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

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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.

About Leslie Book

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

Comments

  1. Kate EP Pendleton says

    YES!! I know this isn’t in my State of Iowa, but my husband owes back child support and his EIP was taken completely which is good-but mine and MY children’s (2 EIP @ 500 each, totaling 1k) were also taken and given to my husband’s ex and their GROWN children (both whom work). Both of my kids are 8 and not even one yet. I have filed an injured spouse form (also for our joint married return last year)….still nothing….
    We got ZERO relief and no one will tell us what is going on. Please advise! I’m glad this is getting attention.

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