489 F.Supp.3d 1008
N.D. Cal.2020Background:
- Plaintiffs Colin Scholl and Lisa Strawn (incarcerated or formerly incarcerated) sued Treasury, IRS and officials after not receiving CARES Act economic impact payments (EIPs) and sought a preliminary injunction and class certification.
- The CARES Act (§ 6428) created a 2020 refundable tax credit and an "advance refund" mechanism to distribute payments rapidly and defines "eligible individual" by excluding only nonresident aliens, dependents, and estates/trusts.
- The IRS initially issued many EIPs (including ~85,000 to incarcerated persons), then issued an FAQ (May 6, 2020) and internal guidance asserting incarcerated persons are not eligible and instructed returns or interceptions of payments; TIGTA reported the April tranche errors.
- Plaintiffs allege the IRS’s exclusion of incarcerated persons conflicts with the CARES Act and is arbitrary and capricious under the APA; they seek (prospective) injunctive and declaratory relief plus class-wide relief.
- The court found plaintiffs had Article III standing and prudential ripeness, concluded the APA waives sovereign immunity here (§§ 702/704), preliminarily enjoined withholding EIPs based solely on incarceration, and provisionally certified a nationwide Rule 23(b)(2) class.
- Injunction: defendants must reconsider withheld or denied EIP/non-filer claims previously rejected solely for incarceration within 30 days and report steps/data within 45 days; injunction remains until merits resolution.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing & Ripeness | Denial of advance refund is a concrete, imminent monetary injury now (wrongfully withheld funds). | Injury is speculative until tax-credit denial on 2020 returns; not ripe. | Court: Plaintiffs have standing and claims are ripe (injury already occurred when IRS withheld payments). |
| Sovereign immunity / APA reviewability | APA §702 waiver applies; IRS FAQ/decision is final agency action and no adequate alternative exists to APA review for injunctive relief. | Sovereign immunity bars suit; plaintiffs must seek tax-refund procedures (26 U.S.C. §7422) first. | Court: APA waiver applies; IRS action is final and §7422 is not an adequate alternative to APA injunctive review. |
| Statutory interpretation (must IRS pay; are incarcerated "eligible individuals") | §6428(f) requires the Secretary to "refund or credit" overpayments "as rapidly as possible"; "eligible individual" lacks any exclusion for incarcerated persons, so payments are mandatory for eligible incarcerated persons. | IRS says advance refunds are discretionary and incarceration justifies exclusion. | Court: The statute unambiguously mandates advance refunds and does not exclude incarcerated persons; plaintiffs likely to succeed on contrary-to-law claim. |
| APA arbitrary & capricious challenge | IRS offered no adequate public reason for excluding incarcerated persons; its position shifted and lacks rational explanation. | IRS cites fraud risk and administrative difficulty as justification. | Court: IRS action likely arbitrary and capricious—agency failed to provide reasoned explanation and its shifting positions are problematic. |
| Irreparable harm, balance of equities, public interest | Withholding EIPs causes immediate inability to obtain necessities (commissary, hygiene, communication), thus irreparable harm; public interest favors lawful agency action. | Administrative/logistical burdens, fraud concerns, and pending legislation weigh against injunction. | Court: Plaintiffs likely to suffer irreparable harm; balance/public interest favor injunction given likelihood of statutory violation and limited government burden. |
| Class certification under Rule 23(b)(2) | Common policy excludes all incarcerated persons; injunctive relief would apply classwide; numerosity, commonality, typicality and adequacy satisfied. | Opposed but raised principally as premature. | Court: Provisionally certifies nationwide class under Rule 23(b)(2) and appoints class counsel and representatives. |
Key Cases Cited
- Winter v. Natural Res. Def. Council, 555 U.S. 7 (2008) (standard for preliminary injunction: likelihood of success, irreparable harm, balance of equities, public interest)
- Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) (Article III standing elements)
- Bennett v. Spear, 520 U.S. 154 (1997) (two-part test for final agency action)
- U.S. Army Corps of Eng'rs v. Hawkes Co., 136 S. Ct. 1807 (2016) (agency action can be final and reviewable under APA)
- Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) (agency deference framework)
- United States v. Mead Corp., 533 U.S. 218 (2001) (limits on Chevron deference for informal agency interpretations)
- Motor Vehicle Mfrs. Ass'n v. State Farm, 463 U.S. 29 (1983) (arbitrary and capricious review standard)
- Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016) (procedural defects affect deference)
- Sarmiento v. United States, 678 F.3d 147 (2d Cir. 2012) (advance refund treated as legal fiction supporting immediate payment)
- Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127 (9th Cir. 2011) (sliding-scale approach to preliminary injunction)