Scholl v. Mnuchin

• Decision Date: 14 October 2020
• Docket Number: Case No. 20-cv-05309-PJH
• Citation: 494 F.Supp.3d 661
• Court: U.S. District Court — Northern District of California
• Parties: Colin SCHOLL, et al., Plaintiffs, v. Steven MNUCHIN, et al., Defendants.

494 F.Supp.3d 661

Colin SCHOLL, et al., Plaintiffs,

v.Steven MNUCHIN, et al., Defendants.

Case No. 20-cv-05309-PJH

United States District Court, N.D. California.

Signed October 14, 2020

Kelly M. Dermody, Jalle H. Dafa, Yaman Salahi, Leiff Cabraser Heimann & Bernstein LLP, San Francisco, CA, Christina A. Alvernaz, Eva Jefferson Paterson, Rau Mona Tawatao, Equal Justice Society, Oakland, CA, for Plaintiffs.

Landon Monte Yost, DOJ Tax Division, Washington, DC, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR SUMMARY JUDGMENT AND DENYING MOTION FOR STAY

Re: Dkt. Nos. 54, 58

PHYLLIS J. HAMILTON, United States District Judge

Before the court are defendants Steven Mnuchin, Charles Rettig, the U.S. Department of the Treasury, the U.S. Internal Revenue Service ("IRS"), and the United States of America's (collectively "defendants") motion for stay of preliminary injunction pending appeal (Dkt. 58, "Mtn.") and plaintiffs Colin Scholl and Lisa Strawn's ("plaintiffs") motion for summary judgment, (Dkt. 54, "MSJ"). The matters are fully briefed and suitable for resolution without oral argument. Having read the parties’ papers and carefully considered their arguments and the relevant legal authority, and good cause appearing, the court rules as follows.

BACKGROUND

On August 1, 2020, plaintiffs filed a complaint ("Compl.") in this class action asserting three causes of action: (1) violation of the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(1) ; (2) violation of the APA, 5 U.S.C. §§ 702, 706(2) ; and (3) violation of the CARES Act, 26 U.S.C. § 6428, and the Little Tucker Act, 28 U.S.C. § 1346(a)(2). Dkt. 1. On August 4, 2020, plaintiffs filed a motion for preliminary injunction, motion for class certification, and motion to appoint co-lead counsel. Dkt. 8. On September 24, 2020, the court granted plaintiffs’ motions, provisionally certified a class, and entered a preliminary injunction. Dkt. 50.

Defendants are responsible for administering economic impact payments ("EIP") to eligible individuals pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act" or the "Act"), Pub. L. No. 116-136, 134 Stat. 281 (2020), which was signed into law on March 27, 2020. Plaintiffs are incarcerated and formerly incarcerated individuals who did not receive payments and members of the class are all similarly situated persons who are or were incarcerated, otherwise met the criteria to receive an EIP under the CARES Act but did not receive an EIP. Compl. ¶¶ 4–5, 33.

The CARES Act, codified in part at section 6428 of the Internal Revenue Code, 26 U.S.C. § 6428, establishes a tax credit for eligible individuals in the amount of $1,200 ($2,400 if filing a joint return), plus $500 multiplied by the number of qualifying children. 26 U.S.C. § 6428(a).¹ For purposes of the Act, an eligible individual is defined as "any individual" other than (1) any nonresident alien individual, (2) any individual who is allowed as a dependent deduction on another taxpayer's return, and (3) an estate or trust. § 6428(d). The EIP is an advance refund of the subsection (a) tax credit and subsection (f) describes the mechanism for implementing the advance refund. Paragraph (1) of subsection (f) provides that "each individual who was an eligible individual for such individual's first taxable year beginning in 2019² shall be treated as having made a payment against the tax imposed by chapter 1 for such taxable year in an amount equal to the advance refund amount for such taxable year." § 6428(f)(1).

Paragraph (3) of subsection (f) requires the IRS to "refund or credit any overpayment attributable to this section as rapidly as possible." § 6428(f)(3). Additionally, Congress provided that "[n]o refund or credit shall be made or allowed under this subsection after December 31, 2020." Id. The CARES Act also has a reconciliation provision between the advance refund and the tax credit such that if a taxpayer receives an advance refund of the tax credit then the amount of the credit is reduced by the aggregate amount of the refund. § 6428(e).

Three days after the President signed the CARES Act, the IRS issued a news release explaining that the agency would calculate and automatically issue an EIP to eligible individuals. Declaration of Yaman Salahi ("Salahi Decl."), Dkt. 55, Ex. 1 at 1. Though not required to do so by the Act, the IRS established an online portal for individuals who are not typically required to file federal income tax returns (e.g., because an individual's income is less than $12,200), which allows those non-filers to enter their information to receive an EIP. Id., Ex. 2. Individuals who use the non-filer online portal have until October 15, 2020³ to register in order to receive the EIP by the December 31, 2020 deadline imposed by the CARES Act. Id., Ex. 3.

On May 6, 2020, the IRS published responses to "Frequently Asked Questions" ("FAQ") on the IRS.gov website. Id., Ex. 4. Question 15 asked "Does someone who is incarcerated qualify for the Payment [i.e., an EIP]?" The IRS responded:

A15. No. A Payment made to someone who is incarcerated should be returned to the IRS by following the instructions about repayments. A person is incarcerated if he or she is described in one or more of clauses (i) through (v) of Section 202(x)(1)(A) of the Social Security Act ( 42 U.S.C. § 402 (x)(1)(A)(i) through (v) ). For a Payment made with respect to a joint return where only one spouse is incarcerated, you only need to return the portion of the Payment made on account of the incarcerated spouse. This amount will be $1,200 unless adjusted gross income exceeded $150,000.

Id. On June 18, 2020, the IRS updated its internal procedures manual to reflect the policy stated in response to the FAQ. Id., Ex. 5.

On June 30, 2020, the Treasury Inspector General for Tax Administration ("TIGTA") issued a report on the interim results of the 2020 filing season, including results of an audit on the IRS's issuance of the EIPs. Id., Ex. 6. The TIGTA noted that on April 10, 2020 the IRS issued 81.4 million CARES Act payments and some of those payments were sent to incarcerated individuals and deceased individuals. Id. at 4.⁴ At the time, the TIGTA notified IRS management of its concern regarding the issuance of such payments to incarcerated individuals. The report then stated "IRS management noted that payments to these populations of individuals were allowed because the CARES Act does not prohibit them from receiving a payment. However, the IRS subsequently changed its position, noting that individuals who are prisoners or deceased are not entitled to an EIP." Id. at 5. The IRS provided taxpayer identification numbers of incarcerated individuals to the Bureau of Fiscal Service⁵ ("BFS") and requested that BFS remove those individuals from subsequent payments issued on May 1, 2020 and May 8, 2020. Id. There were no payments to incarcerated individuals in these later tranches.

TIGTA calculated that the April 10th disbursement sent 84,861 payments totaling approximately $100 million to incarcerated individuals. Id. at 6, fig. 3. In response to these already issued payments, the IRS issued guidance, as reflected in the FAQ, that individuals who received a direct deposit payment in error should repay the advance refund by submitting a personal check or money order to the IRS. Id. at 6. Individuals who received a paper EIP check were instructed to return the voided check to the IRS. Id. Further, plaintiffs cite news stories reporting that the IRS took proactive steps to intercept and retrieve the April 10th payments such as directing state corrections departments to intercept payments made to incarcerated individuals and return them to the IRS. Id., Ex. 7.

As part of the order granting plaintiffs’ motion for preliminary injunction, the court enjoined defendants from withholding benefits pursuant to the CARES Act from plaintiffs or any class member on the sole basis of their incarcerated status. Dkt. 50 at 44. The court ordered defendants to reconsider payments to those who would otherwise be entitled to an EIP based on their 2018 or 2019 tax returns but did not receive the payment on the sole basis of their incarcerated status. Id. The court also ordered defendants to reconsider any claim filed through the online non-filer tool, described below, for those claims that were previously denied on the sole basis of the claimant's incarcerated status. Id. The court set a thirty-day deadline for each reconsideration. Id.

On October 1, 2020, defendants filed an appeal of the court's preliminary injunction order and also filed the present motion for stay of the preliminary injunction pending the appeal. Plaintiffs filed a motion for summary judgment on their two APA claims. The court consolidated briefing on these two motions. Dkt. 62.

DISCUSSION

A. Legal Standard

1. Motion for Stay

Granting a stay pending appeal is "an exercise of judicial discretion." Virginian Ry. Co. v. United States, 272 U.S. 658, 672, 47 S.Ct. 222, 71 L.Ed. 463 (1926). The party requesting a stay bears the burden of convincing a court to exercise that discretion. Nken v. Holder, 556 U.S. 418, 433–34, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009). In deciding whether to grant a stay, the court must consider "(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies." Id. at 426, 129 S.Ct. 1749 (quotation omitted). The first two stay factors are "the most critical." Lair v. Bullock, 697 F.3d 1200, 1204 (9th Cir. 2012). "[T]he last two are reached only ‘[o]nce an applicant satisfies the first two factors.’ " Al Otro Lado v. Wolf, 952 F.3d 999, 1007 (9th Cir. 2020) (second alteration in original) (quoting Nken, 556 U.S. at 434–35, 129 S.Ct. 1749 ).

" Nken in...