Adam STEELE, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
Case No: 14-cv-1523-RCL
United States District Court, District of Columbia.
Signed 06/01/2017
ORDERED that defendant‘s Motion for a Certificate of Appealability [162] is DENIED.
It is SO ORDERED this 11th day of September, 2015.
Christopher James Williamson, Vassiliki Eliza Economides, U.S. Department of Justice, Washington, DC, for Defendant.
MEMORANDUM OPINION
Royce C. Lamberth, United States District Judge
I. INTRODUCTION
Plaintiffs bring this class action against the United States to challenge regulations promulgated by the Treasury Department and the Internal Revenue Service requiring tax return preparers to obtain and pay fees for preparer tax identification numbers (PTINs). Both parties have moved for partial summary judgment on the first issue raised in plaintiffs’ lawsuit: whether Treasury and the IRS have the authority to require that all tax return preparers obtain and pay for a PTIN.1 For the reasons stated below, the Court finds that although the IRS has the authority to require the use of PTINs, it does not have the authority to charge fees for issuing PTINs. The Court will grant in part and
II. BACKGROUND
This case revolves around a group of 2010-2011 regulations promulgated by the Treasury Department and the IRS regarding tax return preparers. As explained fully below, the regulations imposed certain requirements for becoming a tax return preparer, including obtaining a specific PTIN and paying a user fee for obtaining such PTIN. Plaintiffs argue that the government lacks legal authority to require PTINs and PTIN fees, and alternatively, that the fee imposed is excessive and impermissible. They seek a declaratory judgment that Treasury and the IRS lack legal authority to charge these fees or that the fees charged are excessive, and for the return or refund of all fees previously collected or for the return and refund of the excessive fees. In 2016, this Court certified the proposed class of “all individuals and entities who have paid an initial and/or renewal fee for a PTIN, excluding Allen Buckley, Allen Buckley LLC, and Christopher Rizek.” See Steele v. United States, 159 F.Supp.3d 73, 88 (D.D.C. 2016); Steele v. United States, 200 F.Supp.3d 217, 227 (D.D.C. 2016).
A. Statutory and Regulatory Framework
Each year, every American is required to submit a tax return to the IRS. Given the complexity of the tax code, it is unsurprising that many people hire others—tax return preparers—to prepare their returns for them. Some tax return preparers have credentials, such as CPAs and attorneys, but others are known as uncredentialed tax return preparers. Before 2010, anyone could file a tax return on behalf of someone else, credentialed or not. In 2010, however, the IRS, attempting to regulate both credentialed and uncredentialed tax return preparers, promulgated new regulations. The regulations established a new “registered tax return preparer” designation, requiring individuals other than attorneys and CPAs to: “(1) [p]ass a one-time competency exam, (2) pass a suitability check, and (3) obtain a PTIN (and pay the amount provided in the PTIN User Fee regulations).” Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. 32286, 32287 (June 11, 2011);
In support of its conclusion that such regulations were necessary, the IRS pointed to the prevalence of the use of tax return preparers but the lack of consistent oversight, and specifically found that
[t]he tax system is best served by tax return preparers who are ethical, provide good service, and are qualified.... As such, the IRS recognizes the need to apply a uniform set of rules to offer taxpayers some assurance that their tax returns are prepared completely and accurately. Increasing the completeness and accuracy of returns would necessarily lead to increased compliance with tax obligations by taxpayers.
Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. at 32294. Thus, “[t]he primary benefit anticipated from these regulations is that they will improve the accuracy, completeness, and timeliness of tax returns prepared by tax return preparers.” Id. The IRS later specifically identified two overarching objectives of the new regulations: “The first overarching objective is to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice. The second overarching objective is to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. 60309, 60310 (Sept. 30, 2010).
A statutory provision—in effect prior to the new regulations—requires that “[a]ny return or claim for refund prepared by a tax return preparer shall bear such identifying number for securing proper identification of such preparer, his employer, or both, as may be prescribed.”
The regulations also imposed a user fee requirement for obtaining a PTIN. See User Fees Relating to Enrollment and Preparer Tax Identification Numbers, 75 Fed. Reg. 60316 (Sept. 30, 2010);
B. Prior Caselaw Interpreting the Tax Return Preparer Regulations
In 2014, the D.C. Circuit addressed the regulations regarding the exam and education requirements, asking “whether the IRS‘s statutory authority to ‘regulate the practice of representatives of persons before the Department of the Treasury’ [under
The only other cases regarding these regulations that have been litigated have taken place in the Northern District of Georgia (and subsequently the Eleventh Circuit), and all were decided prior to the D.C. Circuit‘s Loving opinion. First, in Brannen v. United States, No. 4:11-CV-0135-HLM, 2011 WL 8245026 (N.D. Ga. Aug. 26, 2011), plaintiffs sought “to prevent charges of user fees under
The Brannen decision was affirmed on appeal. See Brannen v. United States, 682 F.3d 1316 (11th Cir. 2012). The Eleventh Circuit held that the PTIN user fees are permissible under Section 9701:
[A] tax return preparer cannot prepare tax returns for others for compensation without having the required identifying number. And because
§ 6109(a)(4) expressly authorizes the Secretary to assign such numbers, a person cannot prepare tax returns for another for compensation unless that person obtains from the Secretary the required identifying number. For this reason, when the Secretary assigns the identifying number (the preparer tax identification number or “PTIN“), the Secretary is conferring a special benefit upon the recipient, i.e., the privilege of preparing tax returns for others for compensation.
Approximately eighteen months after the Brannen decision, and after the Loving district court decision, the Northern District of Georgia considered “whether
III. LEGAL STANDARDS
Plaintiffs first argue that the PTIN requirements—that tax return preparers obtain and pay fees for PTINs—are arbitrary and capricious under the Administrative Procedure Act. They alternatively argue that even if the fee requirements are not arbitrary and capricious, they are unlawful under the IOAA because Congress did not grant the IRS licensing authority over tax return preparers, so the fees do not confer a “service or thing of
A. Summary Judgment
Courts “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
B. Review of an Agency Action
The APA permits the judicial review of an agency action unless a statute precludes judicial review or an “agency action is committed to agency discretion by law.”
If a court may review an agency action, more than one standard of review exists. First, Chevron review—the standards promulgated in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)—is appropriate to determine “whether an agency has authority to act under a statute.” Arent v. Shalala, 70 F.3d 610, 615 (D.C. Cir. 1995). Chevron review employs a two step analysis:
First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency‘s answer is based on a permissible construction of the statute. Chevron, 467 U.S. at 842-43. “The paradigmatic Chevron case concerns ‘[t]he power of an administrative agency to administer a congressionally created ... program.‘” Arent, 70 F.3d at 615 (quoting Chevron, 467 U.S. at 843). As described by the D.C. Circuit, “a reviewing court‘s inquiry under
Alternatively, agency actions may be held unlawful because they are arbitrary and capricious. See
The scope of review under the “arbitrary and capricious” standard is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a “rational connection between the facts found and the choice made.” In reviewing that explanation, we must “consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.” Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. The reviewing court should not attempt itself to make up for such deficiencies: “We may not supply a reasoned basis for the agency‘s action that the agency itself has not given.” We will, however, “uphold a decision of less than ideal clarity if the agency‘s path may reasonably be discerned.”
Motor Vehicle Mfrs. Ass‘n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (internal citations omitted). Keeping with the rule that agencies must explain their decisions, courts “do not defer to the agency‘s conclusory or unsupported suppositions.” McDonnell Douglas Corp. v. U.S. Dep‘t of the Air Force, 375 F.3d 1182, 1187 (D.C. Cir. 2004). Courts must “set aside agency regulations which, though well within the agencies’ scope of authority, are not supported by the reasons that the agencies adduce.” Allentown Mack Sales & Serv., Inc. v. N.L.R.B., 522 U.S. 359, 374 (1998).
Although agencies may change existing policies, to survive arbitrary and capricious review they must “provide a reasoned explanation for the change.” Encino Motorcars, LLC v. Navarro, 136 S.Ct. 2117, 2125 (2016). Although it “need not always provide a more detailed justification than what would suffice for a new policy created on a blank slate,’ ... the agency must at least ‘display awareness that it is changing position’ and ‘show that there are good reasons for the new policy.‘” Id. at 2125-26. Unexplained inconsistencies in agency position are arbitrary and capricious and therefore unlawful. Id. at 2126.
Chevron review and arbitrary and capricious review under State Farm “overlap at the margins.” Arent, 70 F.3d at 615, n.6 (“[W]hether an agency action is
C. “Service or Thing of Value” Under the IOAA
The IOAA permits agencies to charge user fees for “a service or thing of value provided by the agency.”
IV. ANALYSIS
The Court first finds that the agency action here is reviewable. The statute enacted by Congress specifies that tax return preparers shall use their social security numbers to identify themselves on prepared returns unless the Secretary of the Treasury specifies otherwise. See
A. The Agency is Authorized to Require the Exclusive Use of PTINs
Although the parties disagree about the proper standard under which to judge the IRS‘s action, the Court first finds that the IRS was authorized to issue regulations requiring the exclusive use of PTINs under both Chevron and State Farm. First, plaintiffs’ arguments fail step one of Chevron. Chevron states that “if Congress has directly spoken to the precise question at issue ... that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842. The statute specifically says that the Secretary has the authority to specify the required identifying number to be used on prepared tax returns.
In addition, the decision to require the use of PTINs was not arbitrary or capricious. The agency offered several justifications for the regulation requiring the exclusive use of PTINs. First, the IRS explained the need to identify tax return preparers in order to maintain oversight, and stated that the use of a single identifying number was critical to such effective oversight. See Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. at 60310, 60313. The IRS stated that the use of a single number would “enable the IRS to accurately identify tax return preparers, match preparers with the tax returns and claims for refund they prepare, and better administer the tax laws with respect to tax return preparers and their clients.” Id. at 60314. The IRS has articulated satisfactory explanations for its actions. See State Farm, 463 U.S. at 43. There is a rational connection between the regulations—requiring the use of PTINs—and the stated rationales—effective administration and oversight. See id. And, there is no indication that the IRS entirely failed to consider an important aspect of the problem, or that its rationales ran counter to the evidence before it, or that its reasoning is completely implausible. See id. In addition, this was not an unexplained change in policy. See Encino Motorcars, 136 S.Ct. at 2126. The aforementioned reasons for the change in policy were identified by the IRS.
Other courts to consider this issue also have found that the PTIN requirement is authorized by law. See Brannen, 2011 WL 8245026, at *5 (“Congress specifically authorized the Secretary of the Treasury to create regulations requiring tax return preparers to identify themselves, by means of identifying numbers, on tax returns and refund claims that they prepare.“); Brannen, 682 F.3d at 1319 (“§ 6109(a)(4) expressly authorizes the Secretary to assign such numbers“); Buckley, 2013 WL 7121182, at *1-2.2
For these reasons, the Court concludes that the IRS was authorized to issue the regulations requiring tax return preparers to obtain PTINs.
B. The IRS May Not Impose User Fees for PTINs
Having found that the IRS has the authority to require the exclusive use of PTINs, the Court now turns to the question of whether the IRS is authorized to charge user fees for PTINs. Plaintiffs argue that after the D.C. Circuit struck down the eligibility criteria for becoming a registered tax return preparer in Loving, it removed the IRS‘s stated rationale for requiring PTIN fees—to regulate tax return preparers. Given that the IRS now no longer has any valid justification for the fees, plaintiffs argue that they are arbitrary and capricious, and therefore unlawful under the APA. Alternatively, plaintiffs argue that because Congress did not grant the IRS licensing authority—as found by Loving—tax return preparers receive no special benefit in exchange for the fees, rendering them unlawful under the IOAA. In other words, plaintiffs argue that the IRS originally created a licensing scheme that would limit tax return preparers to those certain people who could meet eligibility criteria. But, because Loving found
The government argues that the PTIN and user fee regulations are separate from the regulations imposing eligibility requirements on registered tax return preparers. It argues that the PTIN requirements are not arbitrary and capricious because they make it easier to identify tax return preparers and the returns they prepare, which is a critical step in tax administration, and because PTINs protect social security numbers from disclosure. In support of its position that it may charge fees for PTINs, the IRS states that PTINs are a service or thing of value because the ability to prepare tax returns for compensation is a special benefit provided only to those people who obtain PTINs, who are distinct from the general public. Individuals without PTINs cannot prepare tax returns for compensation. In addition, the IRS argues that PTINs protect the confidentiality of tax return preparers’ social security numbers, and that protection itself is a service or thing of value.
The Court finds that PTINs do not pass muster as a “service or thing of value” under the government‘s rationale. First, the argument that the registered tax return preparer regulations regarding testing and eligibility requirements and the PTIN regulations are completely separate and distinct is a stretch at best. While it is true that they were issued separately and at different times, they are clearly interrelated. The RTRP regulations specifically mention the PTIN requirements and state that PTINs are part of the eligibility requirements for becoming a registered tax return preparer. See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. at 32287-89;
Having concluded the interconnectedness of the regulations, the government‘s argument begins to break down. The Loving court concluded that the IRS does not have the authority to regulate tax return preparers. Loving, 742 F.3d at 1015. It cannot impose a licensing regime with eligibility requirements on such people as it tried to do in the regulations at issue.
Over forty years ago, the Supreme Court interpreted the predecessor to the current form of the IOAA, which stated that an agency could charge fees for “any work, service ... benefit, ... license, ... or similar thing of value” provided by the agency. Nat‘l Cable Television Ass‘n, Inc., 415 U.S. at 337. In listing examples of activities for which an agency could charge a fee, the Supreme Court noted “a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station,” i.e., permits and occupational licenses. Id. at 340. Subsequently, the D.C. Circuit cases finding that a fee was permissible under the IOAA generally concern valid regulatory schemes, as opposed to the situation here where the regulatory scheme was struck down. In Elec. Indus. Ass‘n, Consumer Elecs. Grp. v. F.C.C., 554 F.2d 1109 (D.C. Cir. 1976), common carriers and equipment manufacturers regulated by the FCC challenged the validity of fees for “(1) common carrier application, filing, and grant fees; (2) common carrier tariff filing fees; and (3) equipment type approval, type acceptance and certification fees.” Id. at 1111. The court found that fees could be assessed for tariff filings and equipment testing and approval because such services created the “independent private benefit[s]” of “provid[ing] a means for the carrier to obtain its revenues and to regulate subscriber use of its facilities” and “assist[ing] the manufacturer in marketing a quality product and giv[ing] him credibility in the market place.” Id. at 1015-16. The other fees were “justified by the statutory requirement of a permit for construction of new or extended lines or the discontinuance of service by a common carrier, and by the requirement of an operating license and station construction permit.” Id. at 1016.
In Engine Mfrs. Ass‘n v. E.P.A., the Engine Manufacturers Association (“EMA“) challenged an EPA rule assessing fees for the EPA‘s “Motor Vehicle and Engine Compliance Program under which
Finally, in Seafarers Int‘l Union of N. Am. v. U.S. Coast Guard, the court considered fees charged for issuing “merchant mariner licenses, certificates of registry, or merchant mariner documentation ... to qualified individuals seeking to work aboard a United States merchant marine vessel,” which were documents that “serve[d] as occupational licenses.” Seafarers Int‘l Union, 81 F.3d at 181. The court, finding that “a person who is lawfully required to obtain an occupational license may be charged a fee to reimburse the agency for the cost of processing the license,” concluded that an “agency may exact a fee for administering any procedures reasonably necessary to ensure that [job-related eligibility criteria necessary to obtain a license] have been met.” Id. at 185. The court therefore concluded that because Congress laid out specific eligibility criteria for such licenses which “permit[ted] the Coast Guard to take reasonable steps to ensure that the particular requirements have been met,” the Coast Guard could charge fees “to recover the expense of whatever reasonable procedure is employed by the Coast Guard to comply with the statute.” Id. at 185-86.
The Court acknowledges that courts in the Eleventh Circuit have found that the PTIN fees are permissible under the IOAA. See Brannen, 682 F.3d at 1319; Brannen, 2011 WL 8245026, at *5-6; Buckley, 2013 WL 7121182, at *2. But, the Brannen decisions were made prior to D.C. Circuit‘s Loving decision, i.e., prior to the finding that the IRS lacks the authority to regulate tax return preparers and the striking down of the regulations attempting to do so. In addition, the Court disagrees with the Buckley court‘s finding that Loving (at the time the district court opinion) is entirely inapplicable because although the PTIN scheme was authorized by a different statutory authority, it is, as explained above, interrelated with the RTRP scheme.
If tax return preparers were regulated entities required to obtain licenses, this case would be very different and the cases cited above may support the government‘s argument that it is authorized to charge fees. However, Loving makes clear that the IRS may not regulate in this area or require that tax return preparers obtain an occupational license. The Court is unaware of similar cases in which an agency has been allowed to charge fees under the IOAA for issuing some sort of identifier when that agency is not allowed to regulate those to whom the identifier is issued, and the government has not pointed to any.
The government argues that the fact that anyone may obtain a PTIN is irrelevant, comparing it to the fact that anyone may enter a national park if they buy a ticket. This is unpersuasive. The Secretary of the Interior is authorized by statute to “establish, modify, charge, and collect recreation fees at Federal recreational lands and waters.”
Finally, the Court addresses the IRS‘s second argument that PTINs are things of value because they protect the confidentiality of social security numbers. The confidentiality justification is mentioned only briefly in the regulations requiring the use of PTINs: “The final regulations will also benefit taxpayers and tax return preparers and help maintain the confidentiality of SSNs.” Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. at 60309. It is not discussed in the regulation specifically addressing user fees. See User Fees Relating to Enrollment and Preparer Tax Identification Numbers, 75 Fed. Reg. 60316. Despite the fact that tax return preparers were allowed for many years to use their SSNs, and that under the statute SSNs are presumptively to be used as the required identifying number, and that the taxpayer‘s SSN appears on their tax returns regardless of whether they used a tax return preparer, the regulations fail to even state that SSNs were being inadvertently disclosed or that their confidentiality was at risk. It is not at all clear that requiring PTINs was necessary for this reason. There is no stated evidence in the administrative record that permitted the IRS to make such a determination. See Innovator Enterprises, Inc. v. Jones, 28 F.Supp.3d 14, 20 (D.D.C. 2014) (“[T]he function of the district court is to determine whether or not as a matter of law the evidence in the administrative record permitted the agency to make the decision it did.“). The Court will not defer to these conclusory and unsupported justifications, see McDonnell Douglas, 375 F.3d at 1187, and finds that the IRS may not charge fees for PTINs for this reason.
For all of the reasons stated above, the Court concludes that PTINs are not a “service or thing of value” provided by the IRS. The IRS may therefore not charge fees for issuing PTINs and the regulations requiring payment of fees for PTINs are unlawful.
V. CONCLUSION
In sum, the Court finds that although the IRS may require the use of PTINs, it may not charge fees for issuing PTINs.
A separate Order accompanies this Memorandum Opinion.
NEXSAN TECHNOLOGIES, INCORPORATED, Plaintiff, v. EMC CORPORATION, Defendant. CIVIL ACTION NO. 16-10847-WGY United States District Court, D. Massachusetts. Signed 04/14/2017