Brittany Montrois v. United States, 916 F.3d 1056

Background

IRS requires paid tax-return preparers to obtain and annually renew a Preparer Tax Identification Number (PTIN) and to list it on returns; in 2010 the IRS began charging a user fee to obtain/renew PTINs.
The PTIN fee was justified as recouping IRS costs for issuing/maintaining PTINs and protecting preparers’ Social Security Numbers (SSNs); initially set at ~$50, later reduced to $33 after court decisions.
Plaintiffs (a class of preparers) challenged the PTIN fee under the Independent Offices Appropriations Act (31 U.S.C. § 9701) and as arbitrary and capricious under the APA; they sought injunction and refunds.
The district court invalidated the PTIN fee, reasoning the fee resembled a tax (not a fee) because the benefit allegedly extended to the public and the IRS had not relied on confidentiality when adopting the fee.
On appeal the D.C. Circuit considered jurisdictional exhaustion (I.R.C. § 7422) and the merits: whether the Independent Offices Appropriations Act authorized the fee and whether the fee decision was arbitrary and capricious.
The D.C. Circuit vacated the district court’s judgment, holding the IRS acted within its statutory authority and its decision was not arbitrary and capricious, and remanded to assess whether the fee amount unreasonably exceeds IRS costs.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Jurisdictional exhaustion under I.R.C. § 7422 applies	Preparers should have filed administrative refund claim before suing	§ 7422 applies only to Internal Revenue Code taxes/penalties; PTIN fee is outside the Code	§ 7422 inapplicable; plaintiffs need not exhaust administrative refund remedies
Whether IOAA authorizes PTIN fee	Fee is effectively a tax because benefit is to the public (anyone can get a PTIN after Loving); thus IOAA does not authorize it	IOAA permits reasonable fees for services conferring specific benefits on identifiable recipients (PTIN issuance and SSN confidentiality)	IOAA authorizes the PTIN fee: IRS provides a service, it confers a specific benefit (SSN protection), and recipients (preparers) are identifiable
Whether IRS’s confidentiality rationale was preserved	IRS failed to rely on confidentiality in fee rulemaking; cannot now invoke it	Rulemaking and regulatory history repeatedly identified identity/SSN protection as a PTIN benefit	Court finds IRS adequately relied on confidentiality protection in the regulatory record; confidentiality justifies the fee
Whether fee decision was arbitrary and capricious	Fee was tied to functions invalidated in Loving and lacks reasoned justification; amount may be excessive	IRS reissued fee post-Loving with independent rationales (confidentiality, admin costs) and adjusted fee downward	Agency action was not arbitrary and capricious as to adopting a fee; remand required to examine reasonableness of fee amount

Key Cases Cited

Nat’l Cable & Tel. Ass’n v. United States, 415 U.S. 336 (1974) (IOAA authorizes fees, not taxes; fees must be tied to services conferring special benefits)
Fed. Power Comm’n v. New England Power Co., 415 U.S. 345 (1974) (concurrent opinion clarifying fees vs. taxes under IOAA)
Engine Mfrs. Ass’n v. EPA, 20 F.3d 1177 (D.C. Cir. 1994) (IOAA fee requires service, specific benefit, and identifiable recipients)
Seafarers Int’l Union of N. Am. v. U.S. Coast Guard, 81 F.3d 179 (D.C. Cir. 1996) (agency cannot add licensing then charge fee solely because it can regulate)
Loving v. Internal Revenue Serv., 742 F.3d 1013 (D.C. Cir. 2014) (invalidated IRS registered tax-return preparer program)
Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016) (agency must give adequate, discernible reasons for its actions)
Nat’l Cable Television Ass’n v. FCC, 554 F.2d 1094 (D.C. Cir. 1976) (assessment of fee must relate to costs and value of service)
Cent. & S. Motor Freight Tariff Ass’n v. United States, 777 F.2d 722 (D.C. Cir. 1985) (private benefit must be predicated on more than mere regulation)
Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83 (1998) (courts must ensure jurisdiction exists)
Horizon Coal Corp. v. United States, 43 F.3d 234 (6th Cir. 1994) (distinguishing Title 26 taxes from non-Title 26 fees/taxes for exhaustion rules)
Computervision Corp. v. United States, 445 F.3d 1355 (Fed. Cir. 2006) (describing § 7422’s exhaustion purpose)
Ayuda, Inc. v. Attorney Gen., 848 F.2d 1297 (D.C. Cir. 1988) (specific benefit must be above public benefit)
SEC v. Chenery Corp., 332 U.S. 194 (1947) (agency action must rest on reasons articulated in its record)