United States District Court, District of Columbia
For RYAN, LLC, G. BRINT RYAN, GERALD LEE RIDGELY, JR, Plaintiffs: David J. Fioccola, R. Gregory Roberts, MORRISON & FOERSTER,LLP, New York, NY.
For TIMOTHY F. GEITHNER, in his official capacity as the Secretary of the Treasury, DOUGLAS H. SHULMAN, in his official capacity as the Commissioner of the Internal Revenue Service, Defendants: Andrew C. Strelka, LEAD ATTORNEY, DEPARTMENT OF JUSTICE, Washington, DC; E. Christopher Lambert, U.S. DEPARTMENT OF JUSTICE, Washington, DC.
ROBERT L. WILKINS, United States District Judge.
Plaintiffs Ryan, LLC, G. Brint Ryan, and Gerald Lee Ridgely (collectively, " Plaintiffs" ) bring this action against Jacob Lew, in his official capacity as the U.S. Secretary of the Treasury,  and against Douglas H. Shulman, in his official capacity as the Commissioner of the Internal Revenue Service (" IRS" ) (collectively, the " Government" ). Plaintiffs challenge certain provisions of Title 31, Section 10 of the Code of Federal Regulations--commonly known as " Circular 230" --that generally limit the use of contingent fee arrangements in connection with the preparation and filing of refund claims with the IRS. See 31 C.F.R. § 10.27. More specifically, Plaintiffs mount three distinct attacks against Circular 230: (1) Ryan, LLC and Mr. Ryan argue that Circular 230 violates their rights under the Petition Clause of the First Amendment (Count I); (2) Mr. Ryan argues that Circular 230 violates his Fifth Amendment Due Process Rights (Count II); and (3) Mr. Ridgely brings suit under the Administrative Procedure Act (" APA" ), 5 U.S.C. § § 701, et seq., arguing that the IRS exceeded its statutory authority in promulgating Circular 230 (Count III). Plaintiffs seek a declaratory judgment that Circular 230's restrictions of contingent fee arrangements in the context of " ordinary refund claims" is unconstitutional and exceeds the scope of the IRS's authorizing statute, and they seek a permanent injunction barring the enforcement of Circular 230's restrictions on the use of contingent fee arrangements for " ordinary refund claims."
This matter is presently before the Court on the Government's Motion to Dismiss Counts I and II. (Dkt. No. 10). The parties previously appeared before the Court for a hearing on the Government's Motion on November 19, 2012, at which time the Court alerted the parties to its concerns as to whether Ryan, LLC and Mr. Ryan possess standing to pursue their constitutional claims. At the conclusion of the hearing, the parties sought leave to submit supplemental briefs on the standing issue, which the parties have now done. ( See Dkt. Nos. 21, 22, 23). Upon careful consideration of the parties' respective briefs and supplemental briefs, the presentation of counsel during the hearing on November 19, 2012, and the entire record in this action, the Court concludes, for the reasons set forth herein, that Mr. Ryan lacks standing to pursue his Due Process Clause claim and that Count II will therefore be DISMISSED for lack of jurisdiction. The Court also concludes that both Ryan, LLC's and Mr. Ryan's Petition Clause claims under Count I will be DISMISSED pursuant to Rule 12(b)(6) for failure to state a claim. Accordingly, the Government's Motion to Dismiss Counts I and II is GRANTED IN PART and DENIED AS MOOT IN PART.
A. Factual Summary
Circular 230 prescribes rules governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and appraisers before the IRS. (Dkt. No. 1 (" Compl." ) at ¶ 34). Circular 230 was promulgated by the IRS under authority granted to it by statute. ( Id. ¶ 35 (citing 31 U.S.C. § 330)). Circular 230 is divided into five subparts that establish: (i) rules governing the authority to practice before the IRS; (ii) duties and restrictions
relating to practice before the IRS; (iii) rules applicable to disciplinary proceedings; (iv) rules applicable to disqualification of appraisers; and (v) general miscellaneous provisions. ( Id. ¶ 36). Simply stated, Circular 230 delineates who may practice before the IRS, the standards and restrictions such persons must follow, and the sanctions imposed for violations of such standards and restrictions. See 31 C.F.R. § § 10.1-10.93.
Beginning in 1994, Circular 230 restricted the use of contingent fee arrangements for preparing original income tax returns; however, the regulations allowed the use of contingent fee arrangements for the preparation and filing of amended returns and/or refund claims, so long as the practitioner " reasonably anticipate[d] at the time the fee arrangement [was] entered into that the [amended] return [or refund claim] will receive substantive review by the IRS." (Compl. at ¶ 38 (quoting Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries Before the Internal Revenue Service, 59 Fed. Reg. 31,523, 31,525 (June 20, 1994))). In promulgating these regulations, the IRS explained that " Treasury continues to believe that a rule restricting contingent fees for preparing tax returns supports voluntary compliance with the tax laws by discouraging return positions that exploit the audit selection process." ( Id. (quoting 59 Fed. Reg. at 31,525)).
In September 2007, however, the IRS promulgated a final rule that amended Circular 230's regulations and expanded the limitations on the use of contingent fee arrangements. See Regulations Governing Practice Before the Internal Revenue Service, 72 Fed. Reg. 54,540 (Sept. 26, 2007). In response to public comments, the IRS explained that " [t]he Treasury Department and the IRS continue to believe that a rule restricting contingent fees for preparing tax returns supports voluntary compliance with the Federal tax laws by discouraging return positions that exploit the audit selection process." (Compl. at ¶ 39 (quoting 71 Fed. Reg. 6,421, 6,423-24 (Feb. 8, 2006)). Circular 230 now provides that, in most circumstances, " a practitioner may not charge a contingent fee for services rendered in connection with any matter before the [IRS]." 31 C.F.R. § 10.27(b)(1). However, Circular 230 does allow for some exceptions to this limitation, " for services rendered in connection with the Service's examination of, or challenge to: (i) [a]n original tax return; or (ii) [a]n amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return." Id. § 10.27(b)(2). Additionally, a practitioner may properly charge a contingent fee " for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the [IRS]," or " for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code." Id. § 10.27(b)(3), (4).
The term " contingent fee" is defined as " any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the [IRS] or is sustained either by the [IRS] or in litigation," and also includes " a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved or that otherwise depends on the specific result attained." Id. § 10.27(c)(1). The regulations define " [m]atter before the Internal Revenue Service" as:
[T]ax planning and advice, preparing or filing or assisting in preparing or filing returns or claims for refund or credit, and all matters connected with a presentation to the [IRS] or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the [IRS]. Such presentations include, but are not limited to, preparing and filing documents, corresponding and communicating with the [IRS], rendering written advice with respect to any entity, transaction, plan or arrangement, and representing a client at conferences, hearings, and meetings.
Id. § 10.27(c)(2). As relevant here, Circular 230 proscribes the use of contingent fee arrangements for what the Plaintiffs term " ordinary refund claims," i.e., claims for refund filed after taxpayers have filed their original tax return, but before the IRS initiates an audit of the return(s). (Compl. at ¶ 2).  It is precisely this restriction--Circular 230's application to " ordinary refund claims" --that Plaintiffs challenge herein.
Ryan, LLC, a leading global tax services firm, alleges that " [a]n integral part" of its business " has historically been the representation of clients on a contingent fee basis in the preparing and filing of 'Ordinary Refund Claims.'" ( Id. ¶ 20). Ryan, LLC asserts that the " ordinary refund claims" it has prepared and filed on behalf of its clients " typically have not involved complex legal issues, or in many cases, any legal disputes at all. Instead, these refund claims have usually been extremely fact intensive inquiries that required an enormous outlay of time, energy, and resources." ( Id. ¶ 22). According to Plaintiffs, Ryan, LLC's efforts in " [c]ompiling, organizing, preparing, and analyzing the volumes of data necessary to establish the validity of such claims results in substantial expenses being incurred upfront, in the preparation of the claim." ( Id. ). Given this, Ryan, LLC alleges that its " clients have preferred the use of contingent fee arrangements when pursuing Ordinary Refund Claims." ( Id. ). Ryan, LLC alleges that it " has lost clients and substantial revenue due to the Circular 230 prohibition on the use of contingent fee arrangement for services rendered in connection with the preparation and filing of 'Ordinary Refund Claims.'" ( Id. ¶ ¶ 8, 49-51). Through this suit, Ryan, LLC asserts that Circular 230's restrictions infringe upon the " First Amendment right to petition the Government for a redress of grievances," through the filing of " ordinary refund claims." ( Id. ¶ ¶ 1, 54-60).
Plaintiff G. Brint Ryan (" Mr. Ryan" ) is the founder and chairman of Ryan, LLC. For his part, he asserts that, because of Circular 230's prohibition on the use of contingent fee arrangements, he " is unable to retain a practitioner on a contingent fee basis to prepare and file an Ordinary Refund Claim on his behalf." ( Id. ¶ 24). Elsewhere in the Complaint, however, Mr. Ryan avers that, while unable to obtain representation on a contingent fee basis, he has nevertheless " filed an Ordinary Refund Claim since the effective date of the 2007 revisions to Circular 230." ( Id. ¶ 25). Along with Ryan, LLC, Mr. Ryan alleges that Circular 230 violates his rights under the Petition Clause of the First Amendment, and he also claims that Circular 230 violates his Fifth Amendment due process rights by depriving him of the ability " to
obtain a refund for an overpayment of tax." ( Id. ¶ ¶ 1, 9, 54-60, 61-66). 
B. Procedural History
Plaintiffs filed their Complaint in this matter on April 11, 2012. ( See generally Compl.). On July 23, 2012, the Government filed its Motion to Dismiss Counts I and II, seeking the dismissal of Plaintiffs' constitutional claims under Federal Rule of Civil Procedure 12(b)(6) on the grounds that they fail to state plausible claims under either the Petition Clause or the Due Process Clause. ( See Dkt. No. 10-1). The parties subsequently stipulated to a briefing schedule, and the Court set a hearing on the Government's Motion for November 19, 2012. ( See Dkt. No. 11; Minute Entry, Aug. 1, 2012). In the course of preparing for that hearing, however, the Court developed some concerns as to whether Ryan, LLC and/or Mr. Ryan had standing to pursue their constitutional claims. The Court raised these concerns with the parties during the hearing on November 19th, setting forth in detail its doubts about Plaintiffs' ability to establish standing. ( See Dkt. No. 20 (Transcript)). ...