Incarcerated Individuals Win Big Victory

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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.


  1. This is all a reminder that FAQs are not binding and are not always correct. It is interesting too that S. 4318, introduced by Senate Finance Committee Chair Grassley on July 27, includes a new section 6428A for another recovery rebate. This time, there is a subsection (h) specifying no payment to prisoners. It also includes a change to the CARES Act enactment of section 6428 to add the same, effective as if originally in the CARES Act.

    Why was there an FAQ (now #14) that prisoners are not eligible if the SFC chair believed a legislative fix is needed to reach that result? Or why did it remain after Grassley’s introduction of his bill?

    Thanks for your post about the case.

    • Norman Diamond says

      “specifying no payment to prisoners.”

      When they’re acquitted (at trial 2 years later or after an innocence project 20 years later) do they get the payment? If an accused can pay bail therefore not be a prisoner before trial, do they get the payment even if later found guilty at trial?

  2. Robert Kantowitz says

    A few comments:

    1. This case is not really as much a matter of tax procedure per se as it is a more general exposition of the extent to which Treasury is, as is every other agency, subject to the the actual law as written (yes, Congress decides what people must pay in taxes — even if “policy experts” think that Congress made the wrong choices) and the Administrative Procedure Act. If Congress did not deny the payment to incarcerated individuals or to deceased taxpayers, it is not for the Treasury to “fix” it.

    2. All readers should ask themselves whether their own policy preferences on the underlying issues play a role in deciding whether Treasury has cut corners on procedures.

    a. If you agree that Treasury didn’t follow the law or the APA here, you should probably not be applauding the Ninth Circuit’s milquetoast Chevron analysis in Altera, even though, having argued that the Altera case was correctly decided by the Tax Court and wrongly reversed in the Ninth Circuit, I will concede that economists have a theoretical point that the regulation in question is sensible economically but just not in consonance with the statute.

    b. Likewise, if you approve of muscular federal court action to order the IRS to make payments to these individuals, you should be asking yourself whether you can reconcile that with invoking the Tax Injunction Act to help Treasury collect penalties from tax shelter promoters.

  3. Great article, and great response by Prof. Nellen.

  4. Keep an eye on Congress, which may yet come through with legislation that deals with past and future rebates under Section 6428. The proposed Senate HEALS legislation would, according to a Finance Committee description, change the rules for decedents and prisoners as follows:

    “The section also makes some clarifications on the eligibility of decedents and prisoners, which apply retroactively to the CARES Act rebate payments. These clarifications explicitly exclude anyone dying prior to January 1, 2020 from eligibility for the advanced rebate or 2020 tax credit. They also prohibit any payment of an advanced rebate to any individual in prison at the time Treasury processes the rebate. Furthermore, any individual in prison for all of 2020 is ineligible to claim the rebate as a 2020 tax credit.”

    A compromise between the Republican Senate HEALS bill, and the Democratic House HEROES bill, might address these issues.

    • James C Counts II CPA CTFA says

      It helps if you provide the bill number when mentioning a bill as in this case sorting on for HEALS brings up 4 bills with two in the Senate and none of them has what you talking about. So what is the bill number you are talking abouit?

      • I tried using a hyperlink to the Senate Finance Committee announcement, but apparently those don’t work in Comments. And there does not seem to be a text version of the bill itself. This is from

        “As of August 3, a single HEALS Act is theoretical: the term instead refers to ten distinct bills and proposals introduced in the Senate. The two bills that constitute the bulk of the fiscal provisions under the HEALS Act are the American Workers, Families and Employers Assistance Act and the Continuing Small Business Recovery and Paycheck Protection Program Act. Read the full text of these bills here and here, respectively. [With hyperlinks to the two bills.]”

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