrine—to protect the adversarial process. 

In framing the issue the court looks to United States v. Deloitte LLP, 610 F.3d 129, 140 (D.C. Cir. 2010): 

Addressing whether Deloitte was a “potential adversary” to Dow, the D.C. Circuit framed the relevant question as “not whether Deloitte could be Dow’s adversary in any conceivable future litigation, but whether Deloitte could be Dow’s adversary in the sort of litigation the [work-product documents] address.” Id. at 140. In concluding “that the answer must be no,” the court noted that, in preparing the work product, “Dow anticipated a dispute with the IRS, not a dispute with Deloitte,” and the work product concerned tax implications that “would not likely be relevant in any dispute Dow might have with Deloitte.” Id

While it was easy for the Sanmina opinion to conclude that DLA Piper was not an adversary (after all it engaged DLA to help with its tax reporting), the opinion notes that courts have expanded the inquiry to see if the work product could be considered disclosed because the actions substantially increased the chances that an adversary would obtain the documents.

The opinion helpfully situates this latter inquiry as part of a “conduit” analysis. In other words, a party cannot avoid a finding that there was an express waiver of the attorney work product doctrine if it was reasonable to expect that the third party would not keep the documents confidential and disclosure to the third party increased the odds that an adversary would get access to the documents. Leaning on the DC Circuit, the court frames the conduit inquiry as follows:

As to the “conduit to an adversary” analysis, the D.C. Circuit noted that its prior applications of the “maintenance of secrecy” standard have generally involved “two discrete inquiries in assessing whether disclosure constitutes waiver.” The first inquiry is “whether the disclosing party has engaged in self-interested selective disclosure by revealing its work product to some adversaries but not to others.If so, “[s]uch conduct militates in favor of waiver” based on fairness concerns. The second inquiry is “whether the disclosing party had a reasonable basis for believing that the recipient would keep the disclosed material confidential.” 

The government argued that DLA should be viewed as a conduit because the DLA Report “was intended for disclosure to interested tax authorities” and any “expectation of confidentiality was therefore absent.”  

In the Ninth Circuit’s view the government take on the conduit analysis was lacking because it failed to focus on the underlying in house counsel documents: 

The relevant inquiry, however, is not whether Sanmina expected confidentiality over the DLA Piper Report. It is whether Sanmina “had a reasonable basis for believing that [DLA Piper] would keep the [Attorney Memos] confidential” In the process of producing its valuation analysis. Deloitte, 610 F.3d at 141. That Sanmina shared the Attorney Memos with DLA Piper to obtain a valuation report for the IRS does not necessarily mean that Sanmina knew or should have known that the resulting DLA Piper Report would disclose or make reference to its attorney work product. If anything, Sanmina’s enlistment of DLA Piper’s assistance in anticipation of litigation with the IRS indicates a “common litigation interest” between Sanmina and DLA Piper insofar as the Attorney Memos are concerned. 

What About the Disclosure of the DLA Report to the IRS?

The above discussion focuses on Sanmina’s possible waiver arising from its providing the in house memos to DLA Piper. A separate issue is whether Sanmina’s turning over the DLA Report to the IRS itself constituted a waiver of the work product protection. This issue turns on whether the DLA Report, which identifies and cites to the existence of the memos in a footnote but does not describe their contents, is enough to conclude that there is waiver of work product protection over the identified documents. 

The opinion notes that the position that disclosure requires some elaboration on the content of documents is both intuitive and supported by case law. Yet that was not enough for the court to conclude that there was no waiver. To fully analyze the issue, the opinion draws on the differences between express and implied waivers:

As we have recognized in the attorney-client privilege context, there is a difference between express and implied waivers. This framework is also applicable in the context of work-product protection, where an express waiver generally occurs by disclosure to an adversary, while an implied waiver occurs by disclosure or conduct that is inconsistent with the maintenance of secrecy against an adversary. 

Drilling down deeper into the issue, the court sets out the relevant task for the court: 

Thus, the focal point of our waiver inquiry is whether, under the totality of the circumstances, Sanmina acted in such a way that is inconsistent with the maintenance of secrecy against its adversary in regard to the Attorney Memos. More broadly, we must ask whether and to what extent fairness mandates the disclosure of the Attorney Memos in this case.

The key consideration is the relationship between the party seeking to maintain the confidentiality and the overall adversary process. On this last point the opinion highlights that Sanmina could have chosen to substantiate its worthless stock deductions with documents or evidence that did not reference the attorney memos, but it chose to reveal their existence when it gave the IRS the DLA Report:

Assuming that Sanmina reasonably expected confidentiality over the Attorney Memos when sharing them with DLA Piper, this expectation became far less reasonable once Sanmina decided to disclose to the IRS a valuation report that explicitly cited the memoranda as a basis for its conclusions. In doing so, Sanmina increased the possibility that the IRS, its adversary in this matter, might obtain its protected work product, and thereby engaged in conduct inconsistent with the purposes of the privilege.

After finding that the actions amounted to waiver, the court then refined its analysis even further, noting that the next step is to focus on the scope of the waiver “which must be ‘closely tailored . . . to the needs of the opposing party’ and limited to what is necessary to rectify any unfair advantage gained by Sanmina from its conduct.” 

That led the court to distinguish between differing parts of the in house counsel memos: 

Based on Sanmina’s overall conduct, Sanmina has implicitly waived protection over any factual or non-opinion work product in the Attorney Memos that serve as foundational material for the DLA Piper Report. However, the IRS provides no reason why the scope of this implied waiver should encompass the opinion work product contained in the Attorney Memos. Besides its general argument the Attorney Memos are needed to understand the DLA Piper Report, the IRS does not explain why the “mental impressions, conclusions, opinions or legal theories” of Sanmina’s in-house attorneys are specifically at issue or critical to its assessment of the deduction’s legal validity. Hickman v. Taylor, 329 U.S. 495, 508 (1947). 

As such, the court held that the IRS was not entitled to parts of the in house memos that contained the internal lawyers’ discussion of the legal issue, as that “may potentially undermine the adversary process by allowing the IRS the opportunity to litigate ‘on wits borrowed from the adversary’ in a future legal dispute with Sanmina. Hickman, 329 U.S. at 516 (Jackson, J., concurring). 

Conclusion

The opinion closes by ordering disclosure of the factual portion of the lawyers’ memos, all to be accomplished by a remand that will require the district court to determine which portions of the memos involve factual work product.  Sanmina will still be able to keep from the IRS its lawyers’ mental impressions, opinions, and legal theories.  As Jack Townsend has discussed in a recent blog post, the opinion highlights the difference between factual and opinion work product, and it remains difficult to force disclosure of true legal analysis. The devil, however, is in the details, and the district court will have to carefully distinguish between fact and legal analysis. Perhaps that too will lead to more litigation—all of course as predicate to a possible challenge to the merits of the deduction. 

Court Rules Against Government in CARES Litigation Challenging Statute’s Denial of Payments to Mixed Status Couples

Earlier this year MALDEF filed a lawsuit in federal district court in Maryland on behalf of US citizens who were denied the COVID stimulus benefits under Section 6428 because they filed a joint return with spouses who use an ITIN. In response to a government motion to dismiss the suit, earlier this week in Amador v Mnuchin a federal district court in Maryland ruled against the government and allowed the suit to proceed to the merits.

The case is one of a handful of lawsuits that is challenging CARES’ failure to benefit mixed status couples and one of a number of other legal challenges to the CARES legislation. [Disclosure: I am co-counsel on two such cases, one challenging the IRS’s failure to rapidly and effectively distribute economic impact payments to the eligible children of parents and caretakers who do not file federal income tax returns and the other challenging the  exclusion of U.S. citizen children from the benefits of emergency cash assistance based solely on the fact that one or both of their parents are undocumented immigrants.] 

All of the cases raise interesting tax procedure issues, and many raise important constitutional law issues. In this post, I will discuss the tax procedure issue relating to sovereign immunity that Amador implicates, and save for another day the standing and the constitutional issues.

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The Amador suit targets CARES identification requirements that effectively deny any EIP or later 6428(a) credit to taxpayers who file a joint return and are married to someone with an ITIN rather than a social security number. The complaint alleges that CARES discriminates against mixed-status couples because it treats them differently than other married couples, in violation of the Constitution, including the Fifth Amendment guarantees of equal protection and due process. The government filed a preliminary motion to dismiss the lawsuit on a number of grounds, including that 1) the government had not waived sovereign immunity, 2) the plaintiffs failed to establish standing, and 3) the plaintiffs’ constitutional arguments failed to state valid claims for relief. The district court ordered an abbreviated and accelerated briefing on the government’s motion.

In Amador, of most immediate relevance for tax procedure was the government’s argument that the plaintiffs’ suit should be dismissed because it failed to establish a waiver of sovereign immunity. Absent a waiver, sovereign immunity shields the federal government and its agencies from suit. In a nutshell the government argued that the plaintiffs had to wait until the filing of a 2020 tax return or separate refund claim and the passage of six months or the denial of the refund claim before bringing suit to challenge Congress’ decision to not allow payments under Section 6428 to US citizens who are married to undocumented immigrants. In other words, the placement of Section 6428 in the Code meant, according to the government, that the taxpayers had to exhaust through normal refund procedures after or with the filing of a 2020 tax return to get a court to pass on the merits of the constitutional challenge. 

In response, the plaintiffs argued that they were not seeking a tax refund, and as a result they did not need to go through the typical refund process. Instead, they argued that their suit seeks injunctive and declaratory relief, with the APA serving as the source for the waiver of sovereign immunity.

Where in the APA is the source for a waiver? 5 U.S.C. § 702 provides that  “[a]n action in a court of the United States seeking relief other than money damages and stating a claim that an agency . . . acted or failed to act . . . shall not be dismissed nor relief therein be denied on the ground that it is against the United States or that the United States is an indispensable party.” 

The government in response argued that 5 USC § 704 provides a backstop against using the APA as a source for challenging the CARES provisions because it authorizes review of agency action under the APA only if “there is no other adequate remedy in a court.”  In other words, what 5 USC § 704 provides is that the APA does not generally displace procedures that provide a specific means to challenge a particular agency action. This, along with the Anti-Injunction Act, is why most challenges to tax law, including allegations that IRS/Treasury failed to comply with APA procedural requirements in rulemaking, have traditionally been shoehorned into the normal baskets of deficiency cases or refund cases (though as we have discussed in PT the Supreme Court in CIC will likely be addressing the AIA’s role in insulating IRS practice from pre-enforcement scrutiny). 

This gets us back to the government’s view in Amador that the individuals had an alternate remedy that served to defeat the APA’s separate source of jurisdiction for the suit. The court disagreed with the government and held that the APA did serve as a waiver of sovereign immunity, looking to the nature of the EIP and the absurdity of requiring exhaustion for a benefit that Congress sought to deliver as rapidly as possible:

Forcing plaintiffs to exhaust their administrative remedies would be an “arduous, expensive, and long” process, Hawkes, 136 S. Ct. at 1815-16, that serves none of the goals underlying § 7422. Before plaintiffs could challenge § 6428(g)(1)(B), they would first have file a 2020 tax return, which they cannot do until 2021. Then, plaintiffs would have to wait until the IRS invariably denies their request for a refund in the amount of the CARES Act payment, because they are ineligible per § 6428(g)(1)(B). Once that happens, plaintiffs would have to file an administrative claim with the IRS, asking it to reconsider its position. But, here too, the IRS will reject plaintiffs’ claim, citing § 6428. Thus, administrative exhaustion under § 7422 is guaranteed to be an exercise in futility because there is no possibility that it could provide plaintiffs with relief. See Cohen v. United States, 650 F.3d 717, 732 (D.C. Cir. 2011) (en banc) (concluding that the § 7422 was not an adequate alternative to APA where administrative exhaustion could not remedy plaintiff’s complaint). 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. (emphasis added)

In addition, the court held Congress did not explicitly create a separate path to challenge the payment of EIP, given that Section 7422 presupposes a recovery of tax that had been previously collected or assessed:

Plaintiffs do not seek the recovery of any monies wrongfully “assessed” because they do not allege that the IRS improperly calculated their tax liability. See Hibbs v. Winn, 542 U.S. 88, 100 (2004) (“As used in the Internal Revenue Code (IRC), the term ‘assessment’ involves a ‘recording’ of the amount the taxpayer owes the Government.”). Nor do plaintiffs complain of taxes wrongfully “collected.” Instead, they challenge the discriminatory effect of a refundable tax credit under the First and Fifth Amendments.

In finding that there was no previous assessment or collection, the court suggested that refund procedures for the EIP itself were likely inappropriate in the first instance:

Certainly, the mismatch between the plain language of § 7422 and the nature of plaintiffs’ suit does not support the finding that Congress intended § 7422 to replace the APA. In fact, if anything, it leaves the Court “doubtful,” Bowen, 487 U.S. at 901, that § 7422 can serve as a statutory basis for plaintiffs to challenge § 6428(g)(1)(B). (citation omitted).

Conclusion

Amador now proceeds to the merits, though the opinion notes that due to the accelerated briefing on the preliminary issues the government may re-raise the procedural challenges later, including at the likely next summary judgment stage.

While this is a preliminary decision and not directly addressing the merits, the Amador district court’s discussion of the relationship between Section 6428(g), Section 7422 and the APA is significant. 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. The issues that the Amador suit raises are serious and the stakes are very high. Traditional paths for challenges to tax statutes should not serve as a bar to effectively shield suspect legislation from judicial review.