Scholl v. Mnuchin

• Citation: 489 F.Supp.3d 1008
• Decision Date: 24 September 2020
• Docket Number: Case No. 20-cv-05309-PJH
• Parties: Colin SCHOLL, et al., Plaintiffs, v. Steven MNUCHIN, et al., Defendants.
• Court: U.S. District Court — Northern District of California

489 F.Supp.3d 1008

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 September 24, 2020

Kelly M. Dermody, Jalle H. Dafa, Yaman Salahi, Lieff 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 MOTION FOR PRELIMINARY INJUNCTION AND MOTION FOR CLASS CERTIFICATION

Re: Dkt. No. 8

PHYLLIS J. HAMILTON, United States District Judge

Before the court is plaintiffs Colin Scholl and Lisa Strawn's ("plaintiffs") motion for preliminary injunction, motion for class certification, and motion to appoint class counsel. The matter is fully briefed and suitable for resolution without oral argument. Having read the papers filed by the parties 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 putative 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 the present motion for preliminary injunction, motion for class certification, and motion to appoint co-lead counsel. Dkt. 8.

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 (collectively "defendants") are generally 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. Compl. ¶¶ 1, 6–11. Plaintiffs are incarcerated and formerly incarcerated persons who did not receive payments (id. ¶¶ 4–5) and seek to certify a nationwide class of 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, (id. ¶ 33).

In the spring of 2020, the COVID-19 pandemic swept across the United States and the globe causing significant disruptions to the living and working arrangements of virtually everyone. As part of the response to the pandemic, many institutions and businesses closed their doors in an effort to slow or stop the spread of the disease. The secondary and tertiary effects of this response was both widespread and largely unknown at the time. One fairly obvious impact of the pandemic was the loss of employment for millions of Americans; in April 2020 alone more than 20 million Americans lost their jobs. Amador v. Mnuchin, 476 F. Supp. 3d 125, 135–37, (D. Md. Aug. 5, 2020). In response, Congress passed the CARES Act that included many provisions totaling $2.2 trillion in relief. See id. As part of that relief package, Congress provided for a mechanism to distribute stimulus payments, the EIP, directly to Americans.

The CARES Act, codified in part at section 6428 of the Internal Revenue Code, 26 U.S.C. § 6428, establishes the following mechanism for the IRS¹ to issue EIP to eligible individuals. First, subsection (a) 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). This amount is credited against an eligible individual's federal income tax for the year 2020. Id. The amount of the credit is reduced "by 5 percent of so much of the taxpayer's adjusted gross income" that exceeds $150,000 for joint filers, $112,500 for a head of household, and $75,000 in all other cases.²

§ 6428(c). For purposes of the CARES 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 2019 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 (5) of subsection (f) permits the IRS to substitute taxable year 2018 for taxable year 2019 in paragraph (f)(1) and further allows the IRS to use information for calendar year 2019 provided in Form SSA-1099 or Form RRB-1099 (relating to Social Security benefit statements) if an individual has not filed a tax return for either 2018 or 2019. § 6428(f)(5). Thus, if an eligible individual filed a tax return in 2018 or 2019 or filed one of the enumerated Social Security forms, then the Act directs the IRS to treat those taxpayers as eligible for an advance refund of the tax credit.

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). Finally, the CARES Act delegates to the Secretary of the Treasury the authority to "prescribe such regulations or other guidance as may be necessary to carry out the purposes of this section, including any such measures as are deemed appropriate to avoid allowing multiple credits or rebates to a taxpayer." § 6428(h).

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. Mtn. at 2; Declaration of Yaman Salahi ("Salahi Decl."), Dkt. 11, Ex. 1 at 1.³ The IRS also established an online portal for individuals who are not typically required to file federal income tax returns (e.g., an individual's income is less than $12,200), which allows those non-filers to enter their information to see if they qualify for an EIP. Mtn. at 3; Salahi Decl., Ex. 2. Individuals who use the non-filer online portal have until October 15, 2020 to register in order to receive the EIP by the December 31, 2020 deadline imposed by the CARES Act. Mtn. at 3; Salahi Decl., Ex. 3.

On May 6, 2020, the IRS published responses to "Frequently Asked Questions" ("FAQ") on the IRS.gov website. Mtn. at 3; Salahi Decl., Ex. 4. Question 15⁴ 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.

Salahi Decl., Ex. 4. 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 payments pursuant to the CARES Act and some of those payments were sent to incarcerated persons and deceased individuals. Id. at 4.⁵ At the time, the TIGTA notified IRS management of its concern regarding the issuance of such payments to incarcerated persons. 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 persons to the Bureau of Fiscal Service⁶ ("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 persons in these later tranches.

TIGTA calculated that the April 10th disbursement sent 84,861 payments totaling approximately $100 million to incarcerated persons. 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 persons and return them to the IRS. Mtn. at 5; Salahi Decl., Ex. 7.

Plaintiffs seek to certify a...