Loving v. Internal Revenue Serv.

• Decision Date: 11 February 2014
• Docket Number: No. 13–5061.,13–5061.
• Citation: 742 F.3d 1013
• Parties: Sabina LOVING, et al., Appellees v. INTERNAL REVENUE SERVICE, et al., Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

742 F.3d 1013

Sabina LOVING, et al., Appellees

v.INTERNAL REVENUE SERVICE, et al., Appellants.

No. 13–5061.

United States Court of Appeals,District of Columbia Circuit.

Argued Sept. 24, 2013.

Decided Feb. 11, 2014.

Held Invalid

31 C.F.R. § 10.3(f)(2), 10.4(c), 10.5(b)Gilbert S. Rothenberg, Attorney, U.S. Department of Justice, argued the cause for appellants. With him on the briefs were Tamara W. Ashford, Principal Deputy Assistant Attorney General, Richard Farber and Patrick J. Urda, Attorneys.

David W. Foster was on the brief for amici curiae Former Commissioners of Internal Revenue in support of appellants.

Charles Harak was on the brief for amici curiae National Consumer Law Center, et al. in support of appellants.

Dan Alban argued the cause for appellees. With him on the brief were William H. Mellor, Scott G. Bullock, and Ari S. Bargil.

Patrick J. Smith was on the brief for amici curiae Ronda Gordon, et al. in support of appellees.

Before: KAVANAUGH, Circuit Judge, and WILLIAMS and SENTELLE, Senior Circuit Judges.

Opinion for the Court filed by Circuit Judge KAVANAUGH.

KAVANAUGH, Circuit Judge:

The federal income tax code is massive and complicated. So it is not surprising that many taxpayers hire someone else to help prepare their tax returns.

In 2011, responding to concern about the performance of some paid tax-return preparers, the IRS issued new regulations. Among other things, the new regulations require that paid tax-return preparers pass an initial certification exam, pay annual fees, and complete at least 15 hours of continuing education courses each year. The IRS estimates that the new regulations will apply to between 600,000 and 700,000 tax-return preparers.

As statutory authority for the new regulations, the IRS has relied on 31 U.S.C. § 330. Originally enacted in 1884, that statute authorizes the IRS to “regulate the practice of representatives of persons before the Department of the Treasury.” 31 U.S.C. § 330(a)(1). In the first 125 years after the statute's enactment, the Executive Branch never interpreted the statute to authorize regulation of tax-return preparers. But in 2011, the IRS decided that the statute in fact did authorize regulation of tax-return preparers.

In this case, three independent tax-return preparers contend that the IRS's new regulations exceed the agency's authority under the statute. The precise question is whether the IRS's statutory authority to “regulate the practice of representatives of persons before the Department of the Treasury” encompasses authority to regulate tax-return preparers. The District Court ruled against the IRS, relying on the text, history, structure, and context of the statute. We agree with the District Court that the IRS's statutory authority under Section 330 cannot be stretched so broadly as to encompass authority to regulate tax-return preparers. We therefore affirm the judgment of the District Court.

I

Originally passed by Congress and signed by President Chester A. Arthur in 1884, Section 330 of Title 31 authorizes the Secretary of the Treasury—and by extension, the IRS, a subordinate agency within the Treasury Department—to “regulate the practice of representatives of persons before the Department of the Treasury.” 31 U.S.C. § 330(a)(1). Before admitting a person to practice as a representative, the IRS may require the applicant to demonstrate “good character,” “good reputation,” “necessary qualifications to enable the representative to provide to persons valuable service,” and “competency to advise and assist persons in presenting their cases.” Id. § 330(a)(2). The statute also empowers the IRS to discipline any representative who is “incompetent,” “disreputable,” “violates regulations prescribed under” Section 330, or who “with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented.” Id. § 330(b). Such representatives may be fined, or suspended or disbarred from practice. Id.

In longstanding regulations implementing Section 330, the IRS has maintained standards of competence for attorneys, accountants, and other tax professionals appearing in adversarial proceedings before the agency. Covered individuals who fail to comply with those requirements may be censured, suspended from practice, disbarred from practice, or monetarily sanctioned.

In 2011, after an IRS review found problems in the tax-preparation industry, the IRS issued a new rule regulating tax-return preparers, a group that had not previously been regulated pursuant to Section 330. SeeRegulations Governing Practice Before the Internal Revenue Service, 76 Fed.Reg. 32,286 (June 3, 2011). (The rule was technically issued by the Department of the Treasury, of which the IRS is a part.) A tax-return preparer is a person who “prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code.” 26 C.F.R. § 301.7701–15(a). The new 2011 regulations require tax-return preparers to register with the IRS by paying a fee and passing a qualifying exam. 31 C.F.R. §§ 10.3(f)(2), 10.4(c), 10.5(b). Each year after the initial registration, a tax-return preparer must pay an additional fee and complete at least 15 hours of continuing education classes. Id. § 10.6(d)(6), 10.6(e).

Plaintiffs in this case are three independent tax-return preparers who would be subject to the new requirements. They filed suit seeking declaratory and injunctive relief to prevent enforcement of the new regulations. On cross motions for summary judgment, the District Court ruled in favor of the plaintiffs, concluding that “together the statutory text and context unambiguously foreclose the IRS's interpretation of 31 U.S.C. § 330.” Loving v. IRS, 917 F.Supp.2d 67, 79 (D.D.C.2013). The District Court permanently enjoined the tax-return preparer regulations. The IRS moved in the District Court for a stay of the District Court's decision and asked to keep the regulations in place pending appeal. The District Court denied the stay motion.

The IRS filed a timely notice of appeal disputing the District Court's construction of Section 330. The IRS also filed a stay motion in this Court to keep the regulations in place pending appeal. That motion was denied. Loving v. IRS, No. 13–5061, 2013 WL 1703893 (D.C.Cir. Mar. 27, 2013).

Our review of the District Court's statutory interpretation is de novo. See, e.g., Judicial Watch, Inc. v. FBI, 522 F.3d 364, 367 (D.C.Cir.2008).

II

The question in this case is whether the IRS's authority to “regulate the practice of representatives of persons before the Department of the Treasury” encompasses authority to regulate tax-return preparers. 31 U.S.C. § 330(a)(1). The IRS says it does. Under Chevron, we must accept an agency's authoritative interpretation of an ambiguous statutory provision if the agency's interpretation is reasonable. See Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). In determining whether a statute is ambiguous and in ultimately determining whether the agency's interpretation is permissible or instead is foreclosed by the statute, we must employ all the tools of statutory interpretation, including “text, structure, purpose, and legislative history.” Pharmaceutical Research & Manufacturers of America v. Thompson, 251 F.3d 219, 224 (D.C.Cir.2001); see also Chevron, 467 U.S. at 843 n. 9, 104 S.Ct. 2778. “No matter how it is framed, the question a court faces when confronted with an agency's interpretation of a statute it administers is always, simply, whether the agency has stayed within the bounds of its statutory authority.” City of Arlington v. FCC, ––– U.S. ––––, 133 S.Ct. 1863, 1868, ––– L.Ed.2d –––– (2013).

In our view, at least six considerations foreclose the IRS's interpretation of the statute.

First is the meaning of the key statutory term “representatives.” In its opening brief, the IRS simply asserts that there “can be no serious dispute that paid tax-return preparers are ‘representatives of persons.’ ” IRS Br. 31 n. 11. Beyond that ipse dixit, however, the IRS never explains how a tax-return preparer “represents” a taxpayer. And for good reason: The term “representative” is traditionally and commonly defined as an agent with authority to bind others, a description that does not fit tax-return preparers. See, e.g.,Oxford English Dictionary 660 (2d ed. 1989) ( [4] “One who represents another as agent, delegate, substitute, successor, or heir”); Black's Law Dictionary 1416 (9th ed. 2009) ( [1] “One who stands for or acts on behalf of another.... See agent”); Ballentine's Law Dictionary 1096 (3d ed. 1969) (“An agent, an officer of a corporation or association, a trustee, executor, or administrator of an estate, or any other person empowered to act for another.”); 45 U.S.C. § 151 (“The term ‘representative’ means any person or persons, labor union, organization, or corporation designated either by a carrier or group of carriers or by its or their employees, to act for it or them.”); U.C.C. § 1–201(b)(33) (“ ‘Representative’ means a person empowered to act for another, including an agent, an officer of a corporation or association, and a trustee, executor, or administrator of an estate.”).

Put simply, tax-return preparers are not agents. They do not possess legal authority to act on the taxpayer's behalf. They cannot legally bind the taxpayer by acting on the taxpayer's behalf. The IRS cites no law suggesting that tax-return preparers have legal authority to act on behalf of taxpayers. Indeed, a tax-return preparer who tried to act on the taxpayer's behalf would run into trouble with the IRS: Under the IRS regulation found at 26 C.F.R. § 601.504(a), “representation” of a taxpayer before the IRS requires formally obtaining the taxpayer's power of attorney, something tax-return preparers do not typically...